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1040ez free 10. 1040ez free   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. 1040ez free Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. 1040ez free Use Schedule SE to figure net earnings from self-employment. 1040ez free Sole proprietor or independent contractor. 1040ez free   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. 1040ez free SE tax rate. 1040ez free    For 2013, the SE tax rate on net earnings is 15. 1040ez free 3% (12. 1040ez free 4% social security tax plus 2. 1040ez free 9% Medicare tax). 1040ez free Maximum earnings subject to self-employment tax. 1040ez free    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. 1040ez free 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. 1040ez free   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. 1040ez free 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. 1040ez free   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. 1040ez free 4% social security part of the SE tax on any of your net earnings. 1040ez free However, you must pay the 2. 1040ez free 9% Medicare part of the SE tax on all your net earnings. 1040ez free Special Rules and Exceptions Aliens. 1040ez free   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. 1040ez free S. 1040ez free citizens. 1040ez free Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. 1040ez free S. 1040ez free social security system. 1040ez free However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. 1040ez free S. 1040ez free residents for self-employment tax purposes. 1040ez free For more information on aliens, see Publication 519, U. 1040ez free S. 1040ez free Tax Guide for Aliens. 1040ez free Child employed by parent. 1040ez free   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. 1040ez free Church employee. 1040ez free    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. 1040ez free 28 or more in wages from the church or organization. 1040ez free For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. 1040ez free Fishing crew member. 1040ez free   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. 1040ez free You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. 1040ez free The pay is not more than $100 per trip. 1040ez free The pay is received only if there is a minimum catch. 1040ez free The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. 1040ez free You get a share of the catch or a share of the proceeds from the sale of the catch. 1040ez free Your share depends on the amount of the catch. 1040ez free The boat's operating crew normally numbers fewer than 10 individuals. 1040ez free (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. 1040ez free ) Notary public. 1040ez free   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). 1040ez free State or local government employee. 1040ez free   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. 1040ez free Foreign government or international organization employee. 1040ez free   You are subject to SE tax if both the following conditions are true. 1040ez free You are a U. 1040ez free S. 1040ez free citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. 1040ez free Your employer is not required to withhold social security and Medicare taxes from your wages. 1040ez free U. 1040ez free S. 1040ez free citizen or resident alien residing abroad. 1040ez free    If you are a self-employed U. 1040ez free S. 1040ez free citizen or resident alien living outside the United States, in most cases you must pay SE tax. 1040ez free Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. 1040ez free Exception. 1040ez free    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. 1040ez free Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. 1040ez free The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. 1040ez free   For more information, see the Instructions for Schedule SE (Form 1040). 1040ez free More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. 1040ez free A loss from one business reduces your profit from another business. 1040ez free Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. 1040ez free Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. 1040ez free It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. 1040ez free Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. 1040ez free If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. 1040ez free Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. 1040ez free The regular method. 1040ez free The nonfarm optional method. 1040ez free The farm optional method. 1040ez free You must use the regular method unless you are eligible to use one or both of the optional methods. 1040ez free Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. 1040ez free You want to receive credit for social security benefit coverage. 1040ez free You incurred child or dependent care expenses for which you could claim a credit. 1040ez free (An optional method may increase your earned income, which could increase your credit. 1040ez free ) You are entitled to the earned income credit. 1040ez free (An optional method may increase your earned income, which could increase your credit. 1040ez free ) You are entitled to the additional child tax credit. 1040ez free (An optional method may increase your earned income, which could increase your credit. 1040ez free ) Effects of using an optional method. 1040ez free   Using an optional method could increase your SE tax. 1040ez free Paying more SE tax could result in your getting higher benefits when you retire. 1040ez free   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. 1040ez free   The optional methods may be used only to figure your SE tax. 1040ez free To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. 1040ez free Regular Method Multiply your total earnings subject to SE tax by 92. 1040ez free 35% (. 1040ez free 9235) to get your net earnings under the regular method. 1040ez free See Short Schedule SE, line 4, or Long Schedule SE, line 4a. 1040ez free Net earnings figured using the regular method are also called actual net earnings. 1040ez free Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. 1040ez free You may use this method if you meet all the following tests. 1040ez free You are self-employed on a regular basis. 1040ez free This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. 1040ez free The net earnings can be from either farm or nonfarm earnings or both. 1040ez free You have used this method less than 5 years. 1040ez free (There is a 5-year lifetime limit. 1040ez free ) The years do not have to be one after another. 1040ez free Your net nonfarm profits were: Less than $5,024, and Less than 72. 1040ez free 189% of your gross nonfarm income. 1040ez free Net nonfarm profits. 1040ez free   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). 1040ez free   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. 1040ez free Gross nonfarm income. 1040ez free   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). 1040ez free Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. 1040ez free Table 10-1. 1040ez free Figuring Nonfarm Net Earnings IF your gross nonfarm income is. 1040ez free . 1040ez free . 1040ez free THEN your net earnings are equal to. 1040ez free . 1040ez free . 1040ez free $6,960 or less Two-thirds of your gross nonfarm income. 1040ez free More than $6,960 $4,640 Actual net earnings. 1040ez free   Your actual net earnings are 92. 1040ez free 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. 1040ez free 35% (. 1040ez free 9235) to get actual net earnings). 1040ez free Actual net earnings are equivalent to net earnings figured using the regular method. 1040ez free Optional net earnings less than actual net earnings. 1040ez free   You cannot use this method to report an amount less than your actual net earnings from self-employment. 1040ez free Gross nonfarm income of $6,960 or less. 1040ez free   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. 1040ez free Example 1. 1040ez free Net nonfarm profit less than $5,024 and less than 72. 1040ez free 189% of gross nonfarm income. 1040ez free Ann Green runs a craft business. 1040ez free Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. 1040ez free She meets the test for being self-employed on a regular basis. 1040ez free She has used the nonfarm optional method less than 5 years. 1040ez free Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . 1040ez free 9235). 1040ez free Because her net profit is less than $5,024 and less than 72. 1040ez free 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). 1040ez free Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. 1040ez free Example 2. 1040ez free Net nonfarm profit less than $5,024 but not less than 72. 1040ez free 189% of gross nonfarm income. 1040ez free Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. 1040ez free She must use the regular method to figure her net earnings. 1040ez free She cannot use the nonfarm optional method because her net profit is not less than 72. 1040ez free 189% of her gross income. 1040ez free Example 3. 1040ez free Net loss from a nonfarm business. 1040ez free Assume that in Example 1 Ann has a net loss of $700. 1040ez free She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. 1040ez free Example 4. 1040ez free Nonfarm net earnings less than $400. 1040ez free Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. 1040ez free In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. 1040ez free Gross nonfarm income of more than $6,960. 1040ez free   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. 1040ez free Example 1. 1040ez free Net nonfarm profit less than $5,024 and less than 72. 1040ez free 189% of gross nonfarm income. 1040ez free John White runs an appliance repair shop. 1040ez free His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. 1040ez free He meets the test for being self-employed on a regular basis. 1040ez free He has used the nonfarm optional method less than 5 years. 1040ez free His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . 1040ez free 9235). 1040ez free Because his net profit is less than $5,024 and less than 72. 1040ez free 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. 1040ez free Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. 1040ez free Example 2. 1040ez free Net nonfarm profit not less than $5,024. 1040ez free Assume that in Example 1 John's net profit is $5,400. 1040ez free He must use the regular method. 1040ez free He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. 1040ez free Example 3. 1040ez free Net loss from a nonfarm business. 1040ez free Assume that in Example 1 John has a net loss of $700. 1040ez free He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. 1040ez free Farm Optional Method Use the farm optional method only for earnings from a farming business. 1040ez free See Publication 225 for information about this method. 1040ez free Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. 1040ez free To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. 1040ez free Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. 1040ez free Add the net earnings figured under each method to arrive at your total net earnings from self-employment. 1040ez free You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. 1040ez free If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. 1040ez free Example. 1040ez free You are a self-employed farmer. 1040ez free You also operate a retail grocery store. 1040ez free Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. 1040ez free Table 10-2. 1040ez free Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. 1040ez free Method 1. 1040ez free Using the regular method for both farm and nonfarm income. 1040ez free Method 2. 1040ez free Using the optional method for farm income and the regular method for nonfarm income. 1040ez free Method 3. 1040ez free Using the regular method for farm income and the optional method for nonfarm income. 1040ez free Method 4. 1040ez free Using the optional method for both farm and nonfarm income. 1040ez free Note. 1040ez free Actual net earnings is the same as net earnings figured using the regular method. 1040ez free Table 10-3. 1040ez free Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. 1040ez free Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. 1040ez free Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. 1040ez free Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. 1040ez free Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. 1040ez free Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. 1040ez free However, certain taxpayers must use Section B—Long Schedule SE. 1040ez free If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. 1040ez free Joint return. 1040ez free   Even if you file a joint return, you cannot file a joint Schedule SE. 1040ez free This is true whether one spouse or both spouses have earnings subject to SE tax. 1040ez free If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. 1040ez free However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. 1040ez free Attach both schedules to the joint return. 1040ez free More than one business. 1040ez free   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. 1040ez free A loss from one business will reduce your profit from another business. 1040ez free File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. 1040ez free Example. 1040ez free You are the sole proprietor of two separate businesses. 1040ez free You operate a restaurant that made a net profit of $25,000. 1040ez free You also have a cabinetmaking business that had a net loss of $500. 1040ez free You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. 1040ez free You file Schedule SE showing total earnings subject to SE tax of $24,500. 1040ez free Prev  Up  Next   Home   More Online Publications
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1040ez free 5. 1040ez free   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. 1040ez free Short-term lease. 1040ez free Retail space. 1040ez free Qualified long-term real property. 1040ez free Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. 1040ez free If there is a connection between any income you receive and your business, the income is business income. 1040ez free A connection exists if it is clear that the payment of income would not have been made if you did not have the business. 1040ez free You can have business income even if you are not involved in the activity on a regular full-time basis. 1040ez free Income from work you do on the side in addition to your regular job can be business income. 1040ez free You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. 1040ez free But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. 1040ez free For information on selling business assets, see chapter 3. 1040ez free Nonemployee compensation. 1040ez free Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. 1040ez free This includes amounts reported as nonemployee compensation in box 7 of the form. 1040ez free You can find more information in the instructions on the back of the Form 1099-MISC you received. 1040ez free Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. 1040ez free In most cases, your business income will be in the form of cash, checks, and credit card charges. 1040ez free But business income can be in other forms, such as property or services. 1040ez free These and other types of income are explained next. 1040ez free If you are a U. 1040ez free S. 1040ez free citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. 1040ez free S. 1040ez free law. 1040ez free If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. 1040ez free For details, see Publication 54, Tax Guide for U. 1040ez free S. 1040ez free Citizens and Resident Aliens Abroad. 1040ez free Bartering for Property or Services Bartering is an exchange of property or services. 1040ez free You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. 1040ez free If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. 1040ez free Example 1. 1040ez free You are a self-employed lawyer. 1040ez free You perform legal services for a client, a small corporation. 1040ez free In payment for your services, you receive shares of stock in the corporation. 1040ez free You must include the fair market value of the shares in income. 1040ez free Example 2. 1040ez free You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. 1040ez free You must include the fair rental value of the apartment in your gross receipts. 1040ez free Your landlord must include the fair market value of the work of art in his or her rental income. 1040ez free Example 3. 1040ez free You are a self-employed accountant. 1040ez free Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. 1040ez free Members get in touch with other members directly and bargain for the value of the services to be performed. 1040ez free In return for accounting services you provided for the house painter's business, the house painter painted your home. 1040ez free You must include in gross receipts the fair market value of the services you received from the house painter. 1040ez free The house painter must include the fair market value of your accounting services in his or her gross receipts. 1040ez free Example 4. 1040ez free You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. 1040ez free As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. 1040ez free You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. 1040ez free The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. 1040ez free It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. 1040ez free See Publication 15 (Circular E), Employer's Tax Guide. 1040ez free Example 5. 1040ez free You operate a plumbing business and use the cash method of accounting. 1040ez free You join a barter club and agree to provide plumbing services to any member for a specified number of hours. 1040ez free Each member has access to a directory that lists the members of the club and the services available. 1040ez free Members contact each other directly and request services to be performed. 1040ez free You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. 1040ez free You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. 1040ez free Information returns. 1040ez free   If you are involved in a bartering transaction, you may have to file either of the following forms. 1040ez free Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. 1040ez free Form 1099-MISC, Miscellaneous Income. 1040ez free For information about these forms, see the General Instructions for Certain Information Returns. 1040ez free Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. 1040ez free , who provides services (maid services, etc. 1040ez free ) for guests, report the rental income and expenses on Schedule C or C-EZ. 1040ez free If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. 1040ez free For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). 1040ez free Real estate dealer. 1040ez free   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. 1040ez free Rent you receive from real estate held for sale to customers is subject to SE tax. 1040ez free However, rent you receive from real estate held for speculation or investment is not subject to SE tax. 1040ez free Trailer park owner. 1040ez free   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. 1040ez free    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. 1040ez free Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. 1040ez free   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. 1040ez free   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. 1040ez free Hotels, boarding houses, and apartments. 1040ez free   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. 1040ez free   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. 1040ez free An example of a service that is not normally provided for the convenience of the occupants is maid service. 1040ez free However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. 1040ez free Prepaid rent. 1040ez free   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. 1040ez free This is true no matter what accounting method or period you use. 1040ez free Lease bonus. 1040ez free   A bonus you receive from a lessee for granting a lease is an addition to the rent. 1040ez free Include it in your gross receipts in the year received. 1040ez free Lease cancellation payments. 1040ez free   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. 1040ez free Payments to third parties. 1040ez free   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. 1040ez free A common example of this kind of income is a lessee's payment of your property taxes on leased real property. 1040ez free Settlement payments. 1040ez free   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. 1040ez free Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. 1040ez free ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. 1040ez free Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. 1040ez free If you receive any of those payments, include them in your gross receipts as explained in that discussion. 1040ez free Interest and Dividend Income Interest and dividends may be considered business income. 1040ez free Interest. 1040ez free   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. 1040ez free Interest received on loans is business income if you are in the business of lending money. 1040ez free Uncollectible loans. 1040ez free   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. 1040ez free If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. 1040ez free See Bad Debts in chapter 8. 1040ez free Unstated interest. 1040ez free   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. 1040ez free See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. 1040ez free Dividends. 1040ez free   Generally, dividends are business income to dealers in securities. 1040ez free For most sole proprietors and statutory employees, however, dividends are nonbusiness income. 1040ez free If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. 1040ez free   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. 1040ez free To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. 1040ez free Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. 1040ez free General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. 1040ez free Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. 1040ez free If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. 1040ez free Exceptions The following discussion covers some exceptions to the general rule for canceled debt. 1040ez free Price reduced after purchase. 1040ez free   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. 1040ez free Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. 1040ez free Deductible debt. 1040ez free   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. 1040ez free Example. 1040ez free You get accounting services for your business on credit. 1040ez free Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. 1040ez free Your accountant forgives part of the amount you owe for the accounting services. 1040ez free How you treat the canceled debt depends on your method of accounting. 1040ez free Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. 1040ez free Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. 1040ez free   For information on the cash and accrual methods of accounting, see chapter 2. 1040ez free Exclusions Do not include canceled debt in income in the following situations. 1040ez free However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. 1040ez free For more information, see Form 982. 1040ez free The cancellation takes place in a bankruptcy case under title 11 of the U. 1040ez free S. 1040ez free Code (relating to bankruptcy). 1040ez free See Publication 908, Bankruptcy Tax Guide. 1040ez free The cancellation takes place when you are insolvent. 1040ez free You can exclude the canceled debt to the extent you are insolvent. 1040ez free See Publication 908. 1040ez free The canceled debt is a qualified farm debt owed to a qualified person. 1040ez free See chapter 3 in Publication 225, Farmer's Tax Guide. 1040ez free The canceled debt is a qualified real property business debt. 1040ez free This situation is explained later. 1040ez free The canceled debt is qualified principal residence indebtedness which is discharged after 2006. 1040ez free See Form 982. 1040ez free If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. 1040ez free If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. 1040ez free Debt. 1040ez free   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. 1040ez free Qualified real property business debt. 1040ez free   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. 1040ez free If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. 1040ez free Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. 1040ez free However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. 1040ez free Cancellation of qualified real property business debt. 1040ez free   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. 1040ez free It was incurred or assumed in connection with real property used in a trade or business. 1040ez free It was secured by such real property. 1040ez free It was incurred or assumed at either of the following times. 1040ez free Before January 1, 1993. 1040ez free After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. 1040ez free It is debt to which you choose to apply these rules. 1040ez free   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. 1040ez free   You cannot exclude more than either of the following amounts. 1040ez free The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. 1040ez free The total adjusted bases of depreciable real property held by you immediately before the cancellation. 1040ez free These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. 1040ez free Do not take into account depreciable real property acquired in contemplation of the cancellation. 1040ez free Election. 1040ez free   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. 1040ez free You must file your return by the due date (including extensions). 1040ez free If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040ez free For more information, see When To File in the form instructions. 1040ez free Other Income The following discussion explains how to treat other types of business income you may receive. 1040ez free Restricted property. 1040ez free   Restricted property is property that has certain restrictions that affect its value. 1040ez free If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. 1040ez free However, you can choose to be taxed in the year you receive the property. 1040ez free For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. 1040ez free Gains and losses. 1040ez free   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. 1040ez free Instead, you must report these gains and losses on other forms. 1040ez free For more information, see chapter 3. 1040ez free Promissory notes. 1040ez free   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. 1040ez free In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. 1040ez free Lost income payments. 1040ez free   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. 1040ez free Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. 1040ez free Damages. 1040ez free   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. 1040ez free Patent infringement. 1040ez free Breach of contract or fiduciary duty. 1040ez free Antitrust injury. 1040ez free Economic injury. 1040ez free   You may be entitled to a deduction against the income if it compensates you for actual economic injury. 1040ez free Your deduction is the smaller of the following amounts. 1040ez free The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. 1040ez free Your loss from the injury that you have not yet deducted. 1040ez free Punitive damages. 1040ez free   You must also include punitive damages in income. 1040ez free Kickbacks. 1040ez free   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. 1040ez free However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. 1040ez free Recovery of items previously deducted. 1040ez free   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. 1040ez free However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. 1040ez free If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. 1040ez free Example. 1040ez free Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. 1040ez free He also had 2 personal exemptions for a total of $7,800. 1040ez free He would not pay income tax even if he did not deduct the bad debt. 1040ez free Therefore, he will not report as income any part of the $300 he may recover in any future year. 1040ez free Exception for depreciation. 1040ez free   This rule does not apply to depreciation. 1040ez free You recover depreciation using the rules explained next. 1040ez free Recapture of depreciation. 1040ez free   In the following situations, you have to recapture the depreciation deduction. 1040ez free This means you include in income part or all of the depreciation you deducted in previous years. 1040ez free Listed property. 1040ez free   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. 1040ez free You do this by including in income on Schedule C part of the depreciation you deducted in previous years. 1040ez free Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. 1040ez free For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. 1040ez free That chapter explains how to determine whether property is used more than 50% in your business. 1040ez free Section 179 property. 1040ez free   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. 1040ez free You do this by including in income on Schedule C part of the deduction you took. 1040ez free Use Part IV of Form 4797 to figure the amount to include on Schedule C. 1040ez free See chapter 2 in Publication 946 to find out when you recapture the deduction. 1040ez free Sale or exchange of depreciable property. 1040ez free   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. 1040ez free You figure the income due to depreciation recapture in Part III of Form 4797. 1040ez free For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. 1040ez free Items That Are Not Income In some cases the property or money you receive is not income. 1040ez free Appreciation. 1040ez free   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. 1040ez free Consignments. 1040ez free   Consignments of merchandise to others to sell for you are not sales. 1040ez free The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. 1040ez free Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. 1040ez free Merchandise you have shipped out on consignment is included in your inventory until it is sold. 1040ez free   Do not include merchandise you receive on consignment in your inventory. 1040ez free Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. 1040ez free Construction allowances. 1040ez free   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. 1040ez free Under a short-term lease of retail space. 1040ez free For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. 1040ez free Amount you can exclude. 1040ez free   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. 1040ez free Short-term lease. 1040ez free   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. 1040ez free The following rules apply in determining whether the lease is for 15 years or less. 1040ez free Take into account options to renew when figuring whether the lease is for 15 years or less. 1040ez free But do not take into account any option to renew at fair market value determined at the time of renewal. 1040ez free Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. 1040ez free Retail space. 1040ez free   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. 1040ez free Qualified long-term real property. 1040ez free   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. 1040ez free Exchange of like-kind property. 1040ez free   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. 1040ez free This means that the gain is not taxable and the loss is not deductible. 1040ez free A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. 1040ez free For more information, see Form 8824. 1040ez free Leasehold improvements. 1040ez free   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. 1040ez free However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. 1040ez free Loans. 1040ez free   Money borrowed through a bona fide loan is not income. 1040ez free Sales tax. 1040ez free   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. 1040ez free Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). 1040ez free Direct seller. 1040ez free   You must report all income you receive as a direct seller on Schedule C or C-EZ. 1040ez free This includes any of the following. 1040ez free Income from sales—payments you receive from customers for products they buy from you. 1040ez free Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. 1040ez free Prizes, awards, and gifts you receive from your selling business. 1040ez free You must report this income regardless of whether it is reported to you on an information return. 1040ez free   You are a direct seller if you meet all the following conditions. 1040ez free You are engaged in one of the following trades or businesses. 1040ez free Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. 1040ez free Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). 1040ez free Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. 1040ez free Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. 1040ez free Executor or administrator. 1040ez free   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. 1040ez free A nonprofessional fiduciary (personal representative) and both of the following apply. 1040ez free The estate includes an active trade or business in which you actively participate. 1040ez free Your fees are related to the operation of that trade or business. 1040ez free A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. 1040ez free    If the fees do not meet the above requirements, report them on line 21 of Form 1040. 1040ez free Fishing crew member. 1040ez free    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . 1040ez free Insurance agent, former. 1040ez free   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. 1040ez free You received payments after your agreement to perform services for the company ended. 1040ez free You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. 1040ez free You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. 1040ez free The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. 1040ez free The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). 1040ez free Insurance agent, retired. 1040ez free   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. 1040ez free Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. 1040ez free   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. 1040ez free Newspaper carrier or distributor. 1040ez free   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. 1040ez free You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). 1040ez free Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. 1040ez free You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. 1040ez free   This rule applies whether or not you hire others to help you make deliveries. 1040ez free It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. 1040ez free Newspaper or magazine vendor. 1040ez free   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. 1040ez free You sell newspapers or magazines to ultimate consumers. 1040ez free You sell them at a fixed price. 1040ez free Your earnings are based on the difference between the sales price and your cost of goods sold. 1040ez free   This rule applies whether or not you are guaranteed a minimum amount of earnings. 1040ez free It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. 1040ez free Notary public. 1040ez free   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. 1040ez free These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). 1040ez free Public official. 1040ez free   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. 1040ez free This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. 1040ez free Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. 1040ez free   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. 1040ez free Real estate agent or direct seller. 1040ez free   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. 1040ez free Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. 1040ez free You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. 1040ez free Securities dealer. 1040ez free   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. 1040ez free For more information, see sections 1256 and 1402(i). 1040ez free Securities trader. 1040ez free   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. 1040ez free As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. 1040ez free However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. 1040ez free For more information about securities traders, see Publication 550, Investment Income and Expenses. 1040ez free Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. 1040ez free This section discusses some of the more common differences that may affect business transactions. 1040ez free Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). 1040ez free If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. 1040ez free Dealers in real estate are not allowed to use inventories. 1040ez free For more information on inventories, see chapter 2. 1040ez free Income paid to a third party. 1040ez free   All income you earn is taxable to you. 1040ez free You cannot avoid tax by having the income paid to a third party. 1040ez free Example. 1040ez free You rent out your property and the rental agreement directs the lessee to pay the rent to your son. 1040ez free The amount paid to your son is gross income to you. 1040ez free Cash discounts. 1040ez free   These are amounts the seller permits you to deduct from the invoice price for prompt payment. 1040ez free For income tax purposes, you can use either of the following two methods to account for cash discounts. 1040ez free Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). 1040ez free Credit the cash discount to a discount income account. 1040ez free You must use the chosen method every year for all your purchase discounts. 1040ez free   If you use the second method, the credit balance in the account at the end of your tax year is business income. 1040ez free Under this method, you do not reduce the cost of goods sold by the cash discounts you received. 1040ez free When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. 1040ez free Trade discounts. 1040ez free   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. 1040ez free Do not enter these discounts on your books of account. 1040ez free Instead, use only the net amount as the cost of the merchandise purchased. 1040ez free For more information, see Trade discounts in chapter 6. 1040ez free Payment placed in escrow. 1040ez free   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. 1040ez free However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. 1040ez free Sales returns and allowances. 1040ez free   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. 1040ez free Advance payments. 1040ez free   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. 1040ez free Insurance proceeds. 1040ez free   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. 1040ez free You cannot deduct the reimbursed part of a casualty or theft loss. 1040ez free   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040ez free Prev  Up  Next   Home   More Online Publications