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Filemy2010taxreturnforfree

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Filemy2010taxreturnforfree

Filemy2010taxreturnforfree 4. Filemy2010taxreturnforfree   How Income of Aliens Is Taxed Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Resident Aliens Nonresident AliensTrade or Business in the United States Effectively Connected Income The 30% Tax Income From Real Property Transportation Tax Interrupted Period of Residence Expatriation TaxExpatriation Before June 4, 2004 Expatriation After June 3, 2004, and Before June 17, 2008 Expatriation After June 16, 2008 Introduction Resident and nonresident aliens are taxed in different ways. Filemy2010taxreturnforfree Resident aliens are generally taxed in the same way as U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens. Filemy2010taxreturnforfree Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree The following discussions will help you determine if income you receive during the tax year is effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business and how it is taxed. Filemy2010taxreturnforfree Topics - This chapter discusses: Income that is effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree Income that is not effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree Interrupted period of residence. Filemy2010taxreturnforfree Expatriation tax. Filemy2010taxreturnforfree Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 1212 List of Original Issue Discount Instruments Form (and Instructions) 6251 Alternative Minimum Tax—Individuals Schedule D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting these publications and forms. Filemy2010taxreturnforfree Resident Aliens Resident aliens are generally taxed in the same way as U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens. Filemy2010taxreturnforfree This means that their worldwide income is subject to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax and must be reported on their U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax return. Filemy2010taxreturnforfree Income of resident aliens is subject to the graduated tax rates that apply to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens. Filemy2010taxreturnforfree Resident aliens use the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens. Filemy2010taxreturnforfree Nonresident Aliens A nonresident alien's income that is subject to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree income tax must be divided into two categories: Income that is effectively connected with a trade or business in the United States, and Income that is not effectively connected with a trade or business in the United States (discussed under The 30% Tax, later). Filemy2010taxreturnforfree The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. Filemy2010taxreturnforfree These are the same rates that apply to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens and residents. Filemy2010taxreturnforfree Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. Filemy2010taxreturnforfree If you were formerly a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen or resident alien, these rules may not apply. Filemy2010taxreturnforfree See Expatriation Tax, later, in this chapter. Filemy2010taxreturnforfree Trade or Business in the United States Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as effectively connected with that trade or business. Filemy2010taxreturnforfree Whether you are engaged in a trade or business in the United States depends on the nature of your activities. Filemy2010taxreturnforfree The discussions that follow will help you determine whether you are engaged in a trade or business in the United States. Filemy2010taxreturnforfree Personal Services If you perform personal services in the United States at any time during the tax year, you usually are considered engaged in a trade or business in the United States. Filemy2010taxreturnforfree Certain compensation paid to a nonresident alien by a foreign employer is not included in gross income. Filemy2010taxreturnforfree For more information, see Services Performed for Foreign Employer in chapter 3. Filemy2010taxreturnforfree Other Trade or Business Activities Other examples of being engaged in a trade or business in the United States follow. Filemy2010taxreturnforfree Students and trainees. Filemy2010taxreturnforfree   You are considered engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant under an “F,” “J,” “M,” or “Q” visa. Filemy2010taxreturnforfree A nonresident alien temporarily present in the United States under a “J” visa includes a nonresident alien individual admitted to the United States as an exchange visitor under the Mutual Educational and Cultural Exchange Act of 1961. Filemy2010taxreturnforfree The taxable part of any scholarship or fellowship grant that is U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source income is treated as effectively connected with a trade or business in the United States. Filemy2010taxreturnforfree Business operations. Filemy2010taxreturnforfree   If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. Filemy2010taxreturnforfree Partnerships. Filemy2010taxreturnforfree   If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States. Filemy2010taxreturnforfree Beneficiary of an estate or trust. Filemy2010taxreturnforfree   If you are the beneficiary of an estate or trust that is engaged in a trade or business in the United States, you are treated as being engaged in the same trade or business. Filemy2010taxreturnforfree Trading in stocks, securities, and commodities. Filemy2010taxreturnforfree   If your only U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree resident broker or other agent, you are not engaged in a trade or business in the United States. Filemy2010taxreturnforfree   For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks and securities. Filemy2010taxreturnforfree   For transactions in commodities, this applies to commodities that are usually traded on an organized commodity exchange and to transactions that are usually carried out at such an exchange. Filemy2010taxreturnforfree   This discussion does not apply if you have a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree office or other fixed place of business at any time during the tax year through which, or by the direction of which, you carry out your transactions in stocks, securities, or commodities. Filemy2010taxreturnforfree Trading for a nonresident alien's own account. Filemy2010taxreturnforfree   You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities, or commodities is your only U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree business activity. Filemy2010taxreturnforfree This applies even if the trading takes place while you are present in the United States or is done by your employee or your broker or other agent. Filemy2010taxreturnforfree   This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. Filemy2010taxreturnforfree This does not necessarily mean, however, that as a dealer you are considered to be engaged in a trade or business in the United States. Filemy2010taxreturnforfree Determine that based on the facts and circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities . Filemy2010taxreturnforfree Effectively Connected Income If you are engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business, all income, gain, or loss for the tax year that you get from sources within the United States (other than certain investment income) is treated as effectively connected income. Filemy2010taxreturnforfree This applies whether or not there is any connection between the income and the trade or business being carried on in the United States during the tax year. Filemy2010taxreturnforfree Two tests, described next under Investment Income, determine whether certain items of investment income (such as interest, dividends, and royalties) are treated as effectively connected with that business. Filemy2010taxreturnforfree In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business in the United States. Filemy2010taxreturnforfree For a discussion of these rules, see Foreign Income , later. Filemy2010taxreturnforfree Investment Income Investment income from U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree sources that may or may not be treated as effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business generally falls into the following three categories. Filemy2010taxreturnforfree Fixed or determinable income (interest, dividends, rents, royalties, premiums, annuities, etc. Filemy2010taxreturnforfree ). Filemy2010taxreturnforfree Gains (some of which are considered capital gains) from the sale or exchange of the following types of property. Filemy2010taxreturnforfree Timber, coal, or domestic iron ore with a retained economic interest. Filemy2010taxreturnforfree Patents, copyrights, and similar property on which you receive contingent payments after October 4, 1966. Filemy2010taxreturnforfree Patents transferred before October 5, 1966. Filemy2010taxreturnforfree Original issue discount obligations. Filemy2010taxreturnforfree Capital gains (and losses). Filemy2010taxreturnforfree Use the two tests, described next, to determine whether an item of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source income falling in one of the three categories above and received during the tax year is effectively connected with your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree If the tests indicate that the item of income is effectively connected, you must include it with your other effectively connected income. Filemy2010taxreturnforfree If the item of income is not effectively connected, include it with all other income discussed under The 30% Tax later, in this chapter. Filemy2010taxreturnforfree Asset-use test. Filemy2010taxreturnforfree   This test usually applies to income that is not directly produced by trade or business activities. Filemy2010taxreturnforfree Under this test, if an item of income is from assets (property) used in, or held for use in, the trade or business in the United States, it is considered effectively connected. Filemy2010taxreturnforfree   An asset is used in, or held for use in, the trade or business in the United States if the asset is: Held for the principal purpose of promoting the conduct of a trade or business in the United States, Acquired and held in the ordinary course of the trade or business conducted in the United States (for example, an account receivable or note receivable arising from that trade or business), or Otherwise held to meet the present needs of the trade or business in the United States and not its anticipated future needs. Filemy2010taxreturnforfree Generally, stock of a corporation is not treated as an asset used in, or held for use in, a trade or business in the United States. Filemy2010taxreturnforfree Business-activities test. Filemy2010taxreturnforfree   This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business. Filemy2010taxreturnforfree The business-activities test is most important when: Dividends or interest are received by a dealer in stocks or securities, Royalties are received in the trade or business of licensing patents or similar property, or Service fees are earned by a servicing business. Filemy2010taxreturnforfree Under this test, if the conduct of the U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business was a material factor in producing the income, the income is considered effectively connected. Filemy2010taxreturnforfree Personal Service Income You usually are engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business when you perform personal services in the United States. Filemy2010taxreturnforfree Personal service income you receive in a tax year in which you are engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business is effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree Income received in a year other than the year you performed the services is also effectively connected if it would have been effectively connected if received in the year you performed the services. Filemy2010taxreturnforfree Personal service income includes wages, salaries, commissions, fees, per diem allowances, and employee allowances and bonuses. Filemy2010taxreturnforfree The income may be paid to you in the form of cash, services, or property. Filemy2010taxreturnforfree If you are engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business only because you perform personal services in the United States during the tax year, income and gains from assets, and gains and losses from the sale or exchange of capital assets are generally not effectively connected with your trade or business. Filemy2010taxreturnforfree However, if there is a direct economic relationship between your holding of the asset and your trade or business of performing personal services, the income, gain, or loss is effectively connected. Filemy2010taxreturnforfree Pensions. Filemy2010taxreturnforfree   If you were a nonresident alien engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, such payments are effectively connected income in each year you receive them. Filemy2010taxreturnforfree This is true whether or not you are engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business in the year you receive the retirement pay. Filemy2010taxreturnforfree Transportation Income Transportation income (defined in chapter 2) is effectively connected if you meet both of the following conditions. Filemy2010taxreturnforfree You had a fixed place of business in the United States involved in earning the income. Filemy2010taxreturnforfree At least 90% of your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source transportation income is attributable to regularly scheduled transportation. Filemy2010taxreturnforfree “Fixed place of business” generally means a place, site, structure, or other similar facility through which you engage in a trade or business. Filemy2010taxreturnforfree “Regularly scheduled transportation” means that a ship or aircraft follows a published schedule with repeated sailings or flights at regular intervals between the same points for voyages or flights that begin or end in the United States. Filemy2010taxreturnforfree This definition applies to both scheduled and chartered air transportation. Filemy2010taxreturnforfree If you do not meet the two conditions above, the income is not effectively connected and is taxed at a 4% rate. Filemy2010taxreturnforfree See Transportation Tax, later, in this chapter. Filemy2010taxreturnforfree Business Profits and Losses and Sales Transactions All profits or losses from U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree sources that are from the operation of a business in the United States are effectively connected with a trade or business in the United States. Filemy2010taxreturnforfree For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income. Filemy2010taxreturnforfree A share of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source profits or losses of a partnership that is engaged in a trade or business in the United States is also effectively connected with a trade or business in the United States. Filemy2010taxreturnforfree Real Property Gain or Loss Gains and losses from the sale or exchange of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. Filemy2010taxreturnforfree You must treat the gain or loss as effectively connected with that trade or business. Filemy2010taxreturnforfree U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest. Filemy2010taxreturnforfree   This is any interest in real property located in the United States or the U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree Virgin Islands or any interest (other than as a creditor) in a domestic corporation that is a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property holding corporation. Filemy2010taxreturnforfree Real property includes the following. Filemy2010taxreturnforfree Land and unsevered natural products of the land, such as growing crops and timber, and mines, wells, and other natural deposits. Filemy2010taxreturnforfree Improvements on land, including buildings, other permanent structures, and their structural components. Filemy2010taxreturnforfree Personal property associated with the use of real property, such as equipment used in farming, mining, forestry, or construction or property used in lodging facilities or rented office space, unless the personal property is: Disposed of more than one year before or after the disposition of the real property, or Separately sold to persons unrelated either to the seller or to the buyer of the real property. Filemy2010taxreturnforfree U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property holding corporation. Filemy2010taxreturnforfree   A corporation is a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property holding corporation if the fair market value of the corporation's U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interests are at least 50% of the total fair market value of: The corporation's U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interests, plus The corporation's interests in real property located outside the United States, plus The corporation's other assets that are used in, or held for use in, a trade or business. Filemy2010taxreturnforfree   Gain or loss on the sale of the stock in any domestic corporation is taxed as if you are engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business unless you establish that the corporation is not a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property holding corporation. Filemy2010taxreturnforfree   A U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest does not include a class of stock of a corporation that is regularly traded on an established securities market, unless you hold more than 5% of the fair market value of that class of stock. Filemy2010taxreturnforfree An interest in a foreign corporation owning U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property generally is not a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest unless the corporation chooses to be treated as a domestic corporation. Filemy2010taxreturnforfree Qualified investment entities. Filemy2010taxreturnforfree   Special rules apply to qualified investment entities (QIEs). Filemy2010taxreturnforfree A QIE is any real estate investment trust (REIT) or any regulated investment company (RIC) that is a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property holding corporation. Filemy2010taxreturnforfree    Generally, any distribution from a QIE to a shareholder that is attributable to gain from the sale or exchange of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest is treated as a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property gain by the shareholder receiving the distribution. Filemy2010taxreturnforfree A distribution by a QIE on stock regularly traded on an established securities market in the United States is not treated as gain from the sale or exchange of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest if you did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution. Filemy2010taxreturnforfree A distribution that you do not treat as gain from the sale or exchange of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest is included in your gross income as a regular dividend. Filemy2010taxreturnforfree Note. Filemy2010taxreturnforfree Beginning January 1, 2014 (unless extended by legislation), a RIC that is a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property holding corporation will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. Filemy2010taxreturnforfree Domestically controlled QIE. Filemy2010taxreturnforfree   The sale of an interest in a domestically controlled QIE is not the sale of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest. Filemy2010taxreturnforfree The entity is domestically controlled if at all times during the testing period less than 50% in value of its stock was held, directly or indirectly, by foreign persons. Filemy2010taxreturnforfree The testing period is the shorter of (a) the 5-year period ending on the date of disposition, or (b) the period during which the entity was in existence. Filemy2010taxreturnforfree Wash sale. Filemy2010taxreturnforfree    If you dispose of an interest in a domestically controlled QIE in an applicable wash sale transaction, special rules apply. Filemy2010taxreturnforfree An applicable wash sale transaction is one in which you: Dispose of an interest in the domestically controlled QIE during the 30-day period before the ex-dividend date of a distribution that you would (but for the disposition) have treated as gain from the sale or exchange of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest, and Acquire, or enter into a contract or option to acquire, a substantially identical interest in that entity during the 61-day period that began on the first day of the 30-day period. Filemy2010taxreturnforfree If this occurs, you are treated as having gain from the sale or exchange of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest in an amount equal to the distribution made after June 15, 2006, that would have been treated as such gain. Filemy2010taxreturnforfree This also applies to any substitute dividend payment. Filemy2010taxreturnforfree   A transaction is not treated as an applicable wash sale transaction if: You actually receive the distribution from the domestically controlled QIE related to the interest disposed of, or acquired, in the transaction, or You dispose of any class of stock in a QIE that is regularly traded on an established securities market in the United States but only if you did not own more than 5% of that class of stock at any time during the 1-year period ending on the date of the distribution. Filemy2010taxreturnforfree Alternative minimum tax. Filemy2010taxreturnforfree   There may be a minimum tax on your net gain from the disposition of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interests. Filemy2010taxreturnforfree Figure the amount of this tax, if any, on Form 6251. Filemy2010taxreturnforfree Withholding of tax. Filemy2010taxreturnforfree   If you dispose of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest, the buyer may have to withhold tax. Filemy2010taxreturnforfree See the discussion of Tax Withheld on Real Property Sales in chapter 8. Filemy2010taxreturnforfree Foreign Income You must treat three kinds of foreign source income as effectively connected with a trade or business in the United States if: You have an office or other fixed place of business in the United States to which the income can be attributed, That office or place of business is a material factor in producing the income, and The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Filemy2010taxreturnforfree An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Filemy2010taxreturnforfree The three kinds of foreign source income are listed below. Filemy2010taxreturnforfree Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the United States or from any interest in such property. Filemy2010taxreturnforfree Included are rents or royalties for the use, or for the privilege of using, outside the United States, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the United States. Filemy2010taxreturnforfree Dividends, interest, or amounts received for the provision of a guarantee of indebtedness issued after September 27, 2010, from the active conduct of a banking, financing, or similar business in the United States. Filemy2010taxreturnforfree A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. Filemy2010taxreturnforfree Income, gain, or loss from the sale outside the United States, through the U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree office or other fixed place of business, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Filemy2010taxreturnforfree Item (3) will not apply if you sold the property for use, consumption, or disposition outside the United States and an office or other fixed place of business in a foreign country was a material factor in the sale. Filemy2010taxreturnforfree Any foreign source income that is equivalent to any item of income described above is treated as effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree For example, foreign source interest and dividend equivalents are treated as U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree effectively connected income if the income is derived by a foreign person in the active conduct of a banking, financing, or similar business within the United States. Filemy2010taxreturnforfree Tax on Effectively Connected Income Income you receive during the tax year that is effectively connected with your trade or business in the United States is, after allowable deductions, taxed at the rates that apply to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens and residents. Filemy2010taxreturnforfree Generally, you can receive effectively connected income only if you are a nonresident alien engaged in trade or business in the United States during the tax year. Filemy2010taxreturnforfree However, income you receive from the sale or exchange of property, the performance of services, or any other transaction in another tax year is treated as effectively connected in that year if it would have been effectively connected in the year the transaction took place or you performed the services. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree Ted Richards, a nonresident alien, entered the United States in August 2012, to perform personal services in the U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree office of his overseas employer. Filemy2010taxreturnforfree He worked in the U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree office until December 25, 2012, but did not leave this country until January 11, 2013. Filemy2010taxreturnforfree On January 8, 2013, he received his final paycheck for services performed in the United States during 2012. Filemy2010taxreturnforfree All of Ted's income during his stay here is U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source income. Filemy2010taxreturnforfree During 2012, Ted was engaged in the trade or business of performing personal services in the United States. Filemy2010taxreturnforfree Therefore, all amounts paid to him in 2012 for services performed in the United States during 2012 are effectively connected with that trade or business during 2012. Filemy2010taxreturnforfree The salary payment Ted received in January 2013 is U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source income to him in 2013. Filemy2010taxreturnforfree It is effectively connected with a trade or business in the United States because he was engaged in a trade or business in the United States during 2012 when he performed the services that earned the income. Filemy2010taxreturnforfree Real property income. Filemy2010taxreturnforfree   You may be able to choose to treat all income from real property as effectively connected. Filemy2010taxreturnforfree See Income From Real Property , later, in this chapter. Filemy2010taxreturnforfree The 30% Tax Tax at a 30% (or lower treaty) rate applies to certain items of income or gains from U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree sources but only if the items are not effectively connected with your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree Fixed or Determinable Income The 30% (or lower treaty) rate applies to the gross amount of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source fixed or determinable annual or periodic gains, profits, or income. Filemy2010taxreturnforfree Income is fixed when it is paid in amounts known ahead of time. Filemy2010taxreturnforfree Income is determinable whenever there is a basis for figuring the amount to be paid. Filemy2010taxreturnforfree Income can be periodic if it is paid from time to time. Filemy2010taxreturnforfree It does not have to be paid annually or at regular intervals. Filemy2010taxreturnforfree Income can be determinable or periodic even if the length of time during which the payments are made is increased or decreased. Filemy2010taxreturnforfree Items specifically included as fixed or determinable income are interest (other than original issue discount), dividends, dividend equivalent payments (defined in chapter 2), rents, premiums, annuities, salaries, wages, and other compensation. Filemy2010taxreturnforfree A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. Filemy2010taxreturnforfree Other items of income, such as royalties, also may be subject to the 30% tax. Filemy2010taxreturnforfree Some fixed or determinable income may be exempt from U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax. Filemy2010taxreturnforfree See chapter 3 if you are not sure whether the income is taxable. Filemy2010taxreturnforfree Original issue discount (OID). Filemy2010taxreturnforfree   If you sold, exchanged, or received a payment on a bond or other debt instrument that was issued at a discount after March 31, 1972, all or part of the original issue discount (OID) (other than portfolio interest) may be subject to the 30% tax. Filemy2010taxreturnforfree The amount of OID is the difference between the stated redemption price at maturity and the issue price of the debt instrument. Filemy2010taxreturnforfree The 30% tax applies in the following circumstances. Filemy2010taxreturnforfree You received a payment on a debt instrument. Filemy2010taxreturnforfree In this case, the amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the OID previously taken into account. Filemy2010taxreturnforfree But the tax on the OID cannot be more than the payment minus the tax on the interest payment on the debt instrument. Filemy2010taxreturnforfree You sold or exchanged the debt instrument. Filemy2010taxreturnforfree The amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the amount already taxed in (1) above. Filemy2010taxreturnforfree   Report on your return the amount of OID shown on Form 1042-S, Foreign Person's U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree Source Income Subject to Withholding, if you bought the debt instrument at original issue. Filemy2010taxreturnforfree However, you must recompute your proper share of OID shown on Form 1042-S if any of the following apply. Filemy2010taxreturnforfree You bought the debt instrument at a premium or paid an acquisition premium. Filemy2010taxreturnforfree The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree Treasury securities). Filemy2010taxreturnforfree The debt instrument is a contingent payment or inflation-indexed debt instrument. Filemy2010taxreturnforfree For the definition of premium and acquisition premium and instructions on how to recompute OID, get Publication 1212. Filemy2010taxreturnforfree   If you held a bond or other debt instrument that was issued at a discount before April 1, 1972, contact the IRS for further information. Filemy2010taxreturnforfree See chapter 12. Filemy2010taxreturnforfree Gambling Winnings In general, nonresident aliens are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business and is not exempted by treaty. Filemy2010taxreturnforfree However, no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. Filemy2010taxreturnforfree Nonresident aliens are taxed at graduated rates on net gambling income won in the United States that is effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree Social Security Benefits A nonresident alien must include 85% of any U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree social security benefit (and the social security equivalent part of a tier 1 railroad retirement benefit) in U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source fixed or determinable annual or periodic income. Filemy2010taxreturnforfree Social security benefits include monthly retirement, survivor, and disability benefits. Filemy2010taxreturnforfree This income is exempt under some tax treaties. Filemy2010taxreturnforfree See Table 1 in Publication 901, U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree Tax Treaties, for a list of tax treaties that exempt U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree social security benefits from U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax. Filemy2010taxreturnforfree Sales or Exchanges of Capital Assets These rules apply only to those capital gains and losses from sources in the United States that are not effectively connected with a trade or business in the United States. Filemy2010taxreturnforfree They apply even if you are engaged in a trade or business in the United States. Filemy2010taxreturnforfree These rules do not apply to the sale or exchange of a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree real property interest or to the sale of any property that is effectively connected with a trade or business in the United States. Filemy2010taxreturnforfree See Real Property Gain or Loss , earlier, under Effectively Connected Income. Filemy2010taxreturnforfree A capital asset is everything you own except: Inventory. Filemy2010taxreturnforfree Business accounts or notes receivable. Filemy2010taxreturnforfree Depreciable property used in a trade or business. Filemy2010taxreturnforfree Real property used in a trade or business. Filemy2010taxreturnforfree Supplies regularly used in a trade or business. Filemy2010taxreturnforfree Certain copyrights, literary or musical or artistic compositions, letters or memoranda, or similar property. Filemy2010taxreturnforfree Certain U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree government publications. Filemy2010taxreturnforfree Certain commodities derivative financial instruments held by a commodities derivatives dealer. Filemy2010taxreturnforfree Hedging transactions. Filemy2010taxreturnforfree A capital gain is a gain on the sale or exchange of a capital asset. Filemy2010taxreturnforfree A capital loss is a loss on the sale or exchange of a capital asset. Filemy2010taxreturnforfree If the sale is in foreign currency, for the purpose of determining gain, the cost and selling price of the property should be expressed in U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree currency at the rate of exchange prevailing as of the date of the purchase and date of the sale, respectively. Filemy2010taxreturnforfree You may want to read Publication 544. Filemy2010taxreturnforfree However, use Publication 544 only to determine what is a sale or exchange of a capital asset, or what is treated as such. Filemy2010taxreturnforfree Specific tax treatment that applies to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens or residents generally does not apply to you. Filemy2010taxreturnforfree The following gains are subject to the 30% (or lower treaty) rate without regard to the 183-day rule, discussed later. Filemy2010taxreturnforfree Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest. Filemy2010taxreturnforfree Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966. Filemy2010taxreturnforfree Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966. Filemy2010taxreturnforfree Gains on the sale or exchange of original issue discount obligations. Filemy2010taxreturnforfree Gains in (1) are not subject to the 30% (or lower treaty) rate if you choose to treat the gains as effectively connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree See Income From Real Property , later. Filemy2010taxreturnforfree 183-day rule. Filemy2010taxreturnforfree   If you were in the United States for 183 days or more during the tax year, your net gain from sales or exchanges of capital assets is taxed at a 30% (or lower treaty) rate. Filemy2010taxreturnforfree For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree sources over your capital losses from U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree sources. Filemy2010taxreturnforfree This rule applies even if any of the transactions occurred while you were not in the United States. Filemy2010taxreturnforfree   To determine your net gain, consider the amount of your gains and losses that would be recognized and taken into account only if, and to the extent that, they would be recognized and taken into account if you were in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business during the year and the gains and losses were effectively connected with that trade or business during the tax year. Filemy2010taxreturnforfree   In arriving at your net gain, do not take the following into consideration. Filemy2010taxreturnforfree The four types of gains listed earlier. Filemy2010taxreturnforfree The deduction for a capital loss carryover. Filemy2010taxreturnforfree Capital losses in excess of capital gains. Filemy2010taxreturnforfree Exclusion for gain from the sale or exchange of qualified small business stock (section 1202 exclusion). Filemy2010taxreturnforfree Losses from the sale or exchange of property held for personal use. Filemy2010taxreturnforfree However, losses resulting from casualties or thefts may be deductible on Schedule A (Form 1040NR). Filemy2010taxreturnforfree See Itemized Deductions in chapter 5. Filemy2010taxreturnforfree   If you are not engaged in a trade or business in the United States and have not established a tax year for a prior period, your tax year will be the calendar year for purposes of the 183-day rule. Filemy2010taxreturnforfree Also, you must file your tax return on a calendar-year basis. Filemy2010taxreturnforfree   If you were in the United States for less than 183 days during the tax year, capital gains (other than gains listed earlier) are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year. Filemy2010taxreturnforfree Reporting. Filemy2010taxreturnforfree   Report your gains and losses from the sales or exchanges of capital assets that are not effectively connected with a trade or business in the United States on page 4 of Form 1040NR. Filemy2010taxreturnforfree Report gains and losses from sales or exchanges of capital assets (including real property) that are effectively connected with a trade or business in the United States on a separate Schedule D (Form 1040), Form 4797, or both. Filemy2010taxreturnforfree Attach them to Form 1040NR. Filemy2010taxreturnforfree Income From Real Property If you have income from real property located in the United States that you own or have an interest in and hold for the production of income, you can choose to treat all income from that property as income effectively connected with a trade or business in the United States. Filemy2010taxreturnforfree The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. Filemy2010taxreturnforfree This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. Filemy2010taxreturnforfree It also includes gains from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest. Filemy2010taxreturnforfree You can make this choice only for real property income that is not otherwise effectively connected with your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree If you make the choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. Filemy2010taxreturnforfree This choice does not treat a nonresident alien, who is not otherwise engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business, as being engaged in a trade or business in the United States during the year. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree You are a nonresident alien and are not engaged in a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree You own a single-family house in the United States that you rent out. Filemy2010taxreturnforfree Your rental income for the year is $10,000. Filemy2010taxreturnforfree This is your only U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source income. Filemy2010taxreturnforfree As discussed earlier under The 30% Tax, the rental income is subject to a tax at a 30% (or lower treaty) rate. Filemy2010taxreturnforfree You received a Form 1042-S showing that your tenants properly withheld this tax from the rental income. Filemy2010taxreturnforfree You do not have to file a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax return (Form 1040NR) because your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax liability is satisfied by the withholding of tax. Filemy2010taxreturnforfree If you make the choice discussed earlier, you can offset the $10,000 income by certain rental expenses. Filemy2010taxreturnforfree (See Publication 527, Residential Rental Property, for information on rental expenses. Filemy2010taxreturnforfree ) Any resulting net income is taxed at graduated rates. Filemy2010taxreturnforfree If you make this choice, report the rental income and expenses on Schedule E (Form 1040) and attach the schedule to Form 1040NR. Filemy2010taxreturnforfree For the first year you make the choice, also attach the statement discussed next. Filemy2010taxreturnforfree Making the choice. Filemy2010taxreturnforfree   Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. Filemy2010taxreturnforfree Include the following in your statement. Filemy2010taxreturnforfree That you are making the choice. Filemy2010taxreturnforfree Whether the choice is under Internal Revenue Code section 871(d) (explained earlier) or a tax treaty. Filemy2010taxreturnforfree A complete list of all your real property, or any interest in real property, located in the United States. Filemy2010taxreturnforfree Give the legal identification of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree timber, coal, or iron ore in which you have an interest. Filemy2010taxreturnforfree The extent of your ownership in the property. Filemy2010taxreturnforfree The location of the property. Filemy2010taxreturnforfree A description of any major improvements to the property. Filemy2010taxreturnforfree The dates you owned the property. Filemy2010taxreturnforfree Your income from the property. Filemy2010taxreturnforfree Details of any previous choices and revocations of the real property income choice. Filemy2010taxreturnforfree   This choice stays in effect for all later tax years unless you revoke it. Filemy2010taxreturnforfree Revoking the choice. Filemy2010taxreturnforfree   You can revoke the choice without IRS approval by filing Form 1040X, Amended U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree Individual Income Tax Return, for the year you made the choice and for later tax years. Filemy2010taxreturnforfree You must file Form 1040X within 3 years from the date your return was filed or 2 years from the time the tax was paid, whichever is later. Filemy2010taxreturnforfree If this time period has expired for the year of choice, you cannot revoke the choice for that year. Filemy2010taxreturnforfree However, you may revoke the choice for later tax years only if you have IRS approval. Filemy2010taxreturnforfree For information on how to get IRS approval, see Regulation section 1. Filemy2010taxreturnforfree 871-10(d)(2). Filemy2010taxreturnforfree Transportation Tax A 4% tax rate applies to transportation income that is not effectively connected because it does not meet the two conditions listed earlier under Transportation Income . Filemy2010taxreturnforfree If you receive transportation income subject to the 4% tax, you should figure the tax and show it on line 57 of Form 1040NR. Filemy2010taxreturnforfree Attach a statement to your return that includes the following information (if applicable). Filemy2010taxreturnforfree Your name, taxpayer identification number, and tax year. Filemy2010taxreturnforfree A description of the types of services performed (whether on or off board). Filemy2010taxreturnforfree Names of vessels or registration numbers of aircraft on which you performed the services. Filemy2010taxreturnforfree Amount of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source transportation income derived from each type of service for each vessel or aircraft for the calendar year. Filemy2010taxreturnforfree Total amount of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source transportation income derived from all types of services for the calendar year. Filemy2010taxreturnforfree This 4% tax applies to your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source gross transportation income. Filemy2010taxreturnforfree This only includes transportation income that is treated as derived from sources in the United States if the transportation begins or ends in the United States. Filemy2010taxreturnforfree For transportation income from personal services, the transportation must be between the United States and a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree possession. Filemy2010taxreturnforfree For personal services of a nonresident alien, this only applies to income derived from, or in connection with, an aircraft. Filemy2010taxreturnforfree Interrupted Period of Residence You are subject to tax under a special rule if you interrupt your period of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree residence with a period of nonresidence. Filemy2010taxreturnforfree The special rule applies if you meet all of the following conditions. Filemy2010taxreturnforfree You were a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree resident for a period that includes at least 3 consecutive calendar years. Filemy2010taxreturnforfree You were a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree resident for at least 183 days in each of those years. Filemy2010taxreturnforfree You ceased to be treated as a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree resident. Filemy2010taxreturnforfree You then again became a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree resident before the end of the third calendar year after the end of the period described in (1) above. Filemy2010taxreturnforfree Under this special rule, you are subject to tax on your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) for the period you were a nonresident alien, unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree For information on how to figure the special tax, see How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) under Expatriation Tax , below. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree John Willow, a citizen of New Zealand, entered the United States on April 1, 2008, as a lawful permanent resident. Filemy2010taxreturnforfree On August 1, 2010, John ceased to be a lawful permanent resident and returned to New Zealand. Filemy2010taxreturnforfree During his period of residence, he was present in the United States for at least 183 days in each of three consecutive years (2008, 2009, and 2010). Filemy2010taxreturnforfree He returned to the United States on October 5, 2013, as a lawful permanent resident. Filemy2010taxreturnforfree He became a resident before the close of the third calendar year (2013) beginning after the end of his first period of residence (August 1, 2010). Filemy2010taxreturnforfree Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 2010, through October 4, 2013) if it is more than the tax that would normally apply to him as a nonresident alien. Filemy2010taxreturnforfree Reporting requirements. Filemy2010taxreturnforfree   If you are subject to this tax for any year in the period you were a nonresident alien, you must file Form 1040NR for that year. Filemy2010taxreturnforfree The return is due by the due date (including extensions) for filing your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree income tax return for the year that you again become a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree resident. Filemy2010taxreturnforfree If you already filed returns for that period, you must file amended returns. Filemy2010taxreturnforfree You must attach a statement to your return that identifies the source of all of your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree and foreign gross income and the items of income subject to this special rule. Filemy2010taxreturnforfree Expatriation Tax The expatriation tax provisions apply to U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizens who have renounced their citizenship and long-term residents who have ended their residency. Filemy2010taxreturnforfree The rules that apply are based on the dates of expatriation, which are described in the following sections. Filemy2010taxreturnforfree Expatriation Before June 4, 2004. Filemy2010taxreturnforfree Expatriation After June 3, 2004, and Before June 17, 2008. Filemy2010taxreturnforfree Expatriation After June 16, 2008. Filemy2010taxreturnforfree Long-term resident defined. Filemy2010taxreturnforfree   You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. Filemy2010taxreturnforfree In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits. Filemy2010taxreturnforfree Expatriation Before June 4, 2004 If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree taxes. Filemy2010taxreturnforfree Unless you received a ruling from the IRS that you did not expatriate to avoid U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree taxes, you are presumed to have tax avoidance as a principal purpose if: Your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000, or Your net worth on the date of your action was $500,000 or more. Filemy2010taxreturnforfree The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1). Filemy2010taxreturnforfree Table 4-1. Filemy2010taxreturnforfree Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004 IF you expatriated during . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree   THEN the rules outlined on this page apply if . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree     Your 5-year average annual net income tax was more than . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree OR Your net worth equaled or exceeded . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree . Filemy2010taxreturnforfree 1999   110,000   552,000 2000   112,000   562,000 2001   116,000   580,000 2002   120,000   599,000 2003   122,000   608,000 2004 (before June 4)*   124,000   622,000 *If you expatriated after June 3, 2004, see Expatriation After June 3, 2004, and Before June 17, 2008 or Expatriation After June 16, 2008. Filemy2010taxreturnforfree Reporting requirements. Filemy2010taxreturnforfree   If you lost your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. Filemy2010taxreturnforfree If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended. Filemy2010taxreturnforfree   Your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits. Filemy2010taxreturnforfree Penalties. Filemy2010taxreturnforfree   If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. Filemy2010taxreturnforfree The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. Filemy2010taxreturnforfree The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect. Filemy2010taxreturnforfree Expatriation tax. Filemy2010taxreturnforfree   The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. Filemy2010taxreturnforfree It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. Filemy2010taxreturnforfree See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section. Filemy2010taxreturnforfree Expatriation After June 3, 2004, and Before June 17, 2008 If you expatriated after June 3, 2004, and before June 17, 2008, the expatriation rules apply to you if any of the following statements apply. Filemy2010taxreturnforfree Your average annual net income tax for the 5 tax years ending before the date of expatriation or termination of residency is more than: $124,000 if you expatriated or terminated residency in 2004. Filemy2010taxreturnforfree $127,000 if you expatriated or terminated residency in 2005. Filemy2010taxreturnforfree $131,000 if you expatriated or terminated residency in 2006. Filemy2010taxreturnforfree $136,000 if you expatriated or terminated residency in 2007. Filemy2010taxreturnforfree $139,000 if you expatriated or terminated residency in 2008. Filemy2010taxreturnforfree Your net worth is $2 million or more on the date of your expatriation or termination of residency. Filemy2010taxreturnforfree You fail to certify on Form 8854 that you have complied with all U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree federal tax obligations for the 5 tax years preceding the date of your expatriation or termination of residency. Filemy2010taxreturnforfree Exception for dual-citizens and certain minors. Filemy2010taxreturnforfree   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) earlier. Filemy2010taxreturnforfree However, they still must provide the certification required in (3). Filemy2010taxreturnforfree Certain dual-citizens. Filemy2010taxreturnforfree   You may qualify for the exception described above if all of the following apply. Filemy2010taxreturnforfree You became at birth a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen and a citizen of another country and you continue to be a citizen of that other country. Filemy2010taxreturnforfree You were never a resident alien of the United States (as defined in chapter 1). Filemy2010taxreturnforfree You never held a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree passport. Filemy2010taxreturnforfree You were present in the United States for no more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your loss of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizenship. Filemy2010taxreturnforfree Certain minors. Filemy2010taxreturnforfree   You may qualify for the exception described above if you meet all of the following requirements. Filemy2010taxreturnforfree You became a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen at birth. Filemy2010taxreturnforfree Neither of your parents was a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen at the time of your birth. Filemy2010taxreturnforfree You expatriated before you were 18½. Filemy2010taxreturnforfree You were present in the United States for not more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your expatriation. Filemy2010taxreturnforfree Tax consequences of presence in the United States. Filemy2010taxreturnforfree   The following rules apply if you do not meet the exception above for dual-citizens and certain minors and the expatriation rules would otherwise apply to you. Filemy2010taxreturnforfree   The expatriation tax does not apply to any tax year during the 10-year period if you are physically present in the United States for more than 30 days during the calendar year ending in that year. Filemy2010taxreturnforfree Instead, you are treated as a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen or resident and taxed on your worldwide income for that tax year. Filemy2010taxreturnforfree You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms. Filemy2010taxreturnforfree   When counting the number of days of presence during a calendar year, count any day you were physically present in the United States at any time during the day. Filemy2010taxreturnforfree However, do not count any days (up to a limit of 30 days) on which you performed personal services in the United States for an employer who is not related to you if either of the following apply. Filemy2010taxreturnforfree You have ties with other countries. Filemy2010taxreturnforfree You have ties with other countries if: You became (within a reasonable period after your expatriation or termination of residency) a citizen or resident of the country in which you, your spouse, or either of your parents were born, and You became fully liable for income tax in that country. Filemy2010taxreturnforfree You were physically present in the United States for 30 days or less during each year in the 10-year period ending on the date of expatriation or termination of residency. Filemy2010taxreturnforfree Do not count any day you were an exempt individual or were unable to leave the United States because of a medical condition that arose while you were in the United States. Filemy2010taxreturnforfree See Exempt individual and Medical condition in chapter 1 under Substantial Presence Test, but disregard the information about Form 8843. Filemy2010taxreturnforfree Related employer. Filemy2010taxreturnforfree   If your employer in the United States is any of the following, then your employer is related to you. Filemy2010taxreturnforfree You must count any days you performed services in the United States for that employer as days of presence in the United States. Filemy2010taxreturnforfree Members of your family. Filemy2010taxreturnforfree This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Filemy2010taxreturnforfree ), and lineal descendants (children, grandchildren, etc. Filemy2010taxreturnforfree ). Filemy2010taxreturnforfree A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Filemy2010taxreturnforfree A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Filemy2010taxreturnforfree (See Publication 550, chapter 4, Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock. Filemy2010taxreturnforfree ) A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. Filemy2010taxreturnforfree Date of tax expatriation. Filemy2010taxreturnforfree   For purposes of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax rules, the date of your expatriation or termination of residency is the later of the dates on which you perform the following actions. Filemy2010taxreturnforfree You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating act or termination of residency. Filemy2010taxreturnforfree You file Form 8854 in accordance with the form instructions. Filemy2010taxreturnforfree Annual return. Filemy2010taxreturnforfree   If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the date of expatriation. Filemy2010taxreturnforfree You must file this form even if you owe no U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree tax. Filemy2010taxreturnforfree Penalty. Filemy2010taxreturnforfree   If you fail to file Form 8854 for any tax year, fail to include all information required to be shown on the form, or include incorrect information, you may have to pay a penalty of $10,000. Filemy2010taxreturnforfree You will not have to pay a penalty if you show that the failure is due to reasonable cause and not to willful neglect. Filemy2010taxreturnforfree How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) If the expatriation tax applies to you, you are generally subject to tax on your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree trade or business. Filemy2010taxreturnforfree For this purpose, U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source gross income (defined in chapter 2) includes gains from the sale or exchange of: Property (other than stock or debt obligations) located in the United States, Stock issued by a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree domestic corporation, and Debt obligations of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree persons or of the United States, a state or political subdivision thereof, or the District of Columbia. Filemy2010taxreturnforfree U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source income also includes any income or gain derived from stock in certain controlled foreign corporations if you owned, or were considered to own, at any time during the 2-year period ending on the date of expatriation, more than 50% of: The total combined voting power of all classes of that corporation's stock, or The total value of the stock. Filemy2010taxreturnforfree The income or gain is considered U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source income only to the extent of your share of earnings and profits earned or accumulated before the date of expatriation and during the periods you met the ownership requirements discussed above. Filemy2010taxreturnforfree Any exchange of property is treated as a sale of the property at its fair market value on the date of the exchange and any gain is treated as U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19. Filemy2010taxreturnforfree Other information. Filemy2010taxreturnforfree   For more information on the expatriation tax provisions, including exceptions to the tax and special U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree source rules, see section 877 of the Internal Revenue Code. Filemy2010taxreturnforfree Expatriation Tax Return If you expatriated or terminated your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree residency, or you are subject to the expatriation tax, you must file Form 8854, Initial and Annual Expatriation Statement. Filemy2010taxreturnforfree Attach it to Form 1040NR if you are required to file that form. Filemy2010taxreturnforfree If you are present in the United States following your expatriation and are subject to tax as a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen or resident, file Form 8854 with Form 1040. Filemy2010taxreturnforfree Expatriation After June 16, 2008 If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions. Filemy2010taxreturnforfree Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than: $139,000 if you expatriated or terminated residency in 2008. Filemy2010taxreturnforfree $145,000 if you expatriated or terminated residency in 2009 or 2010. Filemy2010taxreturnforfree $147,000 if you expatriated or terminated residency in 2011. Filemy2010taxreturnforfree $151,000 if you expatriated or terminated residency in 2012. Filemy2010taxreturnforfree $155,000 if you expatriated or terminated residency in 2013. Filemy2010taxreturnforfree Your net worth is $2 million or more on the date of your expatriation or termination of residency. Filemy2010taxreturnforfree You fail to certify on Form 8854 that you have complied with all U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. Filemy2010taxreturnforfree Exception for dual-citizens and certain minors. Filemy2010taxreturnforfree   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. Filemy2010taxreturnforfree However, they still must provide the certification required in (3) above. Filemy2010taxreturnforfree Certain dual-citizens. Filemy2010taxreturnforfree   You may qualify for the exception described above if both of the following apply. Filemy2010taxreturnforfree You became at birth a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country. Filemy2010taxreturnforfree You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. Filemy2010taxreturnforfree For the purpose of determining U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree residency, use the substantial presence test described in chapter 1. Filemy2010taxreturnforfree Certain minors. Filemy2010taxreturnforfree   You may qualify for the exception described earlier if you meet both of the following requirements. Filemy2010taxreturnforfree You expatriated before you were 18½. Filemy2010taxreturnforfree You have been a resident of the United States for not more than 10 tax years before the expatriation occurs. Filemy2010taxreturnforfree For the purpose of determining U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree residency, use the substantial presence test described in chapter 1. Filemy2010taxreturnforfree Expatriation date. Filemy2010taxreturnforfree   Your expatriation date is the date you relinquish U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree resident). Filemy2010taxreturnforfree Former U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizen. Filemy2010taxreturnforfree   You are considered to have relinquished your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizenship on the earliest of the following dates. Filemy2010taxreturnforfree The date you renounced U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality). Filemy2010taxreturnforfree The date you furnished to the State Department a signed statement of voluntary relinquishment of U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality). Filemy2010taxreturnforfree The date the State Department issued a certificate of loss of nationality. Filemy2010taxreturnforfree The date that a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree court canceled your certificate of naturalization. Filemy2010taxreturnforfree Former long-term resident. Filemy2010taxreturnforfree   You are considered to have terminated your long-term residency on the earliest of the following dates. Filemy2010taxreturnforfree The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status. Filemy2010taxreturnforfree The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order. Filemy2010taxreturnforfree If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you began to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and notify the IRS of that treatment on Forms 8833 and 8854. Filemy2010taxreturnforfree See Effect of Tax Treaties in chapter 1 for more information about dual residents. Filemy2010taxreturnforfree How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008) In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). Filemy2010taxreturnforfree This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. Filemy2010taxreturnforfree But see Exceptions , later. Filemy2010taxreturnforfree Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree internal revenue laws. Filemy2010taxreturnforfree Losses from deemed sales must be taken into account to the extent otherwise provided under U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree internal revenue laws. Filemy2010taxreturnforfree However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. Filemy2010taxreturnforfree The net gain that you otherwise must include in your income is reduced (but not below zero) by: $600,000 if you expatriated or terminated residency before January 1, 2009. Filemy2010taxreturnforfree $626,000 if you expatriated or terminated residency in 2009. Filemy2010taxreturnforfree $627,000 if you expatriated or terminated residency in 2010. Filemy2010taxreturnforfree $636,000 if you expatriated or terminated residency in 2011. Filemy2010taxreturnforfree $651,000 if you expatriated or terminated residency in 2012. Filemy2010taxreturnforfree $668,000 if you expatriated or terminated residency in 2013. Filemy2010taxreturnforfree Exceptions. Filemy2010taxreturnforfree   The mark-to-market tax does not apply to the following. Filemy2010taxreturnforfree Eligible deferred compensation items. Filemy2010taxreturnforfree Ineligible deferred compensation items. Filemy2010taxreturnforfree Interests in nongrantor trusts. Filemy2010taxreturnforfree Specified tax deferred accounts. Filemy2010taxreturnforfree Instead, items (1) and (3) may be subject to withholding at source. Filemy2010taxreturnforfree In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. Filemy2010taxreturnforfree In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. Filemy2010taxreturnforfree See paragraphs (d), (e), and (f) of section 877A for more information. Filemy2010taxreturnforfree Expatriation Tax Return If you expatriated or terminated your U. Filemy2010taxreturnforfree S. Filemy2010taxreturnforfree residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. Filemy2010taxreturnforfree Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms. Filemy2010taxreturnforfree Deferral of payment of mark-to-market tax. Filemy2010taxreturnforfree   You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. Filemy2010taxreturnforfree If you make this election, the following rules apply. Filemy2010taxreturnforfree You can make the election on a property-by-property basis. Filemy2010taxreturnforfree The deferred tax attributable to a particular property is due on the return for the tax year in which you dispose of the property. Filemy2010taxreturnforfree Interest is charged for the period the tax is deferred. Filemy2010taxreturnforfree The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates. Filemy2010taxreturnforfree The due date of the return required for the year of death. Filemy2010taxreturnforfree The time that the security provided for the property fails to be adequate. Filemy2010taxreturnforfree See item (6) below. Filemy2010taxreturnforfree You make the election on Form 8854. Filemy2010taxreturnforfree You must provide adequate security (such as a bond). Filemy2010taxreturnforfree You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax. Filemy2010taxreturnforfree   For more information about the deferral of payment, see the Instructions for Form 8854. Filemy2010taxreturnforfree Prev  Up  Next   Home   More Online Publications
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Contact My Local Office in North Dakota

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City  Street Address  Days/Hours of Service  Telephone* 
Bismarck 

4503 Coleman St.
Suite 101
Bismarck, ND  58503 

Monday-Friday - 8:30 a.m. - 4:30 p.m.
(Closed for lunch 11:00 a.m. - 12:00 noon)

 

**This office will be closed 4/17**

 

Services Provided

(701) 221-5834 
Fargo  657 Second Ave. N.
Fargo, ND 58102 

Monday-Friday - 8:30 a.m. - 4:30 p.m.

 

Services Provided

(701) 232-4710 
Grand Forks  102 N. Fourth St.
Grand Forks, ND 58203 

Monday-Friday - 8:30 a.m. - 4:30 p.m.
(Closed for lunch 11:00 a.m. - 12:00 noon)

 

**This office will be closed 3/31**

 

Services Provided

(701) 746-5283 
Minot  315 S. Main St.
Suite 316
Minot, ND 58701 

Monday-Friday - 8:30 a.m. - 4:30 p.m.
(Closed for lunch 11:00 a.m. - 12:00 noon)

 

Services Provided

(701) 839-7741 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call (701) 237-8342 in Fargo or 1-877-777-4778 elsewhere, or see Publication 1546, The Taxpayer Advocate Service of the IRS.

For further information, see Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
657 2nd Ave., North
Fargo, ND 58102

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The Filemy2010taxreturnforfree

Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Hybrid method. Filemy2010taxreturnforfree Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Filemy2010taxreturnforfree Accounting Periods You must use a tax year to figure your taxable income. Filemy2010taxreturnforfree A tax year is an annual accounting period for keeping records and reporting income and expenses. Filemy2010taxreturnforfree An annual accounting period does not include a short tax year (discussed later). Filemy2010taxreturnforfree You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Filemy2010taxreturnforfree Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Filemy2010taxreturnforfree A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree This section discusses: A calendar year. Filemy2010taxreturnforfree A fiscal year (including a period of 52 or 53 weeks). Filemy2010taxreturnforfree A short tax year. Filemy2010taxreturnforfree An improper tax year. Filemy2010taxreturnforfree A change in tax year. Filemy2010taxreturnforfree Special situations that apply to individuals. Filemy2010taxreturnforfree Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Filemy2010taxreturnforfree Special situations that apply to corporations. Filemy2010taxreturnforfree Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree See Change in Tax Year, later. Filemy2010taxreturnforfree Generally, anyone can adopt the calendar year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree If you make this election, your 52-53-week tax year must always end on the same day of the week. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Election. Filemy2010taxreturnforfree   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Filemy2010taxreturnforfree The month in which the new 52-53-week tax year ends. Filemy2010taxreturnforfree The day of the week on which the tax year always ends. Filemy2010taxreturnforfree The date the tax year ends. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Short Tax Year A short tax year is a tax year of less than 12 months. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Tax on a short period tax return is figured differently for each situation. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Example 1. Filemy2010taxreturnforfree XYZ Corporation was organized on July 1, 2012. Filemy2010taxreturnforfree It elected the calendar year as its tax year. Filemy2010taxreturnforfree Therefore, its first tax return was due March 15, 2013. Filemy2010taxreturnforfree This short period return will cover the period from July 1, 2012, through December 31, 2012. Filemy2010taxreturnforfree Example 2. Filemy2010taxreturnforfree A calendar year corporation dissolved on July 23, 2012. Filemy2010taxreturnforfree Its final return is due by October 15, 2012. Filemy2010taxreturnforfree It will cover the short period from January 1, 2012, through July 23, 2012. Filemy2010taxreturnforfree Death of individual. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree   Agnes Green was a single, calendar year taxpayer. Filemy2010taxreturnforfree She died on March 6, 2012. Filemy2010taxreturnforfree Her final income tax return must be filed by April 15, 2013. Filemy2010taxreturnforfree It will cover the short period from January 1, 2012, to March 6, 2012. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Figure tax for a short year under the general rule, explained below. Filemy2010taxreturnforfree You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Filemy2010taxreturnforfree General rule. Filemy2010taxreturnforfree   Income tax for a short tax year must be annualized. Filemy2010taxreturnforfree However, self-employment tax is figured on the actual self-employment income for the short period. Filemy2010taxreturnforfree Individuals. Filemy2010taxreturnforfree   An individual must figure income tax for the short tax year as follows. Filemy2010taxreturnforfree Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Filemy2010taxreturnforfree You must itemize deductions when you file a short period tax return. Filemy2010taxreturnforfree Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Filemy2010taxreturnforfree Subtract the amount in (2) from the amount in (1). Filemy2010taxreturnforfree The result is your modified taxable income. Filemy2010taxreturnforfree Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Filemy2010taxreturnforfree The result is your annualized income. Filemy2010taxreturnforfree Figure the total tax on your annualized income using the appropriate tax rate schedule. Filemy2010taxreturnforfree Multiply the total tax by the number of months in the short tax year and divide the result by 12. Filemy2010taxreturnforfree The result is your tax for the short tax year. Filemy2010taxreturnforfree Relief procedure. Filemy2010taxreturnforfree   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Filemy2010taxreturnforfree It may result in less tax. Filemy2010taxreturnforfree Under this procedure, the tax is figured by two separate methods. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree For more information, see section 443(b)(2) of the Internal Revenue Code. Filemy2010taxreturnforfree Alternative minimum tax. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Multiply the AMTI by 12. Filemy2010taxreturnforfree Divide the result by the number of months in the short tax year. Filemy2010taxreturnforfree Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Filemy2010taxreturnforfree The result is the annualized AMT. Filemy2010taxreturnforfree Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Filemy2010taxreturnforfree   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Filemy2010taxreturnforfree For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Filemy2010taxreturnforfree Tax withheld from wages. Filemy2010taxreturnforfree   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Filemy2010taxreturnforfree Federal income tax is withheld on a calendar year basis. Filemy2010taxreturnforfree The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Filemy2010taxreturnforfree Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree See Accounting Periods, earlier, for a description of permissible tax years. Filemy2010taxreturnforfree To change to a proper tax year, you must do one of the following. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Attach a completed Form 1128 to the amended tax return. Filemy2010taxreturnforfree Write “FILED UNDER REV. Filemy2010taxreturnforfree PROC. Filemy2010taxreturnforfree 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Filemy2010taxreturnforfree See the Instructions for Form 1128 for exceptions. Filemy2010taxreturnforfree If you qualify for an automatic approval request, a user fee is not required. Filemy2010taxreturnforfree Individuals Generally, individuals must adopt the calendar year as their tax year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Filemy2010taxreturnforfree A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Filemy2010taxreturnforfree 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). Filemy2010taxreturnforfree The following discussions provide the rules for partnerships, S corporations, and PSCs. Filemy2010taxreturnforfree Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree The partnership can establish a business purpose for a different tax year. Filemy2010taxreturnforfree The rules for the required tax year for partnerships are as follows. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Filemy2010taxreturnforfree A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Filemy2010taxreturnforfree Least aggregate deferral of income. Filemy2010taxreturnforfree   The tax year that results in the least aggregate deferral of income is determined as follows. Filemy2010taxreturnforfree Figure the number of months of deferral for each partner using one partner's tax year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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). Filemy2010taxreturnforfree Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Filemy2010taxreturnforfree Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Filemy2010taxreturnforfree   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Filemy2010taxreturnforfree A uses the calendar year and B uses a fiscal year ending November 30. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Filemy2010taxreturnforfree 5 -0- -0- B 11/30 0. Filemy2010taxreturnforfree 5 11 5. Filemy2010taxreturnforfree 5 Total Deferral 5. Filemy2010taxreturnforfree 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Filemy2010taxreturnforfree 5 1 0. Filemy2010taxreturnforfree 5 B 11/30 0. Filemy2010taxreturnforfree 5 -0- -0- Total Deferral 0. Filemy2010taxreturnforfree 5 When determination is made. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Filemy2010taxreturnforfree This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Filemy2010taxreturnforfree Short period return. Filemy2010taxreturnforfree   When a partnership changes its tax year, a short period return must be filed. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Filemy2010taxreturnforfree 706-1. Filemy2010taxreturnforfree ” More information. Filemy2010taxreturnforfree   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Filemy2010taxreturnforfree S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Filemy2010taxreturnforfree A permitted tax year is any of the following. Filemy2010taxreturnforfree The calendar year. Filemy2010taxreturnforfree A tax year elected under section 444 of the Internal Revenue Code. Filemy2010taxreturnforfree See Section 444 Election, below for details. Filemy2010taxreturnforfree A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Filemy2010taxreturnforfree Any other tax year for which the corporation establishes a business purpose. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Filemy2010taxreturnforfree Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Filemy2010taxreturnforfree The corporation makes an election under section 444 of the Internal Revenue Code. Filemy2010taxreturnforfree See Section 444 Election, below for details. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree The corporation establishes a business purpose for a fiscal year. Filemy2010taxreturnforfree See the Instructions for Form 1120 for general information about PSCs. Filemy2010taxreturnforfree For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Certain restrictions apply to the election. Filemy2010taxreturnforfree 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). Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Filemy2010taxreturnforfree It is not a member of a tiered structure (defined in section 1. Filemy2010taxreturnforfree 444-2T of the regulations). Filemy2010taxreturnforfree It has not previously had a section 444 election in effect. Filemy2010taxreturnforfree It elects a year that meets the deferral period requirement. Filemy2010taxreturnforfree Deferral period. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Retaining tax year. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Filemy2010taxreturnforfree Adopting or changing tax year. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Filemy2010taxreturnforfree If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Filemy2010taxreturnforfree Example 1. Filemy2010taxreturnforfree BD Partnership uses a calendar year, which is also its required tax year. Filemy2010taxreturnforfree BD cannot make a section 444 election because the deferral period is zero. Filemy2010taxreturnforfree Example 2. Filemy2010taxreturnforfree E, a newly formed partnership, began operations on December 1. Filemy2010taxreturnforfree E is owned by calendar year partners. Filemy2010taxreturnforfree E wants to make a section 444 election to adopt a September 30 tax year. Filemy2010taxreturnforfree E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Filemy2010taxreturnforfree Making the election. Filemy2010taxreturnforfree   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Filemy2010taxreturnforfree Note. Filemy2010taxreturnforfree If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Example 1. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Example 2. Filemy2010taxreturnforfree The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Filemy2010taxreturnforfree AB must file Form 8716 by March 17, 2013. Filemy2010taxreturnforfree Example 3. Filemy2010taxreturnforfree B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Filemy2010taxreturnforfree B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Note. Filemy2010taxreturnforfree The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Filemy2010taxreturnforfree Extension of time for filing. Filemy2010taxreturnforfree   There is an automatic extension of 12 months to make this election. Filemy2010taxreturnforfree See the Form 8716 instructions for more information. Filemy2010taxreturnforfree Terminating the election. Filemy2010taxreturnforfree   The section 444 election remains in effect until it is terminated. Filemy2010taxreturnforfree If the election is terminated, another section 444 election cannot be made for any tax year. Filemy2010taxreturnforfree   The election ends when any of the following applies to the partnership, S corporation, or PSC. Filemy2010taxreturnforfree The entity changes to its required tax year. Filemy2010taxreturnforfree The entity liquidates. Filemy2010taxreturnforfree The entity becomes a member of a tiered structure. Filemy2010taxreturnforfree The IRS determines that the entity willfully failed to comply with the required payments or distributions. Filemy2010taxreturnforfree   The election will also end if either of the following events occur. Filemy2010taxreturnforfree An S corporation's S election is terminated. Filemy2010taxreturnforfree However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Filemy2010taxreturnforfree A PSC ceases to be a PSC. Filemy2010taxreturnforfree If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Filemy2010taxreturnforfree Required payment for partnership or S corporation. Filemy2010taxreturnforfree   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Filemy2010taxreturnforfree The required payment for that year (or any preceding tax year) is more than $500. Filemy2010taxreturnforfree    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Applicable election year. Filemy2010taxreturnforfree   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Required distribution for PSC. Filemy2010taxreturnforfree   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Filemy2010taxreturnforfree If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Filemy2010taxreturnforfree The amount deferred is treated as paid or incurred in the following tax year. Filemy2010taxreturnforfree   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). Filemy2010taxreturnforfree Back-up election. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Filemy2010taxreturnforfree Making back-up election. Filemy2010taxreturnforfree   The general rules for making a section 444 election, as discussed earlier, apply. Filemy2010taxreturnforfree When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Activating election. Filemy2010taxreturnforfree   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Filemy2010taxreturnforfree The due date for filing Form 8752 and making the payment is the later of the following dates. Filemy2010taxreturnforfree May 15 of the calendar year following the calendar year in which the applicable election year begins. Filemy2010taxreturnforfree 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree ” 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). Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Filemy2010taxreturnforfree See the Instructions for Form 1128 for details. Filemy2010taxreturnforfree Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree See the Instructions for Form 1128 for details. Filemy2010taxreturnforfree Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Filemy2010taxreturnforfree Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Filemy2010taxreturnforfree You choose an accounting method when you file your first tax return. Filemy2010taxreturnforfree If you later want to change your accounting method, you must get IRS approval. Filemy2010taxreturnforfree See Change in Accounting Method, later. Filemy2010taxreturnforfree No single accounting method is required of all taxpayers. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Filemy2010taxreturnforfree You must use the same accounting method from year to year. Filemy2010taxreturnforfree An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Methods you can use. Filemy2010taxreturnforfree   In general, you can compute your taxable income under any of the following accounting methods. Filemy2010taxreturnforfree Cash method. Filemy2010taxreturnforfree Accrual method. Filemy2010taxreturnforfree Special methods of accounting for certain items of income and expenses. Filemy2010taxreturnforfree A hybrid method which combines elements of two or more of the above accounting methods. Filemy2010taxreturnforfree The cash and accrual methods of accounting are explained later. Filemy2010taxreturnforfree Special methods. Filemy2010taxreturnforfree   This publication does not discuss special methods of accounting for certain items of income or expenses. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree The following publications also discuss special methods of reporting income or expenses. Filemy2010taxreturnforfree Publication 225, Farmer's Tax Guide. Filemy2010taxreturnforfree Publication 535, Business Expenses. Filemy2010taxreturnforfree Publication 537, Installment Sales. Filemy2010taxreturnforfree Publication 946, How To Depreciate Property. Filemy2010taxreturnforfree Hybrid method. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree However, the following restrictions apply. Filemy2010taxreturnforfree If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Filemy2010taxreturnforfree See Exceptions under Inventories, later. Filemy2010taxreturnforfree Generally, you can use the cash method for all other items of income and expenses. Filemy2010taxreturnforfree See Inventories, later. Filemy2010taxreturnforfree If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Filemy2010taxreturnforfree If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Filemy2010taxreturnforfree Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Filemy2010taxreturnforfree Business and personal items. Filemy2010taxreturnforfree   You can account for business and personal items using different accounting methods. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Two or more businesses. Filemy2010taxreturnforfree   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Filemy2010taxreturnforfree No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Filemy2010taxreturnforfree Note. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Cash Method Most individuals and many small businesses use the cash method of accounting. Filemy2010taxreturnforfree Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Filemy2010taxreturnforfree See Inventories, later, for exceptions to this rule. Filemy2010taxreturnforfree Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Filemy2010taxreturnforfree If you receive property and services, you must include their fair market value (FMV) in income. Filemy2010taxreturnforfree Constructive receipt. Filemy2010taxreturnforfree   Income is constructively received when an amount is credited to your account or made available to you without restriction. Filemy2010taxreturnforfree You need not have possession of it. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree You are a calendar year taxpayer. Filemy2010taxreturnforfree Your bank credited, and made available, interest to your bank account in December 2012. Filemy2010taxreturnforfree You did not withdraw it or enter it into your books until 2013. Filemy2010taxreturnforfree You must include the amount in gross income for 2012, the year you constructively received it. Filemy2010taxreturnforfree You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Filemy2010taxreturnforfree You must report the income in the year the property is received or made available to you without restriction. Filemy2010taxreturnforfree Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Filemy2010taxreturnforfree This includes business expenses for which you contest liability. Filemy2010taxreturnforfree However, you may not be able to deduct an expense paid in advance. Filemy2010taxreturnforfree Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Filemy2010taxreturnforfree Expense paid in advance. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree See Change in Accounting Method, later. Filemy2010taxreturnforfree Example 1. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Example 2. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree The 12-month rule applies. Filemy2010taxreturnforfree Therefore, the full $10,000 is deductible in 2012. Filemy2010taxreturnforfree Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Filemy2010taxreturnforfree (See Special rules for farming businesses, later. Filemy2010taxreturnforfree ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Filemy2010taxreturnforfree See Gross receipts test, below. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree See Gross receipts test, below. Filemy2010taxreturnforfree A tax shelter. Filemy2010taxreturnforfree Exceptions The following entities are not prohibited from using the cash method of accounting. Filemy2010taxreturnforfree Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Filemy2010taxreturnforfree A qualified personal service corporation (PSC). Filemy2010taxreturnforfree Gross receipts test. Filemy2010taxreturnforfree   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree    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. Filemy2010taxreturnforfree See Gross receipts test for qualifying taxpayers, for more information. Filemy2010taxreturnforfree Generally, a partnership applies the test at the partnership level. Filemy2010taxreturnforfree Gross receipts for a short tax year are annualized. Filemy2010taxreturnforfree Aggregation rules. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Change to accrual method. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Special rules for farming businesses. Filemy2010taxreturnforfree   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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). Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Filemy2010taxreturnforfree See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Filemy2010taxreturnforfree Qualified PSC. Filemy2010taxreturnforfree   A PSC that meets the following function and ownership tests can use the cash method. Filemy2010taxreturnforfree Function test. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Ownership test. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Employees performing services for the corporation in a field qualifying under the function test. Filemy2010taxreturnforfree Retired employees who had performed services in those fields. Filemy2010taxreturnforfree The estate of an employee described in (1) or (2). Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Filemy2010taxreturnforfree Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Change to accrual method. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree The purpose of an accrual method of accounting is to match income and expenses in the correct year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Under this rule, you report an amount in your gross income on the earliest of the following dates. Filemy2010taxreturnforfree When you receive payment. Filemy2010taxreturnforfree When the income amount is due to you. Filemy2010taxreturnforfree When you earn the income. Filemy2010taxreturnforfree When title has passed. Filemy2010taxreturnforfree Estimated income. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Change in payment schedule. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Continue this procedure until you complete the services, then account for the difference. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree However, you cannot postpone including any payment beyond that tax year. Filemy2010taxreturnforfree Service agreement. Filemy2010taxreturnforfree   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Filemy2010taxreturnforfree This includes an agreement providing for incidental replacement of parts or materials. Filemy2010taxreturnforfree However, this applies only if you offer the property without a service agreement in the normal course of business. Filemy2010taxreturnforfree Postponement not allowed. Filemy2010taxreturnforfree   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Examples. Filemy2010taxreturnforfree   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Filemy2010taxreturnforfree Example 1. Filemy2010taxreturnforfree You manufacture, sell, and service computers. Filemy2010taxreturnforfree You received payment in 2012 for a one-year contingent service contract on a computer you sold. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Example 2. Filemy2010taxreturnforfree You are in the television repair business. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree You include the payments in gross income as you earn them. Filemy2010taxreturnforfree Example 3. Filemy2010taxreturnforfree You own a dance studio. Filemy2010taxreturnforfree On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Filemy2010taxreturnforfree You give eight lessons in 2012. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Example 4. Filemy2010taxreturnforfree Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Filemy2010taxreturnforfree You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Filemy2010taxreturnforfree Guarantee or warranty. Filemy2010taxreturnforfree   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Filemy2010taxreturnforfree Prepaid rent. Filemy2010taxreturnforfree   You cannot postpone reporting income from prepaid rent. Filemy2010taxreturnforfree Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Books and records. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Filemy2010taxreturnforfree IRS approval. Filemy2010taxreturnforfree   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree An agreement includes a gift certificate that can be redeemed for goods. Filemy2010taxreturnforfree Amounts due and payable are considered received. Filemy2010taxreturnforfree How to report payments. Filemy2010taxreturnforfree   Generally, include an advance payment in income in the year in which you receive it. Filemy2010taxreturnforfree However, you can use the alternative method, discussed next. Filemy2010taxreturnforfree Alternative method of reporting. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Filemy2010taxreturnforfree Example 1. Filemy2010taxreturnforfree You are a retailer. Filemy2010taxreturnforfree You use an accrual method of accounting and account for the sale of goods when you ship the goods. Filemy2010taxreturnforfree You use this method for both tax and financial reporting purposes. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree However, see Exception for inventory goods, later. Filemy2010taxreturnforfree Example 2. Filemy2010taxreturnforfree You are a calendar year taxpayer. Filemy2010taxreturnforfree You manufacture household furniture and use an accrual method of accounting. Filemy2010taxreturnforfree Under this method, you accrue income for your financial reports when you ship the furniture. Filemy2010taxreturnforfree For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Information schedule. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Total advance payments received in the current tax year. Filemy2010taxreturnforfree Total advance payments received in earlier tax years and not included in income before the current tax year. Filemy2010taxreturnforfree Total payments received in earlier tax years included in income for the current tax year. Filemy2010taxreturnforfree Exception for inventory goods. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree You account for the advance payment under the alternative method (discussed earlier). Filemy2010taxreturnforfree You have received a substantial advance payment on the agreement (discussed next). Filemy2010taxreturnforfree You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Filemy2010taxreturnforfree If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Filemy2010taxreturnforfree Note. Filemy2010taxreturnforfree You must report any advance payments you receive after the second year in the year received. Filemy2010taxreturnforfree No further deferral is allowed. Filemy2010taxreturnforfree Substantial advance payments. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Filemy2010taxreturnforfree In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Filemy2010taxreturnforfree The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Filemy2010taxreturnforfree You receive the following advance payments under the contract. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Filemy2010taxreturnforfree   No further deferral is allowed. Filemy2010taxreturnforfree You must include in gross income the advance payment you receive each remaining year of the contract. Filemy2010taxreturnforfree Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Filemy2010taxreturnforfree IRS approval. Filemy2010taxreturnforfree   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Filemy2010taxreturnforfree Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Filemy2010taxreturnforfree The all-events test has been met. Filemy2010taxreturnforfree The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Filemy2010taxreturnforfree Economic performance has occurred. Filemy2010taxreturnforfree Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Filemy2010taxreturnforfree Example. Filemy2010taxreturnforfree You are a calendar year taxpayer. Filemy2010taxreturnforfree You buy office supplies in December 2012. Filemy2010taxreturnforfree You receive the supplies and the bill in December, but you pay the bill in January 2013. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Your office supplies may qualify as a recurring item, discussed later. Filemy2010taxreturnforfree If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Filemy2010taxreturnforfree Workers' compensation and tort liability. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Taxes. Filemy2010taxreturnforfree   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Filemy2010taxreturnforfree are paid. Filemy2010taxreturnforfree However, you can elect to treat taxes as a recurring item, discussed later. Filemy2010taxreturnforfree You can also elect to ratably accrue real estate taxes. Filemy2010taxreturnforfree See chapter 5 of Publication 535 for information about real estate taxes. Filemy2010taxreturnforfree Other liabilities. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Interest. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree Compensation for services. Filemy2010taxreturnforfree   Generally, economic performance occurs as an employee renders service to the employer. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Filemy2010taxreturnforfree Vacation pay. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree If you pay it later than this, you must deduct it in the year actually paid. Filemy2010taxreturnforfree An amount is vested if your right to it cannot be nullified or cancelled. Filemy2010taxreturnforfree Exception for recurring items. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree The exception applies if all the following requirements are met. Filemy2010taxreturnforfree The all-events test, discussed earlier, is met. Filemy2010taxreturnforfree Economic performance occurs by the earlier of the following dates. Filemy2010taxreturnforfree 8½ months after the close of the year. Filemy2010taxreturnforfree The date you file a timely return (including extensions) for the year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree This exception does not apply to workers' compensation or tort liabilities. Filemy2010taxreturnforfree Amended return. Filemy2010taxreturnforfree   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Recurrence and consistency. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Materiality. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree   An item considered material for financial statement purposes is also considered material for tax purposes. Filemy2010taxreturnforfree However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Filemy2010taxreturnforfree Matching expenses with income. Filemy2010taxreturnforfree   Costs directly associated with the revenue of a period are properly allocable to that period. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree fasab. Filemy2010taxreturnforfree gov/accepted. Filemy2010taxreturnforfree html) are an important factor. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree However, the matching requirement is considered met for certain types of expenses. Filemy2010taxreturnforfree These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree See Change in Accounting Method, later, for information on how to get IRS approval. Filemy2010taxreturnforfree See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Filemy2010taxreturnforfree See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Filemy2010taxreturnforfree Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Filemy2010taxreturnforfree If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Filemy2010taxreturnforfree However, see Exceptions, next. Filemy2010taxreturnforfree See also Accrual Method, earlier. Filemy2010taxreturnforfree To figure taxable income, you must value your inventory at the beginning and end of each tax year. Filemy2010taxreturnforfree To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Filemy2010taxreturnforfree See Identifying Cost and Valuing Inventory, later. Filemy2010taxreturnforfree The rules for valuing inventory are not the same for all businesses. Filemy2010taxreturnforfree The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Filemy2010taxreturnforfree Your inventory practices must be consistent from year to year. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Filemy2010taxreturnforfree These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Filemy2010taxreturnforfree A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Filemy2010taxreturnforfree irs. Filemy2010taxreturnforfree gov/pub/irs-irbs/irb01–02. Filemy2010taxreturnforfree pdf. Filemy2010taxreturnforfree A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Filemy2010taxreturnforfree irs. Filemy2010taxreturnforfree gov/pub/irs-irbs/irb02–18. Filemy2010taxreturnforfree pdf. Filemy2010taxreturnforfree 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). Filemy2010taxreturnforfree Qualifying taxpayer. Filemy2010taxreturnforfree   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). Filemy2010taxreturnforfree Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Filemy2010taxreturnforfree You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Filemy2010taxreturnforfree Gross receipts test for qualifying taxpayers. Filemy2010taxreturnforfree   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Filemy2010taxreturnforfree List each of the test years. Filemy2010taxreturnforfree For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Filemy2010taxreturnforfree Step 2. Filemy2010taxreturnforfree Determine your average annual gross receipts for each test year listed in Step 1. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Step 3. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Qualifying small business taxpayer. Filemy2010taxreturnforfree   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). Filemy2010taxreturnforfree Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Filemy2010taxreturnforfree You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Filemy2010taxreturnforfree Your principle business activity is an eligible business. Filemy2010taxreturnforfree See Eligible business, later. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Note. Filemy2010taxreturnforfree Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Filemy2010taxreturnforfree A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Filemy2010taxreturnforfree See Special rules for farming businesses under Cash Method, earlier. Filemy2010taxreturnforfree Gross receipts test for qualifying small business taxpayers. Filemy2010taxreturnforfree   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Filemy2010taxreturnforfree List each of the test years. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Step 2. Filemy2010taxreturnforfree Determine your average annual gross receipts for each test year listed in Step 1. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Step 3. Filemy2010taxreturnforfree 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. Filemy2010taxreturnforfree Eligible business. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree You have an eligible business if you meet any of the following requirements. Filemy2010taxreturnforfree 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). Filemy2010taxreturnforfree NAICS codes 31-33 (manufacturing). Filemy2010taxreturnforfree NAICS code 42 (wholesale trade). Filemy2010taxreturnforfree NAICS codes 44-45 (retail trade). Filemy2010taxreturnforfree NAICS codes 5111 and 5122 (information industries). Filemy2010taxreturnforfree Your principal business activity is the provision of services, including the provision of property incident to those services. Filemy2010taxreturnforfree Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Filemy2010taxreturnforfree   Information about the NAICS codes can be found at http://www. Filemy2010taxreturnforfree census. Filemy2010taxreturnforfree gov/naics or in the instructions for your federal income tax return. Filemy2010taxreturnforfree Gross receipts. Filemy2010taxreturnforfree   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. Filemy2010taxreturnforfree See the definit