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Student Tax Returns

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Student Tax Returns

Student tax returns 14. Student tax returns   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Fuels Used in FarmingBuyer of fuel, including undyed diesel fuel or undyed kerosene. Student tax returns Undyed diesel fuel, undyed kerosene, and Other Fuels (including alternative fuel). Student tax returns Custom application of fertilizer and pesticide. Student tax returns Fuel not used for farming. Student tax returns Dyed Diesel Fuel and Dyed Kerosene Fuels Used in Off-Highway Business Use Fuels Used for Household Purposes or Other Than as a Fuel for Propulsion Engines How To Claim a Credit or RefundCredit only. Student tax returns Claiming a Credit Claiming a Refund Including the Credit or Refund in Income Introduction You may be eligible to claim a credit on your income tax return for the federal excise tax on certain fuels. Student tax returns You may also be eligible to claim a quarterly refund of the fuel taxes during the year, instead of waiting to claim a credit on your income tax return. Student tax returns Whether you can claim a credit or refund depends on whether the fuel was taxed and the purpose (nontaxable use) for which you used the fuel. Student tax returns The nontaxable uses of fuel for which a farmer may claim a credit or refund are generally the following. Student tax returns Use on a farm for farming purposes. Student tax returns Off-highway business use. Student tax returns Uses other than as a fuel in a propulsion engine, such as home use. Student tax returns Table 14-1 presents an overview of credits and refunds that may be claimed for fuels used for the nontaxable uses listed above. Student tax returns See Publication 510, Excise Taxes, for more information. Student tax returns Topics - This chapter discusses: Fuels used in farming Dyed diesel fuel and dyed kerosene Fuels used in off-highway business use Fuels used for household purposes How to claim a credit or refund Including the credit or refund in income Useful Items - You may want to see: Publication 510 Excise Taxes Form (and Instructions) 720 Quarterly Federal Excise Tax Return 4136 Credit for Federal Tax Paid on Fuels 8849 Claim for Refund of Excise Taxes See chapter 16 for information about getting publications and forms. Student tax returns Fuels Used in Farming Owners, operators, and tenants of farms and certain other persons may be eligible to claim a credit or refund of excise taxes on fuel used in the trade or business of farming, when used on a farm in the United States for farming purposes. Student tax returns See Table 14-1 for a list of available fuel tax credits and refunds. Student tax returns Fuel is used on a farm for farming purposes only if used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes. Student tax returns Farm. Student tax returns   A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards for finishing cattle. Student tax returns It also includes structures such as greenhouses used primarily for raising agricultural or horticultural commodities. Student tax returns A fish farm is an area where fish are grown or raised and not merely caught or harvested. Student tax returns Table 14-1. Student tax returns Fuel Tax Credits and Refunds at a Glance Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed. Student tax returns Fuel Used On a Farm for Farming Purposes Off-Highway Business Use Household Use or Use Other Than as a Fuel1 Gasoline Credit only Credit or refund None Aviation gasoline Credit only None None Undyed diesel fuel and undyed kerosene Credit or refund Credit or refund2 Credit or refund2 Kerosene for use in aviation Credit or refund None None Dyed diesel fuel and dyed kerosene None None None Other Fuels (including alternative fuels)3 Credit or refund Credit or refund None 1For a use other than as fuel in a propulsion engine. Student tax returns 2Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending with undyed diesel fuel to be used for heating purposes. Student tax returns See Reg. Student tax returns 48. Student tax returns 6427-10 (b)(1) for the definition of a blocked pump. Student tax returns 3Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under Internal Revenue Code section 4081. Student tax returns It includes the alternative fuels: liquefied petroleum gas (LPG),“P” Series fuels, compressed natural gas (CNG), liquefied hydrogen, any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, liquid fuel derived from biomass, liquid natural gas (LNG), liquefied gas derived from biomass, and compressed gas derived from biomass. Student tax returns Farming purposes. Student tax returns   As the owner, tenant, or operator and the ultimate purchaser of fuel that you purchased, you use the fuel on a farm for farming purposes if you use it in any of the following ways. Student tax returns To cultivate the soil or to raise or harvest any agricultural or horticultural commodity. Student tax returns To raise, shear, feed, care for, train, or manage livestock, bees, poultry, fur-bearing animals, or wildlife. Student tax returns To operate, manage, conserve, improve, or maintain your farm and its tools and equipment. Student tax returns To handle, dry, pack, grade, or store any raw agricultural or horticultural commodity. Student tax returns For this use to qualify, you must have produced more than half the commodity so treated during the tax year. Student tax returns The more-than-one-half test applies separately to each commodity. Student tax returns Commodity means a single raw product. Student tax returns For example, apples and peaches are two separate commodities. Student tax returns To plant, cultivate, care for, or cut trees or to prepare (other than sawing logs into lumber, chipping, or other milling) trees for market, but only if these activities are incidental to your farming operations. Student tax returns Your tree operations are incidental only if they are minor in nature when compared to the total farming operations. Student tax returns   If any other person, such as a neighbor or custom operator (independent contractor), performs a service for you on your farm for any of the purposes included in list items (1) or (2), above, you are considered to be the ultimate purchaser who used the fuel on a farm for farming purposes. Student tax returns Therefore, you can still claim the credit or refund for the fuel so used. Student tax returns However, see Custom application of fertilizer and pesticide, later. Student tax returns If the other person performs any other services for you on your farm for purposes not included in list items (1) or (2) above, no one can claim the credit or refund for fuel used on your farm for those other services. Student tax returns Buyer of fuel, including undyed diesel fuel or undyed kerosene. Student tax returns   If doubt exists whether the owner, tenant, or operator of the farm bought the fuel, determine who actually bore the cost of the fuel. Student tax returns For example, if the owner of a farm and his or her tenant equally share the cost of gasoline used on the farm, each can claim a credit for the tax on half the fuel used. Student tax returns Undyed diesel fuel, undyed kerosene, and Other Fuels (including alternative fuel). Student tax returns   Usually, the farmer is the only person who can make a claim for credit or refund for the tax on undyed diesel fuel, undyed kerosene, or other fuels (including alternative fuel) used for farming purposes. Student tax returns However, see Custom application of fertilizer and pesticide, next. Student tax returns Also see Dyed Diesel Fuel and Dyed Kerosene, later. Student tax returns Example. Student tax returns Farm owner Haleigh Blue hired custom operator Tyler Steele to cultivate the soil on her farm. Student tax returns Tyler used 200 gallons of undyed diesel fuel that he purchased to perform the work on Haleigh's farm. Student tax returns In addition, Haleigh hired contractor Lee Brown to pack and store her apple crop. Student tax returns Lee bought 25 gallons of undyed diesel fuel to use in packing the apples. Student tax returns Haleigh can claim the credit for the 200 gallons of undyed diesel fuel used by Tyler on her farm because it qualifies as fuel used on the farm for farming purposes. Student tax returns No one can claim a credit for the 25 gallons used by Lee because that fuel was not used for a farming purpose included in list items (1) or (2), above. Student tax returns In the above example, both Tyler Steele and Lee Brown could have purchased dyed (untaxed) diesel fuel for their tasks. Student tax returns Custom application of fertilizer and pesticide. Student tax returns   Fuel used on a farm for farming purposes includes fuel used in the application (including aerial application) of fertilizer, pesticides, or other substances. Student tax returns Generally, the applicator is treated as having used the fuel on a farm for farming purposes. Student tax returns For applicators using highway vehicles, only the fuel used on the farm is exempt. Student tax returns Fuel used traveling on the highway to and from the farm is taxable. Student tax returns Fuel used by an aerial applicator for the direct flight between the airfield and one or more farms is treated as used for a farming purpose. Student tax returns For aviation gasoline, the aerial applicator makes the claim as the ultimate purchaser. Student tax returns For kerosene used in aviation, the ultimate purchaser may make the claim or waive the right to make the claim to the registered ultimate vendor. Student tax returns A sample waiver is included as Model Waiver L in the appendix of Publication 510. Student tax returns A registered ultimate vendor is the person who sells undyed diesel fuel, undyed kerosene, or kerosene for use in aviation to the user (ultimate purchaser) of the fuel for use on a farm for farming purposes. Student tax returns To claim a credit or refund of tax, the ultimate vendor must be registered with the Internal Revenue Service at the time the claim is made. Student tax returns However, registered ultimate vendors cannot make claims for undyed diesel fuel and undyed kerosene sold for use on a farm for farming purposes. Student tax returns Fuel not used for farming. Student tax returns   You do not use fuel on a farm for farming purposes when you use it in any of the following ways. Student tax returns Off the farm, such as on the highway or in noncommercial aviation, even if the fuel is used in transporting livestock, feed, crops, or equipment. Student tax returns For personal use, such as lawn mowing. Student tax returns In processing, packaging, freezing, or canning operations. Student tax returns In processing crude gum into gum spirits of turpentine or gum resin or in processing maple sap into maple syrup or maple sugar. Student tax returns All-terrain vehicles (ATVs). Student tax returns   Fuel used in ATVs on a farm for farming purposes, discussed earlier, is eligible for a credit or refund of excise taxes on the fuel. Student tax returns Fuel used in ATVs for nonfarming purposes is not eligible for a credit or refund of the taxes. Student tax returns If ATVs are used both for farming and nonfarming purposes, only that portion of the fuel used for farming purposes is eligible for the credit or refund. Student tax returns Dyed Diesel Fuel and Dyed Kerosene If you purchase dyed diesel fuel or dyed kerosene for a nontaxable use, you must use it only on a farm for farming purposes or for other nontaxable purposes. Student tax returns For example, you should not use dyed diesel fuel in a truck that is used both on the farm for farming purposes and on the highway, even though the highway use is in connection with farm business. Student tax returns Excise tax applies to the fuel used by the truck on the highways. Student tax returns In this situation, undyed (taxed) fuel should be purchased for the truck. Student tax returns You should keep fuel records of the use of the truck on the farm for farming purposes, and for other uses. Student tax returns You may be eligible for a credit or refund for the excise tax on fuel used on the farm for farming purposes. Student tax returns Penalty. Student tax returns   A penalty is imposed on any person who knowingly uses, sells, or alters dyed diesel fuel or dyed kerosene for any purpose other than a nontaxable use. Student tax returns The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. Student tax returns After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. Student tax returns For more information on this penalty, see Publication 510. Student tax returns Fuels Used in Off-Highway Business Use You may be eligible to claim a credit or refund for the excise tax on fuel used in an off-highway business use. Student tax returns Off-highway business use. Student tax returns   This is any use of fuel in a trade or business or in an income-producing activity. Student tax returns The use must not be in a highway vehicle registered or required to be registered for use on public highways. Student tax returns Off-highway business use generally does not include any use in a recreational motorboat. Student tax returns Examples. Student tax returns   Off-highway business use includes the use of fuels in a trade or business in any of the following ways. Student tax returns In stationary machines such as generators, compressors, power saws, and similar equipment; For cleaning ; and In forklift trucks, bulldozers, and earthmovers. Student tax returns   Off-highway nonbusiness (taxable) use of fuel includes: use in minibikes, snowmobiles, power lawn mowers, chain saws, and other yard equipment. Student tax returns For more information, see Publication 510. Student tax returns Fuels Used for Household Purposes or Other Than as a Fuel for Propulsion Engines You may be eligible to claim a credit or refund for the excise tax on undyed diesel fuel or kerosene used for home heating, lighting, and cooking. Student tax returns This also applies to diesel fuel and kerosene used in a home generator to produce electricity for home use. Student tax returns Home use of a fuel does not include use in a propulsion engine and it is not considered an off-highway business use. Student tax returns How To Claim a Credit or Refund You may be able to claim a credit or refund of the excise tax on fuels you use for nontaxable uses. Student tax returns The basic rules for claiming credits and refunds are listed in Table 14-2 . Student tax returns Table 14-2. Student tax returns Claiming a Credit or Refund of Excise Taxes This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a nontaxable use. Student tax returns   Credit Refund Which form to use Form 4136, Credit for Federal Tax Paid on Fuels Form 8849, Claim for Refund of Excise Taxes, and Schedule 1 (Form 8849), Nontaxable Use of Fuels Type of form Annual Quarterly When to file With your income tax return By the last day of the quarter following the last quarter included in the claim Amount of tax Any amount $750 or more1 1You may carry over an amount less than $750 to the next quarter. Student tax returns Keep at your principal place of business all records needed to enable the IRS to verify that you are the person entitled to claim a credit or refund and the amount you claimed. Student tax returns You do not have to use any special form, but the records should establish the following information. Student tax returns The total number of gallons bought and used during the period covered by your claim. Student tax returns The dates of the purchases. Student tax returns The names and addresses of suppliers and amounts bought from each during the period covered by your claim. Student tax returns The nontaxable use for which you used the fuel. Student tax returns The number of gallons used for each nontaxable use. Student tax returns It is important that your records separately show the number of gallons used for each nontaxable use that qualifies as a claim. Student tax returns For more information about recordkeeping, see Publication 583, Starting a Business and Keeping Records. Student tax returns Credit or refund. Student tax returns   A credit is an amount that reduces the tax on your income tax return when you file it at the end of the year. Student tax returns If you meet certain requirements, you may claim a refund during the year instead of waiting until you file your income tax return. Student tax returns Credit only. Student tax returns   You can claim the following taxes only as a credit on your income tax return. Student tax returns Tax on gasoline and aviation gasoline you used on a farm for farming purposes. Student tax returns Tax on fuels (including undyed diesel fuel or undyed kerosene) you used for nontaxable uses if the total for the tax year is less than $750. Student tax returns Tax on fuel you did not include in any claim for refund previously filed for any quarter of the tax year. Student tax returns Claiming a Credit You make a claim for a fuel tax credit on Form 4136 and attach it to your income tax return. Student tax returns Do not claim a credit for any excise tax for which you have filed a refund claim. Student tax returns How to claim a credit. Student tax returns   How you claim a credit depends on whether you are an individual, partnership, corporation, S corporation, trust, or farmers' cooperative association. Student tax returns Individuals. Student tax returns   You claim the credit on the “Credit for federal tax on fuels” line of your Form 1040. Student tax returns If you would not otherwise have to file an income tax return, you must do so to get a fuel tax credit. Student tax returns Partnership. Student tax returns   Partnerships (other than electing large partnerships) claim the credit by including a statement on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Student tax returns , showing each partner's share of the number of gallons of each fuel sold or used for a nontaxable use, the type of use, and the applicable credit per gallon. Student tax returns Each partner claims the credit on his or her income tax return for the partner's share of the fuel used by the partnership. Student tax returns An electing large partnership can claim the credit on the “Other payments” line of Form 1065-B, U. Student tax returns S. Student tax returns Return of Income for Electing Large Partnerships. Student tax returns Other entities. Student tax returns   Corporations, S corporations, farmers' cooperative associations, and trusts make the claim on the appropriate line of their income tax return. Student tax returns When to claim a credit. Student tax returns   You can claim a fuel tax credit on your income tax return for the year you used the fuel. Student tax returns You may be able to make a fuel tax claim on an amended income tax return for the year you used the fuel. Student tax returns A claim for credit or refund of an overpayment must generally be filed within the later of: Three years from the date the original return was filed, or Two years from the date the tax was paid. Student tax returns Claiming a Refund Generally, you may claim a refund of excise taxes on Form 8849. Student tax returns Complete and attach to Form 8849 the appropriate Form 8849 schedule(s). Student tax returns The instructions for Form 8849 and the separate instructions for each schedule explain the requirements for making a claim for refund. Student tax returns If you file Form 720, you can use its Schedule C for your refund claims for the quarter. Student tax returns See the Instructions for Form 720. Student tax returns Do not claim a refund on Form 8849 for any amount for which you have filed or will file a claim on Form 720 or Form 4136. Student tax returns You may file a claim for refund for any quarter of your tax year for which you can claim $750 or more. Student tax returns This amount is the excise tax on all fuels used for a nontaxable use during that quarter or any prior quarter (for which no other claim has been filed) during the tax year. Student tax returns If you cannot claim at least $750 at the end of a quarter, you carry the amount over to the next quarter of your tax year to determine if you can claim at least $750 for that quarter. Student tax returns If you cannot claim at least $750 at the end of the fourth quarter of your tax year, you must claim a credit on your income tax return using Form 4136. Student tax returns Only one claim can be filed for a quarter. Student tax returns You cannot claim a refund for excise tax on gasoline and aviation gasoline used on a farm for farming purposes. Student tax returns You must claim a credit on your income tax return for the tax. Student tax returns How to file a quarterly claim. Student tax returns   File the claim for refund by filling out Schedule 1 (Form 8849) and attaching it to Form 8849. Student tax returns Send it to the address shown in the instructions. Student tax returns If you file Form 720, you can use its Schedule C for your refund claims. Student tax returns See the Instructions for Form 720. Student tax returns When to file a quarterly claim. Student tax returns   You must file a quarterly claim by the last day of the first quarter following the last quarter included in the claim. Student tax returns If you do not file a timely refund claim for the fourth quarter of your tax year, you will have to claim a credit for that amount on your income tax return, as discussed earlier. Student tax returns    In most situations, the amount claimed as a credit or refund will be less than the amount deducted as fuel tax expense because the Leaking Underground Storage Tank (LUST) tax of $0. Student tax returns 001 per gallon is generally not subject to credit or refund. Student tax returns Including the Credit or Refund in Income Include any credit or refund of excise taxes on fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) as an expense deduction that reduced your income tax liability. Student tax returns Which year you include a credit or refund in gross income depends on whether you use the cash or an accrual method of accounting. Student tax returns Cash method. Student tax returns   If you use the cash method and file a claim for refund, include the refund amount in gross income for the tax year in which you receive the refund. Student tax returns If you claim a credit on your income tax return, include the credit amount in gross income for the tax year in which you file Form 4136. Student tax returns If you file an amended return and claim a credit, include the credit amount in gross income for the tax year in which you receive the credit. Student tax returns Example. Student tax returns Sharon Brown, a farmer who uses the cash method, filed her 2012 Form 1040 on March 3, 2013. Student tax returns On her Schedule F, she deducted the total cost of gasoline (including $110 of excise taxes) used on the farm for farming purposes. Student tax returns Then, on Form 4136, she claimed the $110 as a credit. Student tax returns Sharon reports the $110 as other income on line 8b of her 2013 Schedule F. Student tax returns Accrual method. Student tax returns   If you use an accrual method, include the amount of credit or refund in gross income for the tax year in which you used the fuels. Student tax returns It does not matter whether you filed for a quarterly refund or claimed the entire amount as a credit. Student tax returns Example. Student tax returns Patty Green, a farmer who uses the accrual method, files her 2012 Form 1040 on April 15, 2013. Student tax returns On Schedule F, she deducts the total cost of gasoline (including $155 of excise taxes) she used on the farm for farming purposes during 2012. Student tax returns On Form 4136, Patty claims the $155 as a credit. Student tax returns She reports the $155 as other income on line 8b of her 2012 Schedule F. Student tax returns Prev  Up  Next   Home   More Online Publications
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Understanding Your CP3219A Notice

We've received information that is different from what you reported on your tax return. This may result in an increase or decrease in your tax. The notice explains how the amount was calculated and how you can challenge it in U.S Tax Court.


What you need to do

  • Read the notice carefully – it explains the proposed increase or decrease in your tax. Note: The amounts shown as due on the notice may not match your previous notice because not all items can be challenged in tax court.
  • If you agree with the changes – sign the enclosed Form 5564, Notice of Deficiency - Waiver, and mail to the address shown on the notice.
  • If you don’t agree with the changes – you have the right to challenge the proposed changes by filing a petition with the U.S. Tax Court no later than the date listed on the notice. The Court can't consider your case if the petition is filed late.
  • If you don’t agree with the changes and have additional information – mail the information to the address listed on the notice. Our review won't extend the time you have to file a petition with the U.S. Tax Court.

You may want to…


Answers to Common Questions

Why did I receive the notice?

We received information from a third party that doesn’t match the information you reported on your return. This affects your tax return.

Is the notice a bill?

No. It shows the information we’ve received and how it affects your tax. It also provides you contact information for filing a petition with the tax court.

Can I get an extension of time to respond?

No. Once the CP3219A, Notice of Deficiency has been issued, we are unable to extend the time you have to respond or to file a petition with the U.S. Tax Court.

What do I need to do?

If you agree, sign the Form 5564, Notice of Deficiency - Waiver response form and mail to the address on the notice.

What if the information is wrong or if I disagree?

If you want us to consider additional information, send it to us, along with a written explanation supporting your position. You may contact us with the phone number provided on the first page of the notice. You may want to contact whoever reported the information and ask them to correct it. You should send your response to us as soon as possible, since we can't extend the time you have to file a petition with the tax court.

The information is wrong because someone else is using my name and social security number. What can I do?

Call us and let us know. You also can use this link to go to our Identity theft information webpage to find out more about what you can do.

I reported the information but I reported it incorrectly. Can I call you to correct my return?

We can accept your information over the phone for incorrectly reported information as long as the mistake doesn't increase or decrease your tax. If the information you provide over the phone isn't enough to resolve all issues with your case, we're unable to extend the time you have to file a petition with the tax court.

Do I need to amend my return?

If the information displayed in the “Changes to your tax return” section of the notice is correct, you don't need to amend your return unless you have additional income, credits or expenses to report. If you agree with our notice, follow the instructions to sign the Form 5564, Notice of Deficiency - Waiver and return it to us in the envelope provided. 

If you have additional income, credits or expenses to report, you may want to complete and submit a Form 1040-X, Amended U.S. Individual Income Tax Return. You can receive help at an IRS Taxpayer Assistance Center.

I want to check a copy of my original return. I don’t have one. How can I get one?

You can get a transcript of your return on our ”Order a Transcript” webpage at irs.gov. You also can get one by completing and sending us a Form 4506-T, Request for Transcript of Tax Return. We can't extend the time allowed to petition the tax court.

I don’t want a transcript of my return. I want a copy. How can I get one?

Did an accountant or some other person prepare your return? You could ask them for a copy.

I can’t get a copy of my return from a tax preparer. How else can I get a copy of it?

You can get a copy of your return by completing and sending us a Form 4506, Request for Copy of Tax Return. We charge a fee for tax return requests.

How can I find an IRS Taxpayer Assistance Center?

We have centers located throughout the country. Our website has directions on how to find the center nearest to you.

Why did it take you so long to contact me about this matter?

Our computer systems match the information you report on your tax return with information reported by employers, banks, businesses, and others. This matching takes several months to complete.

The notice says my taxes will increase. Will I be charged interest on the money I owe?

Yes, interest accrues on the unpaid balance until it is paid in full.

What happens if I can’t pay the full amount I owe?

You can make a payment plan with us when you can’t pay the full amount you owe.

How can I make a payment plan?

Call us at the toll-free number on the top right corner of your notice to talk about payment plans or learn more about them at this web page.


Tips for next year

You can avoid future problems by:

  • keeping accurate and full records
  • waiting until you get all of your income statements before filing your tax return
  • checking the records you get from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they're correct
  • including all your income on your tax return
  • following the instructions on how to report income, expenses and deductions
  • filing an amended tax return for any information you receive after you’ve filed your return

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 28-Feb-2014

The Student Tax Returns

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