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Need File Back Taxes

Need file back taxes Publication 554 - Introductory Material Table of Contents What's New Reminders IntroductionVolunteer Income Tax Assistance and Tax Counseling for the Elderly. Need file back taxes Ordering forms and publications. Need file back taxes Tax questions. Need file back taxes What's New Alternative minimum tax exemption increased. Need file back taxes  The AMT exemption amount has increased to $51,900 ($80,800 if married filing jointly or qualifying widow(er); $40,400 if married filing separately). Need file back taxes Earned income credit. Need file back taxes  The maximum amount of income you can earn and still get the credit has increased. Need file back taxes You may be able to take the credit if you earn less than: $14,340 ($19,680 if married filing jointly), do not have a qualifying child, and are at least 25 years old and under 65, $37,870 ($43,210 if married filing jointly), and you have one qualifying child, $43,038 ($48,378 if married filing jointly), and you have two qualifying children, or $46,227 ($51,567 if married filing jointly), and you have three or more qualifying children. Need file back taxes For more information, see Earned Income Credit , later. Need file back taxes Exemption phaseout. Need file back taxes  You lose at least part of the benefit of your exemptions if your adjusted gross income is above a certain amount. Need file back taxes For 2013, the phaseout begins at $150,000 for married individuals filing separate returns; $250,000 for single individuals; $275,000 for heads of household; and $300,000 for married individuals filing joint returns or qualifying widow(er)s. Need file back taxes For more information, see Phaseout of Exemptions in Publication 501. Need file back taxes Limit on itemized deductions. Need file back taxes   Beginning January 1, 2013, itemized deductions for taxpayers with adjusted gross incomes above $150,000 may be reduced. Need file back taxes See Overall limitation , later. Need file back taxes Medical and dental expenses. Need file back taxes   Beginning January 1, 2013, taxpayers 65 and older can deduct only the part of their medical and dental expenses that exceed 7. Need file back taxes 5% of their adjusted gross income (10% for taxpayers under 65). Need file back taxes Same-sex marriages. Need file back taxes  If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. Need file back taxes For more information, see Publication 501. Need file back taxes Reminders Future developments. Need file back taxes  For the latest information about developments related to Publication 554, such as legislation enacted after it was published, go to www. Need file back taxes irs. Need file back taxes gov/pub554. Need file back taxes Tax return preparers. Need file back taxes  Choose your preparer carefully. Need file back taxes If you pay someone to prepare your return, the preparer is required, under the law, to sign the return and fill in the other blanks in the Paid Preparer's area of your return. Need file back taxes Remember, however, that you are still responsible for the accuracy of every item entered on your return. Need file back taxes If there is any underpayment, you are responsible for paying it, plus any interest and penalty that may be due. Need file back taxes Sale of home by surviving spouse. Need file back taxes  If you are an unmarried widow or widower, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Need file back taxes For more information, see Sale of Home , later. Need file back taxes Third party designee. Need file back taxes  You can check the “Yes” box in the Third Party Designee area of your return to authorize the IRS to discuss your return with your preparer, a friend, family member, or any other person you choose. Need file back taxes This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. Need file back taxes It also allows your designee to perform certain actions. Need file back taxes See your income tax return instructions for details. Need file back taxes Employment tax withholding. Need file back taxes  Your wages are subject to withholding for income tax, social security tax, and Medicare tax even if you are receiving social security benefits. Need file back taxes Photographs of missing children. Need file back taxes  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Need file back taxes Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Need file back taxes You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Need file back taxes Introduction The purpose of this publication is to provide a general overview of selected topics that are of interest to older taxpayers. Need file back taxes The publication will help you determine if you need to file a return and, if so, what items to report on your return. Need file back taxes Each topic is discussed only briefly, so you will find references to other free IRS publications that provide more detail on these topics if you need it. Need file back taxes Table I has a list of questions you may have about filing your federal tax return. Need file back taxes To the right of each question is the location of the answer in this publication. Need file back taxes Also, at the back of this publication there is an index to help you search for the topic you need. Need file back taxes While most federal income tax laws apply equally to all taxpayers, regardless of age, there are some provisions that give special treatment to older taxpayers. Need file back taxes The following are some examples. Need file back taxes Higher gross income threshold for filing. Need file back taxes You must be age 65 or older at the end of the year to get this benefit. Need file back taxes You are considered age 65 on the day before your 65th birthday. Need file back taxes Therefore, you are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. Need file back taxes Higher standard deduction. Need file back taxes If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. Need file back taxes You are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. Need file back taxes Credit for the elderly or the disabled. Need file back taxes If you qualify, you may benefit from the credit for the elderly or the disabled. Need file back taxes To determine if you qualify and how to figure this credit, see Credit for the Elderly or the Disabled , later. Need file back taxes Return preparation assistance. Need file back taxes   The IRS wants to make it easier for you to file your federal tax return. Need file back taxes You may find it helpful to visit a Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), or American Association of Retired Persons (AARP) Tax-Aide site near you. Need file back taxes Volunteer Income Tax Assistance and Tax Counseling for the Elderly. Need file back taxes   These programs provide free help for low-income taxpayers and taxpayers age 60 or older to fill in and file their returns. Need file back taxes For the VITA/TCE site nearest you, contact your local IRS office. Need file back taxes For more information, see Free help with your tax return under How To Get Tax Help. Need file back taxes   For the location of an AARP Tax-Aide site in your community, call 1-888-227-7669. Need file back taxes When asked, be ready to press in or speak your 5-digit ZIP code. Need file back taxes Or, you can visit their website on the Internet at www. Need file back taxes aarp. Need file back taxes org/money/taxaide. Need file back taxes Comments and suggestions. Need file back taxes   We welcome your comments about this publication and your suggestions for future editions. Need file back taxes   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Need file back taxes NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Need file back taxes Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Need file back taxes   You can send your comments from www. Need file back taxes irs. Need file back taxes gov/formspubs/. Need file back taxes Click on “More Information” and then on “Comment on Tax Forms and Publications. Need file back taxes ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Need file back taxes Ordering forms and publications. Need file back taxes   Visit www. Need file back taxes irs. Need file back taxes gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 business days after your request is received. Need file back taxes Internal Revenue Service 1201 N. Need file back taxes Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Need file back taxes   If you have a tax question, check the information available on IRS. Need file back taxes gov or call 1-800-829-1040. Need file back taxes We cannot answer tax questions sent to either of the above addresses. Need file back taxes Table I. Need file back taxes What You Should Know About Federal Taxes Note. Need file back taxes The following is a list of questions you may have about filling out your federal income tax return. Need file back taxes  To the right of each question is the location of the answer in this publication. Need file back taxes What I Should Know Where To Find the Answer Do I need to file a return? See chapter 1. Need file back taxes Is my income taxable or nontaxable?  If it is nontaxable, must I still report it? See chapter 2. Need file back taxes How do I report benefits I received from the Social Security Administration or the Railroad Retirement Board?  Are these benefits taxable? See Social Security and Equivalent Railroad Retirement Benefits in chapter 2. Need file back taxes Must I report the sale of my home?  If I had a gain, is any part of it taxable? See Sale of Home in chapter 2. Need file back taxes What are some of the items that I can deduct to reduce my income? See chapters 3 and 4. Need file back taxes How do I report the amounts I set aside for my IRA? See Individual Retirement Arrangement (IRA) Contributions and Deductions in chapter 3. Need file back taxes Would it be better for me to claim the standard deduction or itemize my deductions? See chapter 4. Need file back taxes What are some of the credits I can claim to reduce my tax? See chapter 5 for discussions on the credit for the elderly or the disabled, the child and dependent care credit, and the earned income credit. Need file back taxes Must I make estimated tax payments? See chapter 6. Need file back taxes How do I contact the IRS or get more information? See chapter 7. Need file back taxes Prev  Up  Next   Home   More Online Publications
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Taxpayer Rights

Whether you file a Form 1040EZ or a complicated corporate return, you will benefit from knowing your rights as a taxpayer and being familiar with the IRS' obligations to protect them. The goal of the Taxpayer Rights Corner is to be your one-stop shop for taxpayer rights information during every step of your interaction with the IRS.


Know Your Rights

You have rights as a taxpayer when dealing with the IRS.


Your Civil Rights Are Protected

Under no circumstances will the Internal Revenue Service tolerate discrimination by its employees, grantees, contractors, and/or subcontractors. NO ONE shall be excluded from participating in, be denied the benefits of, or be subject to discrimination because of: race, color, sex, national origin, disability, reprisal, or age in programs or activities funded by the Department of Treasury - Internal Revenue Service.


Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an IRS program that provides an independent system to assure that tax problems, which have not been resolved through normal channels, are promptly and fairly handled.


Notices

What should you do if you receive a notice from the IRS?


Your Rights to Representation

Learn more about granting power of attorney.

You are entitled to similar protection of confidentiality with respect to tax advice given by a federally authorized tax practitioner as with an attorney.

Every taxpayer is entitled to have access to representation. The Low Income Tax Clinic grant program is designed to help accredited academic institutions and non-profit organizations provide low to no-cost tax assistance (such as representing the taxpayer during an audit or tax collection effort) and/or tax outreach to taxpayers for whom English is a second language. 

  • Frequently Asked Questions

Examination

We accept most taxpayer's returns as filed. If we inquire about your return or select it for examination, it does not suggest that you are dishonest. The inquiry or examination may or may not result in more tax. To learn about your rights during the examination process, and for information about how audits are conducted;


Appeal Rights

It is your right to appeal any action taken by the IRS to change your account.


Collection Process

Learn about the process IRS may follow to collect overdue taxes, including a summary of your rights and other important information about the collection process.


Innocent Spouse

The Reform Act of 1998, broadened the relief from joint liability available to spouses who file joint returns.


Refund Offset

If you are due a refund but have not paid certain amounts you owe, all or part of your refund may be used to pay all or part of the past-due amount. This includes past-due federal income tax, other federal debts (such as student loans), state income tax, and child and spousal support payments.


Where To Go For 1040 Help?

The IRS sponsors volunteer assistance programs and offers help to taxpayers in many of its offices and other community locations.

Page Last Reviewed or Updated: 14-Mar-2014

The Need File Back Taxes

Need file back taxes Publication 538 - Main Content Table of Contents Accounting PeriodsCalendar Year Fiscal Year Short Tax Year Improper Tax Year Change in Tax Year Individuals Partnerships, S Corporations, and Personal Service Corporations (PSCs) Corporations (Other Than S Corporations and PSCs) Accounting MethodsSpecial methods. Need file back taxes Hybrid method. Need file back taxes Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Need file back taxes Accounting Periods You must use a tax year to figure your taxable income. Need file back taxes A tax year is an annual accounting period for keeping records and reporting income and expenses. Need file back taxes An annual accounting period does not include a short tax year (discussed later). Need file back taxes You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Need file back taxes Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Need file back taxes A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Need file back taxes You cannot adopt a tax year by merely: Filing an application for an extension of time to file an income tax return; Filing an application for an employer identification number (Form SS-4); or Paying estimated taxes. Need file back taxes This section discusses: A calendar year. Need file back taxes A fiscal year (including a period of 52 or 53 weeks). Need file back taxes A short tax year. Need file back taxes An improper tax year. Need file back taxes A change in tax year. Need file back taxes Special situations that apply to individuals. Need file back taxes Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Need file back taxes Special situations that apply to corporations. Need file back taxes Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Need file back taxes If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year. Need file back taxes If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you obtain approval from the IRS to change it, or are otherwise allowed to change it without IRS approval. Need file back taxes See Change in Tax Year, later. Need file back taxes Generally, anyone can adopt the calendar year. Need file back taxes However, you must adopt the calendar year if: You keep no books or records; You have no annual accounting period; Your present tax year does not qualify as a fiscal year; or You are required to use a calendar year by a provision in the Internal Revenue Code or the Income Tax Regulations. Need file back taxes Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Need file back taxes If you are allowed to adopt a fiscal year, you must consistently maintain your books and records and report your income and expenses using the time period adopted. Need file back taxes 52-53-Week Tax Year You can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. Need file back taxes If you make this election, your 52-53-week tax year must always end on the same day of the week. Need file back taxes Your 52-53-week tax year must always end on: Whatever date this same day of the week last occurs in a calendar month, or Whatever date this same day of the week falls that is nearest to the last day of the calendar month. Need file back taxes For example, if you elect a tax year that always ends on the last Monday in March, your 2012 tax year will end on March 25, 2013. Need file back taxes Election. Need file back taxes   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Need file back taxes The month in which the new 52-53-week tax year ends. Need file back taxes The day of the week on which the tax year always ends. Need file back taxes The date the tax year ends. Need file back taxes It can be either of the following dates on which the chosen day: Last occurs in the month in (1), above, or Occurs nearest to the last day of the month in (1), above. Need file back taxes   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Need file back taxes   To determine an effective date (or apply provisions of any law) expressed in terms of tax years beginning, including, or ending on the first or last day of a specified calendar month, a 52-53-week tax year is considered to: Begin on the first day of the calendar month beginning nearest to the first day of the 52-53-week tax year, and End on the last day of the calendar month ending nearest to the last day of the 52-53-week tax year. Need file back taxes Example. Need file back taxes Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Need file back taxes For this purpose, a 52-53-week tax year that begins on the last Tuesday of June, which falls on June 26, 2012, is treated as beginning on July 1, 2012. Need file back taxes Short Tax Year A short tax year is a tax year of less than 12 months. Need file back taxes A short period tax return may be required when you (as a taxable entity): Are not in existence for an entire tax year, or Change your accounting period. Need file back taxes Tax on a short period tax return is figured differently for each situation. Need file back taxes Not in Existence Entire Year Even if a taxable entity was not in existence for the entire year, a tax return is required for the time it was in existence. Need file back taxes Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year. Need file back taxes Example 1. Need file back taxes XYZ Corporation was organized on July 1, 2012. Need file back taxes It elected the calendar year as its tax year. Need file back taxes Therefore, its first tax return was due March 15, 2013. Need file back taxes This short period return will cover the period from July 1, 2012, through December 31, 2012. Need file back taxes Example 2. Need file back taxes A calendar year corporation dissolved on July 23, 2012. Need file back taxes Its final return is due by October 15, 2012. Need file back taxes It will cover the short period from January 1, 2012, through July 23, 2012. Need file back taxes Death of individual. Need file back taxes   When an individual dies, a tax return must be filed for the decedent by the 15th day of the 4th month after the close of the individual's regular tax year. Need file back taxes The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Need file back taxes In the case of a decedent who dies on December 31st, the last day of the regular tax year, a full calendar-year tax return is required. Need file back taxes Example. Need file back taxes   Agnes Green was a single, calendar year taxpayer. Need file back taxes She died on March 6, 2012. Need file back taxes Her final income tax return must be filed by April 15, 2013. Need file back taxes It will cover the short period from January 1, 2012, to March 6, 2012. Need file back taxes Figuring Tax for Short Year If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period. Need file back taxes The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year. Need file back taxes Figure tax for a short year under the general rule, explained below. Need file back taxes You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Need file back taxes General rule. Need file back taxes   Income tax for a short tax year must be annualized. Need file back taxes However, self-employment tax is figured on the actual self-employment income for the short period. Need file back taxes Individuals. Need file back taxes   An individual must figure income tax for the short tax year as follows. Need file back taxes Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Need file back taxes You must itemize deductions when you file a short period tax return. Need file back taxes Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Need file back taxes Subtract the amount in (2) from the amount in (1). Need file back taxes The result is your modified taxable income. Need file back taxes Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Need file back taxes The result is your annualized income. Need file back taxes Figure the total tax on your annualized income using the appropriate tax rate schedule. Need file back taxes Multiply the total tax by the number of months in the short tax year and divide the result by 12. Need file back taxes The result is your tax for the short tax year. Need file back taxes Relief procedure. Need file back taxes   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Need file back taxes It may result in less tax. Need file back taxes Under this procedure, the tax is figured by two separate methods. Need file back taxes If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid. Need file back taxes For more information, see section 443(b)(2) of the Internal Revenue Code. Need file back taxes Alternative minimum tax. Need file back taxes   To figure the alternative minimum tax (AMT) due for a short tax year: Figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps. Need file back taxes Multiply the AMTI by 12. Need file back taxes Divide the result by the number of months in the short tax year. Need file back taxes Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Need file back taxes The result is the annualized AMT. Need file back taxes Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Need file back taxes   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Need file back taxes For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Need file back taxes Tax withheld from wages. Need file back taxes   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Need file back taxes Federal income tax is withheld on a calendar year basis. Need file back taxes The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Need file back taxes Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Need file back taxes For example, if a taxpayer began business on March 15 and adopted a tax year ending on March 14 (a period of exactly 12 months), this would be an improper tax year. Need file back taxes See Accounting Periods, earlier, for a description of permissible tax years. Need file back taxes To change to a proper tax year, you must do one of the following. Need file back taxes If you are requesting a change to a calendar tax year, file an amended income tax return based on a calendar tax year that corrects the most recently filed tax return that was filed on the basis of an improper tax year. Need file back taxes Attach a completed Form 1128 to the amended tax return. Need file back taxes Write “FILED UNDER REV. Need file back taxes PROC. Need file back taxes 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Need file back taxes If you are requesting a change to a fiscal tax year, file Form 1128 in accordance with the form instructions to request IRS approval for the change. Need file back taxes Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Need file back taxes See the Instructions for Form 1128 for exceptions. Need file back taxes If you qualify for an automatic approval request, a user fee is not required. Need file back taxes Individuals Generally, individuals must adopt the calendar year as their tax year. Need file back taxes An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year. Need file back taxes Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Need file back taxes A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Need file back taxes The entity does not have to use the required tax year if it receives IRS approval to use another permitted tax year or makes an election under section 444 of the Internal Revenue Code (discussed later). Need file back taxes The following discussions provide the rules for partnerships, S corporations, and PSCs. Need file back taxes Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Need file back taxes The partnership makes an election under section 444 of the Internal Revenue Code to have a tax year other than a required tax year by filing Form 8716. Need file back taxes The partnership elects to use a 52-53-week tax year that ends with reference to either its required tax year or a tax year elected under section 444. Need file back taxes The partnership can establish a business purpose for a different tax year. Need file back taxes The rules for the required tax year for partnerships are as follows. Need file back taxes If one or more partners having the same tax year own a majority interest (more than 50%) in partnership profits and capital, the partnership must use the tax year of those partners. Need file back taxes If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Need file back taxes A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Need file back taxes If there is no majority interest tax year and the principal partners do not have the same tax year, the partnership generally must use a tax year that results in the least aggregate deferral of income to the partners. Need file back taxes If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Need file back taxes Least aggregate deferral of income. Need file back taxes   The tax year that results in the least aggregate deferral of income is determined as follows. Need file back taxes Figure the number of months of deferral for each partner using one partner's tax year. Need file back taxes Find the months of deferral by counting the months from the end of that tax year forward to the end of each other partner's tax year. Need file back taxes Multiply each partner's months of deferral figured in step (1) by that partner's share of interest in the partnership profits for the year used in step (1). Need file back taxes Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Need file back taxes Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Need file back taxes   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Need file back taxes If the calculation results in more than one tax year qualifying as the tax year with the least aggregate deferral, the partnership can choose any one of those tax years as its tax year. Need file back taxes However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Need file back taxes Example. Need file back taxes A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Need file back taxes A uses the calendar year and B uses a fiscal year ending November 30. Need file back taxes P must change its tax year to a fiscal year ending November 30 because this results in the least aggregate deferral of income to the partners, as shown in the following table. Need file back taxes Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Need file back taxes 5 -0- -0- B 11/30 0. Need file back taxes 5 11 5. Need file back taxes 5 Total Deferral 5. Need file back taxes 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Need file back taxes 5 1 0. Need file back taxes 5 B 11/30 0. Need file back taxes 5 -0- -0- Total Deferral 0. Need file back taxes 5 When determination is made. Need file back taxes   The determination of the tax year under the least aggregate deferral rules must generally be made at the beginning of the partnership's current tax year. Need file back taxes However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Need file back taxes This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Need file back taxes Short period return. Need file back taxes   When a partnership changes its tax year, a short period return must be filed. Need file back taxes The short period return covers the months between the end of the partnership's prior tax year and the beginning of its new tax year. Need file back taxes   If a partnership changes to the tax year resulting in the least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to determine that tax year. Need file back taxes The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Need file back taxes 706-1. Need file back taxes ” More information. Need file back taxes   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Need file back taxes S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Need file back taxes A permitted tax year is any of the following. Need file back taxes The calendar year. Need file back taxes A tax year elected under section 444 of the Internal Revenue Code. Need file back taxes See Section 444 Election, below for details. Need file back taxes A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Need file back taxes Any other tax year for which the corporation establishes a business purpose. Need file back taxes If an electing S corporation wishes to adopt a tax year other than a calendar year, it must request IRS approval using Form 2553, instead of filing Form 1128. Need file back taxes For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Need file back taxes Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Need file back taxes The corporation makes an election under section 444 of the Internal Revenue Code. Need file back taxes See Section 444 Election, below for details. Need file back taxes The corporation elects to use a 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Need file back taxes The corporation establishes a business purpose for a fiscal year. Need file back taxes See the Instructions for Form 1120 for general information about PSCs. Need file back taxes For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Need file back taxes Section 444 Election A partnership, S corporation, electing S corporation, or PSC can elect under section 444 of the Internal Revenue Code to use a tax year other than its required tax year. Need file back taxes Certain restrictions apply to the election. Need file back taxes A partnership or an S corporation that makes a section 444 election must make certain required payments and a PSC must make certain distributions (discussed later). Need file back taxes The section 444 election does not apply to any partnership, S corporation, or PSC that establishes a business purpose for a different period, explained later. Need file back taxes A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Need file back taxes It is not a member of a tiered structure (defined in section 1. Need file back taxes 444-2T of the regulations). Need file back taxes It has not previously had a section 444 election in effect. Need file back taxes It elects a year that meets the deferral period requirement. Need file back taxes Deferral period. Need file back taxes   The determination of the deferral period depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax year with a section 444 election. Need file back taxes Retaining tax year. Need file back taxes   Generally, a partnership, S corporation, or PSC can make a section 444 election to retain its tax year only if the deferral period of the new tax year is 3 months or less. Need file back taxes This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Need file back taxes Adopting or changing tax year. Need file back taxes   If the partnership, S corporation, or PSC is adopting or changing to a tax year other than its required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year. Need file back taxes The IRS will allow a section 444 election only if the deferral period of the new tax year is less than the shorter of: Three months, or The deferral period of the tax year being changed. Need file back taxes This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Need file back taxes If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Need file back taxes Example 1. Need file back taxes BD Partnership uses a calendar year, which is also its required tax year. Need file back taxes BD cannot make a section 444 election because the deferral period is zero. Need file back taxes Example 2. Need file back taxes E, a newly formed partnership, began operations on December 1. Need file back taxes E is owned by calendar year partners. Need file back taxes E wants to make a section 444 election to adopt a September 30 tax year. Need file back taxes E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Need file back taxes Making the election. Need file back taxes   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Need file back taxes Form 8716 must be filed by the earlier of: The due date (not including extensions) of the income tax return for the tax year resulting from the section 444 election, or The 15th day of the 6th month of the tax year for which the election will be effective. Need file back taxes For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Need file back taxes Note. Need file back taxes If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Need file back taxes   Attach a copy of Form 8716 to Form 1065, Form 1120S, or Form 1120 for the first tax year for which the election is made. Need file back taxes Example 1. Need file back taxes AB, a partnership, begins operations on September 13, 2012, and is qualified to make a section 444 election to use a September 30 tax year for its tax year beginning September 13, 2012. Need file back taxes AB must file Form 8716 by January 15, 2013, which is the due date of the partnership's tax return for the period from September 13, 2012, to September 30, 2012. Need file back taxes Example 2. Need file back taxes The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Need file back taxes AB must file Form 8716 by March 17, 2013. Need file back taxes Example 3. Need file back taxes B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Need file back taxes B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Need file back taxes B must file Form 8716 by December 17, 2012, the due date of the income tax return for the short period from September 1, 2012, to September 30, 2012. Need file back taxes Note. Need file back taxes The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Need file back taxes Extension of time for filing. Need file back taxes   There is an automatic extension of 12 months to make this election. Need file back taxes See the Form 8716 instructions for more information. Need file back taxes Terminating the election. Need file back taxes   The section 444 election remains in effect until it is terminated. Need file back taxes If the election is terminated, another section 444 election cannot be made for any tax year. Need file back taxes   The election ends when any of the following applies to the partnership, S corporation, or PSC. Need file back taxes The entity changes to its required tax year. Need file back taxes The entity liquidates. Need file back taxes The entity becomes a member of a tiered structure. Need file back taxes The IRS determines that the entity willfully failed to comply with the required payments or distributions. Need file back taxes   The election will also end if either of the following events occur. Need file back taxes An S corporation's S election is terminated. Need file back taxes However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Need file back taxes A PSC ceases to be a PSC. Need file back taxes If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Need file back taxes Required payment for partnership or S corporation. Need file back taxes   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Need file back taxes The required payment for that year (or any preceding tax year) is more than $500. Need file back taxes    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Need file back taxes   Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. Need file back taxes If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. Need file back taxes If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount. Need file back taxes Applicable election year. Need file back taxes   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Need file back taxes Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins. Need file back taxes Required distribution for PSC. Need file back taxes   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Need file back taxes If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Need file back taxes The amount deferred is treated as paid or incurred in the following tax year. Need file back taxes   For information on the minimum distribution, see the instructions for Part I of Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC). Need file back taxes Back-up election. Need file back taxes   A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. Need file back taxes If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Need file back taxes Making back-up election. Need file back taxes   The general rules for making a section 444 election, as discussed earlier, apply. Need file back taxes When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Need file back taxes However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print “FORM 1128 (or FORM 2553) BACK-UP ELECTION” at the top of Form 8716. Need file back taxes Activating election. Need file back taxes   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Need file back taxes The due date for filing Form 8752 and making the payment is the later of the following dates. Need file back taxes May 15 of the calendar year following the calendar year in which the applicable election year begins. Need file back taxes 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Need file back taxes   A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, “ACTIVATING BACK-UP ELECTION. Need file back taxes ” 52-53-Week Tax Year A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year (discussed earlier) that ends with reference to either its required tax year or a tax year elected under section 444 (discussed earlier). Need file back taxes A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. Need file back taxes However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128. Need file back taxes Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Need file back taxes See the Instructions for Form 1128 for details. Need file back taxes Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Need file back taxes A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. Need file back taxes An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Need file back taxes Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures. Need file back taxes See the Instructions for Form 1128 for details. Need file back taxes Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Need file back taxes Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Need file back taxes You choose an accounting method when you file your first tax return. Need file back taxes If you later want to change your accounting method, you must get IRS approval. Need file back taxes See Change in Accounting Method, later. Need file back taxes No single accounting method is required of all taxpayers. Need file back taxes You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. Need file back taxes In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Need file back taxes You must use the same accounting method from year to year. Need file back taxes An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Need file back taxes If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income. Need file back taxes Methods you can use. Need file back taxes   In general, you can compute your taxable income under any of the following accounting methods. Need file back taxes Cash method. Need file back taxes Accrual method. Need file back taxes Special methods of accounting for certain items of income and expenses. Need file back taxes A hybrid method which combines elements of two or more of the above accounting methods. Need file back taxes The cash and accrual methods of accounting are explained later. Need file back taxes Special methods. Need file back taxes   This publication does not discuss special methods of accounting for certain items of income or expenses. Need file back taxes For information on reporting income using one of the long-term contract methods, see section 460 of the Internal Revenue Code and the related regulations. Need file back taxes The following publications also discuss special methods of reporting income or expenses. Need file back taxes Publication 225, Farmer's Tax Guide. Need file back taxes Publication 535, Business Expenses. Need file back taxes Publication 537, Installment Sales. Need file back taxes Publication 946, How To Depreciate Property. Need file back taxes Hybrid method. Need file back taxes   Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. Need file back taxes However, the following restrictions apply. Need file back taxes If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Need file back taxes See Exceptions under Inventories, later. Need file back taxes Generally, you can use the cash method for all other items of income and expenses. Need file back taxes See Inventories, later. Need file back taxes If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Need file back taxes If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Need file back taxes Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Need file back taxes Business and personal items. Need file back taxes   You can account for business and personal items using different accounting methods. Need file back taxes For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items. Need file back taxes Two or more businesses. Need file back taxes   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Need file back taxes No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Need file back taxes Note. Need file back taxes If you use different accounting methods to create or shift profits or losses between businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct. Need file back taxes Cash Method Most individuals and many small businesses use the cash method of accounting. Need file back taxes Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Need file back taxes See Inventories, later, for exceptions to this rule. Need file back taxes Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Need file back taxes If you receive property and services, you must include their fair market value (FMV) in income. Need file back taxes Constructive receipt. Need file back taxes   Income is constructively received when an amount is credited to your account or made available to you without restriction. Need file back taxes You need not have possession of it. Need file back taxes If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Need file back taxes Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Need file back taxes Example. Need file back taxes You are a calendar year taxpayer. Need file back taxes Your bank credited, and made available, interest to your bank account in December 2012. Need file back taxes You did not withdraw it or enter it into your books until 2013. Need file back taxes You must include the amount in gross income for 2012, the year you constructively received it. Need file back taxes You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Need file back taxes You must report the income in the year the property is received or made available to you without restriction. Need file back taxes Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Need file back taxes This includes business expenses for which you contest liability. Need file back taxes However, you may not be able to deduct an expense paid in advance. Need file back taxes Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Need file back taxes Expense paid in advance. Need file back taxes   An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Need file back taxes   Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. Need file back taxes 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Need file back taxes   If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule. Need file back taxes See Change in Accounting Method, later. Need file back taxes Example 1. Need file back taxes You are a calendar year taxpayer and pay $3,000 in 2012 for a business insurance policy that is effective for three years (36 months), beginning on July 1, 2012. Need file back taxes The general rule that an expense paid in advance is deductible only in the year to which it applies is applicable to this payment because the payment does not qualify for the 12-month rule. Need file back taxes Therefore, only $500 (6/36 x $3,000) is deductible in 2012, $1,000 (12/36 x $3,000) is deductible in 2013, $1,000 (12/36 x $3,000) is deductible in 2014, and the remaining $500 is deductible in 2015. Need file back taxes Example 2. Need file back taxes You are a calendar year taxpayer and pay $10,000 on July 1, 2012, for a business insurance policy that is effective for only one year beginning on July 1, 2012. Need file back taxes The 12-month rule applies. Need file back taxes Therefore, the full $10,000 is deductible in 2012. Need file back taxes Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Need file back taxes (See Special rules for farming businesses, later. Need file back taxes ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Need file back taxes See Gross receipts test, below. Need file back taxes A partnership with a corporation (other than an S corporation) as a partner, and with the partnership having average annual gross receipts exceeding $5 million. Need file back taxes See Gross receipts test, below. Need file back taxes A tax shelter. Need file back taxes Exceptions The following entities are not prohibited from using the cash method of accounting. Need file back taxes Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Need file back taxes A qualified personal service corporation (PSC). Need file back taxes Gross receipts test. Need file back taxes   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Need file back taxes A corporation or a partnership meets the test if, for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or less. Need file back taxes    An entity's average annual gross receipts for a prior tax year is determined by: Adding the gross receipts for that tax year and the 2 preceding tax years; and Dividing the total by 3. Need file back taxes See Gross receipts test for qualifying taxpayers, for more information. Need file back taxes Generally, a partnership applies the test at the partnership level. Need file back taxes Gross receipts for a short tax year are annualized. Need file back taxes Aggregation rules. Need file back taxes   Organizations that are members of an affiliated service group or a controlled group of corporations treated as a single employer for tax purposes are required to aggregate their gross receipts to determine whether the gross receipts test is met. Need file back taxes Change to accrual method. Need file back taxes   A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test. Need file back taxes Special rules for farming businesses. Need file back taxes   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Need file back taxes However, certain corporations (other than S corporations) and partnerships that have a partner that is a corporation must use an accrual method for their farming business. Need file back taxes For this purpose, farming does not include the operation of a nursery or sod farm or the raising or harvesting of trees (other than fruit and nut trees). Need file back taxes   There is an exception to the requirement to use an accrual method for corporations with gross receipts of $1 million or less for each prior tax year after 1975. Need file back taxes For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Need file back taxes See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Need file back taxes Qualified PSC. Need file back taxes   A PSC that meets the following function and ownership tests can use the cash method. Need file back taxes Function test. Need file back taxes   A corporation meets the function test if at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting. Need file back taxes Ownership test. Need file back taxes   A corporation meets the ownership test if at least 95% of its stock is owned, directly or indirectly, at all times during the year by one or more of the following. Need file back taxes Employees performing services for the corporation in a field qualifying under the function test. Need file back taxes Retired employees who had performed services in those fields. Need file back taxes The estate of an employee described in (1) or (2). Need file back taxes Any other person who acquired the stock by reason of the death of an employee referred to in (1) or (2), but only for the 2-year period beginning on the date of death. Need file back taxes   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Need file back taxes Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Need file back taxes Other forms of indirect stock ownership, such as stock owned by family members, are generally not considered when determining if the ownership test is met. Need file back taxes   For purposes of the ownership test, a person is not considered an employee of a corporation unless that person performs more than minimal services for the corporation. Need file back taxes Change to accrual method. Need file back taxes   A corporation that fails to meet the function test for any tax year; or fails to meet the ownership test at any time during any tax year must change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. Need file back taxes A corporation that fails to meet the function test or the ownership test is not treated as a qualified PSC for any part of that tax year. Need file back taxes Accrual Method Under the accrual method of accounting, generally you report income in the year it is earned and deduct or capitalize expenses in the year incurred. Need file back taxes The purpose of an accrual method of accounting is to match income and expenses in the correct year. Need file back taxes Income Generally, you include an amount in gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Need file back taxes Under this rule, you report an amount in your gross income on the earliest of the following dates. Need file back taxes When you receive payment. Need file back taxes When the income amount is due to you. Need file back taxes When you earn the income. Need file back taxes When title has passed. Need file back taxes Estimated income. Need file back taxes   If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination. Need file back taxes Change in payment schedule. Need file back taxes   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a reduced rate. Need file back taxes Continue this procedure until you complete the services, then account for the difference. Need file back taxes Advance Payment for Services Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Need file back taxes However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Need file back taxes However, you cannot postpone including any payment beyond that tax year. Need file back taxes Service agreement. Need file back taxes   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Need file back taxes This includes an agreement providing for incidental replacement of parts or materials. Need file back taxes However, this applies only if you offer the property without a service agreement in the normal course of business. Need file back taxes Postponement not allowed. Need file back taxes   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Need file back taxes You are to perform any part of the service after the end of the tax year immediately following the year you receive the advance payment. Need file back taxes You are to perform any part of the service at any unspecified future date that may be after the end of the tax year immediately following the year you receive the advance payment. Need file back taxes Examples. Need file back taxes   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Need file back taxes Example 1. Need file back taxes You manufacture, sell, and service computers. Need file back taxes You received payment in 2012 for a one-year contingent service contract on a computer you sold. Need file back taxes You can postpone including in income the part of the payment you did not earn in 2012 if, in the normal course of your business, you offer computers for sale without a contingent service contract. Need file back taxes Example 2. Need file back taxes You are in the television repair business. Need file back taxes You received payments in 2012 for one-year contracts under which you agree to repair or replace certain parts that fail to function properly in television sets manufactured and sold by unrelated parties. Need file back taxes You include the payments in gross income as you earn them. Need file back taxes Example 3. Need file back taxes You own a dance studio. Need file back taxes On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Need file back taxes You give eight lessons in 2012. Need file back taxes Under this method of including advance payments, you must include one-sixth (8/48) of the payment in income for 2012, and five-sixths (40/48) of the payment in 2013, even if you do not give all the lessons by the end of 2013. Need file back taxes Example 4. Need file back taxes Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Need file back taxes You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Need file back taxes Guarantee or warranty. Need file back taxes   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Need file back taxes Prepaid rent. Need file back taxes   You cannot postpone reporting income from prepaid rent. Need file back taxes Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Need file back taxes You provide significant service when you supply space in a hotel, boarding house, tourist home, motor court, motel, or apartment house that furnishes hotel services. Need file back taxes Books and records. Need file back taxes   Any advance payment you include in gross receipts on your tax return for the year you receive payment must not be less than the payment you include in income for financial reports under the method of accounting used for those reports. Need file back taxes Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Need file back taxes IRS approval. Need file back taxes   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Need file back taxes Advance Payment for Sales Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. Need file back taxes However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. Need file back taxes An agreement includes a gift certificate that can be redeemed for goods. Need file back taxes Amounts due and payable are considered received. Need file back taxes How to report payments. Need file back taxes   Generally, include an advance payment in income in the year in which you receive it. Need file back taxes However, you can use the alternative method, discussed next. Need file back taxes Alternative method of reporting. Need file back taxes   Under the alternative method, generally include an advance payment in income in the earlier tax year in which you: Include advance payments in gross receipts under the method of accounting you use for tax purposes, or Include any part of advance payments in income for financial reports under the method of accounting used for those reports. Need file back taxes Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Need file back taxes Example 1. Need file back taxes You are a retailer. Need file back taxes You use an accrual method of accounting and account for the sale of goods when you ship the goods. Need file back taxes You use this method for both tax and financial reporting purposes. Need file back taxes You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. Need file back taxes However, see Exception for inventory goods, later. Need file back taxes Example 2. Need file back taxes You are a calendar year taxpayer. Need file back taxes You manufacture household furniture and use an accrual method of accounting. Need file back taxes Under this method, you accrue income for your financial reports when you ship the furniture. Need file back taxes For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Need file back taxes In 2012, you received an advance payment of $8,000 for an order of furniture to be manufactured for a total price of $20,000. Need file back taxes You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Need file back taxes For tax purposes, you include the $8,000 advance payment in gross income for 2012; and include the remaining $12,000 of the contract price in gross income for 2013. Need file back taxes Information schedule. Need file back taxes   If you use the alternative method of reporting advance payments, you must attach a statement with the following information to your tax return each year. Need file back taxes Total advance payments received in the current tax year. Need file back taxes Total advance payments received in earlier tax years and not included in income before the current tax year. Need file back taxes Total payments received in earlier tax years included in income for the current tax year. Need file back taxes Exception for inventory goods. Need file back taxes   If you have an agreement to sell goods properly included in inventory, you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet the following requirements. Need file back taxes You account for the advance payment under the alternative method (discussed earlier). Need file back taxes You have received a substantial advance payment on the agreement (discussed next). Need file back taxes You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Need file back taxes These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. Need file back taxes   If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments. Need file back taxes You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Need file back taxes If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Need file back taxes Note. Need file back taxes You must report any advance payments you receive after the second year in the year received. Need file back taxes No further deferral is allowed. Need file back taxes Substantial advance payments. Need file back taxes   Under an agreement for a future sale, you have substantial advance payments if, by the end of the tax year, the total advance payments received during that year and preceding tax years are equal to or more than the total costs reasonably estimated to be includible in inventory because of the agreement. Need file back taxes Example. Need file back taxes You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Need file back taxes In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Need file back taxes The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Need file back taxes You receive the following advance payments under the contract. Need file back taxes 2009 $17,500 2010 10,000 2011 7,500 2012 5,000 2013 5,000 2014 5,000 Total contract price $50,000   Your customer asked you to deliver the goods in 2015. Need file back taxes In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Need file back taxes Since the advance payments you had received by the end of 2010 were more than the costs you estimated, the payments are substantial advance payments. Need file back taxes   For 2012, include in income all payments you received by the end of 2012, the second tax year following the tax year in which you received substantial advance payments. Need file back taxes You must include $40,000 in sales for 2012 (the total amounts received from 2009 through 2012) and include in inventory the cost of the goods (or similar goods) on hand. Need file back taxes If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Need file back taxes   No further deferral is allowed. Need file back taxes You must include in gross income the advance payment you receive each remaining year of the contract. Need file back taxes Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Need file back taxes IRS approval. Need file back taxes   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Need file back taxes Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Need file back taxes The all-events test has been met. Need file back taxes The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Need file back taxes Economic performance has occurred. Need file back taxes Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Need file back taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or the property is used. Need file back taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Need file back taxes Example. Need file back taxes You are a calendar year taxpayer. Need file back taxes You buy office supplies in December 2012. Need file back taxes You receive the supplies and the bill in December, but you pay the bill in January 2013. Need file back taxes You can deduct the expense in 2012 because all events have occurred to fix the liability, the amount of the liability can be determined, and economic performance occurred in 2012. Need file back taxes Your office supplies may qualify as a recurring item, discussed later. Need file back taxes If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Need file back taxes Workers' compensation and tort liability. Need file back taxes   If you are required to make payments under workers' compensation laws or in satisfaction of any tort liability, economic performance occurs as you make the payments. Need file back taxes If you are required to make payments to a special designated settlement fund established by court order for a tort liability, economic performance occurs as you make the payments. Need file back taxes Taxes. Need file back taxes   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Need file back taxes are paid. Need file back taxes However, you can elect to treat taxes as a recurring item, discussed later. Need file back taxes You can also elect to ratably accrue real estate taxes. Need file back taxes See chapter 5 of Publication 535 for information about real estate taxes. Need file back taxes Other liabilities. Need file back taxes   Other liabilities for which economic performance occurs as you make payments include liabilities for breach of contract (to the extent of incidental, consequential, and liquidated damages), violation of law, rebates and refunds, awards, prizes, jackpots, insurance, and warranty and service contracts. Need file back taxes Interest. Need file back taxes   Economic performance occurs with the passage of time (as the borrower uses, and the lender forgoes use of, the lender's money) rather than as payments are made. Need file back taxes Compensation for services. Need file back taxes   Generally, economic performance occurs as an employee renders service to the employer. Need file back taxes However, deductions for compensation or other benefits paid to an employee in a year subsequent to economic performance are subject to the rules governing deferred compensation, deferred benefits, and funded welfare benefit plans. Need file back taxes For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Need file back taxes Vacation pay. Need file back taxes   You can take a current deduction for vacation pay earned by your employees if you pay it during the year or, if the amount is vested, within 2½ months after the end of the year. Need file back taxes If you pay it later than this, you must deduct it in the year actually paid. Need file back taxes An amount is vested if your right to it cannot be nullified or cancelled. Need file back taxes Exception for recurring items. Need file back taxes   An exception to the economic performance rule allows certain recurring items to be treated as incurred during the tax year even though economic performance has not occurred. Need file back taxes The exception applies if all the following requirements are met. Need file back taxes The all-events test, discussed earlier, is met. Need file back taxes Economic performance occurs by the earlier of the following dates. Need file back taxes 8½ months after the close of the year. Need file back taxes The date you file a timely return (including extensions) for the year. Need file back taxes The item is recurring in nature and you consistently treat similar items as incurred in the tax year in which the all-events test is met. Need file back taxes Either: The item is not material, or Accruing the item in the year in which the all-events test is met results in a better match against income than accruing the item in the year of economic performance. Need file back taxes This exception does not apply to workers' compensation or tort liabilities. Need file back taxes Amended return. Need file back taxes   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Need file back taxes You can do so if economic performance for the liability occurs after you file your tax return for the year, but within 8½ months after the close of the tax year. Need file back taxes Recurrence and consistency. Need file back taxes   To determine whether an item is recurring and consistently reported, consider the frequency with which the item and similar items are incurred (or expected to be incurred) and how you report these items for tax purposes. Need file back taxes A new expense or an expense not incurred every year can be treated as recurring if it is reasonable to expect that it will be incurred regularly in the future. Need file back taxes Materiality. Need file back taxes   Factors to consider in determining the materiality of a recurring item include the size of the item (both in absolute terms and in relation to your income and other expenses) and the treatment of the item on your financial statements. Need file back taxes   An item considered material for financial statement purposes is also considered material for tax purposes. Need file back taxes However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Need file back taxes Matching expenses with income. Need file back taxes   Costs directly associated with the revenue of a period are properly allocable to that period. Need file back taxes To determine whether the accrual of an expense in a particular year results in a better match with the income to which it relates, generally accepted accounting principles (GAAP; visit www. Need file back taxes fasab. Need file back taxes gov/accepted. Need file back taxes html) are an important factor. Need file back taxes   For example, if you report sales income in the year of sale, but you do not ship the goods until the following year, the shipping costs are more properly matched to income in the year of sale than the year the goods are shipped. Need file back taxes Expenses that cannot be practically associated with income of a particular period, such as advertising costs, should be assigned to the period the costs are incurred. Need file back taxes However, the matching requirement is considered met for certain types of expenses. Need file back taxes These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Need file back taxes Expenses Paid in Advance An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Need file back taxes Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. Need file back taxes 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Need file back taxes If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must get IRS approval before using the general rule and/or the 12-month rule. Need file back taxes See Change in Accounting Method, later, for information on how to get IRS approval. Need file back taxes See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Need file back taxes Related Persons Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Need file back taxes Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Need file back taxes See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Need file back taxes Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Need file back taxes If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Need file back taxes However, see Exceptions, next. Need file back taxes See also Accrual Method, earlier. Need file back taxes To figure taxable income, you must value your inventory at the beginning and end of each tax year. Need file back taxes To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Need file back taxes See Identifying Cost and Valuing Inventory, later. Need file back taxes The rules for valuing inventory are not the same for all businesses. Need file back taxes The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Need file back taxes Your inventory practices must be consistent from year to year. Need file back taxes The rules discussed here apply only if they do not conflict with the uniform capitalization rules of section 263A and the mark-to-market rules of section 475. Need file back taxes Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Need file back taxes These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Need file back taxes A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Need file back taxes irs. Need file back taxes gov/pub/irs-irbs/irb01–02. Need file back taxes pdf. Need file back taxes A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Need file back taxes irs. Need file back taxes gov/pub/irs-irbs/irb02–18. Need file back taxes pdf. Need file back taxes In addition to the information provided in this publication, you should see the revenue procedures referenced in the list, above, and the instructions for Form 3115 for information you will need to adopt or change to these accounting methods (see Changing methods, later). Need file back taxes Qualifying taxpayer. Need file back taxes   You are a qualifying taxpayer under Revenue Procedure 2001-10 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 17, 1998 (see Gross receipts test for qualifying taxpayers, next). Need file back taxes Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Need file back taxes You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Need file back taxes Gross receipts test for qualifying taxpayers. Need file back taxes   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Need file back taxes List each of the test years. Need file back taxes For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Need file back taxes Step 2. Need file back taxes Determine your average annual gross receipts for each test year listed in Step 1. Need file back taxes Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Need file back taxes Step 3. Need file back taxes You meet the gross receipts test for qualifying taxpayers if your average annual gross receipts for each test year listed in Step 1 is $1 million or less. Need file back taxes Qualifying small business taxpayer. Need file back taxes   You are a qualifying small business taxpayer under Revenue Procedure 2002-28 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 31, 2000 (see Gross receipts test for qualifying small business taxpayers, next). Need file back taxes Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Need file back taxes You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Need file back taxes Your principle business activity is an eligible business. Need file back taxes See Eligible business, later. Need file back taxes You have not changed (or have not been required to change) from the cash method because you became ineligible to use the cash method under Revenue Procedure 2002-28. Need file back taxes Note. Need file back taxes Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Need file back taxes A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Need file back taxes See Special rules for farming businesses under Cash Method, earlier. Need file back taxes Gross receipts test for qualifying small business taxpayers. Need file back taxes   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Need file back taxes List each of the test years. Need file back taxes For qualifying small business taxpayers under Revenue Procedure 2002-28, the test years are each prior tax year ending on or after December 31, 2000. Need file back taxes Step 2. Need file back taxes Determine your average annual gross receipts for each test year listed in Step 1. Need file back taxes Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Need file back taxes Step 3. Need file back taxes You meet the gross receipts test for qualifying small business taxpayers if your average annual gross receipts for each test year listed in Step 1 is $10 million or less. Need file back taxes Eligible business. Need file back taxes   An eligible business is any business for which a qualified small business taxpayer can use the cash method and choose to not keep an inventory. Need file back taxes You have an eligible business if you meet any of the following requirements. Need file back taxes Your principal business activity is described in a North American Industry Classification System (NAICS) code other than any of the following NAICS subsector codes: NAICS codes 211 and 212 (mining activities). Need file back taxes NAICS codes 31-33 (manufacturing). Need file back taxes NAICS code 42 (wholesale trade). Need file back taxes NAICS codes 44-45 (retail trade). Need file back taxes NAICS codes 5111 and 5122 (information industries). Need file back taxes Your principal business activity is the provision of services, including the provision of property incident to those services. Need file back taxes Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Need file back taxes   Information about the NAICS codes can be found at http://www. Need file back taxes census. Need file back taxes gov/naics or in the instructions for your federal income tax return. Need file back taxes Gross receipts. Need file back taxes   In general, gross receipts must include all receipts from all your trades or businesses that must be recognized under the method of accounting you used for that tax year for federal income tax purposes. Need file back taxes See the definit