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Free tax preparation sites 9. Free tax preparation sites   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. Free tax preparation sites Depletion unit. Free tax preparation sites Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Free tax preparation sites The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Free tax preparation sites There are two ways of figuring depletion: cost depletion and percentage depletion. Free tax preparation sites For mineral property, you generally must use the method that gives you the larger deduction. Free tax preparation sites For standing timber, you must use cost depletion. Free tax preparation sites Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. Free tax preparation sites More than one person can have an economic interest in the same mineral deposit or timber. Free tax preparation sites In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Free tax preparation sites You have an economic interest if both the following apply. Free tax preparation sites You have acquired by investment any interest in mineral deposits or standing timber. Free tax preparation sites You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. Free tax preparation sites A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. Free tax preparation sites A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Free tax preparation sites Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Free tax preparation sites Basis adjustment for depletion. Free tax preparation sites   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Free tax preparation sites Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Free tax preparation sites For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Free tax preparation sites You can treat two or more separate interests as one property or as separate properties. Free tax preparation sites See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Free tax preparation sites There are two ways of figuring depletion on mineral property. Free tax preparation sites Cost depletion. Free tax preparation sites Percentage depletion. Free tax preparation sites Generally, you must use the method that gives you the larger deduction. Free tax preparation sites However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Free tax preparation sites See Oil and Gas Wells , later. Free tax preparation sites Cost Depletion To figure cost depletion you must first determine the following. Free tax preparation sites The property's basis for depletion. Free tax preparation sites The total recoverable units of mineral in the property's natural deposit. Free tax preparation sites The number of units of mineral sold during the tax year. Free tax preparation sites Basis for depletion. Free tax preparation sites   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Free tax preparation sites Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Free tax preparation sites The residual value of land and improvements at the end of operations. Free tax preparation sites The cost or value of land acquired for purposes other than mineral production. Free tax preparation sites Adjusted basis. Free tax preparation sites   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Free tax preparation sites Your adjusted basis can never be less than zero. Free tax preparation sites See Publication 551, Basis of Assets, for more information on adjusted basis. Free tax preparation sites Total recoverable units. Free tax preparation sites   The total recoverable units is the sum of the following. Free tax preparation sites The number of units of mineral remaining at the end of the year (including units recovered but not sold). Free tax preparation sites The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Free tax preparation sites   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. Free tax preparation sites You must include ores and minerals that are developed, in sight, blocked out, or assured. Free tax preparation sites You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Free tax preparation sites But see Elective safe harbor for owners of oil and gas property , later. Free tax preparation sites Number of units sold. Free tax preparation sites   You determine the number of units sold during the tax year based on your method of accounting. Free tax preparation sites Use the following table to make this determination. Free tax preparation sites    IF you  use . Free tax preparation sites . Free tax preparation sites . Free tax preparation sites THEN the units sold during the year are . Free tax preparation sites . Free tax preparation sites . Free tax preparation sites The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Free tax preparation sites An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Free tax preparation sites   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Free tax preparation sites Figuring the cost depletion deduction. Free tax preparation sites   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. Free tax preparation sites Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Free tax preparation sites Rate per unit. Free tax preparation sites 2 Multiply the rate per unit by units sold during the tax year. Free tax preparation sites Cost depletion deduction. Free tax preparation sites You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Free tax preparation sites Elective safe harbor for owners of oil and gas property. Free tax preparation sites   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Free tax preparation sites If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Free tax preparation sites For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Free tax preparation sites irs. Free tax preparation sites gov/pub/irs-irbs/irb04-10. Free tax preparation sites pdf. Free tax preparation sites   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. Free tax preparation sites The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Free tax preparation sites The election, if made, is effective for the tax year in which it is made and all later years. Free tax preparation sites It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Free tax preparation sites Once revoked, it cannot be re-elected for the next 5 years. Free tax preparation sites Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Free tax preparation sites The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . Free tax preparation sites Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Free tax preparation sites Gross income. Free tax preparation sites   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Free tax preparation sites Any rents or royalties you paid or incurred for the property. Free tax preparation sites The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. Free tax preparation sites A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Free tax preparation sites   Use the following fraction to figure the part of the bonus you must subtract. Free tax preparation sites No. Free tax preparation sites of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. Free tax preparation sites For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Free tax preparation sites Taxable income limit. Free tax preparation sites   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. Free tax preparation sites   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. Free tax preparation sites These deductible items include, but are not limited to, the following. Free tax preparation sites Operating expenses. Free tax preparation sites Certain selling expenses. Free tax preparation sites Administrative and financial overhead. Free tax preparation sites Depreciation. Free tax preparation sites Intangible drilling and development costs. Free tax preparation sites Exploration and development expenditures. Free tax preparation sites Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Free tax preparation sites Losses sustained. Free tax preparation sites   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Free tax preparation sites Do not deduct any net operating loss deduction from the gross income from the property. Free tax preparation sites Corporations do not deduct charitable contributions from the gross income from the property. Free tax preparation sites If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. Free tax preparation sites See section 1. Free tax preparation sites 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Free tax preparation sites Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Free tax preparation sites You are either an independent producer or a royalty owner. Free tax preparation sites The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Free tax preparation sites If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Free tax preparation sites For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. Free tax preparation sites Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. Free tax preparation sites However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Free tax preparation sites For information on figuring the deduction, see Figuring percentage depletion , later. Free tax preparation sites Refiners who cannot claim percentage depletion. Free tax preparation sites   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. Free tax preparation sites The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. Free tax preparation sites Related person. Free tax preparation sites   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. Free tax preparation sites For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Free tax preparation sites A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Free tax preparation sites For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. Free tax preparation sites The value of the outstanding stock of a corporation. Free tax preparation sites The interest in the profits or capital of a partnership. Free tax preparation sites The beneficial interests in an estate or trust. Free tax preparation sites Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Free tax preparation sites Retailers who cannot claim percentage depletion. Free tax preparation sites   You cannot claim percentage depletion if both the following apply. Free tax preparation sites You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Free tax preparation sites Through a retail outlet operated by you or a related person. Free tax preparation sites To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. Free tax preparation sites To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. Free tax preparation sites The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. Free tax preparation sites   For the purpose of determining if this rule applies, do not count the following. Free tax preparation sites Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Free tax preparation sites Bulk sales of aviation fuels to the Department of Defense. Free tax preparation sites Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. Free tax preparation sites Related person. Free tax preparation sites   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Free tax preparation sites Sales through a related person. Free tax preparation sites   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. Free tax preparation sites   You are not considered to be selling through a related person who is a retailer if all the following apply. Free tax preparation sites You do not have a significant ownership interest in the retailer. Free tax preparation sites You sell your production to persons who are not related to either you or the retailer. Free tax preparation sites The retailer does not buy oil or natural gas from your customers or persons related to your customers. Free tax preparation sites There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. Free tax preparation sites Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. Free tax preparation sites Transferees who cannot claim percentage depletion. Free tax preparation sites   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. Free tax preparation sites For a definition of the term “transfer,” see section 1. Free tax preparation sites 613A-7(n) of the regulations. Free tax preparation sites For a definition of the term “interest in proven oil or gas property,” see section 1. Free tax preparation sites 613A-7(p) of the regulations. Free tax preparation sites Figuring percentage depletion. Free tax preparation sites   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. Free tax preparation sites If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. Free tax preparation sites If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. Free tax preparation sites   In addition, there is a limit on the percentage depletion deduction. Free tax preparation sites See Taxable income limit , later. Free tax preparation sites Average daily production. Free tax preparation sites   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. Free tax preparation sites Partial interest. Free tax preparation sites   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. Free tax preparation sites   You have a partial interest in the production from a property if you have a net profits interest in the property. Free tax preparation sites To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. Free tax preparation sites To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Free tax preparation sites Then multiply the total production from the property by your percentage participation to figure your share of the production. Free tax preparation sites Example. Free tax preparation sites Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Free tax preparation sites During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Free tax preparation sites Javier had expenses of $90,000 attributable to the property. Free tax preparation sites The property generated a net profit of $110,000 ($200,000 − $90,000). Free tax preparation sites Pablo received income of $22,000 ($110,000 × . Free tax preparation sites 20) for his net profits interest. Free tax preparation sites Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Free tax preparation sites Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Free tax preparation sites Depletable oil or natural gas quantity. Free tax preparation sites   Generally, your depletable oil quantity is 1,000 barrels. Free tax preparation sites Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. Free tax preparation sites If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. Free tax preparation sites Example. Free tax preparation sites You have both oil and natural gas production. Free tax preparation sites To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Free tax preparation sites Your depletable natural gas quantity is 2. Free tax preparation sites 16 million cubic feet of gas (360 × 6000). Free tax preparation sites You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Free tax preparation sites If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. Free tax preparation sites Also, see Notice 2012-50, available at www. Free tax preparation sites irs. Free tax preparation sites gov/irb/2012–31_IRB/index. Free tax preparation sites html. Free tax preparation sites Business entities and family members. Free tax preparation sites   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. Free tax preparation sites Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). Free tax preparation sites You and your spouse and minor children. Free tax preparation sites A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. Free tax preparation sites Controlled group of corporations. Free tax preparation sites   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Free tax preparation sites They share the depletable quantity. Free tax preparation sites A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. Free tax preparation sites ” Gross income from the property. Free tax preparation sites   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. Free tax preparation sites If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. Free tax preparation sites   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. Free tax preparation sites   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Free tax preparation sites Average daily production exceeds depletable quantities. Free tax preparation sites   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. Free tax preparation sites Figure your average daily production of oil or natural gas for the year. Free tax preparation sites Figure your depletable oil or natural gas quantity for the year. Free tax preparation sites Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Free tax preparation sites Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). Free tax preparation sites This is your depletion allowance for that property for the year. Free tax preparation sites Taxable income limit. Free tax preparation sites   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. Free tax preparation sites 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. Free tax preparation sites For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Free tax preparation sites 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. Free tax preparation sites You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Free tax preparation sites Add it to your depletion allowance (before applying any limits) for the following year. Free tax preparation sites Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Free tax preparation sites (However, see Electing large partnerships must figure depletion allowance , later. Free tax preparation sites ) Each partner or shareholder must decide whether to use cost or percentage depletion. Free tax preparation sites If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. Free tax preparation sites Partner's or shareholder's adjusted basis. Free tax preparation sites   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. Free tax preparation sites The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Free tax preparation sites   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. Free tax preparation sites However, in some cases, it is figured according to the partner's interest in partnership income. Free tax preparation sites   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. Free tax preparation sites Recordkeeping. Free tax preparation sites Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. Free tax preparation sites The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Free tax preparation sites The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Free tax preparation sites Reporting the deduction. Free tax preparation sites   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). Free tax preparation sites Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Free tax preparation sites The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Free tax preparation sites The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Free tax preparation sites Form 6198, At-Risk Limitations. Free tax preparation sites Form 8582, Passive Activity Loss Limitations. Free tax preparation sites Electing large partnerships must figure depletion allowance. Free tax preparation sites   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Free tax preparation sites The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. Free tax preparation sites Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Free tax preparation sites   An electing large partnership is one that meets both the following requirements. Free tax preparation sites The partnership had 100 or more partners in the preceding year. Free tax preparation sites The partnership chooses to be an electing large partnership. Free tax preparation sites Disqualified persons. Free tax preparation sites   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Free tax preparation sites Disqualified persons must figure it themselves, as explained earlier. Free tax preparation sites   All the following are disqualified persons. Free tax preparation sites Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Free tax preparation sites Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Free tax preparation sites Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. Free tax preparation sites Average daily production is discussed earlier. Free tax preparation sites Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. Free tax preparation sites Natural gas sold under a fixed contract. Free tax preparation sites   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Free tax preparation sites This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. Free tax preparation sites The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Free tax preparation sites Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Free tax preparation sites Natural gas from geopressured brine. Free tax preparation sites   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Free tax preparation sites This is natural gas that is both the following. Free tax preparation sites Produced from a well you began to drill after September 1978 and before 1984. Free tax preparation sites Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Free tax preparation sites Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Free tax preparation sites Mines and other natural deposits. Free tax preparation sites   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. Free tax preparation sites   The following is a list of the percentage depletion rates for the more common minerals. Free tax preparation sites DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. Free tax preparation sites Corporate deduction for iron ore and coal. Free tax preparation sites   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Free tax preparation sites Gross income from the property. Free tax preparation sites   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Free tax preparation sites Mining includes all the following. Free tax preparation sites Extracting ores or minerals from the ground. Free tax preparation sites Applying certain treatment processes described later. Free tax preparation sites Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Free tax preparation sites Excise tax. Free tax preparation sites   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Free tax preparation sites Extraction. Free tax preparation sites   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Free tax preparation sites This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Free tax preparation sites Treatment processes. Free tax preparation sites   The processes included as mining depend on the ore or mineral mined. Free tax preparation sites To qualify as mining, the treatment processes must be applied by the mine owner or operator. Free tax preparation sites For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Free tax preparation sites Transportation of more than 50 miles. Free tax preparation sites   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. Free tax preparation sites    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. Free tax preparation sites Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. Free tax preparation sites For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Free tax preparation sites irs. Free tax preparation sites gov/irb/2013-01_IRB/ar11. Free tax preparation sites html. Free tax preparation sites Disposal of coal or iron ore. Free tax preparation sites   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Free tax preparation sites You disposed of it after holding it for more than 1 year. Free tax preparation sites You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Free tax preparation sites Treat any gain on the disposition as a capital gain. Free tax preparation sites Disposal to related person. Free tax preparation sites   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Free tax preparation sites A related person (as listed in chapter 2 of Publication 544). Free tax preparation sites A person owned or controlled by the same interests that own or control you. Free tax preparation sites Geothermal deposits. Free tax preparation sites   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Free tax preparation sites A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Free tax preparation sites For percentage depletion purposes, a geothermal deposit is not considered a gas well. Free tax preparation sites   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Free tax preparation sites See Gross income from the property , earlier, under Oil and Gas Wells. Free tax preparation sites Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Free tax preparation sites Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Free tax preparation sites A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Free tax preparation sites Bonuses and advanced royalties. Free tax preparation sites   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. Free tax preparation sites If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. Free tax preparation sites Figuring cost depletion. Free tax preparation sites   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. Free tax preparation sites To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. Free tax preparation sites Figuring percentage depletion. Free tax preparation sites   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . Free tax preparation sites Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. Free tax preparation sites However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Free tax preparation sites Ending the lease. Free tax preparation sites   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Free tax preparation sites Do this for the year the lease ends or is abandoned. Free tax preparation sites Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Free tax preparation sites   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. Free tax preparation sites Include this amount in income for the year the lease ends. Free tax preparation sites Increase your adjusted basis in the property by the amount you include in income. Free tax preparation sites Delay rentals. Free tax preparation sites   These are payments for deferring development of the property. Free tax preparation sites Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Free tax preparation sites These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Free tax preparation sites Timber You can figure timber depletion only by the cost method. Free tax preparation sites Percentage depletion does not apply to timber. Free tax preparation sites Base your depletion on your cost or other basis in the timber. Free tax preparation sites Your cost does not include the cost of land or any amounts recoverable through depreciation. Free tax preparation sites Depletion takes place when you cut standing timber. Free tax preparation sites You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Free tax preparation sites Figuring cost depletion. Free tax preparation sites   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Free tax preparation sites Timber units. Free tax preparation sites   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Free tax preparation sites You measure the timber using board feet, log scale, cords, or other units. Free tax preparation sites If you later determine that you have more or less units of timber, you must adjust the original estimate. Free tax preparation sites   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Free tax preparation sites Depletion unit. Free tax preparation sites   You figure your depletion unit each year by taking the following steps. Free tax preparation sites Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Free tax preparation sites Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Free tax preparation sites Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Free tax preparation sites Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. Free tax preparation sites Divide the result of (2) by the result of (3). Free tax preparation sites This is your depletion unit. Free tax preparation sites Example. Free tax preparation sites You bought a timber tract for $160,000 and the land was worth as much as the timber. Free tax preparation sites Your basis for the timber is $80,000. Free tax preparation sites Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). Free tax preparation sites If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Free tax preparation sites When to claim depletion. Free tax preparation sites   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Free tax preparation sites Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. Free tax preparation sites The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Free tax preparation sites Example. Free tax preparation sites The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Free tax preparation sites You would deduct $20,000 of the $40,000 depletion that year. Free tax preparation sites You would add the remaining $20,000 depletion to your closing inventory of timber products. Free tax preparation sites Electing to treat the cutting of timber as a sale or exchange. Free tax preparation sites   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Free tax preparation sites You must make the election on your income tax return for the tax year to which it applies. Free tax preparation sites If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. Free tax preparation sites You generally report the gain as long-term capital gain. Free tax preparation sites The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. Free tax preparation sites For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Free tax preparation sites   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Free tax preparation sites The prior election (and revocation) is disregarded for purposes of making a subsequent election. Free tax preparation sites See Form T (Timber), Forest Activities Schedule, for more information. Free tax preparation sites Form T. Free tax preparation sites   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. Free tax preparation sites Prev  Up  Next   Home   More Online Publications
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Free tax preparation sites 1. Free tax preparation sites   Filing and Paying Business Taxes Table of Contents Introduction Useful Items - You may want to see: Identification NumbersNew EIN. Free tax preparation sites Employee. Free tax preparation sites Other payee. Free tax preparation sites Income TaxDo I Have To File an Income Tax Return? How Do I File? IRS e-file (Electronic Filing) When Is My Tax Return Due? How Do I Pay Income Tax? Self-Employment (SE) TaxHow to become insured under social security. Free tax preparation sites Earning credits in 2013 and 2014. Free tax preparation sites Employment Taxes Excise Taxes Information ReturnsWaiver of penalties. Free tax preparation sites Penalties. Free tax preparation sites Introduction This chapter explains the business taxes you may have to pay and the forms you may have to file. Free tax preparation sites It also discusses taxpayer identification numbers. Free tax preparation sites Table 1-1 lists the benefits of filing electronically. Free tax preparation sites Table 1-2 lists the federal taxes you may have to pay, their due dates, and the forms you use to report them. Free tax preparation sites Table 1-3 provides checklists that highlight the typical forms and schedules you may need to file if you ever go out of business. Free tax preparation sites You may want to get Publication 509, Tax Calendars. Free tax preparation sites It has tax calendars that tell you when to file returns and make tax payments. Free tax preparation sites Useful Items - You may want to see: Publication 505 Tax Withholding and Estimated Tax Form (and Instructions) 1040 U. Free tax preparation sites S. Free tax preparation sites Individual Income Tax Return 1040-ES Estimated Tax for Individuals Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business Sch SE (Form 1040) Self-Employment Tax See chapter 12 for information about getting publications and forms. Free tax preparation sites Identification Numbers This section explains three types of taxpayer identification numbers, who needs them, when to use them, and how to get them. Free tax preparation sites Social security number (SSN). Free tax preparation sites   Generally, use your SSN as your taxpayer identification number. Free tax preparation sites You must put this number on each of your individual income tax forms, such as Form 1040 and its schedules. Free tax preparation sites   To apply for an SSN, use Form SS-5, Application for a Social Security Card. Free tax preparation sites This form is available at Social Security Administration (SSA) offices or by calling 1-800-772-1213. Free tax preparation sites It is also available from the SSA website at www. Free tax preparation sites socialsecurity. Free tax preparation sites gov. Free tax preparation sites Individual taxpayer identification number (ITIN). Free tax preparation sites   The IRS will issue an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. Free tax preparation sites In general, if you need to obtain an ITIN, you must attach Form W-7, Application for IRS Individual Taxpayer Identification Number, with your signed, original, completed tax return and any other required documentation and mail them to the following address. Free tax preparation sites  Internal Revenue Service ITIN Operation P. Free tax preparation sites O. Free tax preparation sites Box 149342 Austin, TX 78714-9342 The exceptions are covered in detail in the instructions for Form W-7. Free tax preparation sites If you must include another person's SSN on your return and that person does not have and cannot get an SSN, enter that person's ITIN. Free tax preparation sites The application is also available in Spanish. Free tax preparation sites The form is available at IRS. Free tax preparation sites gov or you can call 1-800-829-3676 to order the form. Free tax preparation sites    An ITIN is for tax use only. Free tax preparation sites It does not entitle the holder to social security benefits or change the holder's employment or immigration status. Free tax preparation sites Employer identification number (EIN). Free tax preparation sites   You must also have an EIN to use as a taxpayer identification number if you do either of the following. Free tax preparation sites Pay wages to one or more employees. Free tax preparation sites File pension or excise tax returns. Free tax preparation sites   If you must have an EIN, include it along with your SSN on your Schedule C or C-EZ. Free tax preparation sites   You can apply for an EIN: Online by clicking on the Employer ID Numbers (EINs) link at www. Free tax preparation sites irs. Free tax preparation sites gov/businesses/small. Free tax preparation sites The EIN is issued immediately once the application information is validated. Free tax preparation sites By telephone at 1-800-829-4933. Free tax preparation sites By mailing or faxing Form SS-4, Application for Employer Identification Number. Free tax preparation sites New EIN. Free tax preparation sites   You may need to get a new EIN if either the form or the ownership of your business changes. Free tax preparation sites For more information, see Publication 1635, Understanding Your EIN. Free tax preparation sites When you need identification numbers of other persons. Free tax preparation sites   In operating your business, you will probably make certain payments you must report on information returns. Free tax preparation sites These payments are discussed under Information Returns, later in this chapter. Free tax preparation sites You must give the recipient of these payments (the payee) a statement showing the total amount paid during the year. Free tax preparation sites You must include the payee's identification number and your identification number on the returns and statements. Free tax preparation sites Employee. Free tax preparation sites   If you have employees, you must get an SSN from each of them. Free tax preparation sites Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Free tax preparation sites If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Free tax preparation sites This may occur if the employee's name was changed due to marriage or divorce. Free tax preparation sites   Form W-4, Employee's Withholding Allowance Certificate, is completed by each employee so the correct federal income tax can be withheld from their pay. Free tax preparation sites   If your employee does not have an SSN, he or she should file Form SS-5 with the SSA. Free tax preparation sites Other payee. Free tax preparation sites   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. Free tax preparation sites If you must report payments to an organization, such as a corporation or partnership, you must get its EIN. Free tax preparation sites   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Free tax preparation sites   A payee who does not provide you with an identification number may be subject to backup withholding. Free tax preparation sites For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Free tax preparation sites Income Tax This part explains whether you have to file an income tax return and when you file it. Free tax preparation sites It also explains how you pay the tax. Free tax preparation sites Do I Have To File an Income Tax Return? You have to file an income tax return for 2013 if your net earnings from self-employment were $400 or more. Free tax preparation sites If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions. Free tax preparation sites How Do I File? File your income tax return on Form 1040 and attach Schedule C or Schedule C-EZ. Free tax preparation sites Enter the net profit or loss from Schedule C or Schedule C-EZ on page 1 of Form 1040. Free tax preparation sites Use Schedule C to figure your net profit or loss from your business. Free tax preparation sites If you operated more than one business as a sole proprietorship, you must attach a separate Schedule C for each business. Free tax preparation sites You can use the simpler Schedule C-EZ if you operated only one business as a sole proprietorship, you did not have a net loss, and you meet the other requirements listed in Part I of the schedule. Free tax preparation sites IRS e-file (Electronic Filing) Please click here for the text description of the image. Free tax preparation sites E-file logo You may be able to file your tax returns electronically using an IRS e-file option. Free tax preparation sites Table 1-1 lists the benefits of IRS e-file. Free tax preparation sites IRS e-file uses automation to replace most of the manual steps needed to process paper returns. Free tax preparation sites As a result, the processing of e-file returns is faster and more accurate than the processing of paper returns. Free tax preparation sites As with a paper return, you are responsible for making sure your return contains accurate information and is filed on time. Free tax preparation sites Using e-file does not affect your chances of an IRS examination of your return. Free tax preparation sites You can file most commonly used business forms using IRS e-file. Free tax preparation sites For more information, visit IRS. Free tax preparation sites gov. Free tax preparation sites Electronic signatures. Free tax preparation sites   Paperless filing is easier than you think and it's available to most taxpayers who file electronically—including those first-time filers who were 16 or older at the end of 2013. Free tax preparation sites If you file electronically using tax preparation software or a tax professional, you will participate in the Self-Select PIN (personal identification number) program. Free tax preparation sites If you are married filing jointly, you and your spouse will each need to create a PIN and enter these PINs as your electronic signatures. Free tax preparation sites    To create a PIN, you must know your adjusted gross income (AGI) from your originally filed 2012 income tax return (not from an amended return, Form 1040X, or any math error notice from the IRS). Free tax preparation sites You will also need to provide your date of birth (DOB). Free tax preparation sites Make sure your DOB is accurate and matches the information on record with the Social Security Administration before you e-file. Free tax preparation sites To do this, check your annual Social Security Statement. Free tax preparation sites   With a Self-Select PIN, there is nothing to sign and nothing to mail—not even your Forms W-2. Free tax preparation sites For more details on the Self-Select PIN program, visit IRS. Free tax preparation sites gov. Free tax preparation sites State returns. Free tax preparation sites   In most states, you can file an electronic state return simultaneously with your federal return. Free tax preparation sites For more information, check with your local IRS office, state tax agency, tax professional, or IRS. Free tax preparation sites gov. Free tax preparation sites Refunds. Free tax preparation sites   You can have your refund check mailed to you, or you can have your refund deposited directly to your checking or savings account. Free tax preparation sites   With e-file, your refund will be issued in half the time as when filing on paper. Free tax preparation sites Most refunds are issued within 3 weeks. Free tax preparation sites If you choose Direct Deposit, you can receive your refund in as few as 10 days. Free tax preparation sites Offset against debts. Free tax preparation sites   As with a paper return, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. Free tax preparation sites You will be notified if the refund you claimed has been offset against your debts. Free tax preparation sites Refund inquiries. Free tax preparation sites   You can check the status of your refund if it has been at least 24 hours (4 weeks if you mailed a paper return) from the date you filed your return. Free tax preparation sites Be sure to have a copy of your tax return available because you will need to know the filing status, the first social security number shown on the return, and the exact whole-dollar amount of the refund. Free tax preparation sites To check on your refund, do one of the following. Free tax preparation sites Go to IRS. Free tax preparation sites gov and click on Where's My Refund. Free tax preparation sites Call 1-800-829-4477 for automated refund information, and follow the recorded instructions. Free tax preparation sites Call 1-800-829-1954 during the hours shown in your form instructions. Free tax preparation sites Balance due. Free tax preparation sites   If you owe tax, you must pay it by April 15, 2014, to avoid late-payment penalties and interest. Free tax preparation sites You can make your payment electronically by scheduling an electronic funds withdrawal from your checking or savings account or by credit card. Free tax preparation sites Using an Authorized IRS e-file Provider Many tax professionals can electronically file paperless returns for their clients. Free tax preparation sites You have two options. Free tax preparation sites You can prepare your return, take it to an authorized IRS e-file provider, and have the provider transmit it electronically to the IRS. Free tax preparation sites You can have an authorized IRS e-file provider prepare your return and transmit it for you electronically. Free tax preparation sites You will be asked to complete Form 8879, IRS e-file Signature Authorization, to authorize the provider to enter your self-selected PIN on your return. Free tax preparation sites Depending on the provider and the specific services requested, a fee may be charged. Free tax preparation sites To find an authorized IRS e-file provider near you, go to IRS. Free tax preparation sites gov or look for an “Authorized IRS e-file Provider” sign. Free tax preparation sites Using Your Personal Computer A computer with Internet access is all you need to file your tax return using IRS e-file. Free tax preparation sites When you use your personal computer, you can e-file your return from your home any time of the day or night. Free tax preparation sites Sign your return electronically using a self-selected PIN to complete the process. Free tax preparation sites There is no signature form to submit or Forms W-2 to send in. Free tax preparation sites Free Internet filing options. Free tax preparation sites   More taxpayers can now prepare and e-file their individual income tax returns free using commercial tax preparation software accessible through IRS. Free tax preparation sites gov or www. Free tax preparation sites usa. Free tax preparation sites gov. Free tax preparation sites The IRS is partnering with the tax software industry to offer free preparation and filing services to a significant number of taxpayers. Free tax preparation sites Security and privacy certificate programs will assure tax data is safe and secure. Free tax preparation sites To see if you qualify for these services, visit the Return Preparation and Filing Options page at IRS. Free tax preparation sites gov. Free tax preparation sites   If you cannot use the free services, you can buy tax preparation software at various electronics stores or computer and office supply stores. Free tax preparation sites You can also download software from the Internet or prepare and file your return completely online by using tax preparation software available on the Internet. Free tax preparation sites Filing Through Employers and Financial Institutions Some businesses offer free e-file to their employees, members, or customers. Free tax preparation sites Others offer it for a fee. Free tax preparation sites Ask your employer or financial institution if they offer IRS e-file as an employee, member, or customer benefit. Free tax preparation sites Free Help With Your Return Free help in preparing your return is available nationwide from IRS-trained volunteers. Free tax preparation sites The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers, and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 or older with their tax returns. Free tax preparation sites Some locations offer free electronic filing. Free tax preparation sites Table 1-1. Free tax preparation sites Benefits of IRS e-file Accuracy • Your chance of getting an error notice from the IRS is significantly reduced. Free tax preparation sites Security • Your privacy and security are assured. Free tax preparation sites Electronic signatures • Create your own personal identification number (PIN) and file a completely paperless return through your tax preparation software or tax professional. Free tax preparation sites There is nothing to mail. Free tax preparation sites Proof of acceptance • You receive an electronic acknowledgment within 48 hours that the IRS has accepted your return for processing. Free tax preparation sites Fast refunds • You get your refund faster with Direct Deposit—in as few as 10 days. Free tax preparation sites Free Internet filing options • Use IRS. Free tax preparation sites gov to access commercial tax preparation and e-file services available at no cost to eligible taxpayers. Free tax preparation sites Electronic payment options • Convenient, safe, and secure electronic payment options are available. Free tax preparation sites E-file and pay your taxes in a single step. Free tax preparation sites Schedule an electronic funds withdrawal from your checking or savings account (up to and including April 15, 2014) or pay by credit card. Free tax preparation sites Federal/State filing • Prepare and file your federal and state tax returns together and double the benefits you get from e-file. Free tax preparation sites When Is My Tax Return Due? Form 1040 for calendar year 2013 is due by April 15, 2014. Free tax preparation sites If you use a fiscal year (explained in chapter 2), your return is due by the 15th day of the 4th month after the end of your fiscal year. Free tax preparation sites If you file late, you may have to pay penalties and interest. Free tax preparation sites If you cannot file your return on time, use Form 4868, Application for Automatic Extension of Time To File U. Free tax preparation sites S. Free tax preparation sites Individual Income Tax Return, to request an automatic 6-month extension. Free tax preparation sites For calendar year taxpayers, this will extend the tax filing due date until October 15. Free tax preparation sites Filing an extension does not extend the time to pay your taxes, only the time to file the tax return. Free tax preparation sites How Do I Pay Income Tax? Federal income tax is a pay-as-you-go tax. Free tax preparation sites You must pay it as you earn or receive income during the year. Free tax preparation sites An employee usually has income tax withheld from his or her pay. Free tax preparation sites If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Free tax preparation sites You generally have to make estimated tax payments if you expect to owe taxes, including self-employment tax (discussed later), of $1,000 or more when you file your return. Free tax preparation sites Use Form 1040-ES to figure and pay the tax. Free tax preparation sites If you do not have to make estimated tax payments, you can pay any tax due when you file your return. Free tax preparation sites For more information on estimated tax, see Publication 505, Tax Withholding and Estimated Tax. Free tax preparation sites What are my payment options?   You can pay your estimated tax electronically using various options. Free tax preparation sites If you pay electronically, there is no need to mail in Form 1040-ES payment vouchers. Free tax preparation sites These options include: Paying electronically through the Electronic Federal Tax Payment System (EFTPS). Free tax preparation sites Paying by authorizing an electronic funds withdrawal when you file Form 1040 electronically. Free tax preparation sites Paying by credit or debit card over the phone or by Internet. Free tax preparation sites Other options include crediting an overpayment from your 2013 return to your 2014 estimated tax, or mailing a check or money order with a Form 1040-ES payment voucher. Free tax preparation sites EFTPS    To enroll in EFTPS, go to www. Free tax preparation sites eftps. Free tax preparation sites gov or call 1-800-555-4477. Free tax preparation sites When you request a new EIN and you will have a tax obligation, you are automatically enrolled in EFTPS. Free tax preparation sites Benefits of EFTPS: The chance of an error in making your payments is reduced. Free tax preparation sites You receive immediate confirmation of every transaction. Free tax preparation sites Penalty for underpayment of tax. Free tax preparation sites   If you did not pay enough income tax and self-employment tax for 2013 by withholding or by making estimated tax payments, you may have to pay a penalty on the amount not paid. Free tax preparation sites The IRS will figure the penalty for you and send you a bill. Free tax preparation sites Or you can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you have to pay a penalty and to figure the penalty amount. Free tax preparation sites For more information, see Publication 505. Free tax preparation sites Self-Employment (SE) Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Free tax preparation sites It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. Free tax preparation sites If you earned income as a statutory employee, you do not pay SE tax on that income. Free tax preparation sites Social security coverage. Free tax preparation sites   Social security benefits are available to self-employed persons just as they are to wage earners. Free tax preparation sites Your payments of SE tax contribute to your coverage under the social security system. Free tax preparation sites Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Free tax preparation sites By not reporting all of your self-employment income, you could cause your social security benefits to be lower when you retire. Free tax preparation sites How to become insured under social security. Free tax preparation sites   You must be insured under the social security system before you begin receiving social security benefits. Free tax preparation sites You are insured if you have the required number of credits (also called quarters of coverage), discussed next. Free tax preparation sites Earning credits in 2013 and 2014. Free tax preparation sites   For 2013, you received one credit, up to a maximum of four credits, for each $1,160 ($1,200 for 2014) of income subject to social security taxes. Free tax preparation sites Therefore, for 2013, if you had income (self-employment and wages) of $4,640 that was subject to social security taxes, you receive four credits ($4,640 ÷ $1,160). Free tax preparation sites   For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office. Free tax preparation sites    Making false statements to get or to increase social security benefits may subject you to penalties. Free tax preparation sites The Social Security Administration (SSA) time limit for posting self-employment income. Free tax preparation sites   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Free tax preparation sites If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. Free tax preparation sites The SSA will not change its records to increase your self-employment income. Free tax preparation sites Who must pay self-employment tax. Free tax preparation sites   You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Free tax preparation sites Your net earnings from self-employment (excluding church employee income) were $400 or more. Free tax preparation sites You had church employee income of $108. Free tax preparation sites 28 or more. Free tax preparation sites The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits. Free tax preparation sites SE tax rate. Free tax preparation sites   For 2013, the SE tax rate on net earnings is 15. Free tax preparation sites 3% (12. Free tax preparation sites 4% social security tax plus 2. Free tax preparation sites 9% Medicare tax). Free tax preparation sites Maximum earnings subject to SE tax. Free tax preparation sites   Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Free tax preparation sites 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Free tax preparation sites   All your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Free tax preparation sites 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Free tax preparation sites   If wages and tips you receive as an employee are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Free tax preparation sites 4% social security part of the SE tax on any of your net earnings. Free tax preparation sites However, you must pay the 2. Free tax preparation sites 9% Medicare part of the SE tax on all your net earnings. Free tax preparation sites Deduct one-half of your SE tax as an adjustment to income on line 27 of Form 1040. Free tax preparation sites   More information. Free tax preparation sites   For information on methods of calculating SE tax, see Chapter 10, Self-Employment Tax. Free tax preparation sites Table 1-2. Free tax preparation sites Which Forms Must I File? IF you are liable for: THEN use Form: DUE by:1 Income tax 1040 and Schedule C or C-EZ2 15th day of 4th month after end of  tax year. Free tax preparation sites Self-employment tax Schedule SE File with Form 1040. Free tax preparation sites Estimated tax 1040-ES 15th day of 4th, 6th, and 9th months of tax year, and 15th day of 1st month after the end of tax year. Free tax preparation sites Social security and Medicare taxes and income tax withholding 941 or 944 April 30, July 31, October 31, and January 313. Free tax preparation sites     See Publication 15. Free tax preparation sites Providing information on social security and Medicare taxes and income tax withholding W-2 (to employee)  W-2 and W-3 (to the Social Security Administration) January 313. Free tax preparation sites   Last day of February (March 31 if filing electronically)3. Free tax preparation sites Federal unemployment (FUTA) tax 940 January 313. Free tax preparation sites     April 30, July 31, October 31, and January 31, but only if the liability for unpaid tax is more than $500. Free tax preparation sites Filing information returns for payments to nonemployees and transactions with other persons See Information Returns Forms 1099 – to the recipient by January 31 and to the IRS by February 28 (March 31 if filing electronically). Free tax preparation sites     Other forms – see the General Instructions for Certain Information Returns. Free tax preparation sites Excise tax See Excise Taxes See the instructions to the forms. Free tax preparation sites 1 If a due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday. Free tax preparation sites For more information, see Publication 509, Tax Calendars. Free tax preparation sites 2 File a separate schedule for each business. Free tax preparation sites 3 See the form instructions if you go out of business, change the form of your business, or stop paying wages. Free tax preparation sites     Employment Taxes If you have employees, you will need to file forms to report employment taxes. Free tax preparation sites Employment taxes include the following items. Free tax preparation sites Social security and Medicare taxes. Free tax preparation sites Federal income tax withholding. Free tax preparation sites Federal unemployment (FUTA) tax. Free tax preparation sites For more information, see Publication 15 (Circular E), Employer's Tax Guide. Free tax preparation sites That publication explains your tax responsibilities as an employer. Free tax preparation sites To help you determine whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Free tax preparation sites That publication has information to help you determine whether an individual is an independent contractor or an employee. Free tax preparation sites If you incorrectly classify an employee as an independent contractor, you may be held liable for employment taxes for that worker plus a penalty. Free tax preparation sites An independent contractor is someone who is self-employed. Free tax preparation sites You do not generally have to withhold or pay any taxes on payments made to an independent contractor. Free tax preparation sites Excise Taxes This section identifies some of the excise taxes you may have to pay and the forms you have to file if you do any of the following. Free tax preparation sites Manufacture or sell certain products. Free tax preparation sites Operate certain kinds of businesses. Free tax preparation sites Use various kinds of equipment, facilities, or products. Free tax preparation sites Receive payment for certain services. Free tax preparation sites For more information on excise taxes, see Publication 510, Excise Taxes. Free tax preparation sites Form 720. Free tax preparation sites   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Free tax preparation sites Environmental taxes on the sale or use of ozone-depleting chemicals and imported products containing or manufactured with these chemicals. Free tax preparation sites Communications and air transportation taxes. Free tax preparation sites Fuel taxes. Free tax preparation sites Tax on the first retail sale of heavy trucks, trailers, and tractors. Free tax preparation sites Manufacturers taxes on the sale or use of a variety of different articles. Free tax preparation sites Tax on indoor tanning services. Free tax preparation sites Form 2290. Free tax preparation sites   There is a federal excise tax on the use of certain trucks, truck tractors, and buses on public highways. Free tax preparation sites The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Free tax preparation sites Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Free tax preparation sites For more information, see the Instructions for Form 2290. Free tax preparation sites Depositing excise taxes. Free tax preparation sites   If you have to file a quarterly excise tax return on Form 720, you may have to deposit your excise taxes before the return is due. Free tax preparation sites For details on depositing excise taxes, see the Instructions for Form 720. Free tax preparation sites Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Free tax preparation sites The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Free tax preparation sites You must give a copy of each information return you are required to file to the recipient or payer. Free tax preparation sites In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Free tax preparation sites For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Free tax preparation sites Form 1099-MISC. Free tax preparation sites   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your business. Free tax preparation sites These payments include the following items. Free tax preparation sites Payments of $600 or more for services performed for your business by people not treated as your employees, such as fees to subcontractors, attorneys, accountants, or directors. Free tax preparation sites Rent payments of $600 or more, other than rents paid to real estate agents. Free tax preparation sites Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Free tax preparation sites Royalty payments of $10 or more. Free tax preparation sites Payments to certain crew members by operators of fishing boats. Free tax preparation sites You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Free tax preparation sites Form W-2. Free tax preparation sites   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. Free tax preparation sites You can file Form W-2 online. Free tax preparation sites For more information about Form W-2, see the General Instructions for Forms W-2 and W-3. Free tax preparation sites Penalties. Free tax preparation sites   The law provides for the following penalties if you do not file Form 1099-MISC or Form W-2 or do not correctly report the information. Free tax preparation sites For more information, see the General Instructions for Certain Information Returns. Free tax preparation sites Failure to file information returns. Free tax preparation sites This penalty applies if you do not file information returns by the due date, do not include all required information, or report incorrect information. Free tax preparation sites Failure to furnish correct payee statements. Free tax preparation sites This penalty applies if you do not furnish a required statement to a payee by the required date, do not include all required information, or report incorrect information. Free tax preparation sites Waiver of penalties. Free tax preparation sites   These penalties will not apply if you can show that the failure was due to reasonable cause and not willful neglect. Free tax preparation sites   In addition, there is no penalty for failure to include all required information, or for including incorrect information, on a de minimis (small) number of information returns if you correct the errors by August 1 of the year the returns are due. Free tax preparation sites (A de minimis number of returns is the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. Free tax preparation sites ) Form 8300. Free tax preparation sites   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction, or two or more related business transactions. Free tax preparation sites Cash includes U. Free tax preparation sites S. Free tax preparation sites and foreign coin and currency. Free tax preparation sites It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Free tax preparation sites Cash does not include a check drawn on an individual's personal account (personal check). Free tax preparation sites For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Free tax preparation sites Penalties. Free tax preparation sites   There are civil and criminal penalties, including up to 5 years in prison, for not filing Form 8300, filing (or causing the filing of) a false or fraudulent Form 8300, or structuring a transaction to evade reporting requirements. Free tax preparation sites Table 1-3. Free tax preparation sites Going Out of Business Checklists (Note. Free tax preparation sites The following checklists highlight the typical final forms and schedules you may need to file if you ever go out of business. Free tax preparation sites For more information, see the instructions for the listed forms. Free tax preparation sites ) IF you are liable for:   THEN you may need to: Income tax □ File Schedule C or C-EZ with your Form 1040 for the year in which you go out of business. Free tax preparation sites   □ File Form 4797 with your Form 1040 for each year in which you sell or exchange property used in your business or in which the business use of certain section 179 or listed property drops to 50% or less. Free tax preparation sites   □ File Form 8594 with your Form 1040 if you sold your business. Free tax preparation sites Self-employment tax □ File Schedule SE with your Form 1040 for the year in which you go out of business. Free tax preparation sites Employment taxes □ File Form 941 (or Form 944) for the calendar quarter in which you make final wage payments. Free tax preparation sites Note. Free tax preparation sites Do not forget to check the box and enter the date final wages were paid on line 15 of Form 941 or line 14 of Form 944. Free tax preparation sites   □ File Form 940 for the calendar year in which final wages were paid. Free tax preparation sites Note. Free tax preparation sites Do not forget to check box d, Final: Business closed or stopped paying wages, under Type of Return. Free tax preparation sites Information returns □ Provide Forms W-2 to your employees for the calendar year in which you make final wage payments. Free tax preparation sites Note. Free tax preparation sites These forms are generally due by the due date of your final Form 941 or Form 944. Free tax preparation sites   □ File Form W-3 to file Forms W-2. Free tax preparation sites Note. Free tax preparation sites These forms are generally due within 1 month after the due date of your final Form 941 or Form 944. Free tax preparation sites   □ Provide Forms 1099-MISC to each person to whom you have paid at least $600 for services (including parts and materials) during the calendar year in which you go out of business. Free tax preparation sites   □ File Form 1096 to file Forms 1099-MISC. Free tax preparation sites Prev  Up  Next   Home   More Online Publications