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2013 1040ez Instructions

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2013 1040ez Instructions

2013 1040ez instructions Publication 538 - Main Content Table of Contents Accounting PeriodsCalendar Year Fiscal Year Short Tax Year Improper Tax Year Change in Tax Year Individuals Partnerships, S Corporations, and Personal Service Corporations (PSCs) Corporations (Other Than S Corporations and PSCs) Accounting MethodsSpecial methods. 2013 1040ez instructions Hybrid method. 2013 1040ez instructions Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 2013 1040ez instructions Accounting Periods You must use a tax year to figure your taxable income. 2013 1040ez instructions A tax year is an annual accounting period for keeping records and reporting income and expenses. 2013 1040ez instructions An annual accounting period does not include a short tax year (discussed later). 2013 1040ez instructions You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). 2013 1040ez instructions Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. 2013 1040ez instructions A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. 2013 1040ez instructions You cannot adopt a tax year by merely: Filing an application for an extension of time to file an income tax return; Filing an application for an employer identification number (Form SS-4); or Paying estimated taxes. 2013 1040ez instructions This section discusses: A calendar year. 2013 1040ez instructions A fiscal year (including a period of 52 or 53 weeks). 2013 1040ez instructions A short tax year. 2013 1040ez instructions An improper tax year. 2013 1040ez instructions A change in tax year. 2013 1040ez instructions Special situations that apply to individuals. 2013 1040ez instructions Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. 2013 1040ez instructions Special situations that apply to corporations. 2013 1040ez instructions Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. 2013 1040ez instructions If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year. 2013 1040ez instructions If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you obtain approval from the IRS to change it, or are otherwise allowed to change it without IRS approval. 2013 1040ez instructions See Change in Tax Year, later. 2013 1040ez instructions Generally, anyone can adopt the calendar year. 2013 1040ez instructions However, you must adopt the calendar year if: You keep no books or records; You have no annual accounting period; Your present tax year does not qualify as a fiscal year; or You are required to use a calendar year by a provision in the Internal Revenue Code or the Income Tax Regulations. 2013 1040ez instructions Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. 2013 1040ez instructions If you are allowed to adopt a fiscal year, you must consistently maintain your books and records and report your income and expenses using the time period adopted. 2013 1040ez instructions 52-53-Week Tax Year You can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. 2013 1040ez instructions If you make this election, your 52-53-week tax year must always end on the same day of the week. 2013 1040ez instructions Your 52-53-week tax year must always end on: Whatever date this same day of the week last occurs in a calendar month, or Whatever date this same day of the week falls that is nearest to the last day of the calendar month. 2013 1040ez instructions For example, if you elect a tax year that always ends on the last Monday in March, your 2012 tax year will end on March 25, 2013. 2013 1040ez instructions Election. 2013 1040ez instructions   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. 2013 1040ez instructions The month in which the new 52-53-week tax year ends. 2013 1040ez instructions The day of the week on which the tax year always ends. 2013 1040ez instructions The date the tax year ends. 2013 1040ez instructions It can be either of the following dates on which the chosen day: Last occurs in the month in (1), above, or Occurs nearest to the last day of the month in (1), above. 2013 1040ez instructions   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. 2013 1040ez instructions   To determine an effective date (or apply provisions of any law) expressed in terms of tax years beginning, including, or ending on the first or last day of a specified calendar month, a 52-53-week tax year is considered to: Begin on the first day of the calendar month beginning nearest to the first day of the 52-53-week tax year, and End on the last day of the calendar month ending nearest to the last day of the 52-53-week tax year. 2013 1040ez instructions Example. 2013 1040ez instructions Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. 2013 1040ez instructions For this purpose, a 52-53-week tax year that begins on the last Tuesday of June, which falls on June 26, 2012, is treated as beginning on July 1, 2012. 2013 1040ez instructions Short Tax Year A short tax year is a tax year of less than 12 months. 2013 1040ez instructions A short period tax return may be required when you (as a taxable entity): Are not in existence for an entire tax year, or Change your accounting period. 2013 1040ez instructions Tax on a short period tax return is figured differently for each situation. 2013 1040ez instructions Not in Existence Entire Year Even if a taxable entity was not in existence for the entire year, a tax return is required for the time it was in existence. 2013 1040ez instructions Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year. 2013 1040ez instructions Example 1. 2013 1040ez instructions XYZ Corporation was organized on July 1, 2012. 2013 1040ez instructions It elected the calendar year as its tax year. 2013 1040ez instructions Therefore, its first tax return was due March 15, 2013. 2013 1040ez instructions This short period return will cover the period from July 1, 2012, through December 31, 2012. 2013 1040ez instructions Example 2. 2013 1040ez instructions A calendar year corporation dissolved on July 23, 2012. 2013 1040ez instructions Its final return is due by October 15, 2012. 2013 1040ez instructions It will cover the short period from January 1, 2012, through July 23, 2012. 2013 1040ez instructions Death of individual. 2013 1040ez instructions   When an individual dies, a tax return must be filed for the decedent by the 15th day of the 4th month after the close of the individual's regular tax year. 2013 1040ez instructions The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. 2013 1040ez instructions In the case of a decedent who dies on December 31st, the last day of the regular tax year, a full calendar-year tax return is required. 2013 1040ez instructions Example. 2013 1040ez instructions   Agnes Green was a single, calendar year taxpayer. 2013 1040ez instructions She died on March 6, 2012. 2013 1040ez instructions Her final income tax return must be filed by April 15, 2013. 2013 1040ez instructions It will cover the short period from January 1, 2012, to March 6, 2012. 2013 1040ez instructions Figuring Tax for Short Year If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period. 2013 1040ez instructions The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year. 2013 1040ez instructions Figure tax for a short year under the general rule, explained below. 2013 1040ez instructions You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. 2013 1040ez instructions General rule. 2013 1040ez instructions   Income tax for a short tax year must be annualized. 2013 1040ez instructions However, self-employment tax is figured on the actual self-employment income for the short period. 2013 1040ez instructions Individuals. 2013 1040ez instructions   An individual must figure income tax for the short tax year as follows. 2013 1040ez instructions Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. 2013 1040ez instructions You must itemize deductions when you file a short period tax return. 2013 1040ez instructions Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. 2013 1040ez instructions Subtract the amount in (2) from the amount in (1). 2013 1040ez instructions The result is your modified taxable income. 2013 1040ez instructions Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. 2013 1040ez instructions The result is your annualized income. 2013 1040ez instructions Figure the total tax on your annualized income using the appropriate tax rate schedule. 2013 1040ez instructions Multiply the total tax by the number of months in the short tax year and divide the result by 12. 2013 1040ez instructions The result is your tax for the short tax year. 2013 1040ez instructions Relief procedure. 2013 1040ez instructions   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. 2013 1040ez instructions It may result in less tax. 2013 1040ez instructions Under this procedure, the tax is figured by two separate methods. 2013 1040ez instructions If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid. 2013 1040ez instructions For more information, see section 443(b)(2) of the Internal Revenue Code. 2013 1040ez instructions Alternative minimum tax. 2013 1040ez instructions   To figure the alternative minimum tax (AMT) due for a short tax year: Figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps. 2013 1040ez instructions Multiply the AMTI by 12. 2013 1040ez instructions Divide the result by the number of months in the short tax year. 2013 1040ez instructions Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. 2013 1040ez instructions The result is the annualized AMT. 2013 1040ez instructions Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. 2013 1040ez instructions   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. 2013 1040ez instructions For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. 2013 1040ez instructions Tax withheld from wages. 2013 1040ez instructions   You can claim a credit against your income tax liability for federal income tax withheld from your wages. 2013 1040ez instructions Federal income tax is withheld on a calendar year basis. 2013 1040ez instructions The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. 2013 1040ez instructions Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. 2013 1040ez instructions For example, if a taxpayer began business on March 15 and adopted a tax year ending on March 14 (a period of exactly 12 months), this would be an improper tax year. 2013 1040ez instructions See Accounting Periods, earlier, for a description of permissible tax years. 2013 1040ez instructions To change to a proper tax year, you must do one of the following. 2013 1040ez instructions If you are requesting a change to a calendar tax year, file an amended income tax return based on a calendar tax year that corrects the most recently filed tax return that was filed on the basis of an improper tax year. 2013 1040ez instructions Attach a completed Form 1128 to the amended tax return. 2013 1040ez instructions Write “FILED UNDER REV. 2013 1040ez instructions PROC. 2013 1040ez instructions 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. 2013 1040ez instructions If you are requesting a change to a fiscal tax year, file Form 1128 in accordance with the form instructions to request IRS approval for the change. 2013 1040ez instructions Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. 2013 1040ez instructions See the Instructions for Form 1128 for exceptions. 2013 1040ez instructions If you qualify for an automatic approval request, a user fee is not required. 2013 1040ez instructions Individuals Generally, individuals must adopt the calendar year as their tax year. 2013 1040ez instructions An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year. 2013 1040ez instructions Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. 2013 1040ez instructions A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. 2013 1040ez instructions The entity does not have to use the required tax year if it receives IRS approval to use another permitted tax year or makes an election under section 444 of the Internal Revenue Code (discussed later). 2013 1040ez instructions The following discussions provide the rules for partnerships, S corporations, and PSCs. 2013 1040ez instructions Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. 2013 1040ez instructions The partnership makes an election under section 444 of the Internal Revenue Code to have a tax year other than a required tax year by filing Form 8716. 2013 1040ez instructions The partnership elects to use a 52-53-week tax year that ends with reference to either its required tax year or a tax year elected under section 444. 2013 1040ez instructions The partnership can establish a business purpose for a different tax year. 2013 1040ez instructions The rules for the required tax year for partnerships are as follows. 2013 1040ez instructions If one or more partners having the same tax year own a majority interest (more than 50%) in partnership profits and capital, the partnership must use the tax year of those partners. 2013 1040ez instructions If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. 2013 1040ez instructions A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. 2013 1040ez instructions If there is no majority interest tax year and the principal partners do not have the same tax year, the partnership generally must use a tax year that results in the least aggregate deferral of income to the partners. 2013 1040ez instructions If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. 2013 1040ez instructions Least aggregate deferral of income. 2013 1040ez instructions   The tax year that results in the least aggregate deferral of income is determined as follows. 2013 1040ez instructions Figure the number of months of deferral for each partner using one partner's tax year. 2013 1040ez instructions Find the months of deferral by counting the months from the end of that tax year forward to the end of each other partner's tax year. 2013 1040ez instructions Multiply each partner's months of deferral figured in step (1) by that partner's share of interest in the partnership profits for the year used in step (1). 2013 1040ez instructions Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). 2013 1040ez instructions Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. 2013 1040ez instructions   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. 2013 1040ez instructions If the calculation results in more than one tax year qualifying as the tax year with the least aggregate deferral, the partnership can choose any one of those tax years as its tax year. 2013 1040ez instructions However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. 2013 1040ez instructions Example. 2013 1040ez instructions A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. 2013 1040ez instructions A uses the calendar year and B uses a fiscal year ending November 30. 2013 1040ez instructions P must change its tax year to a fiscal year ending November 30 because this results in the least aggregate deferral of income to the partners, as shown in the following table. 2013 1040ez instructions Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. 2013 1040ez instructions 5 -0- -0- B 11/30 0. 2013 1040ez instructions 5 11 5. 2013 1040ez instructions 5 Total Deferral 5. 2013 1040ez instructions 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. 2013 1040ez instructions 5 1 0. 2013 1040ez instructions 5 B 11/30 0. 2013 1040ez instructions 5 -0- -0- Total Deferral 0. 2013 1040ez instructions 5 When determination is made. 2013 1040ez instructions   The determination of the tax year under the least aggregate deferral rules must generally be made at the beginning of the partnership's current tax year. 2013 1040ez instructions However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. 2013 1040ez instructions This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. 2013 1040ez instructions Short period return. 2013 1040ez instructions   When a partnership changes its tax year, a short period return must be filed. 2013 1040ez instructions The short period return covers the months between the end of the partnership's prior tax year and the beginning of its new tax year. 2013 1040ez instructions   If a partnership changes to the tax year resulting in the least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to determine that tax year. 2013 1040ez instructions The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. 2013 1040ez instructions 706-1. 2013 1040ez instructions ” More information. 2013 1040ez instructions   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. 2013 1040ez instructions S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. 2013 1040ez instructions A permitted tax year is any of the following. 2013 1040ez instructions The calendar year. 2013 1040ez instructions A tax year elected under section 444 of the Internal Revenue Code. 2013 1040ez instructions See Section 444 Election, below for details. 2013 1040ez instructions A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. 2013 1040ez instructions Any other tax year for which the corporation establishes a business purpose. 2013 1040ez instructions If an electing S corporation wishes to adopt a tax year other than a calendar year, it must request IRS approval using Form 2553, instead of filing Form 1128. 2013 1040ez instructions For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. 2013 1040ez instructions Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. 2013 1040ez instructions The corporation makes an election under section 444 of the Internal Revenue Code. 2013 1040ez instructions See Section 444 Election, below for details. 2013 1040ez instructions The corporation elects to use a 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. 2013 1040ez instructions The corporation establishes a business purpose for a fiscal year. 2013 1040ez instructions See the Instructions for Form 1120 for general information about PSCs. 2013 1040ez instructions For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. 2013 1040ez instructions Section 444 Election A partnership, S corporation, electing S corporation, or PSC can elect under section 444 of the Internal Revenue Code to use a tax year other than its required tax year. 2013 1040ez instructions Certain restrictions apply to the election. 2013 1040ez instructions A partnership or an S corporation that makes a section 444 election must make certain required payments and a PSC must make certain distributions (discussed later). 2013 1040ez instructions The section 444 election does not apply to any partnership, S corporation, or PSC that establishes a business purpose for a different period, explained later. 2013 1040ez instructions A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. 2013 1040ez instructions It is not a member of a tiered structure (defined in section 1. 2013 1040ez instructions 444-2T of the regulations). 2013 1040ez instructions It has not previously had a section 444 election in effect. 2013 1040ez instructions It elects a year that meets the deferral period requirement. 2013 1040ez instructions Deferral period. 2013 1040ez instructions   The determination of the deferral period depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax year with a section 444 election. 2013 1040ez instructions Retaining tax year. 2013 1040ez instructions   Generally, a partnership, S corporation, or PSC can make a section 444 election to retain its tax year only if the deferral period of the new tax year is 3 months or less. 2013 1040ez instructions This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. 2013 1040ez instructions Adopting or changing tax year. 2013 1040ez instructions   If the partnership, S corporation, or PSC is adopting or changing to a tax year other than its required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year. 2013 1040ez instructions The IRS will allow a section 444 election only if the deferral period of the new tax year is less than the shorter of: Three months, or The deferral period of the tax year being changed. 2013 1040ez instructions This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. 2013 1040ez instructions If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. 2013 1040ez instructions Example 1. 2013 1040ez instructions BD Partnership uses a calendar year, which is also its required tax year. 2013 1040ez instructions BD cannot make a section 444 election because the deferral period is zero. 2013 1040ez instructions Example 2. 2013 1040ez instructions E, a newly formed partnership, began operations on December 1. 2013 1040ez instructions E is owned by calendar year partners. 2013 1040ez instructions E wants to make a section 444 election to adopt a September 30 tax year. 2013 1040ez instructions E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. 2013 1040ez instructions Making the election. 2013 1040ez instructions   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. 2013 1040ez instructions Form 8716 must be filed by the earlier of: The due date (not including extensions) of the income tax return for the tax year resulting from the section 444 election, or The 15th day of the 6th month of the tax year for which the election will be effective. 2013 1040ez instructions For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. 2013 1040ez instructions Note. 2013 1040ez instructions If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. 2013 1040ez instructions   Attach a copy of Form 8716 to Form 1065, Form 1120S, or Form 1120 for the first tax year for which the election is made. 2013 1040ez instructions Example 1. 2013 1040ez instructions AB, a partnership, begins operations on September 13, 2012, and is qualified to make a section 444 election to use a September 30 tax year for its tax year beginning September 13, 2012. 2013 1040ez instructions AB must file Form 8716 by January 15, 2013, which is the due date of the partnership's tax return for the period from September 13, 2012, to September 30, 2012. 2013 1040ez instructions Example 2. 2013 1040ez instructions The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. 2013 1040ez instructions AB must file Form 8716 by March 17, 2013. 2013 1040ez instructions Example 3. 2013 1040ez instructions B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. 2013 1040ez instructions B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. 2013 1040ez instructions B must file Form 8716 by December 17, 2012, the due date of the income tax return for the short period from September 1, 2012, to September 30, 2012. 2013 1040ez instructions Note. 2013 1040ez instructions The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. 2013 1040ez instructions Extension of time for filing. 2013 1040ez instructions   There is an automatic extension of 12 months to make this election. 2013 1040ez instructions See the Form 8716 instructions for more information. 2013 1040ez instructions Terminating the election. 2013 1040ez instructions   The section 444 election remains in effect until it is terminated. 2013 1040ez instructions If the election is terminated, another section 444 election cannot be made for any tax year. 2013 1040ez instructions   The election ends when any of the following applies to the partnership, S corporation, or PSC. 2013 1040ez instructions The entity changes to its required tax year. 2013 1040ez instructions The entity liquidates. 2013 1040ez instructions The entity becomes a member of a tiered structure. 2013 1040ez instructions The IRS determines that the entity willfully failed to comply with the required payments or distributions. 2013 1040ez instructions   The election will also end if either of the following events occur. 2013 1040ez instructions An S corporation's S election is terminated. 2013 1040ez instructions However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. 2013 1040ez instructions A PSC ceases to be a PSC. 2013 1040ez instructions If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. 2013 1040ez instructions Required payment for partnership or S corporation. 2013 1040ez instructions   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. 2013 1040ez instructions The required payment for that year (or any preceding tax year) is more than $500. 2013 1040ez instructions    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. 2013 1040ez instructions   Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. 2013 1040ez instructions If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. 2013 1040ez instructions If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount. 2013 1040ez instructions Applicable election year. 2013 1040ez instructions   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. 2013 1040ez instructions Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins. 2013 1040ez instructions Required distribution for PSC. 2013 1040ez instructions   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. 2013 1040ez instructions If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. 2013 1040ez instructions The amount deferred is treated as paid or incurred in the following tax year. 2013 1040ez instructions   For information on the minimum distribution, see the instructions for Part I of Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC). 2013 1040ez instructions Back-up election. 2013 1040ez instructions   A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. 2013 1040ez instructions If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). 2013 1040ez instructions Making back-up election. 2013 1040ez instructions   The general rules for making a section 444 election, as discussed earlier, apply. 2013 1040ez instructions When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. 2013 1040ez instructions However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print “FORM 1128 (or FORM 2553) BACK-UP ELECTION” at the top of Form 8716. 2013 1040ez instructions Activating election. 2013 1040ez instructions   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. 2013 1040ez instructions The due date for filing Form 8752 and making the payment is the later of the following dates. 2013 1040ez instructions May 15 of the calendar year following the calendar year in which the applicable election year begins. 2013 1040ez instructions 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. 2013 1040ez instructions   A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, “ACTIVATING BACK-UP ELECTION. 2013 1040ez instructions ” 52-53-Week Tax Year A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year (discussed earlier) that ends with reference to either its required tax year or a tax year elected under section 444 (discussed earlier). 2013 1040ez instructions A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. 2013 1040ez instructions However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128. 2013 1040ez instructions Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. 2013 1040ez instructions See the Instructions for Form 1128 for details. 2013 1040ez instructions Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. 2013 1040ez instructions A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. 2013 1040ez instructions An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. 2013 1040ez instructions Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures. 2013 1040ez instructions See the Instructions for Form 1128 for details. 2013 1040ez instructions Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. 2013 1040ez instructions Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 2013 1040ez instructions You choose an accounting method when you file your first tax return. 2013 1040ez instructions If you later want to change your accounting method, you must get IRS approval. 2013 1040ez instructions See Change in Accounting Method, later. 2013 1040ez instructions No single accounting method is required of all taxpayers. 2013 1040ez instructions You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. 2013 1040ez instructions In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. 2013 1040ez instructions You must use the same accounting method from year to year. 2013 1040ez instructions An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. 2013 1040ez instructions If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income. 2013 1040ez instructions Methods you can use. 2013 1040ez instructions   In general, you can compute your taxable income under any of the following accounting methods. 2013 1040ez instructions Cash method. 2013 1040ez instructions Accrual method. 2013 1040ez instructions Special methods of accounting for certain items of income and expenses. 2013 1040ez instructions A hybrid method which combines elements of two or more of the above accounting methods. 2013 1040ez instructions The cash and accrual methods of accounting are explained later. 2013 1040ez instructions Special methods. 2013 1040ez instructions   This publication does not discuss special methods of accounting for certain items of income or expenses. 2013 1040ez instructions For information on reporting income using one of the long-term contract methods, see section 460 of the Internal Revenue Code and the related regulations. 2013 1040ez instructions The following publications also discuss special methods of reporting income or expenses. 2013 1040ez instructions Publication 225, Farmer's Tax Guide. 2013 1040ez instructions Publication 535, Business Expenses. 2013 1040ez instructions Publication 537, Installment Sales. 2013 1040ez instructions Publication 946, How To Depreciate Property. 2013 1040ez instructions Hybrid method. 2013 1040ez instructions   Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. 2013 1040ez instructions However, the following restrictions apply. 2013 1040ez instructions If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. 2013 1040ez instructions See Exceptions under Inventories, later. 2013 1040ez instructions Generally, you can use the cash method for all other items of income and expenses. 2013 1040ez instructions See Inventories, later. 2013 1040ez instructions If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. 2013 1040ez instructions If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 2013 1040ez instructions Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. 2013 1040ez instructions Business and personal items. 2013 1040ez instructions   You can account for business and personal items using different accounting methods. 2013 1040ez instructions For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items. 2013 1040ez instructions Two or more businesses. 2013 1040ez instructions   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 2013 1040ez instructions No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. 2013 1040ez instructions Note. 2013 1040ez instructions If you use different accounting methods to create or shift profits or losses between businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct. 2013 1040ez instructions Cash Method Most individuals and many small businesses use the cash method of accounting. 2013 1040ez instructions Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. 2013 1040ez instructions See Inventories, later, for exceptions to this rule. 2013 1040ez instructions Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. 2013 1040ez instructions If you receive property and services, you must include their fair market value (FMV) in income. 2013 1040ez instructions Constructive receipt. 2013 1040ez instructions   Income is constructively received when an amount is credited to your account or made available to you without restriction. 2013 1040ez instructions You need not have possession of it. 2013 1040ez instructions If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. 2013 1040ez instructions Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. 2013 1040ez instructions Example. 2013 1040ez instructions You are a calendar year taxpayer. 2013 1040ez instructions Your bank credited, and made available, interest to your bank account in December 2012. 2013 1040ez instructions You did not withdraw it or enter it into your books until 2013. 2013 1040ez instructions You must include the amount in gross income for 2012, the year you constructively received it. 2013 1040ez instructions You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. 2013 1040ez instructions You must report the income in the year the property is received or made available to you without restriction. 2013 1040ez instructions Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. 2013 1040ez instructions This includes business expenses for which you contest liability. 2013 1040ez instructions However, you may not be able to deduct an expense paid in advance. 2013 1040ez instructions Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. 2013 1040ez instructions Expense paid in advance. 2013 1040ez instructions   An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. 2013 1040ez instructions   Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. 2013 1040ez instructions 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. 2013 1040ez instructions   If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule. 2013 1040ez instructions See Change in Accounting Method, later. 2013 1040ez instructions Example 1. 2013 1040ez instructions You are a calendar year taxpayer and pay $3,000 in 2012 for a business insurance policy that is effective for three years (36 months), beginning on July 1, 2012. 2013 1040ez instructions The general rule that an expense paid in advance is deductible only in the year to which it applies is applicable to this payment because the payment does not qualify for the 12-month rule. 2013 1040ez instructions Therefore, only $500 (6/36 x $3,000) is deductible in 2012, $1,000 (12/36 x $3,000) is deductible in 2013, $1,000 (12/36 x $3,000) is deductible in 2014, and the remaining $500 is deductible in 2015. 2013 1040ez instructions Example 2. 2013 1040ez instructions You are a calendar year taxpayer and pay $10,000 on July 1, 2012, for a business insurance policy that is effective for only one year beginning on July 1, 2012. 2013 1040ez instructions The 12-month rule applies. 2013 1040ez instructions Therefore, the full $10,000 is deductible in 2012. 2013 1040ez instructions Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. 2013 1040ez instructions (See Special rules for farming businesses, later. 2013 1040ez instructions ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. 2013 1040ez instructions See Gross receipts test, below. 2013 1040ez instructions A partnership with a corporation (other than an S corporation) as a partner, and with the partnership having average annual gross receipts exceeding $5 million. 2013 1040ez instructions See Gross receipts test, below. 2013 1040ez instructions A tax shelter. 2013 1040ez instructions Exceptions The following entities are not prohibited from using the cash method of accounting. 2013 1040ez instructions Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. 2013 1040ez instructions A qualified personal service corporation (PSC). 2013 1040ez instructions Gross receipts test. 2013 1040ez instructions   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. 2013 1040ez instructions A corporation or a partnership meets the test if, for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or less. 2013 1040ez instructions    An entity's average annual gross receipts for a prior tax year is determined by: Adding the gross receipts for that tax year and the 2 preceding tax years; and Dividing the total by 3. 2013 1040ez instructions See Gross receipts test for qualifying taxpayers, for more information. 2013 1040ez instructions Generally, a partnership applies the test at the partnership level. 2013 1040ez instructions Gross receipts for a short tax year are annualized. 2013 1040ez instructions Aggregation rules. 2013 1040ez instructions   Organizations that are members of an affiliated service group or a controlled group of corporations treated as a single employer for tax purposes are required to aggregate their gross receipts to determine whether the gross receipts test is met. 2013 1040ez instructions Change to accrual method. 2013 1040ez instructions   A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test. 2013 1040ez instructions Special rules for farming businesses. 2013 1040ez instructions   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. 2013 1040ez instructions However, certain corporations (other than S corporations) and partnerships that have a partner that is a corporation must use an accrual method for their farming business. 2013 1040ez instructions For this purpose, farming does not include the operation of a nursery or sod farm or the raising or harvesting of trees (other than fruit and nut trees). 2013 1040ez instructions   There is an exception to the requirement to use an accrual method for corporations with gross receipts of $1 million or less for each prior tax year after 1975. 2013 1040ez instructions For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. 2013 1040ez instructions See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. 2013 1040ez instructions Qualified PSC. 2013 1040ez instructions   A PSC that meets the following function and ownership tests can use the cash method. 2013 1040ez instructions Function test. 2013 1040ez instructions   A corporation meets the function test if at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting. 2013 1040ez instructions Ownership test. 2013 1040ez instructions   A corporation meets the ownership test if at least 95% of its stock is owned, directly or indirectly, at all times during the year by one or more of the following. 2013 1040ez instructions Employees performing services for the corporation in a field qualifying under the function test. 2013 1040ez instructions Retired employees who had performed services in those fields. 2013 1040ez instructions The estate of an employee described in (1) or (2). 2013 1040ez instructions Any other person who acquired the stock by reason of the death of an employee referred to in (1) or (2), but only for the 2-year period beginning on the date of death. 2013 1040ez instructions   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. 2013 1040ez instructions Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. 2013 1040ez instructions Other forms of indirect stock ownership, such as stock owned by family members, are generally not considered when determining if the ownership test is met. 2013 1040ez instructions   For purposes of the ownership test, a person is not considered an employee of a corporation unless that person performs more than minimal services for the corporation. 2013 1040ez instructions Change to accrual method. 2013 1040ez instructions   A corporation that fails to meet the function test for any tax year; or fails to meet the ownership test at any time during any tax year must change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. 2013 1040ez instructions A corporation that fails to meet the function test or the ownership test is not treated as a qualified PSC for any part of that tax year. 2013 1040ez instructions Accrual Method Under the accrual method of accounting, generally you report income in the year it is earned and deduct or capitalize expenses in the year incurred. 2013 1040ez instructions The purpose of an accrual method of accounting is to match income and expenses in the correct year. 2013 1040ez instructions Income Generally, you include an amount in 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. 2013 1040ez instructions Under this rule, you report an amount in your gross income on the earliest of the following dates. 2013 1040ez instructions When you receive payment. 2013 1040ez instructions When the income amount is due to you. 2013 1040ez instructions When you earn the income. 2013 1040ez instructions When title has passed. 2013 1040ez instructions Estimated income. 2013 1040ez instructions   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 you make that determination. 2013 1040ez instructions Change in payment schedule. 2013 1040ez instructions   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 reduced rate. 2013 1040ez instructions Continue this procedure until you complete the services, then account for the difference. 2013 1040ez instructions Advance Payment for Services 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. 2013 1040ez instructions 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. 2013 1040ez instructions However, you cannot postpone including any payment beyond that tax year. 2013 1040ez instructions Service agreement. 2013 1040ez instructions   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. 2013 1040ez instructions This includes an agreement providing for incidental replacement of parts or materials. 2013 1040ez instructions However, this applies only if you offer the property without a service agreement in the normal course of business. 2013 1040ez instructions Postponement not allowed. 2013 1040ez instructions   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. 2013 1040ez instructions You are to perform any part of the service after the end of the tax year immediately following the year you receive the advance payment. 2013 1040ez instructions You are to perform any part of the service at any unspecified future date that may be after the end of the tax year immediately following the year you receive the advance payment. 2013 1040ez instructions Examples. 2013 1040ez instructions   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. 2013 1040ez instructions Example 1. 2013 1040ez instructions You manufacture, sell, and service computers. 2013 1040ez instructions You received payment in 2012 for a one-year contingent service contract on a computer you sold. 2013 1040ez instructions You can postpone including in income the part of the payment you did not earn in 2012 if, in the normal course of your business, you offer computers for sale without a contingent service contract. 2013 1040ez instructions Example 2. 2013 1040ez instructions You are in the television repair business. 2013 1040ez instructions You received payments in 2012 for one-year contracts under which you agree to repair or replace certain parts that fail to function properly in television sets manufactured and sold by unrelated parties. 2013 1040ez instructions You include the payments in gross income as you earn them. 2013 1040ez instructions Example 3. 2013 1040ez instructions You own a dance studio. 2013 1040ez instructions On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. 2013 1040ez instructions You give eight lessons in 2012. 2013 1040ez instructions Under this method of including advance payments, you must include one-sixth (8/48) of the payment in income for 2012, and five-sixths (40/48) of the payment in 2013, even if you do not give all the lessons by the end of 2013. 2013 1040ez instructions Example 4. 2013 1040ez instructions Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. 2013 1040ez instructions You must include the entire payment in income in 2012 since part of the services may be performed after the following year. 2013 1040ez instructions Guarantee or warranty. 2013 1040ez instructions   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. 2013 1040ez instructions Prepaid rent. 2013 1040ez instructions   You cannot postpone reporting income from prepaid rent. 2013 1040ez instructions Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. 2013 1040ez instructions You provide significant service when you supply space in a hotel, boarding house, tourist home, motor court, motel, or apartment house that furnishes hotel services. 2013 1040ez instructions Books and records. 2013 1040ez instructions   Any advance payment you include in gross receipts on your tax return for the year you receive payment must not be less than the payment you include in income for financial reports under the method of accounting used for those reports. 2013 1040ez instructions Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. 2013 1040ez instructions IRS approval. 2013 1040ez instructions   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. 2013 1040ez instructions Advance Payment for Sales Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. 2013 1040ez instructions However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. 2013 1040ez instructions An agreement includes a gift certificate that can be redeemed for goods. 2013 1040ez instructions Amounts due and payable are considered received. 2013 1040ez instructions How to report payments. 2013 1040ez instructions   Generally, include an advance payment in income in the year in which you receive it. 2013 1040ez instructions However, you can use the alternative method, discussed next. 2013 1040ez instructions Alternative method of reporting. 2013 1040ez instructions   Under the alternative method, generally include an advance payment in income in the earlier tax year in which you: Include advance payments in gross receipts under the method of accounting you use for tax purposes, or Include any part of advance payments in income for financial reports under the method of accounting used for those reports. 2013 1040ez instructions Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. 2013 1040ez instructions Example 1. 2013 1040ez instructions You are a retailer. 2013 1040ez instructions You use an accrual method of accounting and account for the sale of goods when you ship the goods. 2013 1040ez instructions You use this method for both tax and financial reporting purposes. 2013 1040ez instructions You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. 2013 1040ez instructions However, see Exception for inventory goods, later. 2013 1040ez instructions Example 2. 2013 1040ez instructions You are a calendar year taxpayer. 2013 1040ez instructions You manufacture household furniture and use an accrual method of accounting. 2013 1040ez instructions Under this method, you accrue income for your financial reports when you ship the furniture. 2013 1040ez instructions For tax purposes, you do not accrue income until the furniture has been delivered and accepted. 2013 1040ez instructions In 2012, you received an advance payment of $8,000 for an order of furniture to be manufactured for a total price of $20,000. 2013 1040ez instructions You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. 2013 1040ez instructions For tax purposes, you include the $8,000 advance payment in gross income for 2012; and include the remaining $12,000 of the contract price in gross income for 2013. 2013 1040ez instructions Information schedule. 2013 1040ez instructions   If you use the alternative method of reporting advance payments, you must attach a statement with the following information to your tax return each year. 2013 1040ez instructions Total advance payments received in the current tax year. 2013 1040ez instructions Total advance payments received in earlier tax years and not included in income before the current tax year. 2013 1040ez instructions Total payments received in earlier tax years included in income for the current tax year. 2013 1040ez instructions Exception for inventory goods. 2013 1040ez instructions   If you have an agreement to sell goods properly included in inventory, you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet the following requirements. 2013 1040ez instructions You account for the advance payment under the alternative method (discussed earlier). 2013 1040ez instructions You have received a substantial advance payment on the agreement (discussed next). 2013 1040ez instructions You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. 2013 1040ez instructions These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. 2013 1040ez instructions   If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments. 2013 1040ez instructions You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. 2013 1040ez instructions If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. 2013 1040ez instructions Note. 2013 1040ez instructions You must report any advance payments you receive after the second year in the year received. 2013 1040ez instructions No further deferral is allowed. 2013 1040ez instructions Substantial advance payments. 2013 1040ez instructions   Under an agreement for a future sale, you have substantial advance payments if, by the end of the tax year, the total advance payments received during that year and preceding tax years are equal to or more than the total costs reasonably estimated to be includible in inventory because of the agreement. 2013 1040ez instructions Example. 2013 1040ez instructions You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. 2013 1040ez instructions In 2008, you entered into a contract for the sale of goods properly includible in your inventory. 2013 1040ez instructions The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. 2013 1040ez instructions You receive the following advance payments under the contract. 2013 1040ez instructions 2009 $17,500 2010 10,000 2011 7,500 2012 5,000 2013 5,000 2014 5,000 Total contract price $50,000   Your customer asked you to deliver the goods in 2015. 2013 1040ez instructions In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. 2013 1040ez instructions Since the advance payments you had received by the end of 2010 were more than the costs you estimated, the payments are substantial advance payments. 2013 1040ez instructions   For 2012, include in income all payments you received by the end of 2012, the second tax year following the tax year in which you received substantial advance payments. 2013 1040ez instructions You must include $40,000 in sales for 2012 (the total amounts received from 2009 through 2012) and include in inventory the cost of the goods (or similar goods) on hand. 2013 1040ez instructions If no such goods are on hand, then estimate the cost necessary to satisfy the contract. 2013 1040ez instructions   No further deferral is allowed. 2013 1040ez instructions You must include in gross income the advance payment you receive each remaining year of the contract. 2013 1040ez instructions Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. 2013 1040ez instructions IRS approval. 2013 1040ez instructions   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. 2013 1040ez instructions Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. 2013 1040ez instructions The all-events test has been met. 2013 1040ez instructions The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 2013 1040ez instructions Economic performance has occurred. 2013 1040ez instructions Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 2013 1040ez instructions 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 the property is used. 2013 1040ez instructions If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2013 1040ez instructions Example. 2013 1040ez instructions You are a calendar year taxpayer. 2013 1040ez instructions You buy office supplies in December 2012. 2013 1040ez instructions You receive the supplies and the bill in December, but you pay the bill in January 2013. 2013 1040ez instructions You can deduct the expense in 2012 because all events have occurred to fix the liability, the amount of the liability can be determined, and economic performance occurred in 2012. 2013 1040ez instructions Your office supplies may qualify as a recurring item, discussed later. 2013 1040ez instructions If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). 2013 1040ez instructions Workers' compensation and tort liability. 2013 1040ez instructions   If you are required to make payments under workers' compensation laws or in satisfaction of any tort liability, economic performance occurs as you make the payments. 2013 1040ez instructions If you are required to make payments to a special designated settlement fund established by court order for a tort liability, economic performance occurs as you make the payments. 2013 1040ez instructions Taxes. 2013 1040ez instructions   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. 2013 1040ez instructions are paid. 2013 1040ez instructions However, you can elect to treat taxes as a recurring item, discussed later. 2013 1040ez instructions You can also elect to ratably accrue real estate taxes. 2013 1040ez instructions See chapter 5 of Publication 535 for information about real estate taxes. 2013 1040ez instructions Other liabilities. 2013 1040ez instructions   Other liabilities for which economic performance occurs as you make payments include liabilities for breach of contract (to the extent of incidental, consequential, and liquidated damages), violation of law, rebates and refunds, awards, prizes, jackpots, insurance, and warranty and service contracts. 2013 1040ez instructions Interest. 2013 1040ez instructions   Economic performance occurs with the passage of time (as the borrower uses, and the lender forgoes use of, the lender's money) rather than as payments are made. 2013 1040ez instructions Compensation for services. 2013 1040ez instructions   Generally, economic performance occurs as an employee renders service to the employer. 2013 1040ez instructions However, deductions for compensation or other benefits paid to an employee in a year subsequent to economic performance are subject to the rules governing deferred compensation, deferred benefits, and funded welfare benefit plans. 2013 1040ez instructions For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. 2013 1040ez instructions Vacation pay. 2013 1040ez instructions   You can take a current deduction for vacation pay earned by your employees if you pay it during the year or, if the amount is vested, within 2½ months after the end of the year. 2013 1040ez instructions If you pay it later than this, you must deduct it in the year actually paid. 2013 1040ez instructions An amount is vested if your right to it cannot be nullified or cancelled. 2013 1040ez instructions Exception for recurring items. 2013 1040ez instructions   An exception to the economic performance rule allows certain recurring items to be treated as incurred during the tax year even though economic performance has not occurred. 2013 1040ez instructions The exception applies if all the following requirements are met. 2013 1040ez instructions The all-events test, discussed earlier, is met. 2013 1040ez instructions Economic performance occurs by the earlier of the following dates. 2013 1040ez instructions 8½ months after the close of the year. 2013 1040ez instructions The date you file a timely return (including extensions) for the year. 2013 1040ez instructions The item is recurring in nature and you consistently treat similar items as incurred in the tax year in which the all-events test is met. 2013 1040ez instructions Either: The item is not material, or Accruing the item in the year in which the all-events test is met results in a better match against income than accruing the item in the year of economic performance. 2013 1040ez instructions This exception does not apply to workers' compensation or tort liabilities. 2013 1040ez instructions Amended return. 2013 1040ez instructions   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. 2013 1040ez instructions You can do so if economic performance for the liability occurs after you file your tax return for the year, but within 8½ months after the close of the tax year. 2013 1040ez instructions Recurrence and consistency. 2013 1040ez instructions   To determine whether an item is recurring and consistently reported, consider the frequency with which the item and similar items are incurred (or expected to be incurred) and how you report these items for tax purposes. 2013 1040ez instructions A new expense or an expense not incurred every year can be treated as recurring if it is reasonable to expect that it will be incurred regularly in the future. 2013 1040ez instructions Materiality. 2013 1040ez instructions   Factors to consider in determining the materiality of a recurring item include the size of the item (both in absolute terms and in relation to your income and other expenses) and the treatment of the item on your financial statements. 2013 1040ez instructions   An item considered material for financial statement purposes is also considered material for tax purposes. 2013 1040ez instructions However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. 2013 1040ez instructions Matching expenses with income. 2013 1040ez instructions   Costs directly associated with the revenue of a period are properly allocable to that period. 2013 1040ez instructions To determine whether the accrual of an expense in a particular year results in a better match with the income to which it relates, generally accepted accounting principles (GAAP; visit www. 2013 1040ez instructions fasab. 2013 1040ez instructions gov/accepted. 2013 1040ez instructions html) are an important factor. 2013 1040ez instructions   For example, if you report sales income in the year of sale, but you do not ship the goods until the following year, the shipping costs are more properly matched to income in the year of sale than the year the goods are shipped. 2013 1040ez instructions Expenses that cannot be practically associated with income of a particular period, such as advertising costs, should be assigned to the period the costs are incurred. 2013 1040ez instructions However, the matching requirement is considered met for certain types of expenses. 2013 1040ez instructions These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. 2013 1040ez instructions Expenses Paid in Advance An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. 2013 1040ez instructions Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. 2013 1040ez instructions 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. 2013 1040ez instructions If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must get IRS approval before using the general rule and/or the 12-month rule. 2013 1040ez instructions See Change in Accounting Method, later, for information on how to get IRS approval. 2013 1040ez instructions See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. 2013 1040ez instructions Related Persons Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. 2013 1040ez instructions Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 2013 1040ez instructions See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. 2013 1040ez instructions Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 2013 1040ez instructions If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. 2013 1040ez instructions However, see Exceptions, next. 2013 1040ez instructions See also Accrual Method, earlier. 2013 1040ez instructions To figure taxable income, you must value your inventory at the beginning and end of each tax year. 2013 1040ez instructions To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. 2013 1040ez instructions See Identifying Cost and Valuing Inventory, later. 2013 1040ez instructions The rules for valuing inventory are not the same for all businesses. 2013 1040ez instructions The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 2013 1040ez instructions Your inventory practices must be consistent from year to year. 2013 1040ez instructions The rules discussed here apply only if they do not conflict with the uniform capitalization rules of section 263A and the mark-to-market rules of section 475. 2013 1040ez instructions Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. 2013 1040ez instructions These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). 2013 1040ez instructions A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. 2013 1040ez instructions irs. 2013 1040ez instructions gov/pub/irs-irbs/irb01–02. 2013 1040ez instructions pdf. 2013 1040ez instructions A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. 2013 1040ez instructions irs. 2013 1040ez instructions gov/pub/irs-irbs/irb02–18. 2013 1040ez instructions pdf. 2013 1040ez instructions In addition to the information provided in this publication, you should see the revenue procedures referenced in the list, above, and the instructions for Form 3115 for information you will need to adopt or change to these accounting methods (see Changing methods, later). 2013 1040ez instructions Qualifying taxpayer. 2013 1040ez instructions   You are a qualifying taxpayer under Revenue Procedure 2001-10 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 17, 1998 (see Gross receipts test for qualifying taxpayers, next). 2013 1040ez instructions Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. 2013 1040ez instructions You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. 2013 1040ez instructions Gross receipts test for qualifying taxpayers. 2013 1040ez instructions   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. 2013 1040ez instructions List each of the test years. 2013 1040ez instructions For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. 2013 1040ez instructions Step 2. 2013 1040ez instructions Determine your average annual gross receipts for each test year listed in Step 1. 2013 1040ez instructions Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. 2013 1040ez instructions Step 3. 2013 1040ez instructions You meet the gross receipts test for qualifying taxpayers if your average annual gross receipts for each test year listed in Step 1 is $1 million or less. 2013 1040ez instructions Qualifying small business taxpayer. 2013 1040ez instructions   You are a qualifying small business taxpayer under Revenue Procedure 2002-28 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 31, 2000 (see Gross receipts test for qualifying small business taxpayers, next). 2013 1040ez instructions Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. 2013 1040ez instructions You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. 2013 1040ez instructions Your principle business activity is an eligible business. 2013 1040ez instructions See Eligible business, later. 2013 1040ez instructions You have not changed (or have not been required to change) from the cash method because you became ineligible to use the cash method under Revenue Procedure 2002-28. 2013 1040ez instructions Note. 2013 1040ez instructions Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. 2013 1040ez instructions A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. 2013 1040ez instructions See Special rules for farming businesses under Cash Method, earlier. 2013 1040ez instructions Gross receipts test for qualifying small business taxpayers. 2013 1040ez instructions   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. 2013 1040ez instructions List each of the test years. 2013 1040ez instructions For qualifying small business taxpayers under Revenue Procedure 2002-28, the test years are each prior tax year ending on or after December 31, 2000. 2013 1040ez instructions Step 2. 2013 1040ez instructions Determine your average annual gross receipts for each test year listed in Step 1. 2013 1040ez instructions Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. 2013 1040ez instructions Step 3. 2013 1040ez instructions You meet the gross receipts test for qualifying small business taxpayers if your average annual gross receipts for each test year listed in Step 1 is $10 million or less. 2013 1040ez instructions Eligible business. 2013 1040ez instructions   An eligible business is any business for which a qualified small business taxpayer can use the cash method and choose to not keep an inventory. 2013 1040ez instructions You have an eligible business if you meet any of the following requirements. 2013 1040ez instructions Your principal business activity is described in a North American Industry Classification System (NAICS) code other than any of the following NAICS subsector codes: NAICS codes 211 and 212 (mining activities). 2013 1040ez instructions NAICS codes 31-33 (manufacturing). 2013 1040ez instructions NAICS code 42 (wholesale trade). 2013 1040ez instructions NAICS codes 44-45 (retail trade). 2013 1040ez instructions NAICS codes 5111 and 5122 (information industries). 2013 1040ez instructions Your principal business activity is the provision of services, including the provision of property incident to those services. 2013 1040ez instructions Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. 2013 1040ez instructions   Information about the NAICS codes can be found at http://www. 2013 1040ez instructions census. 2013 1040ez instructions gov/naics or in the instructions for your federal income tax return. 2013 1040ez instructions Gross receipts. 2013 1040ez instructions   In general, gross receipts must include all receipts from all your trades or businesses that must be recognized under the method of accounting you used for that tax year for federal income tax purposes. 2013 1040ez instructions See the definit
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The 2013 1040ez Instructions

2013 1040ez instructions 25. 2013 1040ez instructions   Nonbusiness Casualty and Theft Losses Table of Contents What's New Introduction Useful Items - You may want to see: CasualtyFamily pet. 2013 1040ez instructions Progressive deterioration. 2013 1040ez instructions Damage from corrosive drywall. 2013 1040ez instructions Theft Loss on Deposits Proof of Loss Figuring a LossDecrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Single Casualty on Multiple Properties Deduction Limits$100 Rule 10% Rule When To Report Gains and LossesDisaster Area Loss How To Report Gains and Losses What's New New Section C of Form 4684 for Ponzi-type investment schemes. 2013 1040ez instructions  Section C of Form 4684 is new for 2013. 2013 1040ez instructions You must complete Section C if you are claiming a theft loss deduction due to a Ponzi-type investment scheme and are using Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58. 2013 1040ez instructions Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. 2013 1040ez instructions You do not need to complete Appendix A. 2013 1040ez instructions For details, see Losses from Ponzi-type investment schemes , in this chapter. 2013 1040ez instructions Introduction This chapter explains the tax treatment of personal (not business or investment related) casualty losses, theft losses, and losses on deposits. 2013 1040ez instructions The chapter also explains the following  topics. 2013 1040ez instructions How to figure the amount of your loss. 2013 1040ez instructions How to treat insurance and other reimbursements you receive. 2013 1040ez instructions The deduction limits. 2013 1040ez instructions When and how to report a casualty or theft. 2013 1040ez instructions Forms to file. 2013 1040ez instructions    When you have a casualty or theft, you have to file Form 4684. 2013 1040ez instructions You will also have to file one or more of the following forms. 2013 1040ez instructions Schedule A (Form 1040), Itemized Deductions Schedule D (Form 1040), Capital Gains and Losses Condemnations. 2013 1040ez instructions   For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544, Sales and Other Disposition of Assets. 2013 1040ez instructions Workbook for casualties and thefts. 2013 1040ez instructions    Publication 584 is available to help you make a list of your stolen or damaged personal-use property and figure your loss. 2013 1040ez instructions It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. 2013 1040ez instructions Business or investment-related losses. 2013 1040ez instructions   For information on a casualty or theft loss of business or income-producing property, see Publication 547, Casualties, Disasters, and Thefts. 2013 1040ez instructions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions  of Assets 547 Casualties, Disasters, and   Thefts 584 Casualty, Disaster, and Theft   Loss Workbook (Personal-Use  Property) Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule D (Form 1040) Capital Gains and Losses 4684 Casualties and Thefts Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. 2013 1040ez instructions A sudden event is one that is swift, not gradual or progressive. 2013 1040ez instructions An unexpected event is one that is ordinarily unanticipated and unintended. 2013 1040ez instructions An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. 2013 1040ez instructions Deductible losses. 2013 1040ez instructions   Deductible casualty losses can result from a number of different causes, including the following. 2013 1040ez instructions Car accidents (but see Nondeductible losses , next, for exceptions). 2013 1040ez instructions Earthquakes. 2013 1040ez instructions Fires (but see Nondeductible losses , next, for exceptions). 2013 1040ez instructions Floods. 2013 1040ez instructions Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses in Publication 547. 2013 1040ez instructions Mine cave-ins. 2013 1040ez instructions Shipwrecks. 2013 1040ez instructions Sonic booms. 2013 1040ez instructions Storms, including hurricanes and tornadoes. 2013 1040ez instructions Terrorist attacks. 2013 1040ez instructions Vandalism. 2013 1040ez instructions Volcanic eruptions. 2013 1040ez instructions Nondeductible losses. 2013 1040ez instructions   A casualty loss is not deductible if the damage or destruction is caused by the following. 2013 1040ez instructions Accidentally breaking articles such as glassware or china under normal conditions. 2013 1040ez instructions A family pet (explained below). 2013 1040ez instructions A fire if you willfully set it or pay someone else to set it. 2013 1040ez instructions A car accident if your willful negligence or willful act caused it. 2013 1040ez instructions The same is true if the willful act or willful negligence of someone acting for you caused the accident. 2013 1040ez instructions Progressive deterioration (explained later). 2013 1040ez instructions Family pet. 2013 1040ez instructions   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. 2013 1040ez instructions Example. 2013 1040ez instructions Your antique oriental rug was damaged by your new puppy before it was housebroken. 2013 1040ez instructions Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. 2013 1040ez instructions Progressive deterioration. 2013 1040ez instructions    Loss of property due to progressive deterioration is not deductible as a casualty loss. 2013 1040ez instructions This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. 2013 1040ez instructions The following are examples of damage due to progressive deterioration. 2013 1040ez instructions The steady weakening of a building due to normal wind and weather conditions. 2013 1040ez instructions The deterioration and damage to a water heater that bursts. 2013 1040ez instructions However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. 2013 1040ez instructions Most losses of property caused by droughts. 2013 1040ez instructions To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. 2013 1040ez instructions Termite or moth damage. 2013 1040ez instructions The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. 2013 1040ez instructions However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. 2013 1040ez instructions Damage from corrosive drywall. 2013 1040ez instructions   Under a special procedure, you may be able to claim a casualty loss deduction for amounts you paid to repair damage to your home and household appliances that resulted from corrosive drywall. 2013 1040ez instructions For details, see Publication 547. 2013 1040ez instructions Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. 2013 1040ez instructions The taking of property must be illegal under the laws of the state where it occurred and it must have been done with criminal intent. 2013 1040ez instructions You do not need to show a conviction for theft. 2013 1040ez instructions Theft includes the taking of money or property by the following means. 2013 1040ez instructions Blackmail. 2013 1040ez instructions Burglary. 2013 1040ez instructions Embezzlement. 2013 1040ez instructions Extortion. 2013 1040ez instructions Kidnapping for ransom. 2013 1040ez instructions Larceny. 2013 1040ez instructions Robbery. 2013 1040ez instructions The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. 2013 1040ez instructions Decline in market value of stock. 2013 1040ez instructions   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. 2013 1040ez instructions However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. 2013 1040ez instructions You report a capital loss on Schedule D (Form 1040). 2013 1040ez instructions For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. 2013 1040ez instructions Mislaid or lost property. 2013 1040ez instructions   The simple disappearance of money or property is not a theft. 2013 1040ez instructions However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. 2013 1040ez instructions Sudden, unexpected, and unusual events are defined earlier. 2013 1040ez instructions Example. 2013 1040ez instructions A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. 2013 1040ez instructions The diamond falls from the ring and is never found. 2013 1040ez instructions The loss of the diamond is a casualty. 2013 1040ez instructions Losses from Ponzi-type investment schemes. 2013 1040ez instructions   If you had a loss from a Ponzi-type investment scheme, see: Revenue Ruling 2009-9, 2009-14 I. 2013 1040ez instructions R. 2013 1040ez instructions B. 2013 1040ez instructions 735 (available at www. 2013 1040ez instructions irs. 2013 1040ez instructions gov/irb/2009-14_IRB/ar07. 2013 1040ez instructions html). 2013 1040ez instructions Revenue Procedure 2009-20, 2009-14 I. 2013 1040ez instructions R. 2013 1040ez instructions B. 2013 1040ez instructions 749 (available at www. 2013 1040ez instructions irs. 2013 1040ez instructions gov/irb/2009-14_IRB/ar11. 2013 1040ez instructions html). 2013 1040ez instructions Revenue Procedure 2011-58, 2011-50 I. 2013 1040ez instructions R. 2013 1040ez instructions B. 2013 1040ez instructions 849 (available at www. 2013 1040ez instructions irs. 2013 1040ez instructions gov/irb/2011-50_IRB/ar11. 2013 1040ez instructions html). 2013 1040ez instructions If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. 2013 1040ez instructions Skip lines 19 to 27. 2013 1040ez instructions Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. 2013 1040ez instructions You do not need to complete Appendix A. 2013 1040ez instructions For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. 2013 1040ez instructions   If you choose not to use the procedures in Revenue Procedure 2009-20, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. 2013 1040ez instructions Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. 2013 1040ez instructions If you incurred this type of loss, you can choose one of the following ways to deduct the loss. 2013 1040ez instructions As a casualty loss. 2013 1040ez instructions As an ordinary loss. 2013 1040ez instructions As a nonbusiness bad debt. 2013 1040ez instructions Casualty loss or ordinary loss. 2013 1040ez instructions   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. 2013 1040ez instructions The choice is generally made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. 2013 1040ez instructions If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. 2013 1040ez instructions However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. 2013 1040ez instructions Once you make this choice, you cannot change it without permission from the Internal Revenue Service. 2013 1040ez instructions   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. 2013 1040ez instructions The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. 2013 1040ez instructions Your loss is subject to the 2%-of-adjusted-gross-income limit. 2013 1040ez instructions You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. 2013 1040ez instructions Nonbusiness bad debt. 2013 1040ez instructions   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. 2013 1040ez instructions How to report. 2013 1040ez instructions   The kind of deduction you choose for your loss on deposits determines how you report your loss. 2013 1040ez instructions If you choose: Casualty loss — report it on Form 4684 first and then on Schedule A (Form 1040). 2013 1040ez instructions Ordinary loss — report it on Schedule A (Form 1040) as a miscellaneous itemized deduction. 2013 1040ez instructions Nonbusiness bad debt — report it on Form 8949 first and then on Schedule D (Form 1040). 2013 1040ez instructions More information. 2013 1040ez instructions   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684 or Deposit in Insolvent or Bankrupt Financial Institution in Publication 550. 2013 1040ez instructions Proof of Loss To deduct a casualty or theft loss, you must be able to prove that you had a casualty or theft. 2013 1040ez instructions You also must be able to support the amount you take as a deduction. 2013 1040ez instructions Casualty loss proof. 2013 1040ez instructions   For a casualty loss, your records should show all the following. 2013 1040ez instructions The type of casualty (car accident, fire, storm, etc. 2013 1040ez instructions ) and when it occurred. 2013 1040ez instructions That the loss was a direct result of the casualty. 2013 1040ez instructions That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. 2013 1040ez instructions Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 2013 1040ez instructions Theft loss proof. 2013 1040ez instructions   For a theft loss, your records should show all the following. 2013 1040ez instructions When you discovered that your property was missing. 2013 1040ez instructions That your property was stolen. 2013 1040ez instructions That you were the owner of the property. 2013 1040ez instructions Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 2013 1040ez instructions It is important that you have records that will prove your deduction. 2013 1040ez instructions If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. 2013 1040ez instructions Figuring a Loss Figure the amount of your loss using the following steps. 2013 1040ez instructions Determine your adjusted basis in the property before the casualty or theft. 2013 1040ez instructions Determine the decrease in fair market value of the property as a result of the casualty or theft. 2013 1040ez instructions From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. 2013 1040ez instructions For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. 2013 1040ez instructions Gain from reimbursement. 2013 1040ez instructions   If your reimbursement is more than your adjusted basis in the property, you have a gain. 2013 1040ez instructions This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. 2013 1040ez instructions If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. 2013 1040ez instructions See Publication 547 for more information on how to treat a gain from a reimbursement for a casualty or theft. 2013 1040ez instructions Leased property. 2013 1040ez instructions   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. 2013 1040ez instructions Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. 2013 1040ez instructions The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. 2013 1040ez instructions FMV of stolen property. 2013 1040ez instructions   The FMV of property immediately after a theft is considered to be zero, since you no longer have the property. 2013 1040ez instructions Example. 2013 1040ez instructions Several years ago, you purchased silver dollars at face value for $150. 2013 1040ez instructions This is your adjusted basis in the property. 2013 1040ez instructions Your silver dollars were stolen this year. 2013 1040ez instructions The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. 2013 1040ez instructions Your theft loss is $150. 2013 1040ez instructions Recovered stolen property. 2013 1040ez instructions   Recovered stolen property is your property that was stolen and later returned to you. 2013 1040ez instructions If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. 2013 1040ez instructions Use this amount to refigure your total loss for the year in which the loss was deducted. 2013 1040ez instructions   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. 2013 1040ez instructions But report the difference only up to the amount of the loss that reduced your tax. 2013 1040ez instructions For more information on the amount to report, see Recoveries in chapter 12. 2013 1040ez instructions Figuring Decrease in FMV— Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. 2013 1040ez instructions However, other measures can also be used to establish certain decreases. 2013 1040ez instructions Appraisal. 2013 1040ez instructions   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. 2013 1040ez instructions The appraiser must recognize the effects of any general market decline that may occur along with the casualty. 2013 1040ez instructions This information is needed to limit any deduction to the actual loss resulting from damage to the property. 2013 1040ez instructions   Several factors are important in evaluating the accuracy of an appraisal, including the following. 2013 1040ez instructions The appraiser's familiarity with your property before and after the casualty or theft. 2013 1040ez instructions The appraiser's knowledge of sales of comparable property in the area. 2013 1040ez instructions The appraiser's knowledge of conditions in the area of the casualty. 2013 1040ez instructions The appraiser's method of appraisal. 2013 1040ez instructions    You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. 2013 1040ez instructions For more information on disasters, see Disaster Area Losses, in Pub. 2013 1040ez instructions 547. 2013 1040ez instructions Cost of cleaning up or making repairs. 2013 1040ez instructions   The cost of repairing damaged property is not part of a casualty loss. 2013 1040ez instructions Neither is the cost of cleaning up after a casualty. 2013 1040ez instructions But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. 2013 1040ez instructions The repairs are actually made. 2013 1040ez instructions The repairs are necessary to bring the property back to its condition before the casualty. 2013 1040ez instructions The amount spent for repairs is not excessive. 2013 1040ez instructions The repairs take care of the damage only. 2013 1040ez instructions The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. 2013 1040ez instructions Landscaping. 2013 1040ez instructions   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. 2013 1040ez instructions You may be able to measure your loss by what you spend on the following. 2013 1040ez instructions Removing destroyed or damaged trees and shrubs minus any salvage you receive. 2013 1040ez instructions Pruning and other measures taken to preserve damaged trees and shrubs. 2013 1040ez instructions Replanting necessary to restore the property to its approximate value before the casualty. 2013 1040ez instructions Car value. 2013 1040ez instructions    Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. 2013 1040ez instructions You can use the book's retail values and modify them by such factors as mileage and the condition of your car to figure its value. 2013 1040ez instructions The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. 2013 1040ez instructions If your car is not listed in the books, determine its value from other sources. 2013 1040ez instructions A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. 2013 1040ez instructions Figuring Decrease in FMV— Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. 2013 1040ez instructions Cost of protection. 2013 1040ez instructions   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. 2013 1040ez instructions The amount you spend on insurance or to board up your house against a storm is not part of your loss. 2013 1040ez instructions   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. 2013 1040ez instructions An example would be the cost of a dike to prevent flooding. 2013 1040ez instructions Exception. 2013 1040ez instructions   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments. 2013 1040ez instructions See Disaster Area Losses in Publication 547. 2013 1040ez instructions Incidental expenses. 2013 1040ez instructions   Any incidental expenses you have due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. 2013 1040ez instructions Replacement cost. 2013 1040ez instructions   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. 2013 1040ez instructions Sentimental value. 2013 1040ez instructions   Do not consider sentimental value when determining your loss. 2013 1040ez instructions If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. 2013 1040ez instructions Decline in market value of property in or near casualty area. 2013 1040ez instructions   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. 2013 1040ez instructions You have a loss only for actual casualty damage to your property. 2013 1040ez instructions However, if your home is in a federally declared disaster area, see Disaster Area Losses in Publication 547. 2013 1040ez instructions Costs of photographs and appraisals. 2013 1040ez instructions    Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. 2013 1040ez instructions Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. 2013 1040ez instructions    Appraisals are used to figure the decrease in FMV because of a casualty or theft. 2013 1040ez instructions See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. 2013 1040ez instructions   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. 2013 1040ez instructions You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). 2013 1040ez instructions For information about miscellaneous deductions, see chapter 28. 2013 1040ez instructions Adjusted Basis Adjusted basis is your basis in the property (usually cost) increased or decreased by various events, such as improvements and casualty losses. 2013 1040ez instructions For more information, see chapter 13. 2013 1040ez instructions Insurance and Other Reimbursements If you receive an insurance payment or other type of reimbursement, you must subtract the reimbursement when you figure your loss. 2013 1040ez instructions You do not have a casualty or theft loss to the extent you are reimbursed. 2013 1040ez instructions If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. 2013 1040ez instructions You must reduce your loss even if you do not receive payment until a later tax year. 2013 1040ez instructions See Reimbursement Received After Deducting Loss , later. 2013 1040ez instructions Failure to file a claim for reimbursement. 2013 1040ez instructions   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. 2013 1040ez instructions Otherwise, you cannot deduct this loss as a casualty or theft loss. 2013 1040ez instructions However, this rule does not apply to the portion of the loss not covered by insurance (for example, a deductible). 2013 1040ez instructions Example. 2013 1040ez instructions You have a car insurance policy with a $1,000 deductible. 2013 1040ez instructions Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the deduction limits discussed later). 2013 1040ez instructions This is true even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. 2013 1040ez instructions Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. 2013 1040ez instructions Other types of reimbursements are discussed next. 2013 1040ez instructions Also see the Instructions for Form 4684. 2013 1040ez instructions Employer's emergency disaster fund. 2013 1040ez instructions   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. 2013 1040ez instructions Take into consideration only the amount you used to replace your destroyed or damaged property. 2013 1040ez instructions Example. 2013 1040ez instructions Your home was extensively damaged by a tornado. 2013 1040ez instructions Your loss after reimbursement from your insurance company was $10,000. 2013 1040ez instructions Your employer set up a disaster relief fund for its employees. 2013 1040ez instructions Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. 2013 1040ez instructions You received $4,000 from the fund and spent the entire amount on repairs to your home. 2013 1040ez instructions In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. 2013 1040ez instructions Your casualty loss before applying the deduction limits discussed later is $6,000. 2013 1040ez instructions Cash gifts. 2013 1040ez instructions   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. 2013 1040ez instructions This applies even if you use the money to pay for repairs to property damaged in the disaster. 2013 1040ez instructions Example. 2013 1040ez instructions Your home was damaged by a hurricane. 2013 1040ez instructions Relatives and neighbors made cash gifts to you that were excludable from your income. 2013 1040ez instructions You used part of the cash gifts to pay for repairs to your home. 2013 1040ez instructions There were no limits or restrictions on how you could use the cash gifts. 2013 1040ez instructions Because it was an excludable gift, the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. 2013 1040ez instructions Insurance payments for living expenses. 2013 1040ez instructions   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. 2013 1040ez instructions You lose the use of your main home because of a casualty. 2013 1040ez instructions Government authorities do not allow you access to your main home because of a casualty or threat of one. 2013 1040ez instructions Inclusion in income. 2013 1040ez instructions   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. 2013 1040ez instructions Report this amount on Form 1040, line 21. 2013 1040ez instructions However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. 2013 1040ez instructions See Qualified disaster relief payments, under Disaster Area Losses in Publication 547. 2013 1040ez instructions   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. 2013 1040ez instructions Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. 2013 1040ez instructions Generally, these expenses include the amounts you pay for the following. 2013 1040ez instructions Rent for suitable housing. 2013 1040ez instructions Transportation. 2013 1040ez instructions Food. 2013 1040ez instructions Utilities. 2013 1040ez instructions Miscellaneous services. 2013 1040ez instructions Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. 2013 1040ez instructions Example. 2013 1040ez instructions As a result of a fire, you vacated your apartment for a month and moved to a motel. 2013 1040ez instructions You normally pay $525 a month for rent. 2013 1040ez instructions None was charged for the month the apartment was vacated. 2013 1040ez instructions Your motel rent for this month was $1,200. 2013 1040ez instructions You normally pay $200 a month for food. 2013 1040ez instructions Your food expenses for the month you lived in the motel were $400. 2013 1040ez instructions You received $1,100 from your insurance company to cover your living expenses. 2013 1040ez instructions You determine the payment you must include in income as follows. 2013 1040ez instructions 1) Insurance payment for living expenses $1,100 2) Actual expenses during the month you are unable to use your home because of fire 1,600   3) Normal living expenses 725   4) Temporary increase in living  expenses: Subtract line 3 from line 2 875 5) Amount of payment includible  in income: Subtract line 4  from line 1 $ 225 Tax year of inclusion. 2013 1040ez instructions   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. 2013 1040ez instructions Example. 2013 1040ez instructions Your main home was destroyed by a tornado in August 2011. 2013 1040ez instructions You regained use of your home in November 2012. 2013 1040ez instructions The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. 2013 1040ez instructions You include this amount in income on your 2012 Form 1040. 2013 1040ez instructions If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. 2013 1040ez instructions Disaster relief. 2013 1040ez instructions   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss unless they are replacements for lost or destroyed property. 2013 1040ez instructions Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster are not taxable income to you. 2013 1040ez instructions For more information, see Disaster Area Losses in Publication 547. 2013 1040ez instructions Disaster unemployment assistance payments are unemployment benefits that are taxable. 2013 1040ez instructions Generally, disaster relief grants and qualified disaster mitigation payments made under the Robert T. 2013 1040ez instructions Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not includible in your income. 2013 1040ez instructions See Disaster Area Losses in Publication 547. 2013 1040ez instructions Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you receive your actual reimbursement. 2013 1040ez instructions This section explains the adjustment you may have to make. 2013 1040ez instructions Actual reimbursement less than expected. 2013 1040ez instructions   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. 2013 1040ez instructions Example. 2013 1040ez instructions Your personal car had an FMV of $2,000 when it was destroyed in a collision with another car in 2012. 2013 1040ez instructions The accident was due to the negligence of the other driver. 2013 1040ez instructions At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. 2013 1040ez instructions You did not have a deductible loss in 2012. 2013 1040ez instructions In January 2013, the court awarded you a judgment of $2,000. 2013 1040ez instructions However, in July it became apparent that you will be unable to collect any amount from the other driver. 2013 1040ez instructions You can deduct the loss in 2013 subject to the limits discussed later. 2013 1040ez instructions Actual reimbursement more than expected. 2013 1040ez instructions   If you later receive more reimbursement than you expected after you claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. 2013 1040ez instructions However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. 2013 1040ez instructions You do not refigure your tax for the year you claimed the deduction. 2013 1040ez instructions For more information, see Recoveries in chapter 12. 2013 1040ez instructions If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. 2013 1040ez instructions If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. 2013 1040ez instructions Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. 2013 1040ez instructions See Figuring a Gain in Publication 547 for more information on how to treat a gain from the reimbursement of a casualty or theft. 2013 1040ez instructions Actual reimbursement same as expected. 2013 1040ez instructions   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. 2013 1040ez instructions Example. 2013 1040ez instructions In December 2013, you had a collision while driving your personal car. 2013 1040ez instructions Repairs to the car cost $950. 2013 1040ez instructions You had $100 deductible collision insurance. 2013 1040ez instructions Your insurance company agreed to reimburse you for the rest of the damage. 2013 1040ez instructions Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. 2013 1040ez instructions Due to the $100 rule (discussed later under Deduction Limits ), you cannot deduct the $100 you paid as the deductible. 2013 1040ez instructions When you receive the $850 from the insurance company in 2014, do not report it as income. 2013 1040ez instructions Single Casualty on Multiple Properties Personal property. 2013 1040ez instructions   Personal property is any property that is not real property. 2013 1040ez instructions If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. 2013 1040ez instructions Then combine these separate losses to figure the total loss from that casualty or theft. 2013 1040ez instructions Example. 2013 1040ez instructions A fire in your home destroyed an upholstered chair, an oriental rug, and an antique table. 2013 1040ez instructions You did not have fire insurance to cover your loss. 2013 1040ez instructions (This was the only casualty or theft you had during the year. 2013 1040ez instructions ) You paid $750 for the chair and you established that it had an FMV of $500 just before the fire. 2013 1040ez instructions The rug cost $3,000 and had an FMV of $2,500 just before the fire. 2013 1040ez instructions You bought the table at an auction for $100 before discovering it was an antique. 2013 1040ez instructions It had been appraised at $900 before the fire. 2013 1040ez instructions You figure your loss on each of these items as follows:     Chair Rug Table 1) Basis (cost) $750 $3,000 $100 2) FMV before fire $500 $2,500 $900 3) FMV after fire –0– –0– –0– 4) Decrease in FMV $500 $2,500 $900 5) Loss (smaller of (1) or  (4)) $500 $2,500 $100           6) Total loss     $3,100 Real property. 2013 1040ez instructions   In figuring a casualty loss on personal-use real property, treat the entire property (including any improvements, such as buildings, trees, and shrubs) as one item. 2013 1040ez instructions Figure the loss using the smaller of the adjusted basis or the decrease in FMV of the entire property. 2013 1040ez instructions Example. 2013 1040ez instructions You bought your home a few years ago. 2013 1040ez instructions You paid $160,000 ($20,000 for the land and $140,000 for the house). 2013 1040ez instructions You also spent $2,000 for landscaping. 2013 1040ez instructions This year a fire destroyed your home. 2013 1040ez instructions The fire also damaged the shrubbery and trees in your yard. 2013 1040ez instructions The fire was your only casualty or theft loss this year. 2013 1040ez instructions Competent appraisers valued the property as a whole at $200,000 before the fire, but only $30,000 after the fire. 2013 1040ez instructions (The loss to your household furnishings is not shown in this example. 2013 1040ez instructions It would be figured separately on each item, as explained earlier under Personal property . 2013 1040ez instructions ) Shortly after the fire, the insurance company paid you $155,000 for the loss. 2013 1040ez instructions You figure your casualty loss as follows: 1) Adjusted basis of the entire property (land, building, and landscaping) $162,000 2) FMV of entire property before fire $200,000 3) FMV of entire property after fire 30,000 4) Decrease in FMV of entire  property $170,000 5) Loss (smaller of (1) or (4)) $162,000 6) Subtract insurance 155,000 7) Amount of loss after reimbursement $7,000 Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. 2013 1040ez instructions If the loss was to property for your personal use or your family's use, there are two limits on the amount you can deduct for your casualty or theft loss. 2013 1040ez instructions You must reduce each casualty or theft loss by $100 ($100 rule). 2013 1040ez instructions You must further reduce the total of all your casualty or theft losses by 10% of your adjusted gross income (10% rule). 2013 1040ez instructions You make these reductions on Form 4684. 2013 1040ez instructions These rules are explained next and Table 25-1 summarizes how to apply the $100 rule and the 10% rule in various situations. 2013 1040ez instructions For more detailed explanations and examples, see Publication 547. 2013 1040ez instructions Table 25-1. 2013 1040ez instructions How To Apply the Deduction Limits for Personal-Use Property   $100 Rule 10% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. 2013 1040ez instructions Apply this rule after you have figured the amount of your loss. 2013 1040ez instructions You must reduce your total casualty or theft loss by 10% of your adjusted gross income. 2013 1040ez instructions Apply this rule after you reduce each loss by $100 (the $100 rule). 2013 1040ez instructions Single Event Apply this rule only once, even if many pieces of property are affected. 2013 1040ez instructions Apply this rule only once, even if many pieces of property are affected. 2013 1040ez instructions More Than One Event Apply to the loss from each event. 2013 1040ez instructions Apply to the total of all your losses from all events. 2013 1040ez instructions More Than One Person— With Loss From the Same Event (other than a married couple filing jointly) Apply separately to each person. 2013 1040ez instructions Apply separately to each person. 2013 1040ez instructions Married Couple—With Loss From the Same Event Filing Jointly Apply as if you were one person. 2013 1040ez instructions Apply as if you were one person. 2013 1040ez instructions Filing Separately Apply separately to each spouse. 2013 1040ez instructions Apply separately to each spouse. 2013 1040ez instructions More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. 2013 1040ez instructions Apply separately to each owner of jointly owned property. 2013 1040ez instructions Property used partly for business and partly for personal purposes. 2013 1040ez instructions   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use part and for the business or income-producing part. 2013 1040ez instructions You must figure each loss separately because the $100 rule and the 10% rule apply only to the loss on the personal-use part of the property. 2013 1040ez instructions $100 Rule After you have figured your casualty or theft loss on personal-use property, you must reduce that loss by $100. 2013 1040ez instructions This reduction applies to each total casualty or theft loss. 2013 1040ez instructions It does not matter how many pieces of property are involved in an event. 2013 1040ez instructions Only a single $100 reduction applies. 2013 1040ez instructions Example. 2013 1040ez instructions A hailstorm damages your home and your car. 2013 1040ez instructions Determine the amount of loss, as discussed earlier, for each of these items. 2013 1040ez instructions Since the losses are due to a single event, you combine the losses and reduce the combined amount by $100. 2013 1040ez instructions Single event. 2013 1040ez instructions   Generally, events closely related in origin cause a single casualty. 2013 1040ez instructions It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. 2013 1040ez instructions 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. 2013 1040ez instructions Apply this rule after you reduce each loss by $100. 2013 1040ez instructions For more information, see the Form 4684 instructions. 2013 1040ez instructions If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. 2013 1040ez instructions Example 1. 2013 1040ez instructions In June, you discovered that your house had been burglarized. 2013 1040ez instructions Your loss after insurance reimbursement was $2,000. 2013 1040ez instructions Your adjusted gross income for the year you discovered the theft is $29,500. 2013 1040ez instructions You first apply the $100 rule and then the 10% rule. 2013 1040ez instructions Figure your theft loss deduction as follows. 2013 1040ez instructions 1) Loss after insurance $2,000 2) Subtract $100 100 3) Loss after $100 rule $1,900 4) Subtract 10% × $29,500 AGI 2,950 5) Theft loss deduction –0– You do not have a theft loss deduction because your loss after you apply the $100 rule ($1,900) is less than 10% of your adjusted gross income ($2,950). 2013 1040ez instructions Example 2. 2013 1040ez instructions In March, you had a car accident that totally destroyed your car. 2013 1040ez instructions You did not have collision insurance on your car, so you did not receive any insurance reimbursement. 2013 1040ez instructions Your loss on the car was $1,800. 2013 1040ez instructions In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items stored there. 2013 1040ez instructions Your loss on the basement items after reimbursement was $2,100. 2013 1040ez instructions Your adjusted gross income for the year that the accident and fire occurred is $25,000. 2013 1040ez instructions You figure your casualty loss deduction as follows. 2013 1040ez instructions       Base-     Car ment 1) Loss $1,800 $2,100 2) Subtract $100 per incident 100 100 3) Loss after $100 rule $1,700 $2,000 4) Total loss $3,700 5) Subtract 10% × $25,000 AGI 2,500 6) Casualty loss deduction $1,200 Gains and losses. 2013 1040ez instructions   If you had both gains and losses from casualties or thefts to personal-use property, you must compare your total gains to your total losses. 2013 1040ez instructions Do this after you have reduced each loss by any reimbursements and by $100, but before you have reduced the losses by 10% of your adjusted gross income. 2013 1040ez instructions Casualty or theft gains do not include gains you choose to postpone. 2013 1040ez instructions See Publication 547 for information on the postponement of gain. 2013 1040ez instructions Losses more than gains. 2013 1040ez instructions   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. 2013 1040ez instructions The rest, if any, is your deductible loss from personal-use property. 2013 1040ez instructions Gains more than losses. 2013 1040ez instructions   If your recognized gains are more than your losses, subtract your losses from your gains. 2013 1040ez instructions The difference is treated as capital gain and must be reported on Schedule D (Form 1040). 2013 1040ez instructions The 10% rule does not apply to your gains. 2013 1040ez instructions When To Report Gains and Losses Gains. 2013 1040ez instructions   If you receive an insurance or other reimbursement that is more than your adjusted basis in the destroyed or stolen property, you have a gain from the casualty or theft. 2013 1040ez instructions You must include this gain in your income in the year you receive the reimbursement, unless you choose to postpone reporting the gain as explained in Publication 547. 2013 1040ez instructions If you have a loss, see Table 25-2 . 2013 1040ez instructions Table 25-2. 2013 1040ez instructions When To Deduct a Loss IF you have a loss. 2013 1040ez instructions . 2013 1040ez instructions . 2013 1040ez instructions THEN deduct it in the year. 2013 1040ez instructions . 2013 1040ez instructions . 2013 1040ez instructions from a casualty, the loss occurred. 2013 1040ez instructions in a federally declared disaster area, the disaster occurred or the year immediately before the disaster. 2013 1040ez instructions from a theft, the theft was discovered. 2013 1040ez instructions on a deposit treated as a:   • casualty or any ordinary loss, a reasonable estimate can be made. 2013 1040ez instructions • bad debt, deposits are totally worthless. 2013 1040ez instructions Losses. 2013 1040ez instructions   Generally, you can deduct a casualty loss that is not reimbursable only in the tax year in which the casualty occurred. 2013 1040ez instructions This is true even if you do not repair or replace the damaged property until a later year. 2013 1040ez instructions   You can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. 2013 1040ez instructions   If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. 2013 1040ez instructions Loss on deposits. 2013 1040ez instructions   If your loss is a loss on deposits in an insolvent or bankrupt financial institution, see Loss on Deposits , earlier. 2013 1040ez instructions Disaster Area Loss You generally must deduct a casualty loss in the year it occurred. 2013 1040ez instructions However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct the loss on your tax return or amended return for either of the following years. 2013 1040ez instructions The year the disaster occurred. 2013 1040ez instructions The year immediately preceding the year the disaster occurred. 2013 1040ez instructions Gains. 2013 1040ez instructions    Special rules apply if you choose to postpone reporting gain on property damaged or destroyed in a federally declared disaster area. 2013 1040ez instructions For those special rules, see Publication 547. 2013 1040ez instructions Postponed tax deadlines. 2013 1040ez instructions   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. 2013 1040ez instructions The tax deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes, and making contributions to a traditional IRA or Roth IRA. 2013 1040ez instructions   If any tax deadline is postponed, the IRS will publicize the postponement in your area by publishing a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). 2013 1040ez instructions Go to www. 2013 1040ez instructions irs. 2013 1040ez instructions gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. 2013 1040ez instructions Who is eligible. 2013 1040ez instructions   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. 2013 1040ez instructions Any individual whose main home is located in a covered disaster area (defined next). 2013 1040ez instructions Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. 2013 1040ez instructions Any individual who is a relief worker affiliated with a recognized government or philanthropic organization who is assisting in a covered disaster area. 2013 1040ez instructions Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. 2013 1040ez instructions The main home or principal place of business does not have to be located in the covered disaster area. 2013 1040ez instructions Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. 2013 1040ez instructions The spouse on a joint return with a taxpayer who is eligible for postponements. 2013 1040ez instructions Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose records necessary to meet a postponed tax deadline are located in the covered disaster area. 2013 1040ez instructions Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. 2013 1040ez instructions Any other person determined by the IRS to be affected by a federally declared disaster. 2013 1040ez instructions Covered disaster area. 2013 1040ez instructions   This is an area of a federally declared disaster in which the IRS has decided to postpone tax deadlines for up to 1 year. 2013 1040ez instructions Abatement of interest and penalties. 2013 1040ez instructions   The IRS may abate the interest and penalties on underpaid income tax for the length of any postponement of tax deadlines. 2013 1040ez instructions More information. 2013 1040ez instructions   For more information, see Disaster Area Losses in Publication 547. 2013 1040ez instructions How To Report Gains and Losses Use Form 4684 to report a gain or a deductible loss from a casualty or theft. 2013 1040ez instructions If you have more than one casualty or theft, use a separate Form 4684 to determine your gain or loss for each event. 2013 1040ez instructions Combine the gains and losses on one Form 4684. 2013 1040ez instructions Follow the form instructions as to which lines to fill out. 2013 1040ez instructions In addition, you must use the appropriate schedule to report a gain or loss. 2013 1040ez instructions The schedule you use depends on whether you have a gain or loss. 2013 1040ez instructions If you have a: Report it on: Gain Schedule D (Form 1040) Loss Schedule A (Form 1040) Adjustments to basis. 2013 1040ez instructions   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive, and by any deductible loss. 2013 1040ez instructions Amounts you spend to restore your property after a casualty increase your adjusted basis. 2013 1040ez instructions See Adjusted Basis in chapter 13 for more information. 2013 1040ez instructions Net operating loss (NOL). 2013 1040ez instructions    If your casualty or theft loss deduction causes your deductions for the year to be more than your income for the year, you may have an NOL. 2013 1040ez instructions You can use an NOL to lower your tax in an earlier year, allowing you to get a refund for tax you have already paid. 2013 1040ez instructions Or, you can use it to lower your tax in a later year. 2013 1040ez instructions You do not have to be in business to have an NOL from a casualty or theft loss. 2013 1040ez instructions For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. 2013 1040ez instructions Prev  Up  Next   Home   More Online Publications