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

State tax forms online 1. State tax forms online   Importance of Records Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Benefits of Recordkeeping Kinds of Records To Keep How Long To Keep Records Introduction A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount of tax. State tax forms online This chapter explains the benefits of keeping records, what kinds of records you must keep, and how long you must keep them for federal tax purposes. State tax forms online Tax records are not the only type of records you need to keep for your farming business. State tax forms online You should also keep records that measure your farm's financial performance. State tax forms online This publication only discusses tax records. State tax forms online The Farm Financial Standards Council has produced a publication that provides a detailed explanation of the recommendations of the Council for financial reporting and analysis. State tax forms online For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www. State tax forms online ffsc. State tax forms online org. State tax forms online For more information, contact Countryside Marketing, Inc. State tax forms online in the following manner. State tax forms online Call 262-253-6902. State tax forms online Send a fax to 262-253-6903. State tax forms online Write to: Farm Financial Standards Council N78 W14573 Appleton Ave. State tax forms online , #287 Menomonee Falls, WI 53051. State tax forms online Topics - This chapter discusses: Benefits of recordkeeping Kinds of records to keep How long to keep records Useful Items - You may want to see: Publication 51 (Circular A), Agricultural Employer's Tax Guide 463 Travel, Entertainment, Gift, and Car Expenses See chapter 16 for information about getting publications. State tax forms online Benefits of Recordkeeping Everyone in business, including farmers, must keep appropriate records. State tax forms online Recordkeeping will help you do the following. State tax forms online Monitor the progress of your farming business. State tax forms online   You need records to monitor the progress of your farming business. State tax forms online Records can show whether your business is improving, which items are selling, or what changes you need to make. State tax forms online Records can help you make better decisions that may increase the likelihood of business success. State tax forms online Prepare your financial statements. State tax forms online   You need records to prepare accurate financial statements. State tax forms online These include income (profit and loss) statements and balance sheets. State tax forms online These statements can help you in dealing with your bank or creditors and help you to manage your farm business. State tax forms online Identify source of receipts. State tax forms online   You will receive money or property from many sources. State tax forms online Your records can identify the source of your receipts. State tax forms online You need this information to separate farm from nonfarm receipts and taxable from nontaxable income. State tax forms online Keep track of deductible expenses. State tax forms online   You may forget expenses when you prepare your tax return unless you record them when they occur. State tax forms online Prepare your tax returns. State tax forms online   You need records to prepare your tax return. State tax forms online For example, your records must support the income, expenses, and credits you report. State tax forms online Generally, these are the same records you use to monitor your farming business and prepare your financial statements. State tax forms online Support items reported on tax returns. State tax forms online   You must keep your business records available at all times for inspection by the IRS. State tax forms online If the IRS examines any of your tax returns, you may be asked to explain the items reported. State tax forms online A complete set of records will speed up the examination. State tax forms online Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. State tax forms online You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses. State tax forms online You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. State tax forms online See  chapter 2. State tax forms online If you are in more than one business, you should keep a complete and separate set of records for each business. State tax forms online A corporation should keep minutes of board of directors' meetings. State tax forms online Your recordkeeping system should include a summary of your business transactions. State tax forms online This summary is ordinarily made in accounting journals and ledgers. State tax forms online For example, they must show your gross income, as well as your deductions and credits. State tax forms online In addition, you must keep supporting documents. State tax forms online Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. State tax forms online These documents contain the information you need to record in your journals and ledgers. State tax forms online It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return. State tax forms online Keep them in an orderly fashion and in a safe place. State tax forms online For instance, organize them by year and type of income or expense. State tax forms online Electronic records. State tax forms online   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. State tax forms online When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. State tax forms online An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. State tax forms online The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. State tax forms online All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. State tax forms online Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. State tax forms online The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. State tax forms online You still have the responsibility of retaining any other books and records that are required to be retained. State tax forms online The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. State tax forms online This test is not considered an examination and the results must be shared with you. State tax forms online If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. State tax forms online If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copybooks and records in a manner that allows you and the IRS to determine your correct tax. State tax forms online For details on electronic storage system requirements, see Rev. State tax forms online Proc. State tax forms online 97-22. State tax forms online You can find Rev. State tax forms online Proc. State tax forms online 97-22 on page 9 of Internal Revenue Bulletin 1997-13 at  www. State tax forms online irs. State tax forms online gov/pub/irs-irbs/irb97-13. State tax forms online pdf. State tax forms online Travel, transportation, entertainment, and gift expenses. State tax forms online   Specific recordkeeping rules apply to these expenses. State tax forms online For more information, see Publication 463. State tax forms online Employment taxes. State tax forms online   There are specific employment tax records you must keep. State tax forms online For a list, see Publication 51 (Circular A). State tax forms online Excise taxes. State tax forms online   See How To Claim a Credit or Refund in chapter 14 for the specific records you must keep to verify your claim for credit or refund of excise taxes on certain fuels. State tax forms online Assets. State tax forms online   Assets are the property, such as machinery and equipment, you own and use in your business. State tax forms online You must keep records to verify certain information about your business assets. State tax forms online You need records to figure your annual depreciation deduction and the gain or (loss) when you sell the assets. State tax forms online Your records should show all the following. State tax forms online When and how you acquired the asset. State tax forms online Purchase price. State tax forms online Cost of any improvements. State tax forms online Section 179 deduction taken. State tax forms online Deductions taken for depreciation. State tax forms online Deductions taken for casualty losses, such as losses resulting from fires or storms. State tax forms online How you used the asset. State tax forms online When and how you disposed of the asset. State tax forms online Selling price. State tax forms online Expenses of sale. State tax forms online   The following are examples of records that may show this information. State tax forms online Purchase and sales invoices. State tax forms online Real estate closing statements. State tax forms online Canceled checks. State tax forms online Bank statements. State tax forms online Financial account statements as proof of payment. State tax forms online   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. State tax forms online These include account statements prepared for the financial institution by a third party. State tax forms online These account statements must be legible. State tax forms online The following table lists acceptable account statements. State tax forms online IF payment is by. State tax forms online . State tax forms online . State tax forms online THEN the statement must show the. State tax forms online . State tax forms online . State tax forms online Check Check number. State tax forms online Amount. State tax forms online Payee's name. State tax forms online Date the check amount was posted to the account by the financial institution. State tax forms online Electronic funds  transfer Amount transferred. State tax forms online Payee's name. State tax forms online Date the transfer was posted to the account by the financial institution. State tax forms online Credit card Amount charged. State tax forms online Payee's name. State tax forms online Transaction date. State tax forms online    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. State tax forms online You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. State tax forms online Tax returns. State tax forms online   Keep copies of your filed tax returns. State tax forms online They help in preparing future tax returns and making computations if you file an amended return. State tax forms online Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2. State tax forms online How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. State tax forms online Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. State tax forms online A period of limitations is the period of time after which no legal action can be brought. State tax forms online Generally, that means you must keep your records for at least 3 years from when your tax return was due or filed or within 2 years of the date the tax was paid, whichever is later. State tax forms online However, certain records must be kept for a longer period of time, as discussed below. State tax forms online Employment taxes. State tax forms online   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. State tax forms online Assets. State tax forms online   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. State tax forms online You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure your basis for computing gain or (loss) when you sell or otherwise dispose of the property. State tax forms online   You may need to keep records relating to the basis of property longer than the period of limitation. State tax forms online Keep those records as long as they are important in figuring the basis of the original or replacement property. State tax forms online Generally, this means as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. State tax forms online For example, if you received property in a nontaxable exchange, you must keep the records for the old property, as well as for the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. State tax forms online For more information on basis, see chapter 6. State tax forms online Records for nontax purposes. State tax forms online   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. State tax forms online For example, your insurance company or creditors may require you to keep them longer than the IRS does. State tax forms online Prev  Up  Next   Home   More Online Publications