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1040 Instructions

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1040 Instructions

1040 instructions Index A Adjusted basis for installment sale, Adjusted basis for installment sale purposes. 1040 instructions Assistance (see Tax help) B Basis Adjusted, Adjusted basis. 1040 instructions Assumed mortgage, Buyer Assumes Mortgage Installment obligation, Basis. 1040 instructions , Basis in installment obligation. 1040 instructions , Basis in installment obligation. 1040 instructions Installment sale, Adjusted basis for installment sale purposes. 1040 instructions Repossessed property, Basis in repossessed property. 1040 instructions , Basis. 1040 instructions Bond, Bond. 1040 instructions Buyer's note, Buyer's note. 1040 instructions C Contingent payment sale, Contingent Payment Sale Contract price, Contract price. 1040 instructions D Dealer sales, special rule, Dealer sales. 1040 instructions Depreciation recapture income, Depreciation Recapture Income Disposition of installment obligation, Disposition of an Installment Obligation E Electing out, Electing Out of the Installment Method Escrow account, Escrow Account F Fair market value, Fair market value (FMV). 1040 instructions , Fair market value (FMV). 1040 instructions Figuring installment sale income, Figuring Installment Sale Income Form 4797, Form 4797, Form 4797. 1040 instructions 6252, Form 6252, Reporting an Installment Sale 8594, Reporting requirement. 1040 instructions Schedule D (Form 1040), Schedule D (Form 1040), Other forms. 1040 instructions , Schedule D (Form 1040). 1040 instructions Free tax services, Free help with your tax return. 1040 instructions G Gross profit percentage, Gross profit percentage. 1040 instructions Gross profit, defined, Gross profit. 1040 instructions Guarantee, Debt not payable on demand. 1040 instructions H Help (see Tax help) I Installment obligation Defined, Installment obligation. 1040 instructions Disposition, Disposition of an Installment Obligation Used as security, Installment Obligation Used as Security (Pledge Rule) Installment Sale, What Is an Installment Sale? Interest Escrow account, Escrow Account Income, Interest Income Reporting, Seller-financed mortgage. 1040 instructions Unstated, Installment income after 2013. 1040 instructions Interest on deferred tax, Interest on Deferred Tax Exceptions, Exceptions. 1040 instructions L Like-kind exchange, Like-Kind Exchange N Note Buyer's, Buyer's note. 1040 instructions Third-party, Third-party note. 1040 instructions O Original issue discount, Installment income after 2013. 1040 instructions P Payments considered received, Payments Received or Considered Received Buyer assumes debts, Buyer Assumes Other Debts Buyer pays seller's expenses, Buyer Pays Seller's Expenses Mortgage assumed, Buyer Assumes Mortgage Pledge rule, Installment Obligation Used as Security (Pledge Rule) Payments received, Payments Received or Considered Received Pledge rule, Installment Obligation Used as Security (Pledge Rule) Publications (see Tax help) R Related person Land sale, Land transfers between related persons. 1040 instructions Reporting sale to, Related person. 1040 instructions Sale to, Sale to a Related Person Reporting installment sale, Reporting Installment Sale Income, Reporting an Installment Sale Repossession, Repossession Holding period for resale, Holding period for resales. 1040 instructions Personal property, Personal Property Real property, Real Property S Sale at a loss, Sale at a loss. 1040 instructions Sale of Business, Sale of a Business Home, Sale of Your Home Land between related persons, Land transfers between related persons. 1040 instructions Partnership interest, Sale of Partnership Interest Several assets, Single Sale of Several Assets, Several assets. 1040 instructions Stock or securities, Stock or securities. 1040 instructions Sales by dealers, Dealer sales. 1040 instructions Section 1274, Section 1274 Exceptions, Exceptions to Sections 1274 and 483 Section 483, Section 483 Exceptions, Exceptions to Sections 1274 and 483 Selling expenses, Selling expenses. 1040 instructions Selling price Defined, Selling price. 1040 instructions Reduced, Selling Price Reduced Single sale of several assets, Single Sale of Several Assets, Several assets. 1040 instructions T Tax help, How To Get Tax Help Third-party note, Third-party note. 1040 instructions TTY/TDD information, How To Get Tax Help U Unstated interest, Installment income after 2013. 1040 instructions Prev  Up     Home   More Online Publications
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Tax Information For Businesses

Small Business and Self-Employed Tax Center
Access to tax information useful to small businesses with assets of $10 million or less.

Large Business and International Tax Center
This page provides links which are helpful for large to mid-size businesses with assets greater than $10 million

Work Opportunity Tax Credit Extended
Businesses, including tax-exempt employers, may qualify for the Work Opportunity Tax Credit for qualified veterans hired before January 1, 2014.

Self-Employed Individuals Tax Center
The basics on your tax responsibilities if you are self-employed or an independent contractor.

Qualifying Advanced Energy Project Credit (section 48C)
Notice 2013-12, issued February 7, 2013, announced the availability of $150,228,397 in section 48C tax credits in the Phase II allocation round in 2013. Application procedures are different than in the first allocation round.

IRS Video Portal
The IRS Video portal contains video and audio presentations on topics of interest to small businesses, individuals and tax professionals. You will find video clips of tax topics, and archived versions of live panel discussions and webinars.

Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations
The Balanced Budget and Emergency Deficit Reduction Act of 1985, as amended, requires certain spending cuts during Fiscal Year 2013 due to the sequester triggered earlier this year.

Alternative Motor Vehicle Credit
The Alternative Fuel Motor Vehicle Credit was enacted by the Energy Policy Act of 2005 and includes separate credits for four distinct categories of vehicles: Hybrid vehicles, Fuel Cell vehicles, Qualified Alternative Fuel Motor vehicles (QAFMV) and Advanced Lean Burn Technology vehicles. The amount of the potential credit varies by type of vehicle and which of the four credits applies.

Coordinated Issue Papers - LB&I
Effective January 21, 2014, all LB&I coordinated issue papers are decoordinated.  See 1/21/14 Directive from LB&I Commissioner Maloy for details.

HIRE Act: Questions and Answers for Employers
General information about the provisions of the Hiring Individuals to Restore Employment Act.

Employment Taxes
Federal income tax, Social Security and Medicare taxes, FUTA, self-employment tax and more.

Disaster Assistance and Emergency Relief for Individuals and Businesses
Special tax law provisions may help taxpayers and businesses recover financially from a disaster.

Small Business Forms and Publications
Download multiple small business and self-employed forms and publications.

e-file for Large Business and International (LB&I)
Certain large business and International (LB&I) corporations are required to electronically file their Forms 1120 and 1120S. Other corporations may do so voluntarily. This site provides e-file information for corporations that prepare and transmit their own electronic corporate income tax returns and those that use the services of third party tax professionals.

Employer ID Numbers (EINs)
Find out more on EINs or apply for one online.

Employee Tool & Equipment Plans
The Internal Revenue Service has established a compliance team to address the marketing and mistreatment of employee tool and equipment plans as tax-favored accountable plans.

Deducting Business Expenses
Find out what qualifies as a deductible business expense, including depreciation.

IRS Tax Calendar for Businesses and Self-Employed
The tax calendar is available for downloading and printing, or you can view it online.

U.S. Citizens and Resident Aliens Abroad
This section covers tax topics for U.S. citizens or resident aliens living overseas.

HCTC: Information for Health Plan Administrators (HPAs)
Health Plan Administrators are key to the success of the HCTC by providing health insurance to eligible individuals. Find information specific to health plan administrators here, including how to get involved and participate with the HCTC Program.

Excise Tax
Information about the various programs, databases, and activities within Excise Tax.

Industry Issue Resolution Program
The Industry Issue Resolution (IIR) Program resolves frequently disputed or burdensome tax issues. IRS solicits suggestions for issues for the program from taxpayers, representatives and associations.

Estate and Gift Taxes
General information on when these taxes apply and when they do not.

Filing Past Due Tax Returns
Understand how to file past due returns.

Information Returns Processing
The Information Reporting Program Website is designed to help you meet your Information Reporting Requirements. Included are help-line telephone numbers and direct links to aid you in reporting information returns. You will also find information about how to file returns electronically or magnetically.

LB&I Directives
LB&I Directives provide industry-related and administrative guidance to LB&I examiners to ensure consistent tax administration. The Directives do not establish Service position on legal issues and are not legal guidance.

Online Ordering for Information Returns and Employer Returns
Order information returns and employer returns online.

Manufacturers' Energy Efficient Appliance Credit
Act Section 305 - Modifications of Energy Efficient Appliance Credit for Appliances Produced After 2007

Audit Techniques Guides (ATGs)
These guides contain examination techniques to assist examiners in performing examinations.

1099-K Reporting Requirements for Payment Settlement Entities
Describes responsibilities of 1099-K filers and provides links to forms and publications.

Plug-In Electric Drive Vehicle Credit (IRC 30D)
Plug-In Electric Drive Vehicle Credit (IRC 30D) - Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks.

Your Guide to an IRS Small Business Audit
Video series shows small business owners steps of an audit and answers questions about the process

Income from Abroad is Taxable
There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with bank accounts in Liechtenstein. The IRS' interest, however, extends beyond bank accounts in Liechtenstein to financial accounts anywhere in the world. The IRS reminds you to report your worldwide income on your U.S. tax return and lists the possible consequences of hiding income overseas.

Quality Examination Process
The Quality Examination Process (QEP) is a systematic approach for engaging and involving Large Business and International (LB&I) taxpayers in the tax examination process, from the earliest planning stages through resolution of all issues and completion of the case.

Market Segment Understandings (MSU)
The IRS and taxpayers in particular market segments, work together to improve tax compliance.

Railroad Retirement Tax Act (RRTA) Desk Guide (January 2009)
This Desk Reference Guide is intended as a resource tool to assist Revenue Agents who are assigned the examination of a railroad employer. The Guide was prepared presuming that the reader has already received employment tax training.

Federal Payment Levy Program
Certain federal payments (OPM, SSA, federal employee salaries, and federal employee travel) disbursed by the Department of the Treasury, Financial Management Service (FMS) may be subject to a 15 percent levy through the Federal Payment Levy Program (FPLP) to pay your delinquent tax debt. Find out your appeal rights and how to resolve any dispute.

Research Credit
Guidelines and audit technique guide are provided for field examiners on the examination of Research Credit cases.

The International Tax Gap
Find resources on this page pertaining to the international tax gap — the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time. The tax gap can also be thought of as the sum of non-compliance with the tax law.

Uncertain Tax Positions - Schedule UTP
IRS finalized Schedule UTP & instructions for reporting uncertain tax positions by certain corporations.

IRS Non-Retaliation Policy
IRS has a zero-tolerance policy for retaliation and has had one in place since 1998.

Page Last Reviewed or Updated: 30-Mar-2014

The 1040 Instructions

1040 instructions 10. 1040 instructions   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. 1040 instructions Cash method. 1040 instructions Debt acquired from a decedent. 1040 instructions Liquidation. 1040 instructions Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. 1040 instructions Introduction You have a bad debt if you cannot collect money owed to you. 1040 instructions A bad debt is either a business bad debt or a nonbusiness bad debt. 1040 instructions This chapter discusses only business bad debts. 1040 instructions Generally, a business bad debt is one that comes from operating your trade or business. 1040 instructions You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. 1040 instructions All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. 1040 instructions For more information on nonbusiness bad debts, see Publication 550. 1040 instructions Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. 1040 instructions S. 1040 instructions Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. 1040 instructions Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. 1040 instructions A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. 1040 instructions Bad debts of a corporation (other than an S corporation) are always business bad debts. 1040 instructions Credit sales. 1040 instructions   Business bad debts are mainly the result of credit sales to customers. 1040 instructions Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. 1040 instructions After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. 1040 instructions   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. 1040 instructions If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. 1040 instructions    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. 1040 instructions This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. 1040 instructions Accrual method. 1040 instructions   If you use the accrual method of accounting, you generally report income as you earn it. 1040 instructions You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. 1040 instructions   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. 1040 instructions Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. 1040 instructions Cash method. 1040 instructions   If you use the cash method of accounting, you generally report income when you receive payment. 1040 instructions You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. 1040 instructions For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. 1040 instructions Debts from a former business. 1040 instructions   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. 1040 instructions If any of these receivables subsequently become worthless, the loss is still a business bad debt. 1040 instructions Debt acquired from a decedent. 1040 instructions   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. 1040 instructions The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. 1040 instructions Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. 1040 instructions Liquidation. 1040 instructions   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. 1040 instructions Types of Business Bad Debts Business bad debts may result from the following. 1040 instructions Loans to clients and suppliers. 1040 instructions   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. 1040 instructions Debts owed by political parties. 1040 instructions   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. 1040 instructions You use the accrual method of accounting. 1040 instructions The debt arose from the sale of goods or services in the ordinary course of your trade or business. 1040 instructions More than 30% of your receivables accrued in the year of the sale were from sales to political parties. 1040 instructions You made substantial and continuing efforts to collect on the debt. 1040 instructions Loan or capital contribution. 1040 instructions   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. 1040 instructions Debts of an insolvent partner. 1040 instructions   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. 1040 instructions If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. 1040 instructions Business loan guarantee. 1040 instructions   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. 1040 instructions You made the guarantee in the course of your trade or business. 1040 instructions You have a legal duty to pay the debt. 1040 instructions You made the guarantee before the debt became worthless. 1040 instructions You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. 1040 instructions You received reasonable consideration for making the guarantee. 1040 instructions You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. 1040 instructions Example. 1040 instructions Jane Zayne owns the Zayne Dress Company. 1040 instructions She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. 1040 instructions Elegant Fashions is one of Zayne's largest clients. 1040 instructions Elegant Fashions later defaulted on the loan. 1040 instructions As a result, Ms. 1040 instructions Zayne paid the remaining balance of the loan in full to the bank. 1040 instructions She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. 1040 instructions She was motivated by the desire to retain one of her better clients and keep a sales outlet. 1040 instructions Deductible in the year paid. 1040 instructions   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. 1040 instructions Rights against a borrower. 1040 instructions   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. 1040 instructions The debt is then owed to you. 1040 instructions If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. 1040 instructions Joint debtor. 1040 instructions   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. 1040 instructions Sale of mortgaged property. 1040 instructions   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. 1040 instructions When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. 1040 instructions This may occur when the debt is due or prior to that date. 1040 instructions To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. 1040 instructions It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. 1040 instructions Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. 1040 instructions Property received for debt. 1040 instructions   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. 1040 instructions You can deduct the remaining debt as a bad debt if and when it becomes worthless. 1040 instructions   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. 1040 instructions It is not a recovery of a bad debt. 1040 instructions For information on the sale of an asset, see Publication 544. 1040 instructions How To Claim a Business Bad Debt There are two methods to claim a business bad debt. 1040 instructions The specific charge-off method. 1040 instructions The nonaccrual-experience method. 1040 instructions Generally, you must use the specific charge-off method. 1040 instructions However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . 1040 instructions Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. 1040 instructions However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. 1040 instructions Partly worthless debts. 1040 instructions   You can deduct specific bad debts that become partly uncollectible during the tax year. 1040 instructions Your tax deduction is limited to the amount you charge off on your books during the year. 1040 instructions You do not have to charge off and deduct your partly worthless debts annually. 1040 instructions You can delay the charge off until a later year. 1040 instructions However, you cannot deduct any part of a debt after the year it becomes totally worthless. 1040 instructions Significantly modified debt. 1040 instructions   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. 1040 instructions For more information, see Regulations section 1. 1040 instructions 166-3(a)(3). 1040 instructions Deduction disallowed. 1040 instructions   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. 1040 instructions If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. 1040 instructions The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. 1040 instructions Totally worthless debts. 1040 instructions   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. 1040 instructions   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. 1040 instructions However, you may want to do so. 1040 instructions If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. 1040 instructions See Partly worthless debts, earlier. 1040 instructions Filing a claim for refund. 1040 instructions   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. 1040 instructions If the bad debt was totally worthless, you must file the claim by the later of the following dates. 1040 instructions 7 years from the date your original return was due (not including extensions). 1040 instructions 2 years from the date you paid the tax. 1040 instructions   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. 1040 instructions 3 years from the date you filed your original return. 1040 instructions 2 years from the date you paid the tax. 1040 instructions You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. 1040 instructions Such an impairment requires proof of existence. 1040 instructions   For details and more information about filing a claim, see Publication 556. 1040 instructions Use one of the following forms to file a claim. 1040 instructions For more information, see the instructions for the applicable form. 1040 instructions Table 10-1. 1040 instructions Forms Used To File a Claim IF you filed as a. 1040 instructions . 1040 instructions . 1040 instructions THEN file. 1040 instructions . 1040 instructions . 1040 instructions Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. 1040 instructions Under this method, you do not accrue service related income you expect to be uncollectible. 1040 instructions Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. 1040 instructions Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. 1040 instructions Service related income. 1040 instructions   You can use the nonaccrual-experience method only for amounts earned by performing services. 1040 instructions You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. 1040 instructions Gross receipts test. 1040 instructions   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. 1040 instructions If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. 1040 instructions   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. 1040 instructions For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. 1040 instructions Interest or penalty charged. 1040 instructions   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. 1040 instructions However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. 1040 instructions You otherwise accrue the full amount due as gross income at the time you provide the services. 1040 instructions You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. 1040 instructions Change in accounting method. 1040 instructions   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. 1040 instructions See Form 3115 and the Instructions for Form 3115 for more information. 1040 instructions Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. 1040 instructions The amount you include is limited to the amount you actually deducted. 1040 instructions However, you can exclude the amount deducted that did not reduce your tax. 1040 instructions Report the recovery as “Other income” on the appropriate business form or schedule. 1040 instructions See Recoveries in Publication 525 for more information. 1040 instructions Net operating loss (NOL) carryover. 1040 instructions   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. 1040 instructions A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. 1040 instructions For more information about NOLs, see Publication 536. 1040 instructions Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 1040 instructions Prev  Up  Next   Home   More Online Publications