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Ez1040 29. Ez1040   Límite sobre Deducciones Detalladas Table of Contents Introduction Useful Items - You may want to see: ¿Está Usted Sujeto al Límite? ¿Qué Deducciones Detalladas Están Limitadas? ¿Qué Deducciones Detalladas no Están Limitadas? ¿Cómo se Calcula el Límite?Ejemplo Introduction Este capítulo trata del límite general sobre las deducciones detalladas en el Anexo A (Formulario 1040). Ez1040 Los temas abarcan: Quién está sujeto al límite. Ez1040 Qué deducciones detalladas están limitadas. Ez1040 Cómo calcular el límite. Ez1040 Useful Items - You may want to see: Formulario (e Instrucciones) Anexo A (Formulario 1040) Itemized Deductions (Deducciones detalladas), en inglés. Ez1040 ¿Está Usted Sujeto al Límite? Si tiene ingresos brutos ajustados (AGI, por sus siglas en inglés) de más de $300,000, si es casado que presenta la declaración conjunta o viudo calificado, $275,000, si es cabeza de familia, $250,000, si es soltero o $150,000, si es casado que presenta la declaración por separado, está sujeto al límite sobre determinadas deducciones detalladas. Ez1040 El ingreso bruto ajustado (AGI) es la cantidad de la línea 38 (Formulario 1040). Ez1040 ¿Qué Deducciones Detalladas Están Limitadas? Las siguientes deducciones del Anexo A (Formulario 1040) están sujetas al límite general sobre las deducciones detalladas: Impuestos pagados —línea 9. Ez1040 Intereses pagados —líneas 10,11,12 y 13. Ez1040 Donaciones a organizaciones caritativas —línea 19. Ez1040 Gastos laborales y determinadas deducciones misceláneas —línea 27. Ez1040 Otras deducciones misceláneas —línea 28, excluyendo pérdidas por apuestas y juegos de azar y por hecho fortuito o robo. Ez1040 ¿Qué Deducciones Detalladas no Están Limitadas? Las siguientes deducciones del Anexo A (Formulario 1040) no están sujetas al límite general sobre las deducciones detalladas. Ez1040 Sin embargo, igualmente están sujetas a otros límites aplicables. Ez1040 Gastos médicos y dentales —línea 4. Ez1040 Gastos de intereses de inversión —línea 14. Ez1040 Pérdidas por hecho fortuito y robo de bienes de uso personal —línea 20. Ez1040 Pérdidas por hecho fortuito y robo de bienes que generan ingresos —línea 28. Ez1040 Pérdidas por apuestas y juegos de azar —línea 28. Ez1040 ¿Cómo se Calcula el Límite? Si las deducciones detalladas están sujetas al límite, el total de todas sus deducciones detalladas es reducido por la cantidad menor de uno de: el 80% de las deducciones detalladas afectadas por el límite. Ez1040 Vea ¿Qué Deducciones Detalladas Están Limitadas? , anteriormente o el 3% de la cantidad por la cual los ingresos brutos ajustados sobrepasen $300,000, si es casado que presenta la declaración conjunta o viudo calificado, $275,000, si es cabeza de familia, $250,000, si es soltero o $150,000, si es casado que presenta la declaración por separado. Ez1040 Antes de calcular el límite general sobre las deducciones detalladas, primero tiene que llenar las líneas 1 a 28 del Anexo A (Formulario 1040), incluyendo todo formulario afín (tal como el Formulario 2106, el Formulario 4684, etc. Ez1040 ) El límite general sobre las deducciones detalladas se calcula después de haberse aplicado cualquier otro límite sobre la asignación de alguna deducción detallada. Ez1040 Estos límites adicionales abarcan los límites sobre donaciones caritativas (capítulo 24), el límite sobre determinados gastos de comida y entretenimiento (capítulo 26) y el límite del 2% de los ingresos brutos ajustados sobre determinadas deducciones misceláneas (capítulo 28). Ez1040 Hoja de trabajo de deducciones detalladas. Ez1040   Después de completar hasta la línea 28, inclusive, del Anexo A (Formulario 1040), puede utilizar la Itemized Deductions Worksheet (Hoja de trabajo de las deducciones detalladas), en las Instrucciones del Anexo A (Formulario 1040) para calcular el límite. Ez1040 Anote el resultado en la línea 29 del Anexo A (Formulario 1040). Ez1040 Guarde la hoja de trabajo con su documentación. Ez1040 Debe comparar la cantidad de la deducción estándar con la cantidad de las deducciones detalladas después de aplicar el límite. Ez1040 Utilice la cantidad mayor cuando complete la línea 40 (Formulario 1040). Ez1040 Vea el capítulo 20 para información sobre cómo calcular la deducción estándar. Ez1040 Ejemplo Para el año tributario 2013, Guillermo y Teresa Valdez presentan la declaración conjunta en el Formulario 1040. Ez1040 Tienen ingresos brutos ajustados de $325,500 en la línea 38. Ez1040 Las deducciones detalladas de su Anexo A son las siguientes: Impuestos pagados —línea 9   $ 17,900 Intereses pagados —líneas 10,11,12 y 13   45,000 Gasto de intereses de inversión  —línea 14   41,000 Donaciones a organizaciones caritativas —línea 19   21,000 Gastos laborales —línea 27   17,240 Total   $142,140       La deducción por gastos de intereses de inversión de los Valdez ($41,000 de la línea 14 del Anexo A (Formulario 1040) no está sujeta al límite general de las deducciones detalladas. Ez1040 Los Valdez utilizan la Itemized Deductions Worksheet (Hoja de trabajo de las deducciones detalladas), en las Instrucciones del Anexo A (Formulario 1040) para calcular el límite general. Ez1040 Del total de las deducciones detalladas de $142,140, los Valdez pueden deducir sólo $141,375 ($142,140 - $765). Ez1040 Anotan $141,375 en la línea 29 del Anexo A (Formulario 1040). Ez1040 Prev  Up  Next   Home   More Online Publications
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Ez1040 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. Ez1040 Hybrid method. Ez1040 Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Ez1040 Accounting Periods You must use a tax year to figure your taxable income. Ez1040 A tax year is an annual accounting period for keeping records and reporting income and expenses. Ez1040 An annual accounting period does not include a short tax year (discussed later). Ez1040 You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Ez1040 Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Ez1040 A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Ez1040 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. Ez1040 This section discusses: A calendar year. Ez1040 A fiscal year (including a period of 52 or 53 weeks). Ez1040 A short tax year. Ez1040 An improper tax year. Ez1040 A change in tax year. Ez1040 Special situations that apply to individuals. Ez1040 Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Ez1040 Special situations that apply to corporations. Ez1040 Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Ez1040 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. Ez1040 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. Ez1040 See Change in Tax Year, later. Ez1040 Generally, anyone can adopt the calendar year. Ez1040 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. Ez1040 Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Ez1040 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. Ez1040 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. Ez1040 If you make this election, your 52-53-week tax year must always end on the same day of the week. Ez1040 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. Ez1040 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. Ez1040 Election. Ez1040   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Ez1040 The month in which the new 52-53-week tax year ends. Ez1040 The day of the week on which the tax year always ends. Ez1040 The date the tax year ends. Ez1040 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. Ez1040   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Ez1040   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. Ez1040 Example. Ez1040 Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Ez1040 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. Ez1040 Short Tax Year A short tax year is a tax year of less than 12 months. Ez1040 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. Ez1040 Tax on a short period tax return is figured differently for each situation. Ez1040 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. Ez1040 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. Ez1040 Example 1. Ez1040 XYZ Corporation was organized on July 1, 2012. Ez1040 It elected the calendar year as its tax year. Ez1040 Therefore, its first tax return was due March 15, 2013. Ez1040 This short period return will cover the period from July 1, 2012, through December 31, 2012. Ez1040 Example 2. Ez1040 A calendar year corporation dissolved on July 23, 2012. Ez1040 Its final return is due by October 15, 2012. Ez1040 It will cover the short period from January 1, 2012, through July 23, 2012. Ez1040 Death of individual. Ez1040   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. Ez1040 The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Ez1040 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. Ez1040 Example. Ez1040   Agnes Green was a single, calendar year taxpayer. Ez1040 She died on March 6, 2012. Ez1040 Her final income tax return must be filed by April 15, 2013. Ez1040 It will cover the short period from January 1, 2012, to March 6, 2012. Ez1040 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. Ez1040 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. Ez1040 Figure tax for a short year under the general rule, explained below. Ez1040 You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Ez1040 General rule. Ez1040   Income tax for a short tax year must be annualized. Ez1040 However, self-employment tax is figured on the actual self-employment income for the short period. Ez1040 Individuals. Ez1040   An individual must figure income tax for the short tax year as follows. Ez1040 Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Ez1040 You must itemize deductions when you file a short period tax return. Ez1040 Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Ez1040 Subtract the amount in (2) from the amount in (1). Ez1040 The result is your modified taxable income. Ez1040 Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Ez1040 The result is your annualized income. Ez1040 Figure the total tax on your annualized income using the appropriate tax rate schedule. Ez1040 Multiply the total tax by the number of months in the short tax year and divide the result by 12. Ez1040 The result is your tax for the short tax year. Ez1040 Relief procedure. Ez1040   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Ez1040 It may result in less tax. Ez1040 Under this procedure, the tax is figured by two separate methods. Ez1040 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. Ez1040 For more information, see section 443(b)(2) of the Internal Revenue Code. Ez1040 Alternative minimum tax. Ez1040   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. Ez1040 Multiply the AMTI by 12. Ez1040 Divide the result by the number of months in the short tax year. Ez1040 Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Ez1040 The result is the annualized AMT. Ez1040 Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Ez1040   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Ez1040 For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Ez1040 Tax withheld from wages. Ez1040   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Ez1040 Federal income tax is withheld on a calendar year basis. Ez1040 The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Ez1040 Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Ez1040 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. Ez1040 See Accounting Periods, earlier, for a description of permissible tax years. Ez1040 To change to a proper tax year, you must do one of the following. Ez1040 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. Ez1040 Attach a completed Form 1128 to the amended tax return. Ez1040 Write “FILED UNDER REV. Ez1040 PROC. Ez1040 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Ez1040 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. Ez1040 Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Ez1040 See the Instructions for Form 1128 for exceptions. Ez1040 If you qualify for an automatic approval request, a user fee is not required. Ez1040 Individuals Generally, individuals must adopt the calendar year as their tax year. Ez1040 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. Ez1040 Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Ez1040 A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Ez1040 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). Ez1040 The following discussions provide the rules for partnerships, S corporations, and PSCs. Ez1040 Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Ez1040 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. Ez1040 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. Ez1040 The partnership can establish a business purpose for a different tax year. Ez1040 The rules for the required tax year for partnerships are as follows. Ez1040 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. Ez1040 If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Ez1040 A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Ez1040 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. Ez1040 If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Ez1040 Least aggregate deferral of income. Ez1040   The tax year that results in the least aggregate deferral of income is determined as follows. Ez1040 Figure the number of months of deferral for each partner using one partner's tax year. Ez1040 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. Ez1040 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). Ez1040 Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Ez1040 Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Ez1040   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Ez1040 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. Ez1040 However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Ez1040 Example. Ez1040 A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Ez1040 A uses the calendar year and B uses a fiscal year ending November 30. Ez1040 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. Ez1040 Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Ez1040 5 -0- -0- B 11/30 0. Ez1040 5 11 5. Ez1040 5 Total Deferral 5. Ez1040 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Ez1040 5 1 0. Ez1040 5 B 11/30 0. Ez1040 5 -0- -0- Total Deferral 0. Ez1040 5 When determination is made. Ez1040   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. Ez1040 However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Ez1040 This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Ez1040 Short period return. Ez1040   When a partnership changes its tax year, a short period return must be filed. Ez1040 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. Ez1040   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. Ez1040 The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Ez1040 706-1. Ez1040 ” More information. Ez1040   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Ez1040 S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Ez1040 A permitted tax year is any of the following. Ez1040 The calendar year. Ez1040 A tax year elected under section 444 of the Internal Revenue Code. Ez1040 See Section 444 Election, below for details. Ez1040 A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Ez1040 Any other tax year for which the corporation establishes a business purpose. Ez1040 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. Ez1040 For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Ez1040 Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Ez1040 The corporation makes an election under section 444 of the Internal Revenue Code. Ez1040 See Section 444 Election, below for details. Ez1040 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. Ez1040 The corporation establishes a business purpose for a fiscal year. Ez1040 See the Instructions for Form 1120 for general information about PSCs. Ez1040 For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Ez1040 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. Ez1040 Certain restrictions apply to the election. Ez1040 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). Ez1040 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. Ez1040 A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Ez1040 It is not a member of a tiered structure (defined in section 1. Ez1040 444-2T of the regulations). Ez1040 It has not previously had a section 444 election in effect. Ez1040 It elects a year that meets the deferral period requirement. Ez1040 Deferral period. Ez1040   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. Ez1040 Retaining tax year. Ez1040   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. Ez1040 This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Ez1040 Adopting or changing tax year. Ez1040   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. Ez1040 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. Ez1040 This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Ez1040 If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Ez1040 Example 1. Ez1040 BD Partnership uses a calendar year, which is also its required tax year. Ez1040 BD cannot make a section 444 election because the deferral period is zero. Ez1040 Example 2. Ez1040 E, a newly formed partnership, began operations on December 1. Ez1040 E is owned by calendar year partners. Ez1040 E wants to make a section 444 election to adopt a September 30 tax year. Ez1040 E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Ez1040 Making the election. Ez1040   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Ez1040 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. Ez1040 For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Ez1040 Note. Ez1040 If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Ez1040   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. Ez1040 Example 1. Ez1040 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. Ez1040 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. Ez1040 Example 2. Ez1040 The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Ez1040 AB must file Form 8716 by March 17, 2013. Ez1040 Example 3. Ez1040 B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Ez1040 B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Ez1040 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. Ez1040 Note. Ez1040 The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Ez1040 Extension of time for filing. Ez1040   There is an automatic extension of 12 months to make this election. Ez1040 See the Form 8716 instructions for more information. Ez1040 Terminating the election. Ez1040   The section 444 election remains in effect until it is terminated. Ez1040 If the election is terminated, another section 444 election cannot be made for any tax year. Ez1040   The election ends when any of the following applies to the partnership, S corporation, or PSC. Ez1040 The entity changes to its required tax year. Ez1040 The entity liquidates. Ez1040 The entity becomes a member of a tiered structure. Ez1040 The IRS determines that the entity willfully failed to comply with the required payments or distributions. Ez1040   The election will also end if either of the following events occur. Ez1040 An S corporation's S election is terminated. Ez1040 However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Ez1040 A PSC ceases to be a PSC. Ez1040 If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Ez1040 Required payment for partnership or S corporation. Ez1040   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Ez1040 The required payment for that year (or any preceding tax year) is more than $500. Ez1040    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Ez1040   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. Ez1040 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. Ez1040 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. Ez1040 Applicable election year. Ez1040   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Ez1040 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. Ez1040 Required distribution for PSC. Ez1040   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Ez1040 If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Ez1040 The amount deferred is treated as paid or incurred in the following tax year. Ez1040   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). Ez1040 Back-up election. Ez1040   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. Ez1040 If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Ez1040 Making back-up election. Ez1040   The general rules for making a section 444 election, as discussed earlier, apply. Ez1040 When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Ez1040 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. Ez1040 Activating election. Ez1040   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Ez1040 The due date for filing Form 8752 and making the payment is the later of the following dates. Ez1040 May 15 of the calendar year following the calendar year in which the applicable election year begins. Ez1040 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Ez1040   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. Ez1040 ” 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). Ez1040 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. Ez1040 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. Ez1040 Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Ez1040 See the Instructions for Form 1128 for details. Ez1040 Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Ez1040 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. Ez1040 An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Ez1040 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. Ez1040 See the Instructions for Form 1128 for details. Ez1040 Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Ez1040 Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Ez1040 You choose an accounting method when you file your first tax return. Ez1040 If you later want to change your accounting method, you must get IRS approval. Ez1040 See Change in Accounting Method, later. Ez1040 No single accounting method is required of all taxpayers. Ez1040 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. Ez1040 In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Ez1040 You must use the same accounting method from year to year. Ez1040 An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Ez1040 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. Ez1040 Methods you can use. Ez1040   In general, you can compute your taxable income under any of the following accounting methods. Ez1040 Cash method. Ez1040 Accrual method. Ez1040 Special methods of accounting for certain items of income and expenses. Ez1040 A hybrid method which combines elements of two or more of the above accounting methods. Ez1040 The cash and accrual methods of accounting are explained later. Ez1040 Special methods. Ez1040   This publication does not discuss special methods of accounting for certain items of income or expenses. Ez1040 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. Ez1040 The following publications also discuss special methods of reporting income or expenses. Ez1040 Publication 225, Farmer's Tax Guide. Ez1040 Publication 535, Business Expenses. Ez1040 Publication 537, Installment Sales. Ez1040 Publication 946, How To Depreciate Property. Ez1040 Hybrid method. Ez1040   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. Ez1040 However, the following restrictions apply. Ez1040 If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Ez1040 See Exceptions under Inventories, later. Ez1040 Generally, you can use the cash method for all other items of income and expenses. Ez1040 See Inventories, later. Ez1040 If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Ez1040 If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Ez1040 Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Ez1040 Business and personal items. Ez1040   You can account for business and personal items using different accounting methods. Ez1040 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. Ez1040 Two or more businesses. Ez1040   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Ez1040 No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Ez1040 Note. Ez1040 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. Ez1040 Cash Method Most individuals and many small businesses use the cash method of accounting. Ez1040 Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Ez1040 See Inventories, later, for exceptions to this rule. Ez1040 Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Ez1040 If you receive property and services, you must include their fair market value (FMV) in income. Ez1040 Constructive receipt. Ez1040   Income is constructively received when an amount is credited to your account or made available to you without restriction. Ez1040 You need not have possession of it. Ez1040 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. Ez1040 Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Ez1040 Example. Ez1040 You are a calendar year taxpayer. Ez1040 Your bank credited, and made available, interest to your bank account in December 2012. Ez1040 You did not withdraw it or enter it into your books until 2013. Ez1040 You must include the amount in gross income for 2012, the year you constructively received it. Ez1040 You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Ez1040 You must report the income in the year the property is received or made available to you without restriction. Ez1040 Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Ez1040 This includes business expenses for which you contest liability. Ez1040 However, you may not be able to deduct an expense paid in advance. Ez1040 Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Ez1040 Expense paid in advance. Ez1040   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. Ez1040   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. Ez1040 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Ez1040   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. Ez1040 See Change in Accounting Method, later. Ez1040 Example 1. Ez1040 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. Ez1040 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. Ez1040 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. Ez1040 Example 2. Ez1040 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. Ez1040 The 12-month rule applies. Ez1040 Therefore, the full $10,000 is deductible in 2012. Ez1040 Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Ez1040 (See Special rules for farming businesses, later. Ez1040 ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Ez1040 See Gross receipts test, below. Ez1040 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. Ez1040 See Gross receipts test, below. Ez1040 A tax shelter. Ez1040 Exceptions The following entities are not prohibited from using the cash method of accounting. Ez1040 Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Ez1040 A qualified personal service corporation (PSC). Ez1040 Gross receipts test. Ez1040   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Ez1040 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. Ez1040    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. Ez1040 See Gross receipts test for qualifying taxpayers, for more information. Ez1040 Generally, a partnership applies the test at the partnership level. Ez1040 Gross receipts for a short tax year are annualized. Ez1040 Aggregation rules. Ez1040   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. Ez1040 Change to accrual method. Ez1040   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. Ez1040 Special rules for farming businesses. Ez1040   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Ez1040 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. Ez1040 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). Ez1040   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. Ez1040 For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Ez1040 See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Ez1040 Qualified PSC. Ez1040   A PSC that meets the following function and ownership tests can use the cash method. Ez1040 Function test. Ez1040   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. Ez1040 Ownership test. Ez1040   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. Ez1040 Employees performing services for the corporation in a field qualifying under the function test. Ez1040 Retired employees who had performed services in those fields. Ez1040 The estate of an employee described in (1) or (2). Ez1040 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. Ez1040   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Ez1040 Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Ez1040 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. Ez1040   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. Ez1040 Change to accrual method. Ez1040   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. Ez1040 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. Ez1040 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. Ez1040 The purpose of an accrual method of accounting is to match income and expenses in the correct year. Ez1040 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. Ez1040 Under this rule, you report an amount in your gross income on the earliest of the following dates. Ez1040 When you receive payment. Ez1040 When the income amount is due to you. Ez1040 When you earn the income. Ez1040 When title has passed. Ez1040 Estimated income. Ez1040   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. Ez1040 Change in payment schedule. Ez1040   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. Ez1040 Continue this procedure until you complete the services, then account for the difference. Ez1040 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. Ez1040 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. Ez1040 However, you cannot postpone including any payment beyond that tax year. Ez1040 Service agreement. Ez1040   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Ez1040 This includes an agreement providing for incidental replacement of parts or materials. Ez1040 However, this applies only if you offer the property without a service agreement in the normal course of business. Ez1040 Postponement not allowed. Ez1040   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Ez1040 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. Ez1040 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. Ez1040 Examples. Ez1040   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Ez1040 Example 1. Ez1040 You manufacture, sell, and service computers. Ez1040 You received payment in 2012 for a one-year contingent service contract on a computer you sold. Ez1040 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. Ez1040 Example 2. Ez1040 You are in the television repair business. Ez1040 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. Ez1040 You include the payments in gross income as you earn them. Ez1040 Example 3. Ez1040 You own a dance studio. Ez1040 On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Ez1040 You give eight lessons in 2012. Ez1040 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. Ez1040 Example 4. Ez1040 Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Ez1040 You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Ez1040 Guarantee or warranty. Ez1040   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Ez1040 Prepaid rent. Ez1040   You cannot postpone reporting income from prepaid rent. Ez1040 Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Ez1040 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. Ez1040 Books and records. Ez1040   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. Ez1040 Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Ez1040 IRS approval. Ez1040   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Ez1040 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. Ez1040 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. Ez1040 An agreement includes a gift certificate that can be redeemed for goods. Ez1040 Amounts due and payable are considered received. Ez1040 How to report payments. Ez1040   Generally, include an advance payment in income in the year in which you receive it. Ez1040 However, you can use the alternative method, discussed next. Ez1040 Alternative method of reporting. Ez1040   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. Ez1040 Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Ez1040 Example 1. Ez1040 You are a retailer. Ez1040 You use an accrual method of accounting and account for the sale of goods when you ship the goods. Ez1040 You use this method for both tax and financial reporting purposes. Ez1040 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. Ez1040 However, see Exception for inventory goods, later. Ez1040 Example 2. Ez1040 You are a calendar year taxpayer. Ez1040 You manufacture household furniture and use an accrual method of accounting. Ez1040 Under this method, you accrue income for your financial reports when you ship the furniture. Ez1040 For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Ez1040 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. Ez1040 You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Ez1040 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. Ez1040 Information schedule. Ez1040   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. Ez1040 Total advance payments received in the current tax year. Ez1040 Total advance payments received in earlier tax years and not included in income before the current tax year. Ez1040 Total payments received in earlier tax years included in income for the current tax year. Ez1040 Exception for inventory goods. Ez1040   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. Ez1040 You account for the advance payment under the alternative method (discussed earlier). Ez1040 You have received a substantial advance payment on the agreement (discussed next). Ez1040 You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Ez1040 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. Ez1040   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. Ez1040 You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Ez1040 If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Ez1040 Note. Ez1040 You must report any advance payments you receive after the second year in the year received. Ez1040 No further deferral is allowed. Ez1040 Substantial advance payments. Ez1040   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. Ez1040 Example. Ez1040 You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Ez1040 In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Ez1040 The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Ez1040 You receive the following advance payments under the contract. Ez1040 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. Ez1040 In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Ez1040 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. Ez1040   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. Ez1040 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. Ez1040 If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Ez1040   No further deferral is allowed. Ez1040 You must include in gross income the advance payment you receive each remaining year of the contract. Ez1040 Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Ez1040 IRS approval. Ez1040   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Ez1040 Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Ez1040 The all-events test has been met. Ez1040 The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Ez1040 Economic performance has occurred. Ez1040 Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Ez1040 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. Ez1040 If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Ez1040 Example. Ez1040 You are a calendar year taxpayer. Ez1040 You buy office supplies in December 2012. Ez1040 You receive the supplies and the bill in December, but you pay the bill in January 2013. Ez1040 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. Ez1040 Your office supplies may qualify as a recurring item, discussed later. Ez1040 If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Ez1040 Workers' compensation and tort liability. Ez1040   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. Ez1040 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. Ez1040 Taxes. Ez1040   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Ez1040 are paid. Ez1040 However, you can elect to treat taxes as a recurring item, discussed later. Ez1040 You can also elect to ratably accrue real estate taxes. Ez1040 See chapter 5 of Publication 535 for information about real estate taxes. Ez1040 Other liabilities. Ez1040   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. Ez1040 Interest. Ez1040   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. Ez1040 Compensation for services. Ez1040   Generally, economic performance occurs as an employee renders service to the employer. Ez1040 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. Ez1040 For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Ez1040 Vacation pay. Ez1040   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. Ez1040 If you pay it later than this, you must deduct it in the year actually paid. Ez1040 An amount is vested if your right to it cannot be nullified or cancelled. Ez1040 Exception for recurring items. Ez1040   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. Ez1040 The exception applies if all the following requirements are met. Ez1040 The all-events test, discussed earlier, is met. Ez1040 Economic performance occurs by the earlier of the following dates. Ez1040 8½ months after the close of the year. Ez1040 The date you file a timely return (including extensions) for the year. Ez1040 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. Ez1040 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. Ez1040 This exception does not apply to workers' compensation or tort liabilities. Ez1040 Amended return. Ez1040   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Ez1040 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. Ez1040 Recurrence and consistency. Ez1040   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. Ez1040 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. Ez1040 Materiality. Ez1040   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. Ez1040   An item considered material for financial statement purposes is also considered material for tax purposes. Ez1040 However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Ez1040 Matching expenses with income. Ez1040   Costs directly associated with the revenue of a period are properly allocable to that period. Ez1040 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. Ez1040 fasab. Ez1040 gov/accepted. Ez1040 html) are an important factor. Ez1040   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. Ez1040 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. Ez1040 However, the matching requirement is considered met for certain types of expenses. Ez1040 These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Ez1040 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. Ez1040 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. Ez1040 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Ez1040 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. Ez1040 See Change in Accounting Method, later, for information on how to get IRS approval. Ez1040 See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Ez1040 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. Ez1040 Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Ez1040 See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Ez1040 Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Ez1040 If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Ez1040 However, see Exceptions, next. Ez1040 See also Accrual Method, earlier. Ez1040 To figure taxable income, you must value your inventory at the beginning and end of each tax year. Ez1040 To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Ez1040 See Identifying Cost and Valuing Inventory, later. Ez1040 The rules for valuing inventory are not the same for all businesses. Ez1040 The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Ez1040 Your inventory practices must be consistent from year to year. Ez1040 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. Ez1040 Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Ez1040 These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Ez1040 A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Ez1040 irs. Ez1040 gov/pub/irs-irbs/irb01–02. Ez1040 pdf. Ez1040 A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Ez1040 irs. Ez1040 gov/pub/irs-irbs/irb02–18. Ez1040 pdf. Ez1040 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). Ez1040 Qualifying taxpayer. Ez1040   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). Ez1040 Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Ez1040 You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Ez1040 Gross receipts test for qualifying taxpayers. Ez1040   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Ez1040 List each of the test years. Ez1040 For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Ez1040 Step 2. Ez1040 Determine your average annual gross receipts for each test year listed in Step 1. Ez1040 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. Ez1040 Step 3. Ez1040 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. Ez1040 Qualifying small business taxpayer. Ez1040   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). Ez1040 Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Ez1040 You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Ez1040 Your principle business activity is an eligible business. Ez1040 See Eligible business, later. Ez1040 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. Ez1040 Note. Ez1040 Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Ez1040 A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Ez1040 See Special rules for farming businesses under Cash Method, earlier. Ez1040 Gross receipts test for qualifying small business taxpayers. Ez1040   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Ez1040 List each of the test years. Ez1040 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. Ez1040 Step 2. Ez1040 Determine your average annual gross receipts for each test year listed in Step 1. Ez1040 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. Ez1040 Step 3. Ez1040 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. Ez1040 Eligible business. Ez1040   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. Ez1040 You have an eligible business if you meet any of the following requirements. Ez1040 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). Ez1040 NAICS codes 31-33 (manufacturing). Ez1040 NAICS code 42 (wholesale trade). Ez1040 NAICS codes 44-45 (retail trade). Ez1040 NAICS codes 5111 and 5122 (information industries). Ez1040 Your principal business activity is the provision of services, including the provision of property incident to those services. Ez1040 Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Ez1040   Information about the NAICS codes can be found at http://www. Ez1040 census. Ez1040 gov/naics or in the instructions for your federal income tax return. Ez1040 Gross receipts. Ez1040   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. Ez1040 See the definit