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Www Irs Gov Efile

Www irs gov efile 8. Www irs gov efile   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. Www irs gov efile Half-time student. Www irs gov efile How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. Www irs gov efile ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Www irs gov efile Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. Www irs gov efile If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. Www irs gov efile You cannot deduct either payments or contributions to a QTP. Www irs gov efile For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. Www irs gov efile What is the tax benefit of a QTP. Www irs gov efile   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Www irs gov efile See Are Distributions Taxable , later, for more information. Www irs gov efile    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. Www irs gov efile See Coordination With American Opportunity and Lifetime Learning Credits, later. Www irs gov efile What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. Www irs gov efile QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. Www irs gov efile The program must meet certain requirements. Www irs gov efile Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. Www irs gov efile Qualified education expenses. Www irs gov efile   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). Www irs gov efile As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. Www irs gov efile See Half-time student , later. Www irs gov efile The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. Www irs gov efile Tuition and fees. Www irs gov efile Books, supplies, and equipment. Www irs gov efile Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. Www irs gov efile Expenses for room and board must be incurred by students who are enrolled at least half-time. Www irs gov efile The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Www irs gov efile The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Www irs gov efile The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Www irs gov efile You will need to contact the eligible educational institution for qualified room and board costs. Www irs gov efile    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. Www irs gov efile Designated beneficiary. Www irs gov efile   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. Www irs gov efile The designated beneficiary can be changed after participation in the QTP begins. Www irs gov efile If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. Www irs gov efile Half-time student. Www irs gov efile   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Www irs gov efile Eligible educational institution. Www irs gov efile   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Www irs gov efile S. Www irs gov efile Department of Education. Www irs gov efile It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Www irs gov efile The educational institution should be able to tell you if it is an eligible educational institution. Www irs gov efile   Certain educational institutions located outside the United States also participate in the U. Www irs gov efile S. Www irs gov efile Department of Education's Federal Student Aid (FSA) programs. Www irs gov efile   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. Www irs gov efile There are no income restrictions on the individual contributors. Www irs gov efile You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. Www irs gov efile   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. Www irs gov efile This is a return of the investment in the plan. Www irs gov efile The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). Www irs gov efile Earnings and return of investment. Www irs gov efile    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. Www irs gov efile The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Www irs gov efile Form 1099-Q should be sent to you by January 31, 2014. Www irs gov efile Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. Www irs gov efile Adjusted qualified education expenses. Www irs gov efile   This amount is the total qualified education expenses reduced by any tax-free educational assistance. Www irs gov efile Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Www irs gov efile Taxable earnings. Www irs gov efile   Use the following steps to figure the taxable part. Www irs gov efile Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. Www irs gov efile The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. Www irs gov efile Subtract the amount figured in (1) from the total distributed earnings. Www irs gov efile The result is the amount the beneficiary must include in income. Www irs gov efile Report it on Form 1040 or Form 1040NR, line 21. Www irs gov efile Example 1. Www irs gov efile In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Www irs gov efile Over the years they contributed $18,000 to the account. Www irs gov efile The total balance in the account was $27,000 on the date the distribution was made. Www irs gov efile In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. Www irs gov efile She paid her college expenses from the following sources. Www irs gov efile   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. Www irs gov efile   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. Www irs gov efile Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Www irs gov efile Sara figures the taxable part of the distributed earnings as follows. Www irs gov efile   1. Www irs gov efile $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. Www irs gov efile $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. Www irs gov efile Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Www irs gov efile This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. Www irs gov efile Example 2. Www irs gov efile Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). Www irs gov efile   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. Www irs gov efile   1. Www irs gov efile $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. Www irs gov efile $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). Www irs gov efile This represents distributed earnings not used for adjusted qualified education expenses. Www irs gov efile Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. Www irs gov efile For purposes of this allocation, disregard any qualified elementary and secondary education expenses. Www irs gov efile Example 3. Www irs gov efile Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. Www irs gov efile In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. Www irs gov efile   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. Www irs gov efile Note. Www irs gov efile If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . Www irs gov efile Coordination With Tuition and Fees Deduction. Www irs gov efile   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Www irs gov efile Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. Www irs gov efile You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Www irs gov efile Your basis is the total amount of contributions to that QTP account. Www irs gov efile You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Www irs gov efile If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. Www irs gov efile ) from all such accounts in order to determine your taxable earnings for the year. Www irs gov efile By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. Www irs gov efile Example 1. Www irs gov efile In 2013, Taylor received a final distribution of $1,000 from QTP #1. Www irs gov efile His unrecovered basis in that account before the distribution was $3,000. Www irs gov efile If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). Www irs gov efile Example 2. Www irs gov efile Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. Www irs gov efile His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Www irs gov efile Taylor's adjusted qualified education expenses for 2013 totaled $6,000. Www irs gov efile In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. Www irs gov efile   1. Www irs gov efile $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. Www irs gov efile $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. Www irs gov efile $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. Www irs gov efile Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). Www irs gov efile Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. Www irs gov efile Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Www irs gov efile Exceptions. Www irs gov efile   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Www irs gov efile Made because the designated beneficiary is disabled. Www irs gov efile A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Www irs gov efile A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Www irs gov efile Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Www irs gov efile Made on account of the attendance of the designated beneficiary at a U. Www irs gov efile S. Www irs gov efile military academy (such as the USNA at Annapolis). Www irs gov efile This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Www irs gov efile S. Www irs gov efile Code) attributable to such attendance. Www irs gov efile Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. Www irs gov efile ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Www irs gov efile Figuring the additional tax. Www irs gov efile    Use Part II of Form 5329, to figure any additional tax. Www irs gov efile Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Www irs gov efile Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. Www irs gov efile In addition, the designated beneficiary can be changed without transferring accounts. Www irs gov efile Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). Www irs gov efile An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. Www irs gov efile Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Www irs gov efile These are not taxable distributions. Www irs gov efile Members of the beneficiary's family. Www irs gov efile   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Www irs gov efile Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Www irs gov efile Brother, sister, stepbrother, or stepsister. Www irs gov efile Father or mother or ancestor of either. Www irs gov efile Stepfather or stepmother. Www irs gov efile Son or daughter of a brother or sister. Www irs gov efile Brother or sister of father or mother. Www irs gov efile Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Www irs gov efile The spouse of any individual listed above. Www irs gov efile First cousin. Www irs gov efile Example. Www irs gov efile When Aaron graduated from college last year he had $5,000 left in his QTP. Www irs gov efile He wanted to give this money to his younger brother, who was in junior high school. Www irs gov efile In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. Www irs gov efile If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. Www irs gov efile Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. Www irs gov efile See Members of the beneficiary's family , earlier. Www irs gov efile Example. Www irs gov efile Assume the same situation as in the last example. Www irs gov efile Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. Www irs gov efile Prev  Up  Next   Home   More Online Publications
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The Www Irs Gov Efile

Www irs gov efile 2. Www irs gov efile   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Www irs gov efile Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Www irs gov efile Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Www irs gov efile Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. Www irs gov efile The annual accounting period for your income tax return is called a tax year. Www irs gov efile You can use one of the following tax years. Www irs gov efile A calendar tax year. Www irs gov efile A fiscal tax year. Www irs gov efile Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Www irs gov efile A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Www irs gov efile Calendar tax year. Www irs gov efile   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Www irs gov efile   You must adopt the calendar tax year if any of the following apply. Www irs gov efile You do not keep books. Www irs gov efile You have no annual accounting period. Www irs gov efile Your present tax year does not qualify as a fiscal year. Www irs gov efile Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. Www irs gov efile   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Www irs gov efile For more information, see Change in tax year, later. Www irs gov efile   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. Www irs gov efile Fiscal tax year. Www irs gov efile   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Www irs gov efile A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Www irs gov efile   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Www irs gov efile   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Www irs gov efile Change in tax year. Www irs gov efile   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Www irs gov efile See the Instructions for Form 1128 for exceptions. Www irs gov efile If you qualify for an automatic approval request, a user fee is not required. Www irs gov efile If you do not qualify for automatic approval, a ruling must be requested. Www irs gov efile See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Www irs gov efile Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Www irs gov efile Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Www irs gov efile You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Www irs gov efile After that, if you want to change your accounting method, you must generally get IRS approval. Www irs gov efile See Change in Accounting Method, later. Www irs gov efile Kinds of methods. Www irs gov efile   Generally, you can use any of the following accounting methods. Www irs gov efile Cash method. Www irs gov efile An accrual method. Www irs gov efile Special methods of accounting for certain items of income and expenses. Www irs gov efile Combination method using elements of two or more of the above. Www irs gov efile You must use the same accounting method to figure your taxable income and to keep your books. Www irs gov efile Also, you must use an accounting method that clearly shows your income. Www irs gov efile Business and personal items. Www irs gov efile   You can account for business and personal items under different accounting methods. Www irs gov efile For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Www irs gov efile Two or more businesses. Www irs gov efile   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. Www irs gov efile They are separate and distinct only if you maintain complete and separate books and records for each business. Www irs gov efile Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Www irs gov efile However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Www irs gov efile For more information, see Inventories, later. Www irs gov efile Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Www irs gov efile If you receive property or services, you must include their fair market value in income. Www irs gov efile Example. Www irs gov efile On December 30, 2012, Mrs. Www irs gov efile Sycamore sent you a check for interior decorating services you provided to her. Www irs gov efile You received the check on January 2, 2013. Www irs gov efile You must include the amount of the check in income for 2013. Www irs gov efile Constructive receipt. Www irs gov efile   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Www irs gov efile You do not need to have possession of it. Www irs gov efile If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. Www irs gov efile Example. Www irs gov efile Interest is credited to your bank account in December 2013. Www irs gov efile You do not withdraw it or enter it into your passbook until 2014. Www irs gov efile You must include it in your gross income for 2013. Www irs gov efile Delaying receipt of income. Www irs gov efile   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Www irs gov efile You must report the income in the year the property is received or made available to you without restriction. Www irs gov efile Example. Www irs gov efile Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Www irs gov efile She was told in December that her payment was available. Www irs gov efile At her request, she was not paid until January 2014. Www irs gov efile She must include this payment in her 2013 income because it was constructively received in 2013. Www irs gov efile Checks. Www irs gov efile   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. Www irs gov efile Example. Www irs gov efile Dr. Www irs gov efile Redd received a check for $500 on December 31, 2013, from a patient. Www irs gov efile She could not deposit the check in her business account until January 2, 2014. Www irs gov efile She must include this fee in her income for 2013. Www irs gov efile Debts paid by another person or canceled. Www irs gov efile   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Www irs gov efile If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Www irs gov efile For more information, see Canceled Debt under Kinds of Income in chapter 5. Www irs gov efile Repayment of income. Www irs gov efile   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. Www irs gov efile If the amount you repay is over $3,000, a special rule applies. Www irs gov efile For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Www irs gov efile Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Www irs gov efile This includes business expenses for which you contest liability. Www irs gov efile However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Www irs gov efile Expenses paid in advance. Www irs gov efile   You can deduct an expense you pay in advance only in the year to which it applies. Www irs gov efile Example. Www irs gov efile You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. Www irs gov efile You can deduct $500 in 2013 and $500 in 2014. Www irs gov efile Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Www irs gov efile The purpose of an accrual method of accounting is to match income and expenses in the correct year. Www irs gov efile Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Www irs gov efile Example. Www irs gov efile You are a calendar year accrual method taxpayer. Www irs gov efile You sold a computer on December 28, 2013. Www irs gov efile You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Www irs gov efile You must include the amount received for the computer in your 2013 income. Www irs gov efile Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Www irs gov efile Estimated income. Www irs gov efile   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Www irs gov efile Change in payment schedule for services. Www irs gov efile   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. Www irs gov efile Advance payments for services. Www irs gov efile   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Www irs gov efile However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Www irs gov efile However, you cannot postpone including any payment beyond that tax year. Www irs gov efile   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Www irs gov efile That publication also explains special rules for reporting the following types of income. Www irs gov efile Advance payments for service agreements. Www irs gov efile Prepaid rent. Www irs gov efile Advance payments for sales. Www irs gov efile   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. Www irs gov efile If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. Www irs gov efile An agreement includes a gift certificate that can be redeemed for goods. Www irs gov efile Treat amounts that are due and payable as amounts you received. Www irs gov efile   You generally include an advance payment in income for the tax year in which you receive it. Www irs gov efile However, you can use an alternative method. Www irs gov efile For information about the alternative method, see Publication 538. Www irs gov efile Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Www irs gov efile The all-events test has been met. Www irs gov efile The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Www irs gov efile Economic performance has occurred. Www irs gov efile Economic performance. Www irs gov efile   You generally cannot deduct or capitalize a business expense until economic performance occurs. Www irs gov efile If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Www irs gov efile If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Www irs gov efile An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Www irs gov efile For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Www irs gov efile Example. Www irs gov efile You are a calendar year taxpayer and use an accrual method of accounting. Www irs gov efile You buy office supplies in December 2013. Www irs gov efile You receive the supplies and the bill in December, but you pay the bill in January 2014. Www irs gov efile You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Www irs gov efile Your office supplies may qualify as a recurring expense. Www irs gov efile In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Www irs gov efile Keeping inventories. Www irs gov efile   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. Www irs gov efile If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Www irs gov efile For more information, see Inventories , later. Www irs gov efile Special rule for related persons. Www irs gov efile   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Www irs gov efile Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Www irs gov efile If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Www irs gov efile   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Www irs gov efile For a list of other related persons, see section 267 of the Internal Revenue Code. Www irs gov efile Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Www irs gov efile However, the following restrictions apply. Www irs gov efile If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Www irs gov efile (See, however, Inventories, later. Www irs gov efile ) You can use the cash method for all other items of income and expenses. Www irs gov efile If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Www irs gov efile If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Www irs gov efile If you use a combination method that includes the cash method, treat that combination method as the cash method. Www irs gov efile Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Www irs gov efile However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Www irs gov efile These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Www irs gov efile A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Www irs gov efile A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Www irs gov efile Qualifying taxpayer. Www irs gov efile   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. Www irs gov efile (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. Www irs gov efile ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Www irs gov efile Qualifying small business taxpayer. Www irs gov efile   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. Www irs gov efile (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Www irs gov efile ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Www irs gov efile Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Www irs gov efile Business not owned or not in existence for 3 years. Www irs gov efile   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. Www irs gov efile If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. Www irs gov efile Materials and supplies that are not incidental. Www irs gov efile   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. Www irs gov efile If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. Www irs gov efile Changing accounting method. Www irs gov efile   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. Www irs gov efile See Change in Accounting Method, later. Www irs gov efile More information. Www irs gov efile    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Www irs gov efile For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Www irs gov efile Items included in inventory. Www irs gov efile   If you are required to account for inventories, include the following items when accounting for your inventory. Www irs gov efile Merchandise or stock in trade. Www irs gov efile Raw materials. Www irs gov efile Work in process. Www irs gov efile Finished products. Www irs gov efile Supplies that physically become a part of the item intended for sale. Www irs gov efile Valuing inventory. Www irs gov efile   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). Www irs gov efile To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. Www irs gov efile   Inventory valuation rules cannot be the same for all kinds of businesses. Www irs gov efile The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Www irs gov efile Your inventory practices must be consistent from year to year. Www irs gov efile More information. Www irs gov efile   For more information about inventories, see Publication 538. Www irs gov efile Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Www irs gov efile Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Www irs gov efile You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Www irs gov efile Activities subject to the uniform capitalization rules. Www irs gov efile   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Www irs gov efile Produce real or tangible personal property. Www irs gov efile For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Www irs gov efile Acquire property for resale. Www irs gov efile Exceptions. Www irs gov efile   These rules do not apply to the following property. Www irs gov efile Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Www irs gov efile Property you produce if you meet either of the following conditions. Www irs gov efile Your indirect costs of producing the property are $200,000 or less. Www irs gov efile You use the cash method of accounting and do not account for inventories. Www irs gov efile For more information, see Inventories, earlier. Www irs gov efile Special Methods There are special methods of accounting for certain items of income or expense. Www irs gov efile These include the following. Www irs gov efile Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Www irs gov efile Bad debts, discussed in chapter 10 of Publication 535. Www irs gov efile Depletion, discussed in chapter 9 of Publication 535. Www irs gov efile Depreciation, discussed in Publication 946, How To Depreciate Property. Www irs gov efile Installment sales, discussed in Publication 537, Installment Sales. Www irs gov efile Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Www irs gov efile A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. Www irs gov efile To get approval, you must file Form 3115, Application for Change in Accounting Method. Www irs gov efile You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Www irs gov efile You may have to pay a user fee. Www irs gov efile For more information, see the form instructions. Www irs gov efile Automatic change procedures. Www irs gov efile   Certain taxpayers can presume to have IRS approval to change their method of accounting. Www irs gov efile The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. Www irs gov efile No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Www irs gov efile   Generally, you must use Form 3115 to request an automatic change. Www irs gov efile For more information, see the Instructions for Form 3115. Www irs gov efile Prev  Up  Next   Home   More Online Publications