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File for extension 2012 taxes 5. File for extension 2012 taxes   How To Get Tax Help Table of Contents Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. File for extension 2012 taxes Free help with your tax return. File for extension 2012 taxes   You can get free help preparing your return nationwide from IRS-certified volunteers. File for extension 2012 taxes The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. File for extension 2012 taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. 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File for extension 2012 taxes Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. File for extension 2012 taxes   What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. File for extension 2012 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. File for extension 2012 taxes You face (or your business is facing) an immediate threat of adverse action. File for extension 2012 taxes You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. File for extension 2012 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. 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Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). These questions and answers reflect the holdings in Revenue Ruling 2013-17 in 2013-38 IRB 201.

Q1. When are individuals of the same sex lawfully married for federal tax purposes?

A1. For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

Q2. Can same-sex spouses file federal tax returns using a married filing jointly or married filing separately status?

A2. Yes. For tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. For tax year 2012 and all prior years, same-sex spouses who file an original tax return on or after Sept. 16, 2013 (the effective date of Rev. Rul. 2013-17), generally must file using a married filing separately or jointly filing status. For tax year 2012, same-sex spouses who filed their tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status. For tax years 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html

Q3. Can a taxpayer and his or her same-sex spouse file a joint return if they were married in a state that recognizes same-sex marriages but they live in a state that does not recognize their marriage?

A3. Yes. For federal tax purposes, the IRS has a general rule recognizing a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. The rules for using a married filing jointly or married filing separately status described in Q&A #2 apply to these married individuals. 

Q4. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?

A4. No. A taxpayer’s spouse cannot be a dependent of the taxpayer.

Q5. Can a same-sex spouse file using head of household filing status?

A5. A taxpayer who is married cannot file using head of household filing status. However, a married taxpayer may be considered unmarried and may use the head-of-household filing status if the taxpayer lives apart from his or her spouse for the last 6 months of the taxable year and provides more than half the cost of maintaining a household that is the principal place of abode of the taxpayer’s dependent child for more than half of the year. See Publication 501 for more details.

Q6. If same-sex spouses (who file using the married filing separately status) have a child, which parent may claim the child as a dependent?

A6. If a child is a qualifying child under section 152(c) of both parents who are spouses (who file using the married filing separate status), either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time during the taxable year. If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.   

Q7. Can a taxpayer who is married to a person of the same sex claim the standard deduction if the taxpayer’s spouse itemized deductions?

A7. No. If a taxpayer’s spouse itemized his or her deductions, the taxpayer cannot claim the standard deduction (section 63(c)(6)(A)).

Q8. If a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

A8. No. The adopting parent may not claim an adoption credit. A taxpayer may not claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse (section 23). 

Q9. Do provisions of the federal tax law such as section 66 (treatment of community income) and section 469(i)(5) ($25,000 offset for passive activity losses for rental real estate activities) apply to same-sex spouses?

A9. Yes. Like other provisions of the federal tax law that apply to married taxpayers, section 66 and section 469(i)(5) apply to same-sex spouses because same-sex spouses are married for all federal tax purposes.

Q10. If an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, can the employee file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse?

A10. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer provided health coverage for an employee’s same-sex spouse, the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee’s spouse been recognized as the employee’s legal spouse for tax purposes. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan covering eligible employees and their dependents and spouses (including same-sex spouses). Fifty percent of the cost of health coverage elected by employees is paid by Employer. Employee A was married to same-sex Spouse B at all times during 2012. Employee A elected coverage for Spouse B through Employer’s group health plan beginning Jan. 1, 2012. The value of the employer-funded portion of Spouse B’s health coverage was $250 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee A included $3,000 ($250 per month x 12 months) of income reflecting the value of employer-funded health coverage provided to Spouse B.  Employee A filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee A may file an amended Form 1040 for the 2012 taxable year excluding the value of Spouse B’s employer-funded health coverage ($3,000) from gross income.

Q11. If an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, can a participating employee file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee’s same-sex spouse?

A11. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee’s same-sex spouse under the employer’s health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee’s spouse. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan as part of a cafeteria plan with a calendar year plan year. The full cost of spousal and dependent coverage is paid by the employees. In the open enrollment period for the 2012 plan year, Employee C elected to purchase self-only health coverage through salary reduction under Employer’s cafeteria plan. On March 1, 2012, Employee C was married to same-sex spouse D. Employee C purchased health coverage for Spouse D through Employer’s group health plan beginning March 1, 2012. The premium paid by Employee C for Spouse D’s health coverage was $500 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee C included the $5,000 ($500 per month x 10 months) of premiums paid by Employee C for Spouse D’s health coverage. Employee C filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee C’s salary reduction election is treated as including the value of the same-sex spousal coverage purchased for Spouse D. Employee C may file an amended Form 1040 for the 2012 taxable year excluding the premiums paid for Spouse D’s health coverage ($5,000) from gross income.

Q12. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund for the Social Security taxes and Medicare taxes paid on the benefits? 

A12. Yes. If the period of limitations for filing a claim for refund is open, the employer may claim a refund of, or make an adjustment for, any overpayment of Social Security taxes and Medicare taxes. The requirements for filing a claim for refund or for making an adjustment for an overpayment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for overpayments of Social Security taxes and Medicare taxes paid on same-sex spouse benefits. 

Q13. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund or make an adjustment of income tax withholding that was withheld from the employee with respect to the benefits in prior years? 

A13. No. Claims for refund of overwithheld income tax for prior years cannot be made by employers. The employee may file for any refund of income tax due for prior years on Form 1040X, provided the period of limitations for claiming a refund has not expired. See Q&A #10 and Q&A #11.

Employers may make adjustments for income tax withholding that was overwithheld from an employee in the current year provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year.

Q14. If an employer cannot locate a former employee with a same-sex spouse who received the benefits described in Q&A #10 and Q&A #11, may the employer still claim a refund of the employer portion of the Social Security and Medicare taxes on the benefits?

A14. Yes, if the employer makes reasonable attempts to locate an employee who received the benefits described in Q&A #10 and Q&A #11 that were treated as wages but the employer is unable to locate the employee, the employer can claim a refund of the employer portion of Social Security and Medicare taxes, but not the employee portion. Also, if an employee is notified and given the opportunity to participate in the claim for refund of Social Security and Medicare taxes but declines in writing, the employer can claim a refund of the employer portion of the taxes, but not the employee portion. Employers can use the special administrative procedure set forth in Notice 2013-61 to file these claims.

Q15. If a sole proprietor employs his or her same-sex spouse in his or her business, can the sole proprietor get a refund of Social Security, Medicare and FUTA taxes on the wages that the sole proprietor paid to the same-sex spouse as an employee in the business?

A15. Services performed by an employee in the employ of his or her spouse are excluded from the definition of employment for purposes of the Federal Unemployment Tax Act (FUTA). Therefore, for all years for which the period of limitations is open, the sole proprietor can claim a refund of the FUTA tax paid on the compensation that the sole proprietor paid his or her same-sex spouse as an employee in the business. Services of a spouse are excluded from Social Security and Medicare taxes only if the services are not in the course of the employer's trade or business, or if it is domestic service in a private home of the employer.

Q16. What rules apply to qualified retirement plans pursuant to Rev. Rul. 2013-17?

A16. Qualified retirement plans are required to comply with the following rules pursuant to Rev. Rul. 2013-17:

  1. A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.
  2. For purposes of satisfying the federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
  3. A person who is in a registered domestic partnership or civil union is not  considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person’s partner is of the opposite or same sex.

Q17. What are some examples of the consequences of these rules for qualified retirement plans?

A17. The following are some examples of the consequences of these rules:

  1. Plan A, a qualified defined benefit plan, is maintained by Employer X, which operates only in a state that does not recognize same-sex marriages. Nonetheless, Plan A must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
  2. Plan B is a qualified defined contribution plan and provides that the participant’s account must be paid to the participant’s spouse upon the participant’s death unless the spouse consents to a different beneficiary. Plan B does not provide for any annuity forms of distribution. Plan B must pay this death benefit to the same-sex surviving spouse of any deceased participant. Plan B is not required to provide this death benefit to a surviving registered domestic partner of a deceased participant. However, Plan B is allowed to make a participant’s registered domestic partner the default beneficiary who will receive the death benefit unless the participant chooses a different beneficiary.

Q18. As of when do the rules of Rev. Rul. 2013-17 apply to qualified retirement plans?

A18. Qualified retirement plans must comply with these rules as of Sept. 16, 2013. Although Rev. Rul. 2013-17 allows taxpayers to file amended returns that relate to prior periods in reliance on the rules in Rev. Rul. 2013-17 with respect to many matters, this rule does not extend to matters relating to qualified retirement plans. The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans with respect to periods before Sept. 16, 2013.

Q19. Will the IRS issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17?

A19. The IRS intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17.  It is expected that future guidance will address the following, among other issues:

  1. Plan amendment requirements (including the timing of any required amendments).
  2. Any necessary corrections relating to plan operations for periods before future guidance is issued.

Q20. Can a same-sex married couple elect to treat a jointly owned and operated unincorporated business as a Qualified Joint Venture?

A20. Yes. Spouses that wholly own and operate an unincorporated business and that meet certain other requirements may avoid Federal partnership tax treatment by electing to be a Qualified Joint Venture. For more information on Qualified Joint Ventures, see the tax topic “Husband and Wife Business” at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Husband-and-Wife-Business.

Q21. In the situations described in FAQ #10 and FAQ #11, may the employee claim a refund for the social security and Medicare taxes paid on the benefits if the employer will not?

A21. Yes. If the period of limitations for filing a claim for refund is open and the employee has not been reimbursed by the employer for the Social Security and Medicare taxes and has not authorized the employer to file a claim for refund of those taxes on his or her behalf, the employee may claim a refund. The employee should seek a refund of Social Security and Medicare taxes from his or her employer first. However, if the employer indicates an intention not to file a claim or adjust the overpaid Social Security and Medicare taxes, the employee may claim a refund of any overpayment of employee Social Security and Medicare taxes by filing Form 843, Claim for Refund and Request for Abatement. The requirements for an employee filing a claim for refund of the employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 843. Employees should write “Windsor Claim” in dark, bold letters across the top margin of Form 843.

Q22. Is an employer that repays or reimburses an employee on or before Dec. 31, 2013, for an overpayment of Social Security and Medicare taxes and income tax withholding with respect to same-sex spouse benefits provided in 2013 required to obtain a written statement from the employee confirming the employee did not make a claim for refund of the overcollected taxes (or the claim was rejected) and will not make any future claim for refund or credit of the overcollected taxes?

A22. No. An employer using the first special administrative procedure under Notice 2013-61 (i.e., employer repays or reimburses an employee for 2013 overpayments of taxes on or before Dec. 31, 2013, and corrects the overpayment on the fourth quarter 2013 Form 941) does not need to obtain the written statement from its employee with respect to the 2013 overpayments. However, an employer using the second special administrative procedure under Notice 2013-61 (i.e., employer does not repay or reimburse an employee for an overpayment of taxes on or before Dec. 31, 2013, and corrects the overpayment on a Form 941-X) is required to obtain such written statement from each affected employee.

Q23. If an individual employed his or her same-sex spouse to perform domestic (household) services in the individual’s private home, can the individual get a refund of Social Security, Medicare and FUTA taxes on wages that the individual paid to the spouse for such service? If so, which forms should the individual use to claim refunds?

A23. Yes, if the period of limitations for filing a claim for refund is open, the individual can get a refund of Social Security, Medicare and FUTA taxes paid on remuneration for domestic services in the individual’s private home that were performed by his or her same sex spouse as the individual’s employee. If the taxes for these services were reported on Schedule H (Form 1040), Household Employment Taxes, and taxes were paid in connection with the Form 1040, the individual should file an amended Form 1040 to claim refund of those taxes together with an amended Schedule H. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. If the Social Security and Medicare taxes for the domestic service were reported on Form 941, Employer’s QUARTERLY Federal Tax Return, the individual employer can use Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to claim a refund of these taxes. The requirements for filing a claim for refund or making an adjustment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for an overpayment of social security taxes and Medicare taxes on same-sex spouse benefits. If the FUTA taxes for the domestic service were reported on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, the individual employer can file an amended Form 940 for the prior year to obtain a refund. The previous year’s Form 940 should be used to claim a refund of FUTA taxes for that prior year. (Forms 940 for prior years may also be found at IRS.gov.)

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Page Last Reviewed or Updated: 07-Mar-2014

The File For Extension 2012 Taxes

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