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2013 Income Tax Forms 1040ez

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2013 Income Tax Forms 1040ez

2013 income tax forms 1040ez Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. 2013 income tax forms 1040ez Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. 2013 income tax forms 1040ez Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. 2013 income tax forms 1040ez Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. 2013 income tax forms 1040ez However, a joint undertaking merely to share expenses is not a partnership. 2013 income tax forms 1040ez For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. 2013 income tax forms 1040ez The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. 2013 income tax forms 1040ez Organizations formed after 1996. 2013 income tax forms 1040ez   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. 2013 income tax forms 1040ez An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. 2013 income tax forms 1040ez An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. 2013 income tax forms 1040ez An insurance company. 2013 income tax forms 1040ez Certain banks. 2013 income tax forms 1040ez An organization wholly owned by a state, local, or foreign government. 2013 income tax forms 1040ez An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). 2013 income tax forms 1040ez Certain foreign organizations identified in section 301. 2013 income tax forms 1040ez 7701-2(b)(8) of the regulations. 2013 income tax forms 1040ez A tax-exempt organization. 2013 income tax forms 1040ez A real estate investment trust. 2013 income tax forms 1040ez An organization classified as a trust under section 301. 2013 income tax forms 1040ez 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. 2013 income tax forms 1040ez Any other organization that elects to be classified as a corporation by filing Form 8832. 2013 income tax forms 1040ez For more information, see the instructions for Form 8832. 2013 income tax forms 1040ez Limited liability company. 2013 income tax forms 1040ez   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2013 income tax forms 1040ez Unlike a partnership, none of the members of an LLC are personally liable for its debts. 2013 income tax forms 1040ez An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. 2013 income tax forms 1040ez 7701-3. 2013 income tax forms 1040ez See Form 8832 and section 301. 2013 income tax forms 1040ez 7701-3 of the regulations for more details. 2013 income tax forms 1040ez A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. 2013 income tax forms 1040ez Organizations formed before 1997. 2013 income tax forms 1040ez   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. 2013 income tax forms 1040ez Community property. 2013 income tax forms 1040ez    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. 2013 income tax forms 1040ez They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. 2013 income tax forms 1040ez A change in reporting position will be treated for federal tax purposes as a conversion of the entity. 2013 income tax forms 1040ez   A qualified entity is a business entity that meets all the following requirements. 2013 income tax forms 1040ez The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. 2013 income tax forms 1040ez No person other than one or both spouses would be considered an owner for federal tax purposes. 2013 income tax forms 1040ez The business entity is not treated as a corporation. 2013 income tax forms 1040ez   For more information about community property, see Publication 555, Community Property. 2013 income tax forms 1040ez Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2013 income tax forms 1040ez Family Partnership Members of a family can be partners. 2013 income tax forms 1040ez However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. 2013 income tax forms 1040ez If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. 2013 income tax forms 1040ez If capital is not a material income-producing factor, they joined together in good faith to conduct a business. 2013 income tax forms 1040ez They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. 2013 income tax forms 1040ez Capital is material. 2013 income tax forms 1040ez   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. 2013 income tax forms 1040ez Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. 2013 income tax forms 1040ez Capital is not material. 2013 income tax forms 1040ez   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. 2013 income tax forms 1040ez Capital interest. 2013 income tax forms 1040ez   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. 2013 income tax forms 1040ez The owner withdraws from the partnership. 2013 income tax forms 1040ez The partnership liquidates. 2013 income tax forms 1040ez   The mere right to share in earnings and profits is not a capital interest in the partnership. 2013 income tax forms 1040ez Gift of capital interest. 2013 income tax forms 1040ez   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. 2013 income tax forms 1040ez It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. 2013 income tax forms 1040ez The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. 2013 income tax forms 1040ez Purchase. 2013 income tax forms 1040ez   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. 2013 income tax forms 1040ez The fair market value of the purchased interest is considered donated capital. 2013 income tax forms 1040ez For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez A father sold 50% of his business to his son. 2013 income tax forms 1040ez The resulting partnership had a profit of $60,000. 2013 income tax forms 1040ez Capital is a material income-producing factor. 2013 income tax forms 1040ez The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. 2013 income tax forms 1040ez The $24,000 must be allocated to the father as compensation. 2013 income tax forms 1040ez Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. 2013 income tax forms 1040ez The son's share of partnership profit cannot be more than $18,000. 2013 income tax forms 1040ez Business owned and operated by spouses. 2013 income tax forms 1040ez   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. 2013 income tax forms 1040ez If so, they should report income or loss from the business on Form 1065. 2013 income tax forms 1040ez They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. 2013 income tax forms 1040ez However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. 2013 income tax forms 1040ez Qualified Joint Venture Election. 2013 income tax forms 1040ez   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. 2013 income tax forms 1040ez A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. 2013 income tax forms 1040ez   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. 2013 income tax forms 1040ez All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. 2013 income tax forms 1040ez Each spouse takes into account his or her respective share of these items as a sole proprietor. 2013 income tax forms 1040ez Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). 2013 income tax forms 1040ez For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. 2013 income tax forms 1040ez e. 2013 income tax forms 1040ez , based on their respective interests in the venture). 2013 income tax forms 1040ez   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. 2013 income tax forms 1040ez Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. 2013 income tax forms 1040ez   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. 2013 income tax forms 1040ez However, this may not be true if either spouse exceeds the social security tax limitation. 2013 income tax forms 1040ez   For more information on qualified joint ventures, go to IRS. 2013 income tax forms 1040ez gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. 2013 income tax forms 1040ez ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. 2013 income tax forms 1040ez The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. 2013 income tax forms 1040ez The agreement or modifications can be oral or written. 2013 income tax forms 1040ez Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. 2013 income tax forms 1040ez This filing date does not include any extension of time. 2013 income tax forms 1040ez If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. 2013 income tax forms 1040ez Terminating a Partnership A partnership terminates when one of the following events takes place. 2013 income tax forms 1040ez All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. 2013 income tax forms 1040ez At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. 2013 income tax forms 1040ez Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. 2013 income tax forms 1040ez See section 1. 2013 income tax forms 1040ez 708-1(b) of the regulations for more information on the termination of a partnership. 2013 income tax forms 1040ez For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. 2013 income tax forms 1040ez 708-1(c) and 1. 2013 income tax forms 1040ez 708-1(d) of the regulations. 2013 income tax forms 1040ez Date of termination. 2013 income tax forms 1040ez   The partnership's tax year ends on the date of termination. 2013 income tax forms 1040ez For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. 2013 income tax forms 1040ez For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. 2013 income tax forms 1040ez Short period return. 2013 income tax forms 1040ez   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. 2013 income tax forms 1040ez The return is due the 15th day of the fourth month following the date of termination. 2013 income tax forms 1040ez See Partnership Return (Form 1065), later, for information about filing Form 1065. 2013 income tax forms 1040ez Conversion of partnership into limited liability company (LLC). 2013 income tax forms 1040ez   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. 2013 income tax forms 1040ez The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. 2013 income tax forms 1040ez   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. 2013 income tax forms 1040ez Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. 2013 income tax forms 1040ez If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. 2013 income tax forms 1040ez For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. 2013 income tax forms 1040ez   The same rules apply if an LLC classified as a partnership is converted into a partnership. 2013 income tax forms 1040ez IRS e-file (Electronic Filing) Please click here for the text description of the image. 2013 income tax forms 1040ez e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). 2013 income tax forms 1040ez Other partnerships generally have the option to file electronically. 2013 income tax forms 1040ez For details about IRS e-file, see the Form 1065 instructions. 2013 income tax forms 1040ez Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. 2013 income tax forms 1040ez All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. 2013 income tax forms 1040ez However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. 2013 income tax forms 1040ez Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. 2013 income tax forms 1040ez Investing partnership. 2013 income tax forms 1040ez   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. 2013 income tax forms 1040ez They own the property as co-owners. 2013 income tax forms 1040ez They reserve the right separately to take or dispose of their shares of any property acquired or retained. 2013 income tax forms 1040ez They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. 2013 income tax forms 1040ez Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. 2013 income tax forms 1040ez Operating agreement partnership. 2013 income tax forms 1040ez   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. 2013 income tax forms 1040ez They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. 2013 income tax forms 1040ez They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. 2013 income tax forms 1040ez They do not jointly sell services or the property produced or extracted. 2013 income tax forms 1040ez Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. 2013 income tax forms 1040ez However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. 2013 income tax forms 1040ez Electing the exclusion. 2013 income tax forms 1040ez   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. 2013 income tax forms 1040ez This filing date includes any extension of time. 2013 income tax forms 1040ez See Regulations section 1. 2013 income tax forms 1040ez 761-2(b) for the procedures to follow. 2013 income tax forms 1040ez Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. 2013 income tax forms 1040ez The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. 2013 income tax forms 1040ez The return must be signed by a general partner. 2013 income tax forms 1040ez If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. 2013 income tax forms 1040ez A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. 2013 income tax forms 1040ez See the Instructions for Form 1065 for more information about who must file Form 1065. 2013 income tax forms 1040ez Partnership Distributions Partnership distributions include the following. 2013 income tax forms 1040ez A withdrawal by a partner in anticipation of the current year's earnings. 2013 income tax forms 1040ez A distribution of the current year's or prior years' earnings not needed for working capital. 2013 income tax forms 1040ez A complete or partial liquidation of a partner's interest. 2013 income tax forms 1040ez A distribution to all partners in a complete liquidation of the partnership. 2013 income tax forms 1040ez A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. 2013 income tax forms 1040ez If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. 2013 income tax forms 1040ez Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. 2013 income tax forms 1040ez Effect on partner's basis. 2013 income tax forms 1040ez   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. 2013 income tax forms 1040ez See Adjusted Basis under Basis of Partner's Interest, later. 2013 income tax forms 1040ez Effect on partnership. 2013 income tax forms 1040ez   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. 2013 income tax forms 1040ez The partnership may be able to elect to adjust the basis of its undistributed property. 2013 income tax forms 1040ez Certain distributions treated as a sale or exchange. 2013 income tax forms 1040ez   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. 2013 income tax forms 1040ez Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. 2013 income tax forms 1040ez Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. 2013 income tax forms 1040ez   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2013 income tax forms 1040ez   This treatment does not apply to the following distributions. 2013 income tax forms 1040ez A distribution of property to the partner who contributed the property to the partnership. 2013 income tax forms 1040ez Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. 2013 income tax forms 1040ez Substantially appreciated inventory items. 2013 income tax forms 1040ez   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. 2013 income tax forms 1040ez However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. 2013 income tax forms 1040ez Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. 2013 income tax forms 1040ez Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. 2013 income tax forms 1040ez If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. 2013 income tax forms 1040ez For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. 2013 income tax forms 1040ez Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez The adjusted basis of Jo's partnership interest is $14,000. 2013 income tax forms 1040ez She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. 2013 income tax forms 1040ez Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. 2013 income tax forms 1040ez Any gain on the land will be recognized when she sells or otherwise disposes of it. 2013 income tax forms 1040ez The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. 2013 income tax forms 1040ez Marketable securities treated as money. 2013 income tax forms 1040ez   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. 2013 income tax forms 1040ez This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. 2013 income tax forms 1040ez   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). 2013 income tax forms 1040ez   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. 2013 income tax forms 1040ez Loss on distribution. 2013 income tax forms 1040ez   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. 2013 income tax forms 1040ez The adjusted basis of the partner's interest in the partnership exceeds the distribution. 2013 income tax forms 1040ez The partner's entire interest in the partnership is liquidated. 2013 income tax forms 1040ez The distribution is in money, unrealized receivables, or inventory items. 2013 income tax forms 1040ez   There are exceptions to these general rules. 2013 income tax forms 1040ez See the following discussions. 2013 income tax forms 1040ez Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. 2013 income tax forms 1040ez Distribution of partner's debt. 2013 income tax forms 1040ez   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). 2013 income tax forms 1040ez   The partner is treated as having satisfied the debt for its fair market value. 2013 income tax forms 1040ez If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. 2013 income tax forms 1040ez   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. 2013 income tax forms 1040ez Net precontribution gain. 2013 income tax forms 1040ez   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. 2013 income tax forms 1040ez   The gain recognized is the lesser of the following amounts. 2013 income tax forms 1040ez The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. 2013 income tax forms 1040ez The “net precontribution gain” of the partner. 2013 income tax forms 1040ez This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. 2013 income tax forms 1040ez For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. 2013 income tax forms 1040ez   The character of the gain is determined by reference to the character of the net precontribution gain. 2013 income tax forms 1040ez This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. 2013 income tax forms 1040ez For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. 2013 income tax forms 1040ez Effect on basis. 2013 income tax forms 1040ez   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. 2013 income tax forms 1040ez Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. 2013 income tax forms 1040ez See Basis of Partner's Interest , later. 2013 income tax forms 1040ez   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. 2013 income tax forms 1040ez Exceptions. 2013 income tax forms 1040ez   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. 2013 income tax forms 1040ez For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. 2013 income tax forms 1040ez   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. 2013 income tax forms 1040ez Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. 2013 income tax forms 1040ez However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 2013 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez The adjusted basis of Emily's partnership interest is $30,000. 2013 income tax forms 1040ez She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. 2013 income tax forms 1040ez Her basis for the property is $20,000. 2013 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez The adjusted basis of Steve's partnership interest is $10,000. 2013 income tax forms 1040ez He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. 2013 income tax forms 1040ez His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). 2013 income tax forms 1040ez Complete liquidation of partner's interest. 2013 income tax forms 1040ez   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. 2013 income tax forms 1040ez Partner's holding period. 2013 income tax forms 1040ez   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. 2013 income tax forms 1040ez If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. 2013 income tax forms 1040ez Basis divided among properties. 2013 income tax forms 1040ez   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. 2013 income tax forms 1040ez For property distributed after August 5, 1997, allocate the basis using the following rules. 2013 income tax forms 1040ez Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. 2013 income tax forms 1040ez If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2013 income tax forms 1040ez Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. 2013 income tax forms 1040ez If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. 2013 income tax forms 1040ez If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2013 income tax forms 1040ez Allocating a basis increase. 2013 income tax forms 1040ez   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. 2013 income tax forms 1040ez If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. 2013 income tax forms 1040ez Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez Eun's basis in her partnership interest is $55,000. 2013 income tax forms 1040ez In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. 2013 income tax forms 1040ez Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. 2013 income tax forms 1040ez Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. 2013 income tax forms 1040ez To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). 2013 income tax forms 1040ez This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). 2013 income tax forms 1040ez She first allocates $35,000 to property A (its unrealized appreciation). 2013 income tax forms 1040ez The remaining $5,000 is allocated between the properties based on their fair market values. 2013 income tax forms 1040ez $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. 2013 income tax forms 1040ez Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). 2013 income tax forms 1040ez Allocating a basis decrease. 2013 income tax forms 1040ez   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. 2013 income tax forms 1040ez Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. 2013 income tax forms 1040ez If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. 2013 income tax forms 1040ez Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez Armando's basis in his partnership interest is $20,000. 2013 income tax forms 1040ez In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. 2013 income tax forms 1040ez Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. 2013 income tax forms 1040ez Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. 2013 income tax forms 1040ez To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). 2013 income tax forms 1040ez This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). 2013 income tax forms 1040ez He allocates the entire $10,000 to property D (its unrealized depreciation). 2013 income tax forms 1040ez Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). 2013 income tax forms 1040ez Distributions before August 6, 1997. 2013 income tax forms 1040ez   For property distributed before August 6, 1997, allocate the basis using the following rules. 2013 income tax forms 1040ez Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. 2013 income tax forms 1040ez If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. 2013 income tax forms 1040ez Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. 2013 income tax forms 1040ez Partner's interest more than partnership basis. 2013 income tax forms 1040ez   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. 2013 income tax forms 1040ez Special adjustment to basis. 2013 income tax forms 1040ez   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. 2013 income tax forms 1040ez To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. 2013 income tax forms 1040ez Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. 2013 income tax forms 1040ez   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. 2013 income tax forms 1040ez However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. 2013 income tax forms 1040ez   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. 2013 income tax forms 1040ez If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. 2013 income tax forms 1040ez   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. 2013 income tax forms 1040ez The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez Chin Ho purchased a 25% interest in X partnership for $17,000 cash. 2013 income tax forms 1040ez At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. 2013 income tax forms 1040ez Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. 2013 income tax forms 1040ez Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. 2013 income tax forms 1040ez The value of the inventory received was 25% of the value of all partnership inventory. 2013 income tax forms 1040ez (It is immaterial whether the inventory he received was on hand when he acquired his interest. 2013 income tax forms 1040ez ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. 2013 income tax forms 1040ez His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). 2013 income tax forms 1040ez The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. 2013 income tax forms 1040ez The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). 2013 income tax forms 1040ez His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). 2013 income tax forms 1040ez The remaining $11,500 is allocated to his new basis for the other property he received. 2013 income tax forms 1040ez Mandatory adjustment. 2013 income tax forms 1040ez   A partner does not always have a choice of making this special adjustment to basis. 2013 income tax forms 1040ez The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. 2013 income tax forms 1040ez The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. 2013 income tax forms 1040ez If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. 2013 income tax forms 1040ez The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. 2013 income tax forms 1040ez Required statement. 2013 income tax forms 1040ez   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. 2013 income tax forms 1040ez The statement must provide information necessary for the partner to compute the special basis adjustment. 2013 income tax forms 1040ez Marketable securities. 2013 income tax forms 1040ez   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. 2013 income tax forms 1040ez See Marketable securities treated as money under Partner's Gain or Loss, earlier. 2013 income tax forms 1040ez The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. 2013 income tax forms 1040ez Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. 2013 income tax forms 1040ez These transactions include the following. 2013 income tax forms 1040ez Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. 2013 income tax forms 1040ez Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. 2013 income tax forms 1040ez Payments by accrual basis partnership to cash basis partner. 2013 income tax forms 1040ez   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. 2013 income tax forms 1040ez However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. 2013 income tax forms 1040ez Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. 2013 income tax forms 1040ez A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. 2013 income tax forms 1040ez This treatment is for purposes of determining gross income and deductible business expenses only. 2013 income tax forms 1040ez For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. 2013 income tax forms 1040ez Guaranteed payments are not subject to income tax withholding. 2013 income tax forms 1040ez The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. 2013 income tax forms 1040ez They are also listed on Schedules K and K-1 of the partnership return. 2013 income tax forms 1040ez The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. 2013 income tax forms 1040ez Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. 2013 income tax forms 1040ez Generally, organizational and syndication expenses are not deductible by the partnership. 2013 income tax forms 1040ez However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). 2013 income tax forms 1040ez Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. 2013 income tax forms 1040ez Minimum payment. 2013 income tax forms 1040ez   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. 2013 income tax forms 1040ez The partnership has net income of $20,000. 2013 income tax forms 1040ez Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). 2013 income tax forms 1040ez The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). 2013 income tax forms 1040ez Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. 2013 income tax forms 1040ez If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. 2013 income tax forms 1040ez Self-employed health insurance premiums. 2013 income tax forms 1040ez   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. 2013 income tax forms 1040ez The partnership can deduct the payments as a business expense, and the partner must include them in gross income. 2013 income tax forms 1040ez However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. 2013 income tax forms 1040ez   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. 2013 income tax forms 1040ez The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. 2013 income tax forms 1040ez For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. 2013 income tax forms 1040ez Including payments in partner's income. 2013 income tax forms 1040ez   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. 2013 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. 2013 income tax forms 1040ez Her distributive share of the partnership income is 10%. 2013 income tax forms 1040ez The partnership has $50,000 of ordinary income after deducting the guaranteed payment. 2013 income tax forms 1040ez She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. 2013 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez Lamont is a calendar year taxpayer who is a partner in a partnership. 2013 income tax forms 1040ez The partnership uses a fiscal year that ended January 31, 2013. 2013 income tax forms 1040ez Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. 2013 income tax forms 1040ez He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. 2013 income tax forms 1040ez Payments resulting in loss. 2013 income tax forms 1040ez   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. 2013 income tax forms 1040ez The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. 2013 income tax forms 1040ez Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. 2013 income tax forms 1040ez Losses. 2013 income tax forms 1040ez   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. 2013 income tax forms 1040ez   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. 2013 income tax forms 1040ez   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. 2013 income tax forms 1040ez   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. 2013 income tax forms 1040ez If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. 2013 income tax forms 1040ez Gains. 2013 income tax forms 1040ez   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. 2013 income tax forms 1040ez More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). 2013 income tax forms 1040ez The property in the hands of the transferee immediately after the transfer is not a capital asset. 2013 income tax forms 1040ez Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. 2013 income tax forms 1040ez More than 50% ownership. 2013 income tax forms 1040ez   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. 2013 income tax forms 1040ez An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. 2013 income tax forms 1040ez An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. 2013 income tax forms 1040ez For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. 2013 income tax forms 1040ez If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. 2013 income tax forms 1040ez However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez Individuals A and B and Trust T are equal partners in Partnership ABT. 2013 income tax forms 1040ez A's husband, AH, is the sole beneficiary of Trust T. 2013 income tax forms 1040ez Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. 2013 income tax forms 1040ez As a result, A is a more-than-50% partner. 2013 income tax forms 1040ez This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. 2013 income tax forms 1040ez More information. 2013 income tax forms 1040ez   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 2013 income tax forms 1040ez Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. 2013 income tax forms 1040ez This applies whether a partnership is being formed or is already operating. 2013 income tax forms 1040ez The partnership's holding period for the property includes the partner's holding period. 2013 income tax forms 1040ez The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. 2013 income tax forms 1040ez The exchange is not subject to the rules explained later under Disposition of Partner's Interest. 2013 income tax forms 1040ez Disguised sales. 2013 income tax forms 1040ez   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. 2013 income tax forms 1040ez The distribution would not have been made but for the contribution. 2013 income tax forms 1040ez The partner's right to the distribution does not depend on the success of partnership operations. 2013 income tax forms 1040ez   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. 2013 income tax forms 1040ez However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. 2013 income tax forms 1040ez If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. 2013 income tax forms 1040ez Form 8275 required. 2013 income tax forms 1040ez   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. 2013 income tax forms 1040ez For exceptions to this requirement, see section 1. 2013 income tax forms 1040ez 707-3(c)(2) of the regulations. 2013 income tax forms 1040ez   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. 2013 income tax forms 1040ez   Form 8275 must include the following information. 2013 income tax forms 1040ez A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. 2013 income tax forms 1040ez A description of the transferred property or money, including its value. 2013 income tax forms 1040ez A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. 2013 income tax forms 1040ez See section 1. 2013 income tax forms 1040ez 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. 2013 income tax forms 1040ez Contribution to partnership treated as investment company. 2013 income tax forms 1040ez   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. 2013 income tax forms 1040ez   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. 2013 income tax forms 1040ez These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. 2013 income tax forms 1040ez For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. 2013 income tax forms 1040ez Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. 2013 income tax forms 1040ez   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. 2013 income tax forms 1040ez Contribution to foreign partnership. 2013 income tax forms 1040ez   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. 2013 income tax forms 1040ez Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. 2013 income tax forms 1040ez The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. 2013 income tax forms 1040ez   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. 2013 income tax forms 1040ez See the form instructions for more information. 2013 income tax forms 1040ez Basis of contributed property. 2013 income tax forms 1040ez   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. 2013 income tax forms 1040ez Allocations to account for built-in gain or loss. 2013 income tax forms 1040ez   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. 2013 income tax forms 1040ez The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. 2013 income tax forms 1040ez This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. 2013 income tax forms 1040ez   The partnership can use different allocation methods for different items of contributed property. 2013 income tax forms 1040ez A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. 2013 income tax forms 1040ez See section 1. 2013 income tax forms 1040ez 704-3 of the regulations for allocation methods generally considered reasonable. 2013 income tax forms 1040ez   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. 2013 income tax forms 1040ez If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. 2013 income tax forms 1040ez However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez Areta and Sofia formed an equal partnership. 2013 income tax forms 1040ez Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. 2013 income tax forms 1040ez The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. 2013 income tax forms 1040ez In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. 2013 income tax forms 1040ez Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. 2013 income tax forms 1040ez To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. 2013 income tax forms 1040ez However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. 2013 income tax forms 1040ez The entire $400 must be allocated to Areta. 2013 income tax forms 1040ez Distribution of contributed property to another partner. 2013 income tax forms 1040ez   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. 2013 income tax forms 1040ez   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. 2013 income tax forms 1040ez This amount is the difference between the property's basis and its fair market value at the time of contribution. 2013 income tax forms 1040ez The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. 2013 income tax forms 1040ez Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. 2013 income tax forms 1040ez Disposition of certain contributed property. 2013 income tax forms 1040ez   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. 2013 income tax forms 1040ez Unrealized receivables. 2013 income tax forms 1040ez If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. 2013 income tax forms 1040ez Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. 2013 income tax forms 1040ez When reading the definition, substitute “partner” for “partnership. 2013 income tax forms 1040ez ” Inventory items. 2013 income tax forms 1040ez If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. 2013 income tax forms 1040ez Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. 2013 income tax forms 1040ez Capital loss property. 2013 income tax forms 1040ez If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. 2013 income tax forms 1040ez The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. 2013 income tax forms 1040ez Substituted basis property. 2013 income tax forms 1040ez If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. 2013 income tax forms 1040ez Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. 2013 income tax forms 1040ez Capital interest. 2013 income tax forms 1040ez   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. 2013 income tax forms 1040ez This determination generally is made at the time of receipt of the partnership interest. 2013 income tax forms 1040ez The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. 2013 income tax forms 1040ez The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. 2013 income tax forms 1040ez   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. 2013 income tax forms 1040ez Profits interest. 2013 income tax forms 1040ez   A profits interest is a partnership interest other than a capital interest. 2013 income tax forms 1040ez If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. 2013 income tax forms 1040ez However, this does not apply in the following situations. 2013 income tax forms 1040ez The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. 2013 income tax forms 1040ez Within 2 years of receipt, the partner disposes of the profits interest. 2013 income tax forms 1040ez The profits interest is a limited partnership interest in a publicly traded partnership. 2013 income tax forms 1040ez   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. 2013 income tax forms 1040ez Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. 2013 income tax forms 1040ez If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. 2013 income tax forms 1040ez Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. 2013 income tax forms 1040ez Interest acquired by gift, etc. 2013 income tax forms 1040ez   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. 2013 income tax forms 1040ez Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). 2013 income tax forms 1040ez The basis of an interest in a partnership is increased or decreased by certain items. 2013 income tax forms 1040ez Increases. 2013 income tax forms 1040ez   A partner's basis is increased by the following items. 2013 income tax forms 1040ez The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. 2013 income tax forms 1040ez The partner's distributive share of taxable and nontaxable partnership income. 2013 income tax forms 1040ez The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. 2013 income tax forms 1040ez Decreases. 2013 income tax forms 1040ez   The partner's basis is decreased (but never below zero) by the following items. 2013 income tax forms 1040ez The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. 2013 income tax forms 1040ez The partner's distributive share of the partnership losses (including capital losses). 2013 income tax forms 1040ez The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. 2013 income tax forms 1040ez This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. 2013 income tax forms 1040ez The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. 2013 income tax forms 1040ez Partner's liabilities assumed by partnership. 2013 income tax forms 1040ez   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. 2013 income tax forms 1040ez This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. 2013 income tax forms 1040ez The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. 2013 income tax forms 1040ez See Effect of Partnership Liabilities , later. 2013 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. 2013 income tax forms 1040ez The partnership assumed payment of the mortgage. 2013 income tax forms 1040ez The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. 2013 income tax forms 1040ez If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. 2013 income tax forms 1040ez The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. 2013 income tax forms 1040ez However, this gain would not increase the basis of his partnership interest. 2013 income tax forms 1040ez Book value of partner's interest. 2013 income tax forms 1040ez   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. 2013 income tax forms 1040ez His partner contributes $1,000 cash. 2013 income tax forms 1040ez While each partner has increased his capital account by $1,000, which will be re
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The 2013 Income Tax Forms 1040ez

2013 income tax forms 1040ez 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 income tax forms 1040ez Hybrid method. 2013 income tax forms 1040ez Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 2013 income tax forms 1040ez Accounting Periods You must use a tax year to figure your taxable income. 2013 income tax forms 1040ez A tax year is an annual accounting period for keeping records and reporting income and expenses. 2013 income tax forms 1040ez An annual accounting period does not include a short tax year (discussed later). 2013 income tax forms 1040ez You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). 2013 income tax forms 1040ez Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. 2013 income tax forms 1040ez A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. 2013 income tax forms 1040ez 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 income tax forms 1040ez This section discusses: A calendar year. 2013 income tax forms 1040ez A fiscal year (including a period of 52 or 53 weeks). 2013 income tax forms 1040ez A short tax year. 2013 income tax forms 1040ez An improper tax year. 2013 income tax forms 1040ez A change in tax year. 2013 income tax forms 1040ez Special situations that apply to individuals. 2013 income tax forms 1040ez Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. 2013 income tax forms 1040ez Special situations that apply to corporations. 2013 income tax forms 1040ez Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez See Change in Tax Year, later. 2013 income tax forms 1040ez Generally, anyone can adopt the calendar year. 2013 income tax forms 1040ez 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 income tax forms 1040ez Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez If you make this election, your 52-53-week tax year must always end on the same day of the week. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Election. 2013 income tax forms 1040ez   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. 2013 income tax forms 1040ez The month in which the new 52-53-week tax year ends. 2013 income tax forms 1040ez The day of the week on which the tax year always ends. 2013 income tax forms 1040ez The date the tax year ends. 2013 income tax forms 1040ez 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 income tax forms 1040ez   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. 2013 income tax forms 1040ez   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 income tax forms 1040ez Example. 2013 income tax forms 1040ez Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. 2013 income tax forms 1040ez 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 income tax forms 1040ez Short Tax Year A short tax year is a tax year of less than 12 months. 2013 income tax forms 1040ez 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 income tax forms 1040ez Tax on a short period tax return is figured differently for each situation. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez XYZ Corporation was organized on July 1, 2012. 2013 income tax forms 1040ez It elected the calendar year as its tax year. 2013 income tax forms 1040ez Therefore, its first tax return was due March 15, 2013. 2013 income tax forms 1040ez This short period return will cover the period from July 1, 2012, through December 31, 2012. 2013 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez A calendar year corporation dissolved on July 23, 2012. 2013 income tax forms 1040ez Its final return is due by October 15, 2012. 2013 income tax forms 1040ez It will cover the short period from January 1, 2012, through July 23, 2012. 2013 income tax forms 1040ez Death of individual. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Example. 2013 income tax forms 1040ez   Agnes Green was a single, calendar year taxpayer. 2013 income tax forms 1040ez She died on March 6, 2012. 2013 income tax forms 1040ez Her final income tax return must be filed by April 15, 2013. 2013 income tax forms 1040ez It will cover the short period from January 1, 2012, to March 6, 2012. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Figure tax for a short year under the general rule, explained below. 2013 income tax forms 1040ez You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. 2013 income tax forms 1040ez General rule. 2013 income tax forms 1040ez   Income tax for a short tax year must be annualized. 2013 income tax forms 1040ez However, self-employment tax is figured on the actual self-employment income for the short period. 2013 income tax forms 1040ez Individuals. 2013 income tax forms 1040ez   An individual must figure income tax for the short tax year as follows. 2013 income tax forms 1040ez Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. 2013 income tax forms 1040ez You must itemize deductions when you file a short period tax return. 2013 income tax forms 1040ez Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. 2013 income tax forms 1040ez Subtract the amount in (2) from the amount in (1). 2013 income tax forms 1040ez The result is your modified taxable income. 2013 income tax forms 1040ez Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. 2013 income tax forms 1040ez The result is your annualized income. 2013 income tax forms 1040ez Figure the total tax on your annualized income using the appropriate tax rate schedule. 2013 income tax forms 1040ez Multiply the total tax by the number of months in the short tax year and divide the result by 12. 2013 income tax forms 1040ez The result is your tax for the short tax year. 2013 income tax forms 1040ez Relief procedure. 2013 income tax forms 1040ez   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. 2013 income tax forms 1040ez It may result in less tax. 2013 income tax forms 1040ez Under this procedure, the tax is figured by two separate methods. 2013 income tax forms 1040ez 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 income tax forms 1040ez For more information, see section 443(b)(2) of the Internal Revenue Code. 2013 income tax forms 1040ez Alternative minimum tax. 2013 income tax forms 1040ez   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 income tax forms 1040ez Multiply the AMTI by 12. 2013 income tax forms 1040ez Divide the result by the number of months in the short tax year. 2013 income tax forms 1040ez Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. 2013 income tax forms 1040ez The result is the annualized AMT. 2013 income tax forms 1040ez Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. 2013 income tax forms 1040ez   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. 2013 income tax forms 1040ez For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. 2013 income tax forms 1040ez Tax withheld from wages. 2013 income tax forms 1040ez   You can claim a credit against your income tax liability for federal income tax withheld from your wages. 2013 income tax forms 1040ez Federal income tax is withheld on a calendar year basis. 2013 income tax forms 1040ez The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. 2013 income tax forms 1040ez Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. 2013 income tax forms 1040ez 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 income tax forms 1040ez See Accounting Periods, earlier, for a description of permissible tax years. 2013 income tax forms 1040ez To change to a proper tax year, you must do one of the following. 2013 income tax forms 1040ez 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 income tax forms 1040ez Attach a completed Form 1128 to the amended tax return. 2013 income tax forms 1040ez Write “FILED UNDER REV. 2013 income tax forms 1040ez PROC. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. 2013 income tax forms 1040ez See the Instructions for Form 1128 for exceptions. 2013 income tax forms 1040ez If you qualify for an automatic approval request, a user fee is not required. 2013 income tax forms 1040ez Individuals Generally, individuals must adopt the calendar year as their tax year. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. 2013 income tax forms 1040ez 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 income tax forms 1040ez The following discussions provide the rules for partnerships, S corporations, and PSCs. 2013 income tax forms 1040ez Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez The partnership can establish a business purpose for a different tax year. 2013 income tax forms 1040ez The rules for the required tax year for partnerships are as follows. 2013 income tax forms 1040ez 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 income tax forms 1040ez If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. 2013 income tax forms 1040ez A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. 2013 income tax forms 1040ez 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 income tax forms 1040ez If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. 2013 income tax forms 1040ez Least aggregate deferral of income. 2013 income tax forms 1040ez   The tax year that results in the least aggregate deferral of income is determined as follows. 2013 income tax forms 1040ez Figure the number of months of deferral for each partner using one partner's tax year. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). 2013 income tax forms 1040ez Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. 2013 income tax forms 1040ez A uses the calendar year and B uses a fiscal year ending November 30. 2013 income tax forms 1040ez 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 income tax forms 1040ez Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. 2013 income tax forms 1040ez 5 -0- -0- B 11/30 0. 2013 income tax forms 1040ez 5 11 5. 2013 income tax forms 1040ez 5 Total Deferral 5. 2013 income tax forms 1040ez 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. 2013 income tax forms 1040ez 5 1 0. 2013 income tax forms 1040ez 5 B 11/30 0. 2013 income tax forms 1040ez 5 -0- -0- Total Deferral 0. 2013 income tax forms 1040ez 5 When determination is made. 2013 income tax forms 1040ez   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 income tax forms 1040ez However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. 2013 income tax forms 1040ez This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. 2013 income tax forms 1040ez Short period return. 2013 income tax forms 1040ez   When a partnership changes its tax year, a short period return must be filed. 2013 income tax forms 1040ez 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 income tax forms 1040ez   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 income tax forms 1040ez The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. 2013 income tax forms 1040ez 706-1. 2013 income tax forms 1040ez ” More information. 2013 income tax forms 1040ez   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. 2013 income tax forms 1040ez S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. 2013 income tax forms 1040ez A permitted tax year is any of the following. 2013 income tax forms 1040ez The calendar year. 2013 income tax forms 1040ez A tax year elected under section 444 of the Internal Revenue Code. 2013 income tax forms 1040ez See Section 444 Election, below for details. 2013 income tax forms 1040ez A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. 2013 income tax forms 1040ez Any other tax year for which the corporation establishes a business purpose. 2013 income tax forms 1040ez 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 income tax forms 1040ez For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. 2013 income tax forms 1040ez Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. 2013 income tax forms 1040ez The corporation makes an election under section 444 of the Internal Revenue Code. 2013 income tax forms 1040ez See Section 444 Election, below for details. 2013 income tax forms 1040ez 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 income tax forms 1040ez The corporation establishes a business purpose for a fiscal year. 2013 income tax forms 1040ez See the Instructions for Form 1120 for general information about PSCs. 2013 income tax forms 1040ez For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. 2013 income tax forms 1040ez 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 income tax forms 1040ez Certain restrictions apply to the election. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. 2013 income tax forms 1040ez It is not a member of a tiered structure (defined in section 1. 2013 income tax forms 1040ez 444-2T of the regulations). 2013 income tax forms 1040ez It has not previously had a section 444 election in effect. 2013 income tax forms 1040ez It elects a year that meets the deferral period requirement. 2013 income tax forms 1040ez Deferral period. 2013 income tax forms 1040ez   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 income tax forms 1040ez Retaining tax year. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez Adopting or changing tax year. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. 2013 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez BD Partnership uses a calendar year, which is also its required tax year. 2013 income tax forms 1040ez BD cannot make a section 444 election because the deferral period is zero. 2013 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez E, a newly formed partnership, began operations on December 1. 2013 income tax forms 1040ez E is owned by calendar year partners. 2013 income tax forms 1040ez E wants to make a section 444 election to adopt a September 30 tax year. 2013 income tax forms 1040ez 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 income tax forms 1040ez Making the election. 2013 income tax forms 1040ez   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. 2013 income tax forms 1040ez 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 income tax forms 1040ez For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. 2013 income tax forms 1040ez Note. 2013 income tax forms 1040ez If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. 2013 income tax forms 1040ez   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 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. 2013 income tax forms 1040ez AB must file Form 8716 by March 17, 2013. 2013 income tax forms 1040ez Example 3. 2013 income tax forms 1040ez B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. 2013 income tax forms 1040ez B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. 2013 income tax forms 1040ez 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 income tax forms 1040ez Note. 2013 income tax forms 1040ez The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. 2013 income tax forms 1040ez Extension of time for filing. 2013 income tax forms 1040ez   There is an automatic extension of 12 months to make this election. 2013 income tax forms 1040ez See the Form 8716 instructions for more information. 2013 income tax forms 1040ez Terminating the election. 2013 income tax forms 1040ez   The section 444 election remains in effect until it is terminated. 2013 income tax forms 1040ez If the election is terminated, another section 444 election cannot be made for any tax year. 2013 income tax forms 1040ez   The election ends when any of the following applies to the partnership, S corporation, or PSC. 2013 income tax forms 1040ez The entity changes to its required tax year. 2013 income tax forms 1040ez The entity liquidates. 2013 income tax forms 1040ez The entity becomes a member of a tiered structure. 2013 income tax forms 1040ez The IRS determines that the entity willfully failed to comply with the required payments or distributions. 2013 income tax forms 1040ez   The election will also end if either of the following events occur. 2013 income tax forms 1040ez An S corporation's S election is terminated. 2013 income tax forms 1040ez However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. 2013 income tax forms 1040ez A PSC ceases to be a PSC. 2013 income tax forms 1040ez If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. 2013 income tax forms 1040ez Required payment for partnership or S corporation. 2013 income tax forms 1040ez   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. 2013 income tax forms 1040ez The required payment for that year (or any preceding tax year) is more than $500. 2013 income tax forms 1040ez    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Applicable election year. 2013 income tax forms 1040ez   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. 2013 income tax forms 1040ez 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 income tax forms 1040ez Required distribution for PSC. 2013 income tax forms 1040ez   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. 2013 income tax forms 1040ez If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. 2013 income tax forms 1040ez The amount deferred is treated as paid or incurred in the following tax year. 2013 income tax forms 1040ez   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 income tax forms 1040ez Back-up election. 2013 income tax forms 1040ez   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 income tax forms 1040ez If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). 2013 income tax forms 1040ez Making back-up election. 2013 income tax forms 1040ez   The general rules for making a section 444 election, as discussed earlier, apply. 2013 income tax forms 1040ez When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. 2013 income tax forms 1040ez 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 income tax forms 1040ez Activating election. 2013 income tax forms 1040ez   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. 2013 income tax forms 1040ez The due date for filing Form 8752 and making the payment is the later of the following dates. 2013 income tax forms 1040ez May 15 of the calendar year following the calendar year in which the applicable election year begins. 2013 income tax forms 1040ez 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. 2013 income tax forms 1040ez   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 income tax forms 1040ez ” 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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. 2013 income tax forms 1040ez See the Instructions for Form 1128 for details. 2013 income tax forms 1040ez Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. 2013 income tax forms 1040ez 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 income tax forms 1040ez An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. 2013 income tax forms 1040ez 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 income tax forms 1040ez See the Instructions for Form 1128 for details. 2013 income tax forms 1040ez Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. 2013 income tax forms 1040ez Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 2013 income tax forms 1040ez You choose an accounting method when you file your first tax return. 2013 income tax forms 1040ez If you later want to change your accounting method, you must get IRS approval. 2013 income tax forms 1040ez See Change in Accounting Method, later. 2013 income tax forms 1040ez No single accounting method is required of all taxpayers. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez You must use the same accounting method from year to year. 2013 income tax forms 1040ez An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. 2013 income tax forms 1040ez 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 income tax forms 1040ez Methods you can use. 2013 income tax forms 1040ez   In general, you can compute your taxable income under any of the following accounting methods. 2013 income tax forms 1040ez Cash method. 2013 income tax forms 1040ez Accrual method. 2013 income tax forms 1040ez Special methods of accounting for certain items of income and expenses. 2013 income tax forms 1040ez A hybrid method which combines elements of two or more of the above accounting methods. 2013 income tax forms 1040ez The cash and accrual methods of accounting are explained later. 2013 income tax forms 1040ez Special methods. 2013 income tax forms 1040ez   This publication does not discuss special methods of accounting for certain items of income or expenses. 2013 income tax forms 1040ez 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 income tax forms 1040ez The following publications also discuss special methods of reporting income or expenses. 2013 income tax forms 1040ez Publication 225, Farmer's Tax Guide. 2013 income tax forms 1040ez Publication 535, Business Expenses. 2013 income tax forms 1040ez Publication 537, Installment Sales. 2013 income tax forms 1040ez Publication 946, How To Depreciate Property. 2013 income tax forms 1040ez Hybrid method. 2013 income tax forms 1040ez   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 income tax forms 1040ez However, the following restrictions apply. 2013 income tax forms 1040ez If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. 2013 income tax forms 1040ez See Exceptions under Inventories, later. 2013 income tax forms 1040ez Generally, you can use the cash method for all other items of income and expenses. 2013 income tax forms 1040ez See Inventories, later. 2013 income tax forms 1040ez If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. 2013 income tax forms 1040ez If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 2013 income tax forms 1040ez Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. 2013 income tax forms 1040ez Business and personal items. 2013 income tax forms 1040ez   You can account for business and personal items using different accounting methods. 2013 income tax forms 1040ez 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 income tax forms 1040ez Two or more businesses. 2013 income tax forms 1040ez   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 2013 income tax forms 1040ez No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. 2013 income tax forms 1040ez Note. 2013 income tax forms 1040ez 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 income tax forms 1040ez Cash Method Most individuals and many small businesses use the cash method of accounting. 2013 income tax forms 1040ez 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 income tax forms 1040ez See Inventories, later, for exceptions to this rule. 2013 income tax forms 1040ez 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 income tax forms 1040ez If you receive property and services, you must include their fair market value (FMV) in income. 2013 income tax forms 1040ez Constructive receipt. 2013 income tax forms 1040ez   Income is constructively received when an amount is credited to your account or made available to you without restriction. 2013 income tax forms 1040ez You need not have possession of it. 2013 income tax forms 1040ez 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 income tax forms 1040ez Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez You are a calendar year taxpayer. 2013 income tax forms 1040ez Your bank credited, and made available, interest to your bank account in December 2012. 2013 income tax forms 1040ez You did not withdraw it or enter it into your books until 2013. 2013 income tax forms 1040ez You must include the amount in gross income for 2012, the year you constructively received it. 2013 income tax forms 1040ez 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 income tax forms 1040ez You must report the income in the year the property is received or made available to you without restriction. 2013 income tax forms 1040ez Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. 2013 income tax forms 1040ez This includes business expenses for which you contest liability. 2013 income tax forms 1040ez However, you may not be able to deduct an expense paid in advance. 2013 income tax forms 1040ez Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. 2013 income tax forms 1040ez Expense paid in advance. 2013 income tax forms 1040ez   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 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez   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 income tax forms 1040ez See Change in Accounting Method, later. 2013 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez 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 income tax forms 1040ez The 12-month rule applies. 2013 income tax forms 1040ez Therefore, the full $10,000 is deductible in 2012. 2013 income tax forms 1040ez Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. 2013 income tax forms 1040ez (See Special rules for farming businesses, later. 2013 income tax forms 1040ez ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. 2013 income tax forms 1040ez See Gross receipts test, below. 2013 income tax forms 1040ez 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 income tax forms 1040ez See Gross receipts test, below. 2013 income tax forms 1040ez A tax shelter. 2013 income tax forms 1040ez Exceptions The following entities are not prohibited from using the cash method of accounting. 2013 income tax forms 1040ez Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. 2013 income tax forms 1040ez A qualified personal service corporation (PSC). 2013 income tax forms 1040ez Gross receipts test. 2013 income tax forms 1040ez   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. 2013 income tax forms 1040ez 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 income tax forms 1040ez    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 income tax forms 1040ez See Gross receipts test for qualifying taxpayers, for more information. 2013 income tax forms 1040ez Generally, a partnership applies the test at the partnership level. 2013 income tax forms 1040ez Gross receipts for a short tax year are annualized. 2013 income tax forms 1040ez Aggregation rules. 2013 income tax forms 1040ez   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 income tax forms 1040ez Change to accrual method. 2013 income tax forms 1040ez   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 income tax forms 1040ez Special rules for farming businesses. 2013 income tax forms 1040ez   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. 2013 income tax forms 1040ez Qualified PSC. 2013 income tax forms 1040ez   A PSC that meets the following function and ownership tests can use the cash method. 2013 income tax forms 1040ez Function test. 2013 income tax forms 1040ez   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 income tax forms 1040ez Ownership test. 2013 income tax forms 1040ez   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 income tax forms 1040ez Employees performing services for the corporation in a field qualifying under the function test. 2013 income tax forms 1040ez Retired employees who had performed services in those fields. 2013 income tax forms 1040ez The estate of an employee described in (1) or (2). 2013 income tax forms 1040ez 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 income tax forms 1040ez   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez   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 income tax forms 1040ez Change to accrual method. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez The purpose of an accrual method of accounting is to match income and expenses in the correct year. 2013 income tax forms 1040ez 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 income tax forms 1040ez Under this rule, you report an amount in your gross income on the earliest of the following dates. 2013 income tax forms 1040ez When you receive payment. 2013 income tax forms 1040ez When the income amount is due to you. 2013 income tax forms 1040ez When you earn the income. 2013 income tax forms 1040ez When title has passed. 2013 income tax forms 1040ez Estimated income. 2013 income tax forms 1040ez   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 income tax forms 1040ez Change in payment schedule. 2013 income tax forms 1040ez   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 income tax forms 1040ez Continue this procedure until you complete the services, then account for the difference. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez However, you cannot postpone including any payment beyond that tax year. 2013 income tax forms 1040ez Service agreement. 2013 income tax forms 1040ez   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 income tax forms 1040ez This includes an agreement providing for incidental replacement of parts or materials. 2013 income tax forms 1040ez However, this applies only if you offer the property without a service agreement in the normal course of business. 2013 income tax forms 1040ez Postponement not allowed. 2013 income tax forms 1040ez   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Examples. 2013 income tax forms 1040ez   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. 2013 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez You manufacture, sell, and service computers. 2013 income tax forms 1040ez You received payment in 2012 for a one-year contingent service contract on a computer you sold. 2013 income tax forms 1040ez 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 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez You are in the television repair business. 2013 income tax forms 1040ez 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 income tax forms 1040ez You include the payments in gross income as you earn them. 2013 income tax forms 1040ez Example 3. 2013 income tax forms 1040ez You own a dance studio. 2013 income tax forms 1040ez On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. 2013 income tax forms 1040ez You give eight lessons in 2012. 2013 income tax forms 1040ez 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 income tax forms 1040ez Example 4. 2013 income tax forms 1040ez Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. 2013 income tax forms 1040ez You must include the entire payment in income in 2012 since part of the services may be performed after the following year. 2013 income tax forms 1040ez Guarantee or warranty. 2013 income tax forms 1040ez   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. 2013 income tax forms 1040ez Prepaid rent. 2013 income tax forms 1040ez   You cannot postpone reporting income from prepaid rent. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez Books and records. 2013 income tax forms 1040ez   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 income tax forms 1040ez Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. 2013 income tax forms 1040ez IRS approval. 2013 income tax forms 1040ez   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez An agreement includes a gift certificate that can be redeemed for goods. 2013 income tax forms 1040ez Amounts due and payable are considered received. 2013 income tax forms 1040ez How to report payments. 2013 income tax forms 1040ez   Generally, include an advance payment in income in the year in which you receive it. 2013 income tax forms 1040ez However, you can use the alternative method, discussed next. 2013 income tax forms 1040ez Alternative method of reporting. 2013 income tax forms 1040ez   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 income tax forms 1040ez Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. 2013 income tax forms 1040ez Example 1. 2013 income tax forms 1040ez You are a retailer. 2013 income tax forms 1040ez You use an accrual method of accounting and account for the sale of goods when you ship the goods. 2013 income tax forms 1040ez You use this method for both tax and financial reporting purposes. 2013 income tax forms 1040ez 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 income tax forms 1040ez However, see Exception for inventory goods, later. 2013 income tax forms 1040ez Example 2. 2013 income tax forms 1040ez You are a calendar year taxpayer. 2013 income tax forms 1040ez You manufacture household furniture and use an accrual method of accounting. 2013 income tax forms 1040ez Under this method, you accrue income for your financial reports when you ship the furniture. 2013 income tax forms 1040ez For tax purposes, you do not accrue income until the furniture has been delivered and accepted. 2013 income tax forms 1040ez 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 income tax forms 1040ez You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. 2013 income tax forms 1040ez 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 income tax forms 1040ez Information schedule. 2013 income tax forms 1040ez   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 income tax forms 1040ez Total advance payments received in the current tax year. 2013 income tax forms 1040ez Total advance payments received in earlier tax years and not included in income before the current tax year. 2013 income tax forms 1040ez Total payments received in earlier tax years included in income for the current tax year. 2013 income tax forms 1040ez Exception for inventory goods. 2013 income tax forms 1040ez   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 income tax forms 1040ez You account for the advance payment under the alternative method (discussed earlier). 2013 income tax forms 1040ez You have received a substantial advance payment on the agreement (discussed next). 2013 income tax forms 1040ez You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. 2013 income tax forms 1040ez 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 income tax forms 1040ez   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 income tax forms 1040ez You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. 2013 income tax forms 1040ez 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 income tax forms 1040ez Note. 2013 income tax forms 1040ez You must report any advance payments you receive after the second year in the year received. 2013 income tax forms 1040ez No further deferral is allowed. 2013 income tax forms 1040ez Substantial advance payments. 2013 income tax forms 1040ez   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 income tax forms 1040ez Example. 2013 income tax forms 1040ez You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. 2013 income tax forms 1040ez In 2008, you entered into a contract for the sale of goods properly includible in your inventory. 2013 income tax forms 1040ez The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. 2013 income tax forms 1040ez You receive the following advance payments under the contract. 2013 income tax forms 1040ez 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 income tax forms 1040ez In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. 2013 income tax forms 1040ez 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 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez If no such goods are on hand, then estimate the cost necessary to satisfy the contract. 2013 income tax forms 1040ez   No further deferral is allowed. 2013 income tax forms 1040ez You must include in gross income the advance payment you receive each remaining year of the contract. 2013 income tax forms 1040ez Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. 2013 income tax forms 1040ez IRS approval. 2013 income tax forms 1040ez   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. 2013 income tax forms 1040ez Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. 2013 income tax forms 1040ez The all-events test has been met. 2013 income tax forms 1040ez 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 income tax forms 1040ez Economic performance has occurred. 2013 income tax forms 1040ez Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 2013 income tax forms 1040ez 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 income tax forms 1040ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2013 income tax forms 1040ez Example. 2013 income tax forms 1040ez You are a calendar year taxpayer. 2013 income tax forms 1040ez You buy office supplies in December 2012. 2013 income tax forms 1040ez You receive the supplies and the bill in December, but you pay the bill in January 2013. 2013 income tax forms 1040ez 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 income tax forms 1040ez Your office supplies may qualify as a recurring item, discussed later. 2013 income tax forms 1040ez If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). 2013 income tax forms 1040ez Workers' compensation and tort liability. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez Taxes. 2013 income tax forms 1040ez   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. 2013 income tax forms 1040ez are paid. 2013 income tax forms 1040ez However, you can elect to treat taxes as a recurring item, discussed later. 2013 income tax forms 1040ez You can also elect to ratably accrue real estate taxes. 2013 income tax forms 1040ez See chapter 5 of Publication 535 for information about real estate taxes. 2013 income tax forms 1040ez Other liabilities. 2013 income tax forms 1040ez   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 income tax forms 1040ez Interest. 2013 income tax forms 1040ez   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 income tax forms 1040ez Compensation for services. 2013 income tax forms 1040ez   Generally, economic performance occurs as an employee renders service to the employer. 2013 income tax forms 1040ez 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 income tax forms 1040ez For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. 2013 income tax forms 1040ez Vacation pay. 2013 income tax forms 1040ez   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 income tax forms 1040ez If you pay it later than this, you must deduct it in the year actually paid. 2013 income tax forms 1040ez An amount is vested if your right to it cannot be nullified or cancelled. 2013 income tax forms 1040ez Exception for recurring items. 2013 income tax forms 1040ez   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 income tax forms 1040ez The exception applies if all the following requirements are met. 2013 income tax forms 1040ez The all-events test, discussed earlier, is met. 2013 income tax forms 1040ez Economic performance occurs by the earlier of the following dates. 2013 income tax forms 1040ez 8½ months after the close of the year. 2013 income tax forms 1040ez The date you file a timely return (including extensions) for the year. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez This exception does not apply to workers' compensation or tort liabilities. 2013 income tax forms 1040ez Amended return. 2013 income tax forms 1040ez   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. 2013 income tax forms 1040ez 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 income tax forms 1040ez Recurrence and consistency. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez Materiality. 2013 income tax forms 1040ez   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 income tax forms 1040ez   An item considered material for financial statement purposes is also considered material for tax purposes. 2013 income tax forms 1040ez However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. 2013 income tax forms 1040ez Matching expenses with income. 2013 income tax forms 1040ez   Costs directly associated with the revenue of a period are properly allocable to that period. 2013 income tax forms 1040ez 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 income tax forms 1040ez fasab. 2013 income tax forms 1040ez gov/accepted. 2013 income tax forms 1040ez html) are an important factor. 2013 income tax forms 1040ez   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 income tax forms 1040ez 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 income tax forms 1040ez However, the matching requirement is considered met for certain types of expenses. 2013 income tax forms 1040ez These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez See Change in Accounting Method, later, for information on how to get IRS approval. 2013 income tax forms 1040ez See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. 2013 income tax forms 1040ez 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 income tax forms 1040ez 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 income tax forms 1040ez See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. 2013 income tax forms 1040ez Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 2013 income tax forms 1040ez If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. 2013 income tax forms 1040ez However, see Exceptions, next. 2013 income tax forms 1040ez See also Accrual Method, earlier. 2013 income tax forms 1040ez To figure taxable income, you must value your inventory at the beginning and end of each tax year. 2013 income tax forms 1040ez To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. 2013 income tax forms 1040ez See Identifying Cost and Valuing Inventory, later. 2013 income tax forms 1040ez The rules for valuing inventory are not the same for all businesses. 2013 income tax forms 1040ez The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 2013 income tax forms 1040ez Your inventory practices must be consistent from year to year. 2013 income tax forms 1040ez 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 income tax forms 1040ez Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. 2013 income tax forms 1040ez These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). 2013 income tax forms 1040ez A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. 2013 income tax forms 1040ez irs. 2013 income tax forms 1040ez gov/pub/irs-irbs/irb01–02. 2013 income tax forms 1040ez pdf. 2013 income tax forms 1040ez A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. 2013 income tax forms 1040ez irs. 2013 income tax forms 1040ez gov/pub/irs-irbs/irb02–18. 2013 income tax forms 1040ez pdf. 2013 income tax forms 1040ez 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 income tax forms 1040ez Qualifying taxpayer. 2013 income tax forms 1040ez   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 income tax forms 1040ez Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. 2013 income tax forms 1040ez You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. 2013 income tax forms 1040ez Gross receipts test for qualifying taxpayers. 2013 income tax forms 1040ez   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. 2013 income tax forms 1040ez List each of the test years. 2013 income tax forms 1040ez For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. 2013 income tax forms 1040ez Step 2. 2013 income tax forms 1040ez Determine your average annual gross receipts for each test year listed in Step 1. 2013 income tax forms 1040ez 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 income tax forms 1040ez Step 3. 2013 income tax forms 1040ez 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 income tax forms 1040ez Qualifying small business taxpayer. 2013 income tax forms 1040ez   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 income tax forms 1040ez Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. 2013 income tax forms 1040ez You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. 2013 income tax forms 1040ez Your principle business activity is an eligible business. 2013 income tax forms 1040ez See Eligible business, later. 2013 income tax forms 1040ez 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 income tax forms 1040ez Note. 2013 income tax forms 1040ez Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. 2013 income tax forms 1040ez A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. 2013 income tax forms 1040ez See Special rules for farming businesses under Cash Method, earlier. 2013 income tax forms 1040ez Gross receipts test for qualifying small business taxpayers. 2013 income tax forms 1040ez   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. 2013 income tax forms 1040ez List each of the test years. 2013 income tax forms 1040ez 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 income tax forms 1040ez Step 2. 2013 income tax forms 1040ez Determine your average annual gross receipts for each test year listed in Step 1. 2013 income tax forms 1040ez 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 income tax forms 1040ez Step 3. 2013 income tax forms 1040ez 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 income tax forms 1040ez Eligible business. 2013 income tax forms 1040ez   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 income tax forms 1040ez You have an eligible business if you meet any of the following requirements. 2013 income tax forms 1040ez 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 income tax forms 1040ez NAICS codes 31-33 (manufacturing). 2013 income tax forms 1040ez NAICS code 42 (wholesale trade). 2013 income tax forms 1040ez NAICS codes 44-45 (retail trade). 2013 income tax forms 1040ez NAICS codes 5111 and 5122 (information industries). 2013 income tax forms 1040ez Your principal business activity is the provision of services, including the provision of property incident to those services. 2013 income tax forms 1040ez Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. 2013 income tax forms 1040ez   Information about the NAICS codes can be found at http://www. 2013 income tax forms 1040ez census. 2013 income tax forms 1040ez gov/naics or in the instructions for your federal income tax return. 2013 income tax forms 1040ez Gross receipts. 2013 income tax forms 1040ez   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 income tax forms 1040ez See the definit