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2011 Taxact Online Tax Prepartion Including Free Efiling

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2011 Taxact Online Tax Prepartion Including Free Efiling

2011 taxact online tax prepartion including free efiling Publication 519 - Introductory Material Table of Contents Future Developments IntroductionOrdering forms and publications. 2011 taxact online tax prepartion including free efiling Tax questions. 2011 taxact online tax prepartion including free efiling What's New Reminders Future Developments For the latest information about developments related to Publication 519, such as legislation enacted after it was published, go to www. 2011 taxact online tax prepartion including free efiling irs. 2011 taxact online tax prepartion including free efiling gov/pub519. 2011 taxact online tax prepartion including free efiling Introduction For tax purposes, an alien is an individual who is not a U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling citizen. 2011 taxact online tax prepartion including free efiling Aliens are classified as nonresident aliens and resident aliens. 2011 taxact online tax prepartion including free efiling This publication will help you determine your status and give you information you will need to file your U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling tax return. 2011 taxact online tax prepartion including free efiling Resident aliens generally are taxed on their worldwide income, the same as U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling citizens. 2011 taxact online tax prepartion including free efiling Nonresident aliens are taxed only on their income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States. 2011 taxact online tax prepartion including free efiling The information in this publication is not as comprehensive for resident aliens as it is for nonresident aliens. 2011 taxact online tax prepartion including free efiling Resident aliens are generally treated the same as U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling citizens and can find more information in other IRS publications. 2011 taxact online tax prepartion including free efiling Table A, Where To Find What You Need To Know About U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling Taxes, provides a list of questions and the chapter or chapters in this publication where you will find the related discussion. 2011 taxact online tax prepartion including free efiling Answers to frequently asked questions are presented in the back of the publication. 2011 taxact online tax prepartion including free efiling Table A. 2011 taxact online tax prepartion including free efiling Where To Find What You Need To Know About U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling Taxes Commonly Asked Questions Where To Find The Answer Am I a nonresident alien or resident alien? See chapter 1. 2011 taxact online tax prepartion including free efiling Can I be a nonresident alien and a resident alien in the same year? See Dual-Status Aliens in chapter 1. 2011 taxact online tax prepartion including free efiling See chapter 6. 2011 taxact online tax prepartion including free efiling I am a resident alien and my spouse is a nonresident alien. 2011 taxact online tax prepartion including free efiling Are there special rules for us? See Nonresident Spouse Treated as a Resident  in chapter 1. 2011 taxact online tax prepartion including free efiling See Community Income in chapter 2. 2011 taxact online tax prepartion including free efiling Is all my income subject to U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling tax? See chapter 2. 2011 taxact online tax prepartion including free efiling See chapter 3. 2011 taxact online tax prepartion including free efiling Is my scholarship subject to U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling tax? See Scholarship Grants, Prizes, and Awards in chapter 2. 2011 taxact online tax prepartion including free efiling See Scholarship and Fellowship Grants in chapter 3. 2011 taxact online tax prepartion including free efiling See chapter 9. 2011 taxact online tax prepartion including free efiling What is the tax rate on my income subject to U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling tax? See chapter 4. 2011 taxact online tax prepartion including free efiling I moved to the United States this year. 2011 taxact online tax prepartion including free efiling Can I deduct my moving expenses on my U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling return? See Deductions in chapter 5. 2011 taxact online tax prepartion including free efiling Can I claim exemptions for my spouse and children? See Exemptions in chapter 5. 2011 taxact online tax prepartion including free efiling I pay income taxes to my home country. 2011 taxact online tax prepartion including free efiling Can I get credit for these taxes on my U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling tax return? See Tax Credits and Payments in chapter 5. 2011 taxact online tax prepartion including free efiling What forms must I file and when and where do I file them? See chapter 7. 2011 taxact online tax prepartion including free efiling How should I pay my U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling income taxes? See chapter 8. 2011 taxact online tax prepartion including free efiling Am I eligible for any benefits under a tax treaty? See Income Entitled to Tax Treaty Benefits in chapter 8. 2011 taxact online tax prepartion including free efiling See chapter 9. 2011 taxact online tax prepartion including free efiling Are employees of foreign governments and international organizations exempt from U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling tax? See chapter 10. 2011 taxact online tax prepartion including free efiling Is there anything special I have to do before leaving the United States? See chapter 11. 2011 taxact online tax prepartion including free efiling See Expatriation Tax in chapter 4. 2011 taxact online tax prepartion including free efiling Comments and suggestions. 2011 taxact online tax prepartion including free efiling   We welcome your comments about this publication and your suggestions for future editions. 2011 taxact online tax prepartion including free efiling   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 2011 taxact online tax prepartion including free efiling NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 2011 taxact online tax prepartion including free efiling Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2011 taxact online tax prepartion including free efiling   You can send us comments from www. 2011 taxact online tax prepartion including free efiling irs. 2011 taxact online tax prepartion including free efiling gov/formspubs/. 2011 taxact online tax prepartion including free efiling Click on “More Information” and then on “Comment on Tax Forms and Publications. 2011 taxact online tax prepartion including free efiling ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 2011 taxact online tax prepartion including free efiling Ordering forms and publications. 2011 taxact online tax prepartion including free efiling   Visit www. 2011 taxact online tax prepartion including free efiling irs. 2011 taxact online tax prepartion including free efiling gov/formspubs/ to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received. 2011 taxact online tax prepartion including free efiling Internal Revenue Service 1201 N. 2011 taxact online tax prepartion including free efiling Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 2011 taxact online tax prepartion including free efiling   If you have a tax question, check the information available on IRS. 2011 taxact online tax prepartion including free efiling gov or call 1-800-829-1040. 2011 taxact online tax prepartion including free efiling We cannot answer tax questions sent to either of the above addresses. 2011 taxact online tax prepartion including free efiling What's New Personal exemption increased. 2011 taxact online tax prepartion including free efiling  For tax years beginning in 2013, the personal exemption amount is increased to $3,900. 2011 taxact online tax prepartion including free efiling U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling real property interest. 2011 taxact online tax prepartion including free efiling  Generally, the treatment of a regulated investment company (RIC) as a qualified investment entity (QIE) was scheduled to expire at the end of 2011. 2011 taxact online tax prepartion including free efiling The provision has been extended through 2013. 2011 taxact online tax prepartion including free efiling The special rules that apply to distributions from a QIE attributable to the gain from the sale or exchange of a U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling real property interest will continue to apply to any distribution from a RIC in 2013. 2011 taxact online tax prepartion including free efiling Beginning in 2014 (unless extended by legislation), a RIC will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. 2011 taxact online tax prepartion including free efiling See Qualified investment entities under U. 2011 taxact online tax prepartion including free efiling S. 2011 taxact online tax prepartion including free efiling Real Property Interest. 2011 taxact online tax prepartion including free efiling Interest-related dividends and short-term capital gain dividends received from mutual funds. 2011 taxact online tax prepartion including free efiling  The exemption of tax on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other regulated investment company was scheduled to expire at the end of 2011. 2011 taxact online tax prepartion including free efiling These provisions have been extended through 2013. 2011 taxact online tax prepartion including free efiling The exemption expires for amounts paid in tax years beginning after December 31, 2013 (unless extended by legislation). 2011 taxact online tax prepartion including free efiling Multi-level marketing. 2011 taxact online tax prepartion including free efiling  Clarification regarding the characterization and source of income received from multi-level marketing companies by distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have recruited and sponsored (lower-tier distributors) is provided. 2011 taxact online tax prepartion including free efiling See Multi-level marketing under Personal Services in chapter 2. 2011 taxact online tax prepartion including free efiling Additional Medicare Tax. 2011 taxact online tax prepartion including free efiling  For 2013, you may be required to pay Additional Medicare Tax. 2011 taxact online tax prepartion including free efiling Also, you may need to report Additional Medicare Tax withheld by your employer. 2011 taxact online tax prepartion including free efiling For more information, see Additional Medicare Tax under Social Security and Medicare Taxes and Self-Employment Tax in chapter 8. 2011 taxact online tax prepartion including free efiling For more information on Additional Medicare Tax, go to IRS. 2011 taxact online tax prepartion including free efiling gov and enter “Additional Medicare Tax” in the search box. 2011 taxact online tax prepartion including free efiling Reminders Refunds of certain withholding tax delayed. 2011 taxact online tax prepartion including free efiling  Refund requests for tax withheld and reported on Form 1042-S, Form 8288-A, or Form 8805 may require additional time for processing. 2011 taxact online tax prepartion including free efiling Allow up to 6 months for these refunds to be issued. 2011 taxact online tax prepartion including free efiling Third party designee. 2011 taxact online tax prepartion including free efiling  You can check the “Yes” box in the “Third Party Designee” area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. 2011 taxact online tax prepartion including free efiling This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. 2011 taxact online tax prepartion including free efiling It also allows your designee to perform certain actions such as asking the IRS for copies of notices or transcripts related to your return. 2011 taxact online tax prepartion including free efiling Also, the authorization can be revoked. 2011 taxact online tax prepartion including free efiling See your income tax return instructions for details. 2011 taxact online tax prepartion including free efiling Change of address. 2011 taxact online tax prepartion including free efiling . 2011 taxact online tax prepartion including free efiling  If you change your mailing address, be sure to notify the Internal Revenue Service using Form 8822, Change of Address. 2011 taxact online tax prepartion including free efiling Photographs of missing children. 2011 taxact online tax prepartion including free efiling  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 2011 taxact online tax prepartion including free efiling Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2011 taxact online tax prepartion including free efiling You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 2011 taxact online tax prepartion including free efiling Prev  Up  Next   Home   More Online Publications
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News Releases for Current Month

IRS Warns of New Email Phishing Scheme Falsely Claiming to be from the Taxpayer Advocate Service
IR-2014-39, March 28, 2014 —The IRS today warned consumers to be on the lookout for a new email phishing scam. The emails appear to be from the IRS Taxpayer Advocate Service and include a bogus case number.‬

Many Retirees Face April 1 Deadline To Take Required Retirement Plan Distributions
IR-2014-38, March 27, 2014 — The IRS reminds taxpayers who turned 70½ during 2013 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Tuesday, April 1, 2014.

IRS Reminds Taxpayers about Direct Deposit and Split Refunds
IR-2014-37, March 27, 2014 — Millions of taxpayers get their refunds through direct deposits. Filing season stats for March 21, 2014.

IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply
IR-2014-36, March. 25, 2014 — Virtual currency is treated as property for U.S. Federal tax purposes; general rules for property transactions apply.

IRS Gives Colorado Flood Victims More Time To Decide When To Claim Losses
IR-2014-35, March 25, 2014 — The IRS today provided taxpayers an extension until Oct. 15, 2014, to decide when to claim disaster losses arising from last September’s flooding.

IRS Releases FY 2013 Data Book
IR-2014-34, March 21, 2014 — The IRS 2013 Data Book provides details on the agency's activities during fiscal year 2013.

Winter 2014 Statistics of Income Bulletin Now Available
IR-2014-33, March 20, 2014 — IRS winter 2014 Bulletin provides information on individual income tax returns filed for tax year 2012 and other topics.

More than Half of all Income Tax Returns Have Been Received. IRS Issues Publication on Business Expenses
IR-2014-32, March 20, 2014 — The IRS has received more than half of all the individual income tax returns it expects this year; issues business expense publication.

IRS Bars Appraisers from Valuing Facade Easements for Federal Tax Purposes for Five Years
IR-2014-31, March 19, 2014 — The IRS announced its Office of Professional Responsibility has entered into a settlement agreement with a group of appraisers from the same firm accused of aiding in the understatement of federal tax liabilities by overvaluing facade easements for charitable donation purposes.

IRS Has $760 Million for People Who Have Not Filed a 2010 Income Tax Return
IR-2014-30, March 19, 2014 — Taxpayers who did not file returns for tax year 2010 have until April 15 to claim their tax refunds.

Interest Rates Remain the Same for the Second Quarter of 2014
IR-2014-29, March 14, 2014 — For the second quarter of 2014, interest rates remain the same.

More Taxpayers Filing from Home Computers in 2014, Many Taxpayers Eligible to Use Free File
IR-2014-28, March 13, 2014 — More taxpayers are e-filing from home computers in 2014 according to IRS filing season statistics.

IRS Encourages Small Employers to Check Out Small Business Health Care Tax Credit; Helpful Resources, Tax Tips Available on IRS.gov
IR-2014-27, March 10, 2014 — With business tax-filing deadlines fast approaching, the IRS encouraged small employers that provide health insurance coverage to their employees to check out the small business health care tax credit and claim it if they qualify.

IRS Seeks Volunteers for Taxpayer Advocacy Panel
IR-2014-26, March 10, 2014 — The IRS is seeking volunteers to serve on the Taxpayer Advocacy Panel, a federal advisory committee that listens to taxpayers, identifies taxpayer concerns, and makes recommendations for improving services.

IRS Seeks Applications for the Electronic Tax Administration Advisory Committee
IR-2014-25 March 7, 2014 — The IRS is opening the nomination and application process for membership on the Electronic Tax Administration Advisory Committee (ETAAC). The deadline for submitting applications is April 21, 2014.

Reminder To Home-Based Businesses: Simplified Option for Claiming Home Office Deduction Now Available; May Deduct up to $1,500; Saves 1.6 Million Hours A Year
IR-2014-24, March 7, 2014 — The Internal Revenue Service today reminded people with home-based businesses that this year for the first time they can choose a new simplified option for claiming the deduction for business use of a home.

2014 Refunds Ahead of Last Year
IR-2014-23, March 6, 2014 — The IRS has issued more than 48 million refunds so far this year.

New IRS Video Helps Same-Sex Couples; Joins Extensive IRS Library Of Online Tax Tips
IR-2014-22, March 6, 2014 — The IRS released a new YouTube video designed to provide useful tax tips to married same-sex couples.

Low Income Taxpayer Clinic Program Reports on Activities
IR-2014-21, March 5, 2014 — The IRS’s Low Income Taxpayer Clinic (LITC) Program Office issued its second annual program report on how LITCs assist thousands of low income taxpayers nationwide with pro bono representation, education, and advocacy services.

News Release and Fact Sheet Archive
News releases and fact sheets from November 2002 forward and an archive of news releases and fact sheets in PDF format back to 1997.

Page Last Reviewed or Updated: 28-Mar-2014

The 2011 Taxact Online Tax Prepartion Including Free Efiling

2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Hybrid method. 2011 taxact online tax prepartion including free efiling Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 2011 taxact online tax prepartion including free efiling Accounting Periods You must use a tax year to figure your taxable income. 2011 taxact online tax prepartion including free efiling A tax year is an annual accounting period for keeping records and reporting income and expenses. 2011 taxact online tax prepartion including free efiling An annual accounting period does not include a short tax year (discussed later). 2011 taxact online tax prepartion including free efiling You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). 2011 taxact online tax prepartion including free efiling Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. 2011 taxact online tax prepartion including free efiling A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling This section discusses: A calendar year. 2011 taxact online tax prepartion including free efiling A fiscal year (including a period of 52 or 53 weeks). 2011 taxact online tax prepartion including free efiling A short tax year. 2011 taxact online tax prepartion including free efiling An improper tax year. 2011 taxact online tax prepartion including free efiling A change in tax year. 2011 taxact online tax prepartion including free efiling Special situations that apply to individuals. 2011 taxact online tax prepartion including free efiling Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. 2011 taxact online tax prepartion including free efiling Special situations that apply to corporations. 2011 taxact online tax prepartion including free efiling Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling See Change in Tax Year, later. 2011 taxact online tax prepartion including free efiling Generally, anyone can adopt the calendar year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling If you make this election, your 52-53-week tax year must always end on the same day of the week. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Election. 2011 taxact online tax prepartion including free efiling   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. 2011 taxact online tax prepartion including free efiling The month in which the new 52-53-week tax year ends. 2011 taxact online tax prepartion including free efiling The day of the week on which the tax year always ends. 2011 taxact online tax prepartion including free efiling The date the tax year ends. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Example. 2011 taxact online tax prepartion including free efiling Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Short Tax Year A short tax year is a tax year of less than 12 months. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Tax on a short period tax return is figured differently for each situation. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Example 1. 2011 taxact online tax prepartion including free efiling XYZ Corporation was organized on July 1, 2012. 2011 taxact online tax prepartion including free efiling It elected the calendar year as its tax year. 2011 taxact online tax prepartion including free efiling Therefore, its first tax return was due March 15, 2013. 2011 taxact online tax prepartion including free efiling This short period return will cover the period from July 1, 2012, through December 31, 2012. 2011 taxact online tax prepartion including free efiling Example 2. 2011 taxact online tax prepartion including free efiling A calendar year corporation dissolved on July 23, 2012. 2011 taxact online tax prepartion including free efiling Its final return is due by October 15, 2012. 2011 taxact online tax prepartion including free efiling It will cover the short period from January 1, 2012, through July 23, 2012. 2011 taxact online tax prepartion including free efiling Death of individual. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Example. 2011 taxact online tax prepartion including free efiling   Agnes Green was a single, calendar year taxpayer. 2011 taxact online tax prepartion including free efiling She died on March 6, 2012. 2011 taxact online tax prepartion including free efiling Her final income tax return must be filed by April 15, 2013. 2011 taxact online tax prepartion including free efiling It will cover the short period from January 1, 2012, to March 6, 2012. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Figure tax for a short year under the general rule, explained below. 2011 taxact online tax prepartion including free efiling You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. 2011 taxact online tax prepartion including free efiling General rule. 2011 taxact online tax prepartion including free efiling   Income tax for a short tax year must be annualized. 2011 taxact online tax prepartion including free efiling However, self-employment tax is figured on the actual self-employment income for the short period. 2011 taxact online tax prepartion including free efiling Individuals. 2011 taxact online tax prepartion including free efiling   An individual must figure income tax for the short tax year as follows. 2011 taxact online tax prepartion including free efiling Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. 2011 taxact online tax prepartion including free efiling You must itemize deductions when you file a short period tax return. 2011 taxact online tax prepartion including free efiling Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. 2011 taxact online tax prepartion including free efiling Subtract the amount in (2) from the amount in (1). 2011 taxact online tax prepartion including free efiling The result is your modified taxable income. 2011 taxact online tax prepartion including free efiling Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. 2011 taxact online tax prepartion including free efiling The result is your annualized income. 2011 taxact online tax prepartion including free efiling Figure the total tax on your annualized income using the appropriate tax rate schedule. 2011 taxact online tax prepartion including free efiling Multiply the total tax by the number of months in the short tax year and divide the result by 12. 2011 taxact online tax prepartion including free efiling The result is your tax for the short tax year. 2011 taxact online tax prepartion including free efiling Relief procedure. 2011 taxact online tax prepartion including free efiling   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. 2011 taxact online tax prepartion including free efiling It may result in less tax. 2011 taxact online tax prepartion including free efiling Under this procedure, the tax is figured by two separate methods. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling For more information, see section 443(b)(2) of the Internal Revenue Code. 2011 taxact online tax prepartion including free efiling Alternative minimum tax. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Multiply the AMTI by 12. 2011 taxact online tax prepartion including free efiling Divide the result by the number of months in the short tax year. 2011 taxact online tax prepartion including free efiling Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. 2011 taxact online tax prepartion including free efiling The result is the annualized AMT. 2011 taxact online tax prepartion including free efiling Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. 2011 taxact online tax prepartion including free efiling   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. 2011 taxact online tax prepartion including free efiling For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. 2011 taxact online tax prepartion including free efiling Tax withheld from wages. 2011 taxact online tax prepartion including free efiling   You can claim a credit against your income tax liability for federal income tax withheld from your wages. 2011 taxact online tax prepartion including free efiling Federal income tax is withheld on a calendar year basis. 2011 taxact online tax prepartion including free efiling The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. 2011 taxact online tax prepartion including free efiling Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling See Accounting Periods, earlier, for a description of permissible tax years. 2011 taxact online tax prepartion including free efiling To change to a proper tax year, you must do one of the following. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Attach a completed Form 1128 to the amended tax return. 2011 taxact online tax prepartion including free efiling Write “FILED UNDER REV. 2011 taxact online tax prepartion including free efiling PROC. 2011 taxact online tax prepartion including free efiling 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. 2011 taxact online tax prepartion including free efiling See the Instructions for Form 1128 for exceptions. 2011 taxact online tax prepartion including free efiling If you qualify for an automatic approval request, a user fee is not required. 2011 taxact online tax prepartion including free efiling Individuals Generally, individuals must adopt the calendar year as their tax year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. 2011 taxact online tax prepartion including free efiling A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. 2011 taxact online tax prepartion including free efiling 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). 2011 taxact online tax prepartion including free efiling The following discussions provide the rules for partnerships, S corporations, and PSCs. 2011 taxact online tax prepartion including free efiling Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling The partnership can establish a business purpose for a different tax year. 2011 taxact online tax prepartion including free efiling The rules for the required tax year for partnerships are as follows. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. 2011 taxact online tax prepartion including free efiling A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. 2011 taxact online tax prepartion including free efiling Least aggregate deferral of income. 2011 taxact online tax prepartion including free efiling   The tax year that results in the least aggregate deferral of income is determined as follows. 2011 taxact online tax prepartion including free efiling Figure the number of months of deferral for each partner using one partner's tax year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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). 2011 taxact online tax prepartion including free efiling Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). 2011 taxact online tax prepartion including free efiling Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. 2011 taxact online tax prepartion including free efiling   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. 2011 taxact online tax prepartion including free efiling Example. 2011 taxact online tax prepartion including free efiling A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. 2011 taxact online tax prepartion including free efiling A uses the calendar year and B uses a fiscal year ending November 30. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. 2011 taxact online tax prepartion including free efiling 5 -0- -0- B 11/30 0. 2011 taxact online tax prepartion including free efiling 5 11 5. 2011 taxact online tax prepartion including free efiling 5 Total Deferral 5. 2011 taxact online tax prepartion including free efiling 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. 2011 taxact online tax prepartion including free efiling 5 1 0. 2011 taxact online tax prepartion including free efiling 5 B 11/30 0. 2011 taxact online tax prepartion including free efiling 5 -0- -0- Total Deferral 0. 2011 taxact online tax prepartion including free efiling 5 When determination is made. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. 2011 taxact online tax prepartion including free efiling This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. 2011 taxact online tax prepartion including free efiling Short period return. 2011 taxact online tax prepartion including free efiling   When a partnership changes its tax year, a short period return must be filed. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. 2011 taxact online tax prepartion including free efiling 706-1. 2011 taxact online tax prepartion including free efiling ” More information. 2011 taxact online tax prepartion including free efiling   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. 2011 taxact online tax prepartion including free efiling S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. 2011 taxact online tax prepartion including free efiling A permitted tax year is any of the following. 2011 taxact online tax prepartion including free efiling The calendar year. 2011 taxact online tax prepartion including free efiling A tax year elected under section 444 of the Internal Revenue Code. 2011 taxact online tax prepartion including free efiling See Section 444 Election, below for details. 2011 taxact online tax prepartion including free efiling A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. 2011 taxact online tax prepartion including free efiling Any other tax year for which the corporation establishes a business purpose. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. 2011 taxact online tax prepartion including free efiling Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. 2011 taxact online tax prepartion including free efiling The corporation makes an election under section 444 of the Internal Revenue Code. 2011 taxact online tax prepartion including free efiling See Section 444 Election, below for details. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling The corporation establishes a business purpose for a fiscal year. 2011 taxact online tax prepartion including free efiling See the Instructions for Form 1120 for general information about PSCs. 2011 taxact online tax prepartion including free efiling For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Certain restrictions apply to the election. 2011 taxact online tax prepartion including free efiling 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). 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. 2011 taxact online tax prepartion including free efiling It is not a member of a tiered structure (defined in section 1. 2011 taxact online tax prepartion including free efiling 444-2T of the regulations). 2011 taxact online tax prepartion including free efiling It has not previously had a section 444 election in effect. 2011 taxact online tax prepartion including free efiling It elects a year that meets the deferral period requirement. 2011 taxact online tax prepartion including free efiling Deferral period. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Retaining tax year. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. 2011 taxact online tax prepartion including free efiling Adopting or changing tax year. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. 2011 taxact online tax prepartion including free efiling If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. 2011 taxact online tax prepartion including free efiling Example 1. 2011 taxact online tax prepartion including free efiling BD Partnership uses a calendar year, which is also its required tax year. 2011 taxact online tax prepartion including free efiling BD cannot make a section 444 election because the deferral period is zero. 2011 taxact online tax prepartion including free efiling Example 2. 2011 taxact online tax prepartion including free efiling E, a newly formed partnership, began operations on December 1. 2011 taxact online tax prepartion including free efiling E is owned by calendar year partners. 2011 taxact online tax prepartion including free efiling E wants to make a section 444 election to adopt a September 30 tax year. 2011 taxact online tax prepartion including free efiling E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. 2011 taxact online tax prepartion including free efiling Making the election. 2011 taxact online tax prepartion including free efiling   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. 2011 taxact online tax prepartion including free efiling Note. 2011 taxact online tax prepartion including free efiling If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Example 1. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Example 2. 2011 taxact online tax prepartion including free efiling The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. 2011 taxact online tax prepartion including free efiling AB must file Form 8716 by March 17, 2013. 2011 taxact online tax prepartion including free efiling Example 3. 2011 taxact online tax prepartion including free efiling B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. 2011 taxact online tax prepartion including free efiling B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Note. 2011 taxact online tax prepartion including free efiling The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. 2011 taxact online tax prepartion including free efiling Extension of time for filing. 2011 taxact online tax prepartion including free efiling   There is an automatic extension of 12 months to make this election. 2011 taxact online tax prepartion including free efiling See the Form 8716 instructions for more information. 2011 taxact online tax prepartion including free efiling Terminating the election. 2011 taxact online tax prepartion including free efiling   The section 444 election remains in effect until it is terminated. 2011 taxact online tax prepartion including free efiling If the election is terminated, another section 444 election cannot be made for any tax year. 2011 taxact online tax prepartion including free efiling   The election ends when any of the following applies to the partnership, S corporation, or PSC. 2011 taxact online tax prepartion including free efiling The entity changes to its required tax year. 2011 taxact online tax prepartion including free efiling The entity liquidates. 2011 taxact online tax prepartion including free efiling The entity becomes a member of a tiered structure. 2011 taxact online tax prepartion including free efiling The IRS determines that the entity willfully failed to comply with the required payments or distributions. 2011 taxact online tax prepartion including free efiling   The election will also end if either of the following events occur. 2011 taxact online tax prepartion including free efiling An S corporation's S election is terminated. 2011 taxact online tax prepartion including free efiling However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. 2011 taxact online tax prepartion including free efiling A PSC ceases to be a PSC. 2011 taxact online tax prepartion including free efiling If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. 2011 taxact online tax prepartion including free efiling Required payment for partnership or S corporation. 2011 taxact online tax prepartion including free efiling   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. 2011 taxact online tax prepartion including free efiling The required payment for that year (or any preceding tax year) is more than $500. 2011 taxact online tax prepartion including free efiling    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Applicable election year. 2011 taxact online tax prepartion including free efiling   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Required distribution for PSC. 2011 taxact online tax prepartion including free efiling   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. 2011 taxact online tax prepartion including free efiling If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. 2011 taxact online tax prepartion including free efiling The amount deferred is treated as paid or incurred in the following tax year. 2011 taxact online tax prepartion including free efiling   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). 2011 taxact online tax prepartion including free efiling Back-up election. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). 2011 taxact online tax prepartion including free efiling Making back-up election. 2011 taxact online tax prepartion including free efiling   The general rules for making a section 444 election, as discussed earlier, apply. 2011 taxact online tax prepartion including free efiling When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Activating election. 2011 taxact online tax prepartion including free efiling   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. 2011 taxact online tax prepartion including free efiling The due date for filing Form 8752 and making the payment is the later of the following dates. 2011 taxact online tax prepartion including free efiling May 15 of the calendar year following the calendar year in which the applicable election year begins. 2011 taxact online tax prepartion including free efiling 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling ” 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). 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. 2011 taxact online tax prepartion including free efiling See the Instructions for Form 1128 for details. 2011 taxact online tax prepartion including free efiling Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling See the Instructions for Form 1128 for details. 2011 taxact online tax prepartion including free efiling Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. 2011 taxact online tax prepartion including free efiling Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 2011 taxact online tax prepartion including free efiling You choose an accounting method when you file your first tax return. 2011 taxact online tax prepartion including free efiling If you later want to change your accounting method, you must get IRS approval. 2011 taxact online tax prepartion including free efiling See Change in Accounting Method, later. 2011 taxact online tax prepartion including free efiling No single accounting method is required of all taxpayers. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. 2011 taxact online tax prepartion including free efiling You must use the same accounting method from year to year. 2011 taxact online tax prepartion including free efiling An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Methods you can use. 2011 taxact online tax prepartion including free efiling   In general, you can compute your taxable income under any of the following accounting methods. 2011 taxact online tax prepartion including free efiling Cash method. 2011 taxact online tax prepartion including free efiling Accrual method. 2011 taxact online tax prepartion including free efiling Special methods of accounting for certain items of income and expenses. 2011 taxact online tax prepartion including free efiling A hybrid method which combines elements of two or more of the above accounting methods. 2011 taxact online tax prepartion including free efiling The cash and accrual methods of accounting are explained later. 2011 taxact online tax prepartion including free efiling Special methods. 2011 taxact online tax prepartion including free efiling   This publication does not discuss special methods of accounting for certain items of income or expenses. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling The following publications also discuss special methods of reporting income or expenses. 2011 taxact online tax prepartion including free efiling Publication 225, Farmer's Tax Guide. 2011 taxact online tax prepartion including free efiling Publication 535, Business Expenses. 2011 taxact online tax prepartion including free efiling Publication 537, Installment Sales. 2011 taxact online tax prepartion including free efiling Publication 946, How To Depreciate Property. 2011 taxact online tax prepartion including free efiling Hybrid method. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling However, the following restrictions apply. 2011 taxact online tax prepartion including free efiling If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. 2011 taxact online tax prepartion including free efiling See Exceptions under Inventories, later. 2011 taxact online tax prepartion including free efiling Generally, you can use the cash method for all other items of income and expenses. 2011 taxact online tax prepartion including free efiling See Inventories, later. 2011 taxact online tax prepartion including free efiling If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. 2011 taxact online tax prepartion including free efiling If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 2011 taxact online tax prepartion including free efiling Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. 2011 taxact online tax prepartion including free efiling Business and personal items. 2011 taxact online tax prepartion including free efiling   You can account for business and personal items using different accounting methods. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Two or more businesses. 2011 taxact online tax prepartion including free efiling   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 2011 taxact online tax prepartion including free efiling No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. 2011 taxact online tax prepartion including free efiling Note. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Cash Method Most individuals and many small businesses use the cash method of accounting. 2011 taxact online tax prepartion including free efiling Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. 2011 taxact online tax prepartion including free efiling See Inventories, later, for exceptions to this rule. 2011 taxact online tax prepartion including free efiling Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. 2011 taxact online tax prepartion including free efiling If you receive property and services, you must include their fair market value (FMV) in income. 2011 taxact online tax prepartion including free efiling Constructive receipt. 2011 taxact online tax prepartion including free efiling   Income is constructively received when an amount is credited to your account or made available to you without restriction. 2011 taxact online tax prepartion including free efiling You need not have possession of it. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. 2011 taxact online tax prepartion including free efiling Example. 2011 taxact online tax prepartion including free efiling You are a calendar year taxpayer. 2011 taxact online tax prepartion including free efiling Your bank credited, and made available, interest to your bank account in December 2012. 2011 taxact online tax prepartion including free efiling You did not withdraw it or enter it into your books until 2013. 2011 taxact online tax prepartion including free efiling You must include the amount in gross income for 2012, the year you constructively received it. 2011 taxact online tax prepartion including free efiling You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. 2011 taxact online tax prepartion including free efiling You must report the income in the year the property is received or made available to you without restriction. 2011 taxact online tax prepartion including free efiling Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. 2011 taxact online tax prepartion including free efiling This includes business expenses for which you contest liability. 2011 taxact online tax prepartion including free efiling However, you may not be able to deduct an expense paid in advance. 2011 taxact online tax prepartion including free efiling Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. 2011 taxact online tax prepartion including free efiling Expense paid in advance. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling See Change in Accounting Method, later. 2011 taxact online tax prepartion including free efiling Example 1. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Example 2. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling The 12-month rule applies. 2011 taxact online tax prepartion including free efiling Therefore, the full $10,000 is deductible in 2012. 2011 taxact online tax prepartion including free efiling Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. 2011 taxact online tax prepartion including free efiling (See Special rules for farming businesses, later. 2011 taxact online tax prepartion including free efiling ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. 2011 taxact online tax prepartion including free efiling See Gross receipts test, below. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling See Gross receipts test, below. 2011 taxact online tax prepartion including free efiling A tax shelter. 2011 taxact online tax prepartion including free efiling Exceptions The following entities are not prohibited from using the cash method of accounting. 2011 taxact online tax prepartion including free efiling Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. 2011 taxact online tax prepartion including free efiling A qualified personal service corporation (PSC). 2011 taxact online tax prepartion including free efiling Gross receipts test. 2011 taxact online tax prepartion including free efiling   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling    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. 2011 taxact online tax prepartion including free efiling See Gross receipts test for qualifying taxpayers, for more information. 2011 taxact online tax prepartion including free efiling Generally, a partnership applies the test at the partnership level. 2011 taxact online tax prepartion including free efiling Gross receipts for a short tax year are annualized. 2011 taxact online tax prepartion including free efiling Aggregation rules. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Change to accrual method. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Special rules for farming businesses. 2011 taxact online tax prepartion including free efiling   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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). 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. 2011 taxact online tax prepartion including free efiling See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. 2011 taxact online tax prepartion including free efiling Qualified PSC. 2011 taxact online tax prepartion including free efiling   A PSC that meets the following function and ownership tests can use the cash method. 2011 taxact online tax prepartion including free efiling Function test. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Ownership test. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Employees performing services for the corporation in a field qualifying under the function test. 2011 taxact online tax prepartion including free efiling Retired employees who had performed services in those fields. 2011 taxact online tax prepartion including free efiling The estate of an employee described in (1) or (2). 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. 2011 taxact online tax prepartion including free efiling Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Change to accrual method. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling The purpose of an accrual method of accounting is to match income and expenses in the correct year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Under this rule, you report an amount in your gross income on the earliest of the following dates. 2011 taxact online tax prepartion including free efiling When you receive payment. 2011 taxact online tax prepartion including free efiling When the income amount is due to you. 2011 taxact online tax prepartion including free efiling When you earn the income. 2011 taxact online tax prepartion including free efiling When title has passed. 2011 taxact online tax prepartion including free efiling Estimated income. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Change in payment schedule. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Continue this procedure until you complete the services, then account for the difference. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling However, you cannot postpone including any payment beyond that tax year. 2011 taxact online tax prepartion including free efiling Service agreement. 2011 taxact online tax prepartion including free efiling   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. 2011 taxact online tax prepartion including free efiling This includes an agreement providing for incidental replacement of parts or materials. 2011 taxact online tax prepartion including free efiling However, this applies only if you offer the property without a service agreement in the normal course of business. 2011 taxact online tax prepartion including free efiling Postponement not allowed. 2011 taxact online tax prepartion including free efiling   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Examples. 2011 taxact online tax prepartion including free efiling   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. 2011 taxact online tax prepartion including free efiling Example 1. 2011 taxact online tax prepartion including free efiling You manufacture, sell, and service computers. 2011 taxact online tax prepartion including free efiling You received payment in 2012 for a one-year contingent service contract on a computer you sold. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Example 2. 2011 taxact online tax prepartion including free efiling You are in the television repair business. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling You include the payments in gross income as you earn them. 2011 taxact online tax prepartion including free efiling Example 3. 2011 taxact online tax prepartion including free efiling You own a dance studio. 2011 taxact online tax prepartion including free efiling On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. 2011 taxact online tax prepartion including free efiling You give eight lessons in 2012. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Example 4. 2011 taxact online tax prepartion including free efiling Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. 2011 taxact online tax prepartion including free efiling You must include the entire payment in income in 2012 since part of the services may be performed after the following year. 2011 taxact online tax prepartion including free efiling Guarantee or warranty. 2011 taxact online tax prepartion including free efiling   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. 2011 taxact online tax prepartion including free efiling Prepaid rent. 2011 taxact online tax prepartion including free efiling   You cannot postpone reporting income from prepaid rent. 2011 taxact online tax prepartion including free efiling Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Books and records. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. 2011 taxact online tax prepartion including free efiling IRS approval. 2011 taxact online tax prepartion including free efiling   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling An agreement includes a gift certificate that can be redeemed for goods. 2011 taxact online tax prepartion including free efiling Amounts due and payable are considered received. 2011 taxact online tax prepartion including free efiling How to report payments. 2011 taxact online tax prepartion including free efiling   Generally, include an advance payment in income in the year in which you receive it. 2011 taxact online tax prepartion including free efiling However, you can use the alternative method, discussed next. 2011 taxact online tax prepartion including free efiling Alternative method of reporting. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. 2011 taxact online tax prepartion including free efiling Example 1. 2011 taxact online tax prepartion including free efiling You are a retailer. 2011 taxact online tax prepartion including free efiling You use an accrual method of accounting and account for the sale of goods when you ship the goods. 2011 taxact online tax prepartion including free efiling You use this method for both tax and financial reporting purposes. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling However, see Exception for inventory goods, later. 2011 taxact online tax prepartion including free efiling Example 2. 2011 taxact online tax prepartion including free efiling You are a calendar year taxpayer. 2011 taxact online tax prepartion including free efiling You manufacture household furniture and use an accrual method of accounting. 2011 taxact online tax prepartion including free efiling Under this method, you accrue income for your financial reports when you ship the furniture. 2011 taxact online tax prepartion including free efiling For tax purposes, you do not accrue income until the furniture has been delivered and accepted. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Information schedule. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Total advance payments received in the current tax year. 2011 taxact online tax prepartion including free efiling Total advance payments received in earlier tax years and not included in income before the current tax year. 2011 taxact online tax prepartion including free efiling Total payments received in earlier tax years included in income for the current tax year. 2011 taxact online tax prepartion including free efiling Exception for inventory goods. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling You account for the advance payment under the alternative method (discussed earlier). 2011 taxact online tax prepartion including free efiling You have received a substantial advance payment on the agreement (discussed next). 2011 taxact online tax prepartion including free efiling You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. 2011 taxact online tax prepartion including free efiling If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. 2011 taxact online tax prepartion including free efiling Note. 2011 taxact online tax prepartion including free efiling You must report any advance payments you receive after the second year in the year received. 2011 taxact online tax prepartion including free efiling No further deferral is allowed. 2011 taxact online tax prepartion including free efiling Substantial advance payments. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Example. 2011 taxact online tax prepartion including free efiling You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. 2011 taxact online tax prepartion including free efiling In 2008, you entered into a contract for the sale of goods properly includible in your inventory. 2011 taxact online tax prepartion including free efiling The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. 2011 taxact online tax prepartion including free efiling You receive the following advance payments under the contract. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling If no such goods are on hand, then estimate the cost necessary to satisfy the contract. 2011 taxact online tax prepartion including free efiling   No further deferral is allowed. 2011 taxact online tax prepartion including free efiling You must include in gross income the advance payment you receive each remaining year of the contract. 2011 taxact online tax prepartion including free efiling Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. 2011 taxact online tax prepartion including free efiling IRS approval. 2011 taxact online tax prepartion including free efiling   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. 2011 taxact online tax prepartion including free efiling Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. 2011 taxact online tax prepartion including free efiling The all-events test has been met. 2011 taxact online tax prepartion including free efiling The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 2011 taxact online tax prepartion including free efiling Economic performance has occurred. 2011 taxact online tax prepartion including free efiling Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2011 taxact online tax prepartion including free efiling Example. 2011 taxact online tax prepartion including free efiling You are a calendar year taxpayer. 2011 taxact online tax prepartion including free efiling You buy office supplies in December 2012. 2011 taxact online tax prepartion including free efiling You receive the supplies and the bill in December, but you pay the bill in January 2013. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Your office supplies may qualify as a recurring item, discussed later. 2011 taxact online tax prepartion including free efiling If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). 2011 taxact online tax prepartion including free efiling Workers' compensation and tort liability. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Taxes. 2011 taxact online tax prepartion including free efiling   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. 2011 taxact online tax prepartion including free efiling are paid. 2011 taxact online tax prepartion including free efiling However, you can elect to treat taxes as a recurring item, discussed later. 2011 taxact online tax prepartion including free efiling You can also elect to ratably accrue real estate taxes. 2011 taxact online tax prepartion including free efiling See chapter 5 of Publication 535 for information about real estate taxes. 2011 taxact online tax prepartion including free efiling Other liabilities. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Interest. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling Compensation for services. 2011 taxact online tax prepartion including free efiling   Generally, economic performance occurs as an employee renders service to the employer. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. 2011 taxact online tax prepartion including free efiling Vacation pay. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling If you pay it later than this, you must deduct it in the year actually paid. 2011 taxact online tax prepartion including free efiling An amount is vested if your right to it cannot be nullified or cancelled. 2011 taxact online tax prepartion including free efiling Exception for recurring items. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling The exception applies if all the following requirements are met. 2011 taxact online tax prepartion including free efiling The all-events test, discussed earlier, is met. 2011 taxact online tax prepartion including free efiling Economic performance occurs by the earlier of the following dates. 2011 taxact online tax prepartion including free efiling 8½ months after the close of the year. 2011 taxact online tax prepartion including free efiling The date you file a timely return (including extensions) for the year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling This exception does not apply to workers' compensation or tort liabilities. 2011 taxact online tax prepartion including free efiling Amended return. 2011 taxact online tax prepartion including free efiling   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Recurrence and consistency. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Materiality. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling   An item considered material for financial statement purposes is also considered material for tax purposes. 2011 taxact online tax prepartion including free efiling However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. 2011 taxact online tax prepartion including free efiling Matching expenses with income. 2011 taxact online tax prepartion including free efiling   Costs directly associated with the revenue of a period are properly allocable to that period. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling fasab. 2011 taxact online tax prepartion including free efiling gov/accepted. 2011 taxact online tax prepartion including free efiling html) are an important factor. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling However, the matching requirement is considered met for certain types of expenses. 2011 taxact online tax prepartion including free efiling These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling See Change in Accounting Method, later, for information on how to get IRS approval. 2011 taxact online tax prepartion including free efiling See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 2011 taxact online tax prepartion including free efiling See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. 2011 taxact online tax prepartion including free efiling Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 2011 taxact online tax prepartion including free efiling If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. 2011 taxact online tax prepartion including free efiling However, see Exceptions, next. 2011 taxact online tax prepartion including free efiling See also Accrual Method, earlier. 2011 taxact online tax prepartion including free efiling To figure taxable income, you must value your inventory at the beginning and end of each tax year. 2011 taxact online tax prepartion including free efiling To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. 2011 taxact online tax prepartion including free efiling See Identifying Cost and Valuing Inventory, later. 2011 taxact online tax prepartion including free efiling The rules for valuing inventory are not the same for all businesses. 2011 taxact online tax prepartion including free efiling The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 2011 taxact online tax prepartion including free efiling Your inventory practices must be consistent from year to year. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. 2011 taxact online tax prepartion including free efiling These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). 2011 taxact online tax prepartion including free efiling A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. 2011 taxact online tax prepartion including free efiling irs. 2011 taxact online tax prepartion including free efiling gov/pub/irs-irbs/irb01–02. 2011 taxact online tax prepartion including free efiling pdf. 2011 taxact online tax prepartion including free efiling A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. 2011 taxact online tax prepartion including free efiling irs. 2011 taxact online tax prepartion including free efiling gov/pub/irs-irbs/irb02–18. 2011 taxact online tax prepartion including free efiling pdf. 2011 taxact online tax prepartion including free efiling 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). 2011 taxact online tax prepartion including free efiling Qualifying taxpayer. 2011 taxact online tax prepartion including free efiling   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). 2011 taxact online tax prepartion including free efiling Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. 2011 taxact online tax prepartion including free efiling You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. 2011 taxact online tax prepartion including free efiling Gross receipts test for qualifying taxpayers. 2011 taxact online tax prepartion including free efiling   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. 2011 taxact online tax prepartion including free efiling List each of the test years. 2011 taxact online tax prepartion including free efiling For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. 2011 taxact online tax prepartion including free efiling Step 2. 2011 taxact online tax prepartion including free efiling Determine your average annual gross receipts for each test year listed in Step 1. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Step 3. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Qualifying small business taxpayer. 2011 taxact online tax prepartion including free efiling   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). 2011 taxact online tax prepartion including free efiling Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. 2011 taxact online tax prepartion including free efiling You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. 2011 taxact online tax prepartion including free efiling Your principle business activity is an eligible business. 2011 taxact online tax prepartion including free efiling See Eligible business, later. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Note. 2011 taxact online tax prepartion including free efiling Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. 2011 taxact online tax prepartion including free efiling A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. 2011 taxact online tax prepartion including free efiling See Special rules for farming businesses under Cash Method, earlier. 2011 taxact online tax prepartion including free efiling Gross receipts test for qualifying small business taxpayers. 2011 taxact online tax prepartion including free efiling   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. 2011 taxact online tax prepartion including free efiling List each of the test years. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Step 2. 2011 taxact online tax prepartion including free efiling Determine your average annual gross receipts for each test year listed in Step 1. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Step 3. 2011 taxact online tax prepartion including free efiling 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. 2011 taxact online tax prepartion including free efiling Eligible business. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling You have an eligible business if you meet any of the following requirements. 2011 taxact online tax prepartion including free efiling 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). 2011 taxact online tax prepartion including free efiling NAICS codes 31-33 (manufacturing). 2011 taxact online tax prepartion including free efiling NAICS code 42 (wholesale trade). 2011 taxact online tax prepartion including free efiling NAICS codes 44-45 (retail trade). 2011 taxact online tax prepartion including free efiling NAICS codes 5111 and 5122 (information industries). 2011 taxact online tax prepartion including free efiling Your principal business activity is the provision of services, including the provision of property incident to those services. 2011 taxact online tax prepartion including free efiling Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. 2011 taxact online tax prepartion including free efiling   Information about the NAICS codes can be found at http://www. 2011 taxact online tax prepartion including free efiling census. 2011 taxact online tax prepartion including free efiling gov/naics or in the instructions for your federal income tax return. 2011 taxact online tax prepartion including free efiling Gross receipts. 2011 taxact online tax prepartion including free efiling   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. 2011 taxact online tax prepartion including free efiling See the definit