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Federal Tax Extension

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Federal Tax Extension

Federal tax extension 10. Federal tax extension   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Federal tax extension Cash method. Federal tax extension Debt acquired from a decedent. Federal tax extension Liquidation. Federal tax extension Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Federal tax extension Introduction You have a bad debt if you cannot collect money owed to you. Federal tax extension A bad debt is either a business bad debt or a nonbusiness bad debt. Federal tax extension This chapter discusses only business bad debts. Federal tax extension Generally, a business bad debt is one that comes from operating your trade or business. Federal tax extension You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Federal tax extension All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Federal tax extension For more information on nonbusiness bad debts, see Publication 550. Federal tax extension Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Federal tax extension S. Federal tax extension Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Federal tax extension Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Federal tax extension A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Federal tax extension Bad debts of a corporation (other than an S corporation) are always business bad debts. Federal tax extension Credit sales. Federal tax extension   Business bad debts are mainly the result of credit sales to customers. Federal tax extension Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Federal tax extension After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Federal tax extension   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Federal tax extension If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Federal tax extension    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Federal tax extension This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Federal tax extension Accrual method. Federal tax extension   If you use the accrual method of accounting, you generally report income as you earn it. Federal tax extension You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Federal tax extension   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Federal tax extension Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Federal tax extension Cash method. Federal tax extension   If you use the cash method of accounting, you generally report income when you receive payment. Federal tax extension You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Federal tax extension For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Federal tax extension Debts from a former business. Federal tax extension   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Federal tax extension If any of these receivables subsequently become worthless, the loss is still a business bad debt. Federal tax extension Debt acquired from a decedent. Federal tax extension   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Federal tax extension The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Federal tax extension Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Federal tax extension Liquidation. Federal tax extension   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Federal tax extension Types of Business Bad Debts Business bad debts may result from the following. Federal tax extension Loans to clients and suppliers. Federal tax extension   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Federal tax extension Debts owed by political parties. Federal tax extension   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Federal tax extension You use the accrual method of accounting. Federal tax extension The debt arose from the sale of goods or services in the ordinary course of your trade or business. Federal tax extension More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Federal tax extension You made substantial and continuing efforts to collect on the debt. Federal tax extension Loan or capital contribution. Federal tax extension   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Federal tax extension Debts of an insolvent partner. Federal tax extension   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Federal tax extension If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Federal tax extension Business loan guarantee. Federal tax extension   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Federal tax extension You made the guarantee in the course of your trade or business. Federal tax extension You have a legal duty to pay the debt. Federal tax extension You made the guarantee before the debt became worthless. Federal tax extension You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Federal tax extension You received reasonable consideration for making the guarantee. Federal tax extension You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Federal tax extension Example. Federal tax extension Jane Zayne owns the Zayne Dress Company. Federal tax extension She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Federal tax extension Elegant Fashions is one of Zayne's largest clients. Federal tax extension Elegant Fashions later defaulted on the loan. Federal tax extension As a result, Ms. Federal tax extension Zayne paid the remaining balance of the loan in full to the bank. Federal tax extension She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Federal tax extension She was motivated by the desire to retain one of her better clients and keep a sales outlet. Federal tax extension Deductible in the year paid. Federal tax extension   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Federal tax extension Rights against a borrower. Federal tax extension   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Federal tax extension The debt is then owed to you. Federal tax extension If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Federal tax extension Joint debtor. Federal tax extension   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Federal tax extension Sale of mortgaged property. Federal tax extension   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Federal tax extension When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Federal tax extension This may occur when the debt is due or prior to that date. Federal tax extension To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Federal tax extension It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Federal tax extension Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Federal tax extension Property received for debt. Federal tax extension   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Federal tax extension You can deduct the remaining debt as a bad debt if and when it becomes worthless. Federal tax extension   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Federal tax extension It is not a recovery of a bad debt. Federal tax extension For information on the sale of an asset, see Publication 544. Federal tax extension How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Federal tax extension The specific charge-off method. Federal tax extension The nonaccrual-experience method. Federal tax extension Generally, you must use the specific charge-off method. Federal tax extension However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Federal tax extension Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Federal tax extension However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Federal tax extension Partly worthless debts. Federal tax extension   You can deduct specific bad debts that become partly uncollectible during the tax year. Federal tax extension Your tax deduction is limited to the amount you charge off on your books during the year. Federal tax extension You do not have to charge off and deduct your partly worthless debts annually. Federal tax extension You can delay the charge off until a later year. Federal tax extension However, you cannot deduct any part of a debt after the year it becomes totally worthless. Federal tax extension Significantly modified debt. Federal tax extension   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Federal tax extension For more information, see Regulations section 1. Federal tax extension 166-3(a)(3). Federal tax extension Deduction disallowed. Federal tax extension   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Federal tax extension If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Federal tax extension The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Federal tax extension Totally worthless debts. Federal tax extension   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Federal tax extension   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Federal tax extension However, you may want to do so. Federal tax extension If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Federal tax extension See Partly worthless debts, earlier. Federal tax extension Filing a claim for refund. Federal tax extension   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Federal tax extension If the bad debt was totally worthless, you must file the claim by the later of the following dates. Federal tax extension 7 years from the date your original return was due (not including extensions). Federal tax extension 2 years from the date you paid the tax. Federal tax extension   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Federal tax extension 3 years from the date you filed your original return. Federal tax extension 2 years from the date you paid the tax. Federal tax extension You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Federal tax extension Such an impairment requires proof of existence. Federal tax extension   For details and more information about filing a claim, see Publication 556. Federal tax extension Use one of the following forms to file a claim. Federal tax extension For more information, see the instructions for the applicable form. Federal tax extension Table 10-1. Federal tax extension Forms Used To File a Claim IF you filed as a. Federal tax extension . Federal tax extension . Federal tax extension THEN file. Federal tax extension . Federal tax extension . Federal tax extension Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Federal tax extension Under this method, you do not accrue service related income you expect to be uncollectible. Federal tax extension Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Federal tax extension Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Federal tax extension Service related income. Federal tax extension   You can use the nonaccrual-experience method only for amounts earned by performing services. Federal tax extension You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Federal tax extension Gross receipts test. Federal tax extension   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Federal tax extension If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Federal tax extension   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Federal tax extension For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Federal tax extension Interest or penalty charged. Federal tax extension   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Federal tax extension However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Federal tax extension You otherwise accrue the full amount due as gross income at the time you provide the services. Federal tax extension You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Federal tax extension Change in accounting method. Federal tax extension   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Federal tax extension See Form 3115 and the Instructions for Form 3115 for more information. Federal tax extension Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Federal tax extension The amount you include is limited to the amount you actually deducted. Federal tax extension However, you can exclude the amount deducted that did not reduce your tax. Federal tax extension Report the recovery as “Other income” on the appropriate business form or schedule. Federal tax extension See Recoveries in Publication 525 for more information. Federal tax extension Net operating loss (NOL) carryover. Federal tax extension   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Federal tax extension A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Federal tax extension For more information about NOLs, see Publication 536. Federal tax extension Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Federal tax extension Prev  Up  Next   Home   More Online Publications
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