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Amend taxes turbotax 4. Amend taxes turbotax   Deductions Table of Contents Standard DeductionStandard Deduction for Dependents Itemized DeductionsMedical and Dental Expenses Most taxpayers have a choice of taking a standard deduction or itemizing their deductions. Amend taxes turbotax You benefit from the standard deduction if your standard deduction is more than the total of your allowable itemized deductions. Amend taxes turbotax If you have a choice, you should use the method that gives you the lower tax. Amend taxes turbotax Standard Deduction The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. Amend taxes turbotax Generally, the standard deduction amounts are adjusted each year for inflation. Amend taxes turbotax In most cases, you can use Worksheet 4-1 to figure your standard deduction amount. Amend taxes turbotax Persons not eligible for the standard deduction. Amend taxes turbotax   Your standard deduction is zero and you should itemize any deductions you have if: You are married and filing a separate return, and your spouse itemizes deductions, You are filing a tax return for a short tax year because of a change in your annual accounting period, or You are a nonresident or dual-status alien during the year. Amend taxes turbotax You are considered a dual-status alien if you were both a nonresident alien and a resident alien during the year. Amend taxes turbotax   If you are a nonresident alien who is married to a U. Amend taxes turbotax S. Amend taxes turbotax citizen or resident alien at the end of the year, you can choose to be treated as a U. Amend taxes turbotax S. Amend taxes turbotax resident. Amend taxes turbotax See Publication 519, U. Amend taxes turbotax S. Amend taxes turbotax Tax Guide for Aliens. Amend taxes turbotax If you make this choice, you can take the standard deduction. Amend taxes turbotax Decedent's final return. Amend taxes turbotax   The amount of the standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. Amend taxes turbotax However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed. Amend taxes turbotax Higher standard deduction for age (65 or older). Amend taxes turbotax   If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. Amend taxes turbotax You are considered age 65 on the day before your 65th birthday. Amend taxes turbotax Therefore, you can take a higher standard deduction for 2013 if you were born before January 2, 1949. Amend taxes turbotax Higher standard deduction for blindness. Amend taxes turbotax   If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. Amend taxes turbotax You qualify for this benefit if you are totally or partly blind. Amend taxes turbotax Not totally blind. Amend taxes turbotax   If you are not totally blind, you must get a certified statement from an eye doctor (ophthalmologist or optometrist) that: You cannot see better than 20/200 in the better eye with glasses or contact lenses, or Your field of vision is not more than 20 degrees. Amend taxes turbotax   If your eye condition will never improve beyond these limits, the statement should include this fact. Amend taxes turbotax You must keep the statement in your records. Amend taxes turbotax   If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify. Amend taxes turbotax Spouse 65 or older or blind. Amend taxes turbotax   You can take the higher standard deduction if your spouse is age 65 or older or blind and: You file a joint return, or You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and an exemption for your spouse could not be claimed by another taxpayer. Amend taxes turbotax    You cannot claim the higher standard deduction for an individual other than yourself and your spouse. Amend taxes turbotax Example. Amend taxes turbotax This example illustrates how to determine your standard deduction using Worksheet 4-1. Amend taxes turbotax Bill and Lisa are filing a joint return for 2013. Amend taxes turbotax Both are over age 65. Amend taxes turbotax Neither is blind, and neither can be claimed as a dependent. Amend taxes turbotax They do not itemize deductions, so they use Worksheet 4-1. Amend taxes turbotax Because they are married filing jointly, they enter $12,200 on line 1. Amend taxes turbotax They check the “No” box on line 2, so they also enter $12,200 on line 4. Amend taxes turbotax Because they are both over age 65, they enter $2,400 ($1,200 × 2) on line 5. Amend taxes turbotax They enter $14,600 ($12,200 + $2,400) on line 6, so their standard deduction is $14,600. Amend taxes turbotax Standard Deduction for Dependents The standard deduction for an individual for whom an exemption can be claimed on another person's tax return is generally limited to the greater of: $1,000, or The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $6,100). Amend taxes turbotax However, the standard deduction may be higher if the individual is 65 or older or blind. Amend taxes turbotax If an exemption for you (or your spouse if you are filing jointly) can be claimed on someone else's return, use Worksheet 4-1, if applicable, to determine your standard deduction. Amend taxes turbotax Worksheet 4-1. Amend taxes turbotax 2013 Standard Deduction Worksheet Caution. Amend taxes turbotax If you are married filing separately and your spouse itemizes deductions, or if you are a dual-status alien, do not complete this worksheet. Amend taxes turbotax If you were born before January 2, 1949, and/or blind, check the correct number of boxes below. Amend taxes turbotax Put the total number of boxes checked in box c and go to line 1. Amend taxes turbotax a. Amend taxes turbotax You   Born before  January 2, 1949     Blind b. Amend taxes turbotax Your spouse, if claiming  spouse's exemption   Born before January 2, 1949     Blind c. Amend taxes turbotax Total boxes checked             1. Amend taxes turbotax Enter the amount shown below for your filing status. Amend taxes turbotax               Single or married filing separately — $6,100 Married filing jointly or Qualifying widow(er) — $12,200 Head of household — $8,950   1. Amend taxes turbotax           2. Amend taxes turbotax Can you (or your spouse if filing jointly) be claimed as a dependent on someone else's return?  No. Amend taxes turbotax Skip line 3; enter the amount from line 1 on line 4. Amend taxes turbotax   Yes. Amend taxes turbotax Go to line 3. Amend taxes turbotax         3. Amend taxes turbotax Is your earned income* more than $650?               Yes. Amend taxes turbotax Add $350 to your earned income. Amend taxes turbotax Enter the total   3. Amend taxes turbotax         No. Amend taxes turbotax Enter $1,000 4. Amend taxes turbotax Enter the smaller of line 1 or line 3 4. Amend taxes turbotax   5. Amend taxes turbotax If born before January 2, 1949, or blind, multiply the number in box c by $1,200 ($1,500 if single or head of household). Amend taxes turbotax Enter the result here. Amend taxes turbotax Otherwise, enter -0- 5. Amend taxes turbotax   6. Amend taxes turbotax Add lines 4 and 5. Amend taxes turbotax This is your standard deduction for 2013. Amend taxes turbotax 6. Amend taxes turbotax   * Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Amend taxes turbotax It also includes any amount received as a scholarship that you must include in your income. Amend taxes turbotax Generally, your earned income is the total of the amount(s) you reported on Form 1040, lines 7, 12, and 18, minus the amount, if any, on line 27 (or the amount you reported on Form 1040A, line 7). Amend taxes turbotax Itemized Deductions Some individuals should itemize their deductions because it will save them money. Amend taxes turbotax Others should itemize because they do not qualify for the standard deduction. Amend taxes turbotax See the discussion under Standard Deduction , earlier, to decide if it would be to your advantage to itemize deductions. Amend taxes turbotax You may be subject to a limit on some of your itemized deductions if your adjusted gross income is more than $150,000. Amend taxes turbotax For more information, see Overall limitation, later. Amend taxes turbotax Medical and dental expenses, some taxes, certain interest expenses, charitable contributions, casualty and theft losses, and certain other miscellaneous expenses may be itemized as deductions on Schedule A (Form 1040). Amend taxes turbotax You may benefit from itemizing your deductions on Schedule A (Form 1040) if you: Cannot take the standard deduction, Had uninsured medical or dental expenses that are more than 10% of your adjusted gross income (or more than 7. Amend taxes turbotax 5% of your adjusted gross income if either you or your spouse is age 65 or older), Paid interest on your home, Paid real estate or personal property taxes, Paid mortgage insurance premiums, Paid state and local income or general sales taxes, Had large unreimbursed employee business expenses or other miscellaneous deductions, Had large uninsured casualty or theft losses, Made large contributions to qualified charities (see Publication 526, Charitable Contributions), or Have total itemized deductions that are more than the standard deduction that applies to you. Amend taxes turbotax See the Schedule A (Form 1040) instructions for more information. Amend taxes turbotax Overall limitation. Amend taxes turbotax   You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than: $150,000, if married filing separately, $250,000, if single, $275,000, if head of household, or $300,000, if married filing jointly or qualifying widow(er). Amend taxes turbotax  If your adjusted gross income exceeds the applicable amount, you will use the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040) to figure your total itemized deductions. Amend taxes turbotax Medical and Dental Expenses You can deduct certain medical and dental expenses you paid for yourself, your spouse, and your dependent(s) if you itemize your deductions on Schedule A (Form 1040). Amend taxes turbotax Table 4-1 shows some common items that you can or cannot include in figuring your medical expense deduction. Amend taxes turbotax For more information, see the following discussions of selected items, which are presented in alphabetical order. Amend taxes turbotax A more extensive list of items and further details can be found in Publication 502, Medical and Dental Expenses. Amend taxes turbotax Table 4-1. Amend taxes turbotax Medical and Dental Expenses Checklist You can include: You cannot include: Bandages Capital expenses for equipment or improvements to your home needed for medical care (see Publication 502) Certain weight-loss expenses for obesity Diagnostic devices Expenses of an organ donor Eye surgery—to promote the correct function of the eye Guide dogs or other animals aiding the blind, deaf, and disabled Hospital services fees (lab work, therapy, nursing services, surgery, etc. Amend taxes turbotax ) Lead-based paint removal (see Publication 502) Long-term care contracts, qualified (see Publication 502) Meals and lodging provided by a hospital during medical treatment Medical and hospital insurance premiums Medical services fees (from doctors, dentists, surgeons, specialists, and other medical practitioners) Medicare Part D premiums Oxygen equipment and oxygen Part of life-care fee paid to retirement home designated for medical care Prescription medicines (prescribed by a doctor) and insulin Psychiatric and psychological treatment Social security tax, Medicare tax, FUTA, and state employment tax for worker providing medical care (see Publication 502) Special items (artificial limbs, false teeth, eyeglasses, contact lenses, hearing aids, crutches, wheelchair, etc. Amend taxes turbotax ) Special education for mentally or physically disabled persons (see Publication 502) Stop-smoking programs Transportation for needed medical care Treatment at a drug or alcohol center (includes meals and lodging provided by the center) Wages for nursing services (see Publication 502) Contributions to Archer MSAs (see Publication 969) Bottled water Diaper service Expenses for your general health (even if following your doctor's advice) such as: —Health club dues —Household help (even if recommended by a doctor) —Social activities, such as dancing or swimming lessons —Trip for general health improvement Flexible spending account reimbursements for medical expenses (if contributions were on a pretax basis) (see Publication 502) Funeral, burial, or cremation expenses Health savings account payments for medical expenses (see Publication 502) Illegal operation or treatment Life insurance or income protection policies, or policies providing payment for loss of life, limb, sight, etc. Amend taxes turbotax Medical insurance included in a car insurance policy covering all persons injured in or by your car Medicine you buy without a prescription Nursing care for a healthy baby Prescription drugs you brought in (or ordered shipped) from another country, in most cases (see Publication 502) Surgery for purely cosmetic reasons (see Publication 502) Toothpaste, toiletries, cosmetics, etc. Amend taxes turbotax Teeth whitening Weight-loss expenses not for the treatment of obesity or other disease You can deduct only the amount of your medical and dental expenses that is more than 10% of your adjusted gross income (or that is more than 7. Amend taxes turbotax 5% of your adjusted gross income if you or your spouse is age 65 or older). Amend taxes turbotax What to include. Amend taxes turbotax   Generally, you can include only the medical and dental expenses you paid this year, regardless of when the services were provided. Amend taxes turbotax If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. Amend taxes turbotax If you use a pay-by-phone or online account to pay your medical expenses, the date reported on the statement of the financial institution showing when payment was made is the date of payment. Amend taxes turbotax You can include medical expenses you charge to your credit card in the year the charge is made. Amend taxes turbotax It does not matter when you actually pay the amount charged. Amend taxes turbotax Home Improvements You can include in medical expenses amounts you pay for home improvements if their main purpose is medical care for you, your spouse, or your dependent. Amend taxes turbotax Only reasonable costs to accommodate a home to your disabled condition (or that of your spouse or your dependent(s) who live with you) are considered medical care. Amend taxes turbotax Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses. Amend taxes turbotax Publication 502 contains additional information and examples, including a capital expense worksheet, to assist you in figuring the amount of the capital expense that you can include in your medical expenses. Amend taxes turbotax Also, see Publication 502 for information about deductible operating and upkeep expenses related to such capital expense items, and for information about improvements, for medical reasons, to property rented by a person with disabilities. Amend taxes turbotax Household Help You cannot include in medical expenses the cost of household help, even if such help is recommended by a doctor. Amend taxes turbotax This is a personal expense that is not deductible. Amend taxes turbotax However, you may be able to include certain expenses paid to a person providing nursing-type services. Amend taxes turbotax For more information, see Nursing Services , later. Amend taxes turbotax Also, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. Amend taxes turbotax For more information, see Qualified long-term care services under Long-Term Care, later. Amend taxes turbotax Hospital Services You can include in medical expenses amounts you pay for the cost of inpatient care at a hospital or similar institution if a principal reason for being there is to receive medical care. Amend taxes turbotax This includes amounts paid for meals and lodging. Amend taxes turbotax Also, see Meals and Lodging , later. Amend taxes turbotax Long-Term Care You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts. Amend taxes turbotax Qualified long-term care services. Amend taxes turbotax   Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined later) that are: Required by a chronically ill individual, and Provided under a plan of care prescribed by a licensed health care practitioner. Amend taxes turbotax Chronically ill individual. Amend taxes turbotax    An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions. Amend taxes turbotax He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Amend taxes turbotax Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. Amend taxes turbotax He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. Amend taxes turbotax Maintenance and personal care services. Amend taxes turbotax    Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment). Amend taxes turbotax Qualified long-term care insurance contracts. Amend taxes turbotax   A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. Amend taxes turbotax The contract must: Be guaranteed renewable, Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses. Amend taxes turbotax   The amount of qualified long-term care premiums you can include is limited. Amend taxes turbotax You can include the following as medical expenses on Schedule A (Form 1040). Amend taxes turbotax Qualified long-term care premiums up to the following amounts. Amend taxes turbotax Age 40 or under – $360. Amend taxes turbotax Age 41 to 50 – $680. Amend taxes turbotax Age 51 to 60 – $1,360. Amend taxes turbotax Age 61 to 70 – $3,640. Amend taxes turbotax Age 71 or over – $4,550. Amend taxes turbotax Unreimbursed expenses for qualified long-term care services. Amend taxes turbotax Note. Amend taxes turbotax The limit on premiums is for each person. Amend taxes turbotax Meals and Lodging You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if your main reason for being there is to receive medical care. Amend taxes turbotax You may be able to include in medical expenses the cost of lodging (but not meals) not provided in a hospital or similar institution. Amend taxes turbotax You can include the cost of such lodging while away from home if all of the following requirements are met. Amend taxes turbotax The lodging is primarily for, and essential to, medical care. Amend taxes turbotax The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital. Amend taxes turbotax The lodging is not lavish or extravagant under the circumstances. Amend taxes turbotax There is no significant element of personal pleasure, recreation, or vacation in the travel away from home. Amend taxes turbotax The amount you include in medical expenses for lodging cannot be more than $50 per night for each person. Amend taxes turbotax You can include lodging for a person traveling with the person receiving the medical care. Amend taxes turbotax For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. Amend taxes turbotax (Meals are not included. Amend taxes turbotax ) Nursing home. Amend taxes turbotax   You can include in medical expenses the cost of medical care in a nursing home or a home for the aged for yourself, your spouse, or your dependent(s). Amend taxes turbotax This includes the cost of meals and lodging in the home if a main reason for being there is to get medical care. Amend taxes turbotax   Do not include the cost of meals and lodging if the reason for being in the home is personal. Amend taxes turbotax However, you can include in medical expenses the part of the cost that is for medical or nursing care. Amend taxes turbotax Medical Insurance Premiums You can include in medical expenses insurance premiums you pay for policies that cover medical care. Amend taxes turbotax Policies can provide payment for: Hospitalization, surgical fees, X-rays, Prescription drugs and insulin, Dental care, Replacement of lost or damaged contact lenses, and Qualified long-term care insurance contracts (subject to the additional limits included in the discussion on qualified long-term care insurance contracts under Long-Term Care , earlier). Amend taxes turbotax If you have a policy that provides payments for other than medical care, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. Amend taxes turbotax The cost of the medical portion must be separately stated in the insurance contract or given to you in a separate statement. Amend taxes turbotax Medicare Part A. Amend taxes turbotax   If you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare Part A. Amend taxes turbotax The payroll tax paid for Medicare Part A is not a medical expense. Amend taxes turbotax If you are not covered under social security (or were not a government employee who paid Medicare tax), you can enroll voluntarily in Medicare Part A. Amend taxes turbotax In this situation you can include the premiums you paid for Medicare Part A as a medical expense. Amend taxes turbotax Medicare Part B. Amend taxes turbotax   Medicare Part B is a supplemental medical insurance. Amend taxes turbotax Premiums you pay for Medicare Part B are a medical expense. Amend taxes turbotax If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid. Amend taxes turbotax If you were over age 65 or disabled when you first enrolled, check with your local Social Security Administration office, or go to their website at www. Amend taxes turbotax SSA. Amend taxes turbotax gov, to find out your premium. Amend taxes turbotax Medicare Part D. Amend taxes turbotax   Medicare Part D is a voluntary prescription drug insurance program for persons with Medicare Part A or Part B. Amend taxes turbotax You can include as a medical expense premiums you pay for Medicare Part D. Amend taxes turbotax Prepaid insurance premiums. Amend taxes turbotax   Insurance premiums you pay before you are age 65 for medical care for yourself, your spouse, or your dependents after you reach age 65 are medical care expenses in the year paid if they are: Payable in equal yearly installments, or more often, and Payable for at least 10 years, or until you reach age 65 (but not for less than 5 years). Amend taxes turbotax Medicines You can include in medical expenses amounts you pay for prescribed medicines and drugs. Amend taxes turbotax A prescribed drug is one that requires a prescription by a doctor for its use by an individual. Amend taxes turbotax You can also include amounts you pay for insulin. Amend taxes turbotax Except for insulin, you cannot include in medical expenses amounts you pay for a drug that is not prescribed. Amend taxes turbotax Imported medicines and drugs. Amend taxes turbotax   If you import medicines or drugs from other countries, see Medicines and Drugs From Other Countries, under What Expenses Are Not Includible, in Publication 502. Amend taxes turbotax Nursing Services You can include in medical expenses wages and other amounts you pay for nursing services. Amend taxes turbotax The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. Amend taxes turbotax This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. Amend taxes turbotax These services can be provided in your home or another care facility. Amend taxes turbotax Generally, only the amount spent for nursing services is a medical expense. Amend taxes turbotax If the attendant also provides personal and household services, amounts paid to the attendant must be divided between the time spent performing household and personal services and the time spent for nursing services. Amend taxes turbotax However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. Amend taxes turbotax See Maintenance and personal care services under Qualified long-term care services, earlier. Amend taxes turbotax Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow you to work may qualify for the child and dependent care credit. Amend taxes turbotax See Child and Dependent Care Credit , later, and Publication 503, Child and Dependent Care Expenses. Amend taxes turbotax You can also include in medical expenses part of the amount you pay for that attendant's meals. Amend taxes turbotax Divide the food expense among the household members to find the cost of the attendant's food. Amend taxes turbotax Then divide that cost in the same manner as in the preceding paragraph. Amend taxes turbotax If you had to pay additional amounts for household upkeep because of the attendant, you can include the extra amounts with your medical expenses. Amend taxes turbotax This includes extra rent or utilities you pay because you moved to a larger apartment to provide space for the attendant. Amend taxes turbotax Employment taxes. Amend taxes turbotax   You can include as a medical expense social security tax, FUTA, Medicare tax, and state employment taxes you pay for a nurse, attendant, or other person who provides medical care. Amend taxes turbotax If the attendant also provides personal and household services, you can include as a medical expense only the amount of employment taxes paid for medical services as explained earlier under Nursing Services. Amend taxes turbotax For information on employment tax responsibilities of household employers, see Publication 926, Household Employer's Tax Guide. Amend taxes turbotax Transportation You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care. Amend taxes turbotax Car expenses. Amend taxes turbotax    You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. Amend taxes turbotax You cannot include depreciation, insurance, general repair, or maintenance expenses. Amend taxes turbotax   If you do not want to use your actual expenses for 2013, you can use the standard medical mileage rate of 24 cents a mile. Amend taxes turbotax   You can also include parking fees and tolls. Amend taxes turbotax You can add these fees and tolls to your medical expenses whether you use actual expenses or use the standard mileage rate. Amend taxes turbotax You can also include:    Bus, taxi, train, or plane fares or ambulance service, and Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone. Amend taxes turbotax Do not include transportation expenses if, for purely personal reasons, you choose to travel to another city for an operation or other medical care prescribed by your doctor. Amend taxes turbotax Prev  Up  Next   Home   More Online Publications
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The Amend Taxes Turbotax

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