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Amend Federal Taxes

Amend federal taxes 5. Amend federal taxes   How To Get Tax Help Table of Contents Go online, use a smart phone, call or walk in to an office near you. Amend federal taxes Whether it's help with a tax issue, preparing your tax return or picking up a free publication or form, get the help you need the way you want it. Amend federal taxes Free help with your tax return. Amend federal taxes    Free help in preparing your return is available nationwide from IRS-certified volunteers. Amend federal taxes The Volunteer Income Tax Assistance (VITA) program is designed to help low-to-moderate income, elderly, persons with disabilities, and limited English proficient taxpayers. Amend federal taxes The Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Amend federal taxes Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Amend federal taxes Some VITA and TCE sites provide taxpayers the opportunity to prepare their return with the assistance of an IRS-certified volunteer. Amend federal taxes To find the nearest VITA or TCE site, visit IRS. Amend federal taxes gov or call 1-800-906-9887. Amend federal taxes   As part of the TCE program, AARP offers the Tax-Aide counseling program. Amend federal taxes To find the nearest AARP Tax-Aide site, visit AARP's website at www. Amend federal taxes aarp. Amend federal taxes org/money/taxaide or call 1-888-227-7669. Amend federal taxes   For more information on these programs, go to IRS. Amend federal taxes gov and enter “VITA” in the search box. Amend federal taxes Internet. Amend federal taxes IRS. Amend federal taxes gov and IRS2Go are ready when you are — every day, every night, 24 hours a day, 7 days a week. Amend federal taxes Apply for an Employer Identification Number (EIN). Amend federal taxes Go to IRS. Amend federal taxes gov and enter Apply for an EIN in the search box. Amend federal taxes Request an Electronic Filing PIN by going to IRS. Amend federal taxes gov and entering Electronic Filing PIN in the search box. Amend federal taxes Check the status of your 2013 refund with Where's My Refund? Go to IRS. Amend federal taxes gov or the IRS2Go app, and click on Where's My Refund? You'll get a personalized refund date as soon as the IRS processes your tax return and approves your refund. Amend federal taxes If you e-file, your refund status is usually available within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. Amend federal taxes Check the status of your amended return. Amend federal taxes Go to IRS. Amend federal taxes gov and enter Where's My Amended Return in the search box. Amend federal taxes Download forms, instructions, and publications, including some accessible versions. Amend federal taxes Order free transcripts of your tax returns or tax account using the Order a Transcript tool on IRS. Amend federal taxes gov or IRS2Go. Amend federal taxes Tax return and tax account transcripts are generally available for the current year and past three years. Amend federal taxes Figure your income tax withholding with the IRS Withholding Calculator on IRS. Amend federal taxes gov. Amend federal taxes Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Amend federal taxes Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Amend federal taxes gov. Amend federal taxes Locate the nearest Taxpayer Assistance Center using the Office Locator tool on IRS. Amend federal taxes gov or IRS2Go. Amend federal taxes Stop by most business days for face-to-face tax help, no appointment necessary — just walk in. Amend federal taxes An employee can explain IRS letters, request adjustments to your tax account or help you set up a payment plan. Amend federal taxes Before you visit, check the Office Locator for the address, phone number, hours of operation and the services provided. Amend federal taxes If you have an ongoing tax account problem or a special need, such as a disability, you can request an appointment. Amend federal taxes Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Amend federal taxes Locate the nearest volunteer help site with the VITA Locator Tool on IRS. Amend federal taxes gov. Amend federal taxes Low-to-moderate income, elderly, persons with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Amend federal taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers 60 and older with their tax returns. Amend federal taxes Most VITA and TCE sites offer free electronic filing and some provide IRS-certified volunteers who can help prepare your tax return. Amend federal taxes AARP offers the Tax-Aide counseling program as part of the TCE program. Amend federal taxes Visit AARP's website to find the nearest Tax-Aide location. Amend federal taxes Research your tax questions. Amend federal taxes Search publications and instructions by topic or keyword. Amend federal taxes Read the Internal Revenue Code, regulations, or other official guidance. Amend federal taxes Read Internal Revenue Bulletins. Amend federal taxes Sign up to receive local and national tax news by email. Amend federal taxes Phone. Amend federal taxes You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Amend federal taxes Download the free IRS2Go mobile app from the iTunes app store or from Google Play. Amend federal taxes Use it to watch the IRS YouTube channel, get IRS news as soon as it's released to the public, order transcripts of your tax returns or tax account, check your refund status, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Amend federal taxes Call to locate the nearest volunteer help site, 1-800-906-9887. Amend federal taxes Low-to-moderate income, elderly, persons with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Amend federal taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers 60 and older with their tax returns. Amend federal taxes Most VITA and TCE sites offer free electronic filing. Amend federal taxes Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. Amend federal taxes Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location. Amend federal taxes Call to check the status of your 2013 refund, 1-800-829-1954 or 1-800-829-4477. Amend federal taxes The automated Where's My Refund? information is available 24 hours a day, 7 days a week. Amend federal taxes If you e-file, your refund status is usually available within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. Amend federal taxes Before you call, have your 2013 tax return handy so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Amend federal taxes Where's My Refund? can give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. Amend federal taxes Where's My Refund? includes information for the most recent return filed in the current year and does not include information about amended returns. Amend federal taxes Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. Amend federal taxes Call to order forms, instructions and publications, 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions and publications, and prior-year forms and instructions (limited to 5 years). Amend federal taxes You should receive your order within 10 business days. Amend federal taxes Call to order transcripts of your tax returns or tax account, 1-800-908-9946. Amend federal taxes Follow the prompts to provide your Social Security Number or Individual Taxpayer Identification Number, date of birth, street address and ZIP code. Amend federal taxes Call for TeleTax topics, 1-800-829-4477, to listen to pre-recorded messages covering various tax topics. Amend federal taxes Call to ask tax questions, 1-800-829-1040. Amend federal taxes Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. Amend federal taxes The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. Amend federal taxes These individuals can also contact the IRS through relay services such as the Federal Relay Service available at www. Amend federal taxes gsa. Amend federal taxes gov/fedrelay. Amend federal taxes Walk-in. Amend federal taxes You can find a selection of forms, publications and services — in-person, face-to-face. Amend federal taxes Products. Amend federal taxes You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Amend federal taxes Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. Amend federal taxes Services. Amend federal taxes You can walk in to your local TAC most business days for personal, face-to-face tax help. Amend federal taxes An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. Amend federal taxes If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local TAC where you can talk with an IRS representative face-to-face. Amend federal taxes No appointment is necessary—just walk in. Amend federal taxes Before visiting, check www. Amend federal taxes irs. Amend federal taxes gov/localcontacts for hours of operation and services provided. Amend federal taxes Mail. Amend federal taxes You can send your order for forms, instructions, and publications to the address below. Amend federal taxes You should receive a response within 10 business days after your request is received. Amend federal taxes  Internal Revenue Service 1201 N. Amend federal taxes Mitsubishi Motorway Bloomington, IL 61705-6613 The Taxpayer Advocate Service Is Here to Help You. Amend federal taxes    The Taxpayer Advocate Service (TAS) is your voice at the IRS. Amend federal taxes Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. Amend federal taxes What can TAS do for you?    We can offer you free help with IRS problems that you can't resolve on your own. Amend federal taxes We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and: Your problem is causing financial difficulties for you, your family, or your business. Amend federal taxes You face (or your business is facing) an immediate threat of adverse action. Amend federal taxes You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. Amend federal taxes   If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. Amend federal taxes Here's why we can help: TAS is an independent organization within the IRS. Amend federal taxes Our advocates know how to work with the IRS. Amend federal taxes Our services are free and tailored to meet your needs. Amend federal taxes We have offices in every state, the District of Columbia, and Puerto Rico. Amend federal taxes How can you reach us?    If you think TAS can help you, call your local advocate, whose number is in your local directory and at www. Amend federal taxes irs. Amend federal taxes gov/advocate, or call us toll-free at 1-877-777-4778. Amend federal taxes How else does TAS help taxpayers?    TAS also works to resolve large-scale, systemic problems that affect many taxpayers. Amend federal taxes If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www. Amend federal taxes irs. Amend federal taxes gov/sams. Amend federal taxes Low Income Taxpayer Clinics. Amend federal taxes    Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes. Amend federal taxes Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Amend federal taxes Visit www. Amend federal taxes TaxpayerAdvocate. Amend federal taxes irs. Amend federal taxes gov or see IRS Publication 4134, Low Income Taxpayer Clinic List. Amend federal taxes Prev  Up  Next   Home   More Online Publications
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Amend federal taxes 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. Amend federal taxes Hybrid method. Amend federal taxes Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Amend federal taxes Accounting Periods You must use a tax year to figure your taxable income. Amend federal taxes A tax year is an annual accounting period for keeping records and reporting income and expenses. Amend federal taxes An annual accounting period does not include a short tax year (discussed later). Amend federal taxes You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Amend federal taxes Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Amend federal taxes A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Amend federal taxes 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. Amend federal taxes This section discusses: A calendar year. Amend federal taxes A fiscal year (including a period of 52 or 53 weeks). Amend federal taxes A short tax year. Amend federal taxes An improper tax year. Amend federal taxes A change in tax year. Amend federal taxes Special situations that apply to individuals. Amend federal taxes Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Amend federal taxes Special situations that apply to corporations. Amend federal taxes Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes See Change in Tax Year, later. Amend federal taxes Generally, anyone can adopt the calendar year. Amend federal taxes 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. Amend federal taxes Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes If you make this election, your 52-53-week tax year must always end on the same day of the week. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Election. Amend federal taxes   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Amend federal taxes The month in which the new 52-53-week tax year ends. Amend federal taxes The day of the week on which the tax year always ends. Amend federal taxes The date the tax year ends. Amend federal taxes 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. Amend federal taxes   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Amend federal taxes   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. Amend federal taxes Example. Amend federal taxes Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Amend federal taxes 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. Amend federal taxes Short Tax Year A short tax year is a tax year of less than 12 months. Amend federal taxes 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. Amend federal taxes Tax on a short period tax return is figured differently for each situation. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Example 1. Amend federal taxes XYZ Corporation was organized on July 1, 2012. Amend federal taxes It elected the calendar year as its tax year. Amend federal taxes Therefore, its first tax return was due March 15, 2013. Amend federal taxes This short period return will cover the period from July 1, 2012, through December 31, 2012. Amend federal taxes Example 2. Amend federal taxes A calendar year corporation dissolved on July 23, 2012. Amend federal taxes Its final return is due by October 15, 2012. Amend federal taxes It will cover the short period from January 1, 2012, through July 23, 2012. Amend federal taxes Death of individual. Amend federal taxes   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. Amend federal taxes The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Amend federal taxes 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. Amend federal taxes Example. Amend federal taxes   Agnes Green was a single, calendar year taxpayer. Amend federal taxes She died on March 6, 2012. Amend federal taxes Her final income tax return must be filed by April 15, 2013. Amend federal taxes It will cover the short period from January 1, 2012, to March 6, 2012. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Figure tax for a short year under the general rule, explained below. Amend federal taxes You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Amend federal taxes General rule. Amend federal taxes   Income tax for a short tax year must be annualized. Amend federal taxes However, self-employment tax is figured on the actual self-employment income for the short period. Amend federal taxes Individuals. Amend federal taxes   An individual must figure income tax for the short tax year as follows. Amend federal taxes Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Amend federal taxes You must itemize deductions when you file a short period tax return. Amend federal taxes Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Amend federal taxes Subtract the amount in (2) from the amount in (1). Amend federal taxes The result is your modified taxable income. Amend federal taxes Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Amend federal taxes The result is your annualized income. Amend federal taxes Figure the total tax on your annualized income using the appropriate tax rate schedule. Amend federal taxes Multiply the total tax by the number of months in the short tax year and divide the result by 12. Amend federal taxes The result is your tax for the short tax year. Amend federal taxes Relief procedure. Amend federal taxes   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Amend federal taxes It may result in less tax. Amend federal taxes Under this procedure, the tax is figured by two separate methods. Amend federal taxes 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. Amend federal taxes For more information, see section 443(b)(2) of the Internal Revenue Code. Amend federal taxes Alternative minimum tax. Amend federal taxes   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. Amend federal taxes Multiply the AMTI by 12. Amend federal taxes Divide the result by the number of months in the short tax year. Amend federal taxes Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Amend federal taxes The result is the annualized AMT. Amend federal taxes Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Amend federal taxes   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Amend federal taxes For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Amend federal taxes Tax withheld from wages. Amend federal taxes   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Amend federal taxes Federal income tax is withheld on a calendar year basis. Amend federal taxes The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Amend federal taxes Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Amend federal taxes 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. Amend federal taxes See Accounting Periods, earlier, for a description of permissible tax years. Amend federal taxes To change to a proper tax year, you must do one of the following. Amend federal taxes 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. Amend federal taxes Attach a completed Form 1128 to the amended tax return. Amend federal taxes Write “FILED UNDER REV. Amend federal taxes PROC. Amend federal taxes 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Amend federal taxes 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. Amend federal taxes Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Amend federal taxes See the Instructions for Form 1128 for exceptions. Amend federal taxes If you qualify for an automatic approval request, a user fee is not required. Amend federal taxes Individuals Generally, individuals must adopt the calendar year as their tax year. Amend federal taxes 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. Amend federal taxes Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Amend federal taxes A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Amend federal taxes 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). Amend federal taxes The following discussions provide the rules for partnerships, S corporations, and PSCs. Amend federal taxes Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes The partnership can establish a business purpose for a different tax year. Amend federal taxes The rules for the required tax year for partnerships are as follows. Amend federal taxes 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. Amend federal taxes If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Amend federal taxes A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Amend federal taxes 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. Amend federal taxes If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Amend federal taxes Least aggregate deferral of income. Amend federal taxes   The tax year that results in the least aggregate deferral of income is determined as follows. Amend federal taxes Figure the number of months of deferral for each partner using one partner's tax year. Amend federal taxes 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. Amend federal taxes 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). Amend federal taxes Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Amend federal taxes Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Amend federal taxes   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Amend federal taxes 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. Amend federal taxes However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Amend federal taxes Example. Amend federal taxes A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Amend federal taxes A uses the calendar year and B uses a fiscal year ending November 30. Amend federal taxes 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. Amend federal taxes Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Amend federal taxes 5 -0- -0- B 11/30 0. Amend federal taxes 5 11 5. Amend federal taxes 5 Total Deferral 5. Amend federal taxes 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Amend federal taxes 5 1 0. Amend federal taxes 5 B 11/30 0. Amend federal taxes 5 -0- -0- Total Deferral 0. Amend federal taxes 5 When determination is made. Amend federal taxes   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. Amend federal taxes However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Amend federal taxes This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Amend federal taxes Short period return. Amend federal taxes   When a partnership changes its tax year, a short period return must be filed. Amend federal taxes 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. Amend federal taxes   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. Amend federal taxes The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Amend federal taxes 706-1. Amend federal taxes ” More information. Amend federal taxes   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Amend federal taxes S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Amend federal taxes A permitted tax year is any of the following. Amend federal taxes The calendar year. Amend federal taxes A tax year elected under section 444 of the Internal Revenue Code. Amend federal taxes See Section 444 Election, below for details. Amend federal taxes A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Amend federal taxes Any other tax year for which the corporation establishes a business purpose. Amend federal taxes 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. Amend federal taxes For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Amend federal taxes Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Amend federal taxes The corporation makes an election under section 444 of the Internal Revenue Code. Amend federal taxes See Section 444 Election, below for details. Amend federal taxes 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. Amend federal taxes The corporation establishes a business purpose for a fiscal year. Amend federal taxes See the Instructions for Form 1120 for general information about PSCs. Amend federal taxes For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Amend federal taxes 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. Amend federal taxes Certain restrictions apply to the election. Amend federal taxes 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). Amend federal taxes 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. Amend federal taxes A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Amend federal taxes It is not a member of a tiered structure (defined in section 1. Amend federal taxes 444-2T of the regulations). Amend federal taxes It has not previously had a section 444 election in effect. Amend federal taxes It elects a year that meets the deferral period requirement. Amend federal taxes Deferral period. Amend federal taxes   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. Amend federal taxes Retaining tax year. Amend federal taxes   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. Amend federal taxes This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Amend federal taxes Adopting or changing tax year. Amend federal taxes   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. Amend federal taxes 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. Amend federal taxes This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Amend federal taxes If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Amend federal taxes Example 1. Amend federal taxes BD Partnership uses a calendar year, which is also its required tax year. Amend federal taxes BD cannot make a section 444 election because the deferral period is zero. Amend federal taxes Example 2. Amend federal taxes E, a newly formed partnership, began operations on December 1. Amend federal taxes E is owned by calendar year partners. Amend federal taxes E wants to make a section 444 election to adopt a September 30 tax year. Amend federal taxes E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Amend federal taxes Making the election. Amend federal taxes   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Amend federal taxes 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. Amend federal taxes For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Amend federal taxes Note. Amend federal taxes If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Amend federal taxes   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. Amend federal taxes Example 1. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Example 2. Amend federal taxes The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Amend federal taxes AB must file Form 8716 by March 17, 2013. Amend federal taxes Example 3. Amend federal taxes B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Amend federal taxes B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Amend federal taxes 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. Amend federal taxes Note. Amend federal taxes The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Amend federal taxes Extension of time for filing. Amend federal taxes   There is an automatic extension of 12 months to make this election. Amend federal taxes See the Form 8716 instructions for more information. Amend federal taxes Terminating the election. Amend federal taxes   The section 444 election remains in effect until it is terminated. Amend federal taxes If the election is terminated, another section 444 election cannot be made for any tax year. Amend federal taxes   The election ends when any of the following applies to the partnership, S corporation, or PSC. Amend federal taxes The entity changes to its required tax year. Amend federal taxes The entity liquidates. Amend federal taxes The entity becomes a member of a tiered structure. Amend federal taxes The IRS determines that the entity willfully failed to comply with the required payments or distributions. Amend federal taxes   The election will also end if either of the following events occur. Amend federal taxes An S corporation's S election is terminated. Amend federal taxes However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Amend federal taxes A PSC ceases to be a PSC. Amend federal taxes If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Amend federal taxes Required payment for partnership or S corporation. Amend federal taxes   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Amend federal taxes The required payment for that year (or any preceding tax year) is more than $500. Amend federal taxes    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Amend federal taxes   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. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Applicable election year. Amend federal taxes   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Amend federal taxes 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. Amend federal taxes Required distribution for PSC. Amend federal taxes   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Amend federal taxes If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Amend federal taxes The amount deferred is treated as paid or incurred in the following tax year. Amend federal taxes   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). Amend federal taxes Back-up election. Amend federal taxes   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. Amend federal taxes If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Amend federal taxes Making back-up election. Amend federal taxes   The general rules for making a section 444 election, as discussed earlier, apply. Amend federal taxes When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Amend federal taxes 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. Amend federal taxes Activating election. Amend federal taxes   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Amend federal taxes The due date for filing Form 8752 and making the payment is the later of the following dates. Amend federal taxes May 15 of the calendar year following the calendar year in which the applicable election year begins. Amend federal taxes 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Amend federal taxes   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. Amend federal taxes ” 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). Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Amend federal taxes See the Instructions for Form 1128 for details. Amend federal taxes Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Amend federal taxes 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. Amend federal taxes An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Amend federal taxes 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. Amend federal taxes See the Instructions for Form 1128 for details. Amend federal taxes Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Amend federal taxes Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Amend federal taxes You choose an accounting method when you file your first tax return. Amend federal taxes If you later want to change your accounting method, you must get IRS approval. Amend federal taxes See Change in Accounting Method, later. Amend federal taxes No single accounting method is required of all taxpayers. Amend federal taxes 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. Amend federal taxes In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Amend federal taxes You must use the same accounting method from year to year. Amend federal taxes An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Amend federal taxes 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. Amend federal taxes Methods you can use. Amend federal taxes   In general, you can compute your taxable income under any of the following accounting methods. Amend federal taxes Cash method. Amend federal taxes Accrual method. Amend federal taxes Special methods of accounting for certain items of income and expenses. Amend federal taxes A hybrid method which combines elements of two or more of the above accounting methods. Amend federal taxes The cash and accrual methods of accounting are explained later. Amend federal taxes Special methods. Amend federal taxes   This publication does not discuss special methods of accounting for certain items of income or expenses. Amend federal taxes 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. Amend federal taxes The following publications also discuss special methods of reporting income or expenses. Amend federal taxes Publication 225, Farmer's Tax Guide. Amend federal taxes Publication 535, Business Expenses. Amend federal taxes Publication 537, Installment Sales. Amend federal taxes Publication 946, How To Depreciate Property. Amend federal taxes Hybrid method. Amend federal taxes   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. Amend federal taxes However, the following restrictions apply. Amend federal taxes If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Amend federal taxes See Exceptions under Inventories, later. Amend federal taxes Generally, you can use the cash method for all other items of income and expenses. Amend federal taxes See Inventories, later. Amend federal taxes If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Amend federal taxes If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Amend federal taxes Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Amend federal taxes Business and personal items. Amend federal taxes   You can account for business and personal items using different accounting methods. Amend federal taxes 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. Amend federal taxes Two or more businesses. Amend federal taxes   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Amend federal taxes No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Amend federal taxes Note. Amend federal taxes 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. Amend federal taxes Cash Method Most individuals and many small businesses use the cash method of accounting. Amend federal taxes Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Amend federal taxes See Inventories, later, for exceptions to this rule. Amend federal taxes Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Amend federal taxes If you receive property and services, you must include their fair market value (FMV) in income. Amend federal taxes Constructive receipt. Amend federal taxes   Income is constructively received when an amount is credited to your account or made available to you without restriction. Amend federal taxes You need not have possession of it. Amend federal taxes 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. Amend federal taxes Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Amend federal taxes Example. Amend federal taxes You are a calendar year taxpayer. Amend federal taxes Your bank credited, and made available, interest to your bank account in December 2012. Amend federal taxes You did not withdraw it or enter it into your books until 2013. Amend federal taxes You must include the amount in gross income for 2012, the year you constructively received it. Amend federal taxes You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Amend federal taxes You must report the income in the year the property is received or made available to you without restriction. Amend federal taxes Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Amend federal taxes This includes business expenses for which you contest liability. Amend federal taxes However, you may not be able to deduct an expense paid in advance. Amend federal taxes Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Amend federal taxes Expense paid in advance. Amend federal taxes   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. Amend federal taxes   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. Amend federal taxes 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Amend federal taxes   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. Amend federal taxes See Change in Accounting Method, later. Amend federal taxes Example 1. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Example 2. Amend federal taxes 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. Amend federal taxes The 12-month rule applies. Amend federal taxes Therefore, the full $10,000 is deductible in 2012. Amend federal taxes Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Amend federal taxes (See Special rules for farming businesses, later. Amend federal taxes ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Amend federal taxes See Gross receipts test, below. Amend federal taxes 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. Amend federal taxes See Gross receipts test, below. Amend federal taxes A tax shelter. Amend federal taxes Exceptions The following entities are not prohibited from using the cash method of accounting. Amend federal taxes Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Amend federal taxes A qualified personal service corporation (PSC). Amend federal taxes Gross receipts test. Amend federal taxes   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Amend federal taxes 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. Amend federal taxes    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. Amend federal taxes See Gross receipts test for qualifying taxpayers, for more information. Amend federal taxes Generally, a partnership applies the test at the partnership level. Amend federal taxes Gross receipts for a short tax year are annualized. Amend federal taxes Aggregation rules. Amend federal taxes   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. Amend federal taxes Change to accrual method. Amend federal taxes   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. Amend federal taxes Special rules for farming businesses. Amend federal taxes   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Amend federal taxes 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. Amend federal taxes 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). Amend federal taxes   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. Amend federal taxes For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Amend federal taxes See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Amend federal taxes Qualified PSC. Amend federal taxes   A PSC that meets the following function and ownership tests can use the cash method. Amend federal taxes Function test. Amend federal taxes   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. Amend federal taxes Ownership test. Amend federal taxes   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. Amend federal taxes Employees performing services for the corporation in a field qualifying under the function test. Amend federal taxes Retired employees who had performed services in those fields. Amend federal taxes The estate of an employee described in (1) or (2). Amend federal taxes 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. Amend federal taxes   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Amend federal taxes Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Amend federal taxes 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. Amend federal taxes   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. Amend federal taxes Change to accrual method. Amend federal taxes   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. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes The purpose of an accrual method of accounting is to match income and expenses in the correct year. Amend federal taxes 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. Amend federal taxes Under this rule, you report an amount in your gross income on the earliest of the following dates. Amend federal taxes When you receive payment. Amend federal taxes When the income amount is due to you. Amend federal taxes When you earn the income. Amend federal taxes When title has passed. Amend federal taxes Estimated income. Amend federal taxes   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. Amend federal taxes Change in payment schedule. Amend federal taxes   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. Amend federal taxes Continue this procedure until you complete the services, then account for the difference. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes However, you cannot postpone including any payment beyond that tax year. Amend federal taxes Service agreement. Amend federal taxes   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Amend federal taxes This includes an agreement providing for incidental replacement of parts or materials. Amend federal taxes However, this applies only if you offer the property without a service agreement in the normal course of business. Amend federal taxes Postponement not allowed. Amend federal taxes   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes Examples. Amend federal taxes   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Amend federal taxes Example 1. Amend federal taxes You manufacture, sell, and service computers. Amend federal taxes You received payment in 2012 for a one-year contingent service contract on a computer you sold. Amend federal taxes 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. Amend federal taxes Example 2. Amend federal taxes You are in the television repair business. Amend federal taxes 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. Amend federal taxes You include the payments in gross income as you earn them. Amend federal taxes Example 3. Amend federal taxes You own a dance studio. Amend federal taxes On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Amend federal taxes You give eight lessons in 2012. Amend federal taxes 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. Amend federal taxes Example 4. Amend federal taxes Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Amend federal taxes You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Amend federal taxes Guarantee or warranty. Amend federal taxes   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Amend federal taxes Prepaid rent. Amend federal taxes   You cannot postpone reporting income from prepaid rent. Amend federal taxes Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Amend federal taxes 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. Amend federal taxes Books and records. Amend federal taxes   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. Amend federal taxes Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Amend federal taxes IRS approval. Amend federal taxes   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes An agreement includes a gift certificate that can be redeemed for goods. Amend federal taxes Amounts due and payable are considered received. Amend federal taxes How to report payments. Amend federal taxes   Generally, include an advance payment in income in the year in which you receive it. Amend federal taxes However, you can use the alternative method, discussed next. Amend federal taxes Alternative method of reporting. Amend federal taxes   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. Amend federal taxes Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Amend federal taxes Example 1. Amend federal taxes You are a retailer. Amend federal taxes You use an accrual method of accounting and account for the sale of goods when you ship the goods. Amend federal taxes You use this method for both tax and financial reporting purposes. Amend federal taxes 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. Amend federal taxes However, see Exception for inventory goods, later. Amend federal taxes Example 2. Amend federal taxes You are a calendar year taxpayer. Amend federal taxes You manufacture household furniture and use an accrual method of accounting. Amend federal taxes Under this method, you accrue income for your financial reports when you ship the furniture. Amend federal taxes For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Amend federal taxes 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. Amend federal taxes You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Amend federal taxes 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. Amend federal taxes Information schedule. Amend federal taxes   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. Amend federal taxes Total advance payments received in the current tax year. Amend federal taxes Total advance payments received in earlier tax years and not included in income before the current tax year. Amend federal taxes Total payments received in earlier tax years included in income for the current tax year. Amend federal taxes Exception for inventory goods. Amend federal taxes   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. Amend federal taxes You account for the advance payment under the alternative method (discussed earlier). Amend federal taxes You have received a substantial advance payment on the agreement (discussed next). Amend federal taxes You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Amend federal taxes 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. Amend federal taxes   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. Amend federal taxes You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Amend federal taxes If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Amend federal taxes Note. Amend federal taxes You must report any advance payments you receive after the second year in the year received. Amend federal taxes No further deferral is allowed. Amend federal taxes Substantial advance payments. Amend federal taxes   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. Amend federal taxes Example. Amend federal taxes You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Amend federal taxes In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Amend federal taxes The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Amend federal taxes You receive the following advance payments under the contract. Amend federal taxes 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. Amend federal taxes In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Amend federal taxes 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. Amend federal taxes   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. Amend federal taxes 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. Amend federal taxes If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Amend federal taxes   No further deferral is allowed. Amend federal taxes You must include in gross income the advance payment you receive each remaining year of the contract. Amend federal taxes Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Amend federal taxes IRS approval. Amend federal taxes   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Amend federal taxes Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Amend federal taxes The all-events test has been met. Amend federal taxes The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Amend federal taxes Economic performance has occurred. Amend federal taxes Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Amend federal taxes 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. Amend federal taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Amend federal taxes Example. Amend federal taxes You are a calendar year taxpayer. Amend federal taxes You buy office supplies in December 2012. Amend federal taxes You receive the supplies and the bill in December, but you pay the bill in January 2013. Amend federal taxes 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. Amend federal taxes Your office supplies may qualify as a recurring item, discussed later. Amend federal taxes If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Amend federal taxes Workers' compensation and tort liability. Amend federal taxes   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. Amend federal taxes 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. Amend federal taxes Taxes. Amend federal taxes   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Amend federal taxes are paid. Amend federal taxes However, you can elect to treat taxes as a recurring item, discussed later. Amend federal taxes You can also elect to ratably accrue real estate taxes. Amend federal taxes See chapter 5 of Publication 535 for information about real estate taxes. Amend federal taxes Other liabilities. Amend federal taxes   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. Amend federal taxes Interest. Amend federal taxes   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. Amend federal taxes Compensation for services. Amend federal taxes   Generally, economic performance occurs as an employee renders service to the employer. Amend federal taxes 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. Amend federal taxes For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Amend federal taxes Vacation pay. Amend federal taxes   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. Amend federal taxes If you pay it later than this, you must deduct it in the year actually paid. Amend federal taxes An amount is vested if your right to it cannot be nullified or cancelled. Amend federal taxes Exception for recurring items. Amend federal taxes   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. Amend federal taxes The exception applies if all the following requirements are met. Amend federal taxes The all-events test, discussed earlier, is met. Amend federal taxes Economic performance occurs by the earlier of the following dates. Amend federal taxes 8½ months after the close of the year. Amend federal taxes The date you file a timely return (including extensions) for the year. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes This exception does not apply to workers' compensation or tort liabilities. Amend federal taxes Amended return. Amend federal taxes   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Amend federal taxes 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. Amend federal taxes Recurrence and consistency. Amend federal taxes   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. Amend federal taxes 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. Amend federal taxes Materiality. Amend federal taxes   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. Amend federal taxes   An item considered material for financial statement purposes is also considered material for tax purposes. Amend federal taxes However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Amend federal taxes Matching expenses with income. Amend federal taxes   Costs directly associated with the revenue of a period are properly allocable to that period. Amend federal taxes 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. Amend federal taxes fasab. Amend federal taxes gov/accepted. Amend federal taxes html) are an important factor. Amend federal taxes   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. Amend federal taxes 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. Amend federal taxes However, the matching requirement is considered met for certain types of expenses. Amend federal taxes These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Amend federal taxes 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. Amend federal taxes 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. Amend federal taxes 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Amend federal taxes 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. Amend federal taxes See Change in Accounting Method, later, for information on how to get IRS approval. Amend federal taxes See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Amend federal taxes 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. Amend federal taxes Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Amend federal taxes See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Amend federal taxes Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Amend federal taxes If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Amend federal taxes However, see Exceptions, next. Amend federal taxes See also Accrual Method, earlier. Amend federal taxes To figure taxable income, you must value your inventory at the beginning and end of each tax year. Amend federal taxes To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Amend federal taxes See Identifying Cost and Valuing Inventory, later. Amend federal taxes The rules for valuing inventory are not the same for all businesses. Amend federal taxes The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Amend federal taxes Your inventory practices must be consistent from year to year. Amend federal taxes 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. Amend federal taxes Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Amend federal taxes These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Amend federal taxes A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Amend federal taxes irs. Amend federal taxes gov/pub/irs-irbs/irb01–02. Amend federal taxes pdf. Amend federal taxes A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Amend federal taxes irs. Amend federal taxes gov/pub/irs-irbs/irb02–18. Amend federal taxes pdf. Amend federal taxes 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). Amend federal taxes Qualifying taxpayer. Amend federal taxes   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). Amend federal taxes Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Amend federal taxes You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Amend federal taxes Gross receipts test for qualifying taxpayers. Amend federal taxes   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Amend federal taxes List each of the test years. Amend federal taxes For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Amend federal taxes Step 2. Amend federal taxes Determine your average annual gross receipts for each test year listed in Step 1. Amend federal taxes 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. Amend federal taxes Step 3. Amend federal taxes 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. Amend federal taxes Qualifying small business taxpayer. Amend federal taxes   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). Amend federal taxes Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Amend federal taxes You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Amend federal taxes Your principle business activity is an eligible business. Amend federal taxes See Eligible business, later. Amend federal taxes 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. Amend federal taxes Note. Amend federal taxes Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Amend federal taxes A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Amend federal taxes See Special rules for farming businesses under Cash Method, earlier. Amend federal taxes Gross receipts test for qualifying small business taxpayers. Amend federal taxes   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Amend federal taxes List each of the test years. Amend federal taxes 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. Amend federal taxes Step 2. Amend federal taxes Determine your average annual gross receipts for each test year listed in Step 1. Amend federal taxes 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. Amend federal taxes Step 3. Amend federal taxes 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. Amend federal taxes Eligible business. Amend federal taxes   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. Amend federal taxes You have an eligible business if you meet any of the following requirements. Amend federal taxes 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). Amend federal taxes NAICS codes 31-33 (manufacturing). Amend federal taxes NAICS code 42 (wholesale trade). Amend federal taxes NAICS codes 44-45 (retail trade). Amend federal taxes NAICS codes 5111 and 5122 (information industries). Amend federal taxes Your principal business activity is the provision of services, including the provision of property incident to those services. Amend federal taxes Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Amend federal taxes   Information about the NAICS codes can be found at http://www. Amend federal taxes census. Amend federal taxes gov/naics or in the instructions for your federal income tax return. Amend federal taxes Gross receipts. Amend federal taxes   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. Amend federal taxes See the definit