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File Amendment

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File Amendment

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

File amendment 2. File amendment   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. File amendment Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. File amendment Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. File amendment Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. File amendment The annual accounting period for your income tax return is called a tax year. File amendment You can use one of the following tax years. File amendment A calendar tax year. File amendment A fiscal tax year. File amendment Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. File amendment A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. File amendment Calendar tax year. File amendment   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. File amendment   You must adopt the calendar tax year if any of the following apply. File amendment You do not keep books. File amendment You have no annual accounting period. File amendment Your present tax year does not qualify as a fiscal year. File amendment Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. File amendment   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. File amendment For more information, see Change in tax year, later. File amendment   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. File amendment Fiscal tax year. File amendment   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. File amendment A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. File amendment   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. File amendment   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. File amendment Change in tax year. File amendment   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. File amendment See the Instructions for Form 1128 for exceptions. File amendment If you qualify for an automatic approval request, a user fee is not required. File amendment If you do not qualify for automatic approval, a ruling must be requested. File amendment See the instructions for Form 1128 for information about user fees if you are requesting a ruling. File amendment Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. File amendment Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. File amendment You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. File amendment After that, if you want to change your accounting method, you must generally get IRS approval. File amendment See Change in Accounting Method, later. File amendment Kinds of methods. File amendment   Generally, you can use any of the following accounting methods. File amendment Cash method. File amendment An accrual method. File amendment Special methods of accounting for certain items of income and expenses. File amendment Combination method using elements of two or more of the above. File amendment You must use the same accounting method to figure your taxable income and to keep your books. File amendment Also, you must use an accounting method that clearly shows your income. File amendment Business and personal items. File amendment   You can account for business and personal items under different accounting methods. File amendment For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. File amendment Two or more businesses. File amendment   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. File amendment They are separate and distinct only if you maintain complete and separate books and records for each business. File amendment Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. File amendment However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. File amendment For more information, see Inventories, later. File amendment Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. File amendment If you receive property or services, you must include their fair market value in income. File amendment Example. File amendment On December 30, 2012, Mrs. File amendment Sycamore sent you a check for interior decorating services you provided to her. File amendment You received the check on January 2, 2013. File amendment You must include the amount of the check in income for 2013. File amendment Constructive receipt. File amendment   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. File amendment You do not need to have possession of it. File amendment If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. File amendment Example. File amendment Interest is credited to your bank account in December 2013. File amendment You do not withdraw it or enter it into your passbook until 2014. File amendment You must include it in your gross income for 2013. File amendment Delaying receipt of income. File amendment   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. File amendment You must report the income in the year the property is received or made available to you without restriction. File amendment Example. File amendment Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. File amendment She was told in December that her payment was available. File amendment At her request, she was not paid until January 2014. File amendment She must include this payment in her 2013 income because it was constructively received in 2013. File amendment Checks. File amendment   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. File amendment Example. File amendment Dr. File amendment Redd received a check for $500 on December 31, 2013, from a patient. File amendment She could not deposit the check in her business account until January 2, 2014. File amendment She must include this fee in her income for 2013. File amendment Debts paid by another person or canceled. File amendment   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. File amendment If you receive income in this way, you constructively receive the income when the debt is canceled or paid. File amendment For more information, see Canceled Debt under Kinds of Income in chapter 5. File amendment Repayment of income. File amendment   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. File amendment If the amount you repay is over $3,000, a special rule applies. File amendment For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. File amendment Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. File amendment This includes business expenses for which you contest liability. File amendment However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. File amendment Expenses paid in advance. File amendment   You can deduct an expense you pay in advance only in the year to which it applies. File amendment Example. File amendment You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. File amendment You can deduct $500 in 2013 and $500 in 2014. File amendment Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. File amendment The purpose of an accrual method of accounting is to match income and expenses in the correct year. File amendment Income—General Rule Under an accrual method, you generally include an amount in your 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. File amendment Example. File amendment You are a calendar year accrual method taxpayer. File amendment You sold a computer on December 28, 2013. File amendment You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. File amendment You must include the amount received for the computer in your 2013 income. File amendment Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. File amendment Estimated income. File amendment   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 in which you make the determination. File amendment Change in payment schedule for services. File amendment   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 lower rate until you complete the services and then receive the difference. File amendment Advance payments for services. File amendment   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. File amendment 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. File amendment However, you cannot postpone including any payment beyond that tax year. File amendment   For more information, see Advance Payment for Services under Accrual Method in Publication 538. File amendment That publication also explains special rules for reporting the following types of income. File amendment Advance payments for service agreements. File amendment Prepaid rent. File amendment Advance payments for sales. File amendment   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. File amendment If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. File amendment An agreement includes a gift certificate that can be redeemed for goods. File amendment Treat amounts that are due and payable as amounts you received. File amendment   You generally include an advance payment in income for the tax year in which you receive it. File amendment However, you can use an alternative method. File amendment For information about the alternative method, see Publication 538. File amendment Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. File amendment The all-events test has been met. File amendment The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. File amendment Economic performance has occurred. File amendment Economic performance. File amendment   You generally cannot deduct or capitalize a business expense until economic performance occurs. File amendment 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 as the property is used. File amendment If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. File amendment An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. File amendment For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. File amendment Example. File amendment You are a calendar year taxpayer and use an accrual method of accounting. File amendment You buy office supplies in December 2013. File amendment You receive the supplies and the bill in December, but you pay the bill in January 2014. File amendment You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. File amendment Your office supplies may qualify as a recurring expense. File amendment In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). File amendment Keeping inventories. File amendment   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. File amendment If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. File amendment For more information, see Inventories , later. File amendment Special rule for related persons. File amendment   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. File amendment Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. File amendment If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. File amendment   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. File amendment For a list of other related persons, see section 267 of the Internal Revenue Code. File amendment Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. File amendment However, the following restrictions apply. File amendment If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. File amendment (See, however, Inventories, later. File amendment ) You can use the cash method for all other items of income and expenses. File amendment If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. File amendment If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. File amendment If you use a combination method that includes the cash method, treat that combination method as the cash method. File amendment Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. File amendment However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. File amendment These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). File amendment A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. File amendment A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. File amendment Qualifying taxpayer. File amendment   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. File amendment (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. File amendment ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. File amendment Qualifying small business taxpayer. File amendment   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. File amendment (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. File amendment ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. File amendment Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). File amendment Business not owned or not in existence for 3 years. File amendment   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. File amendment If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. File amendment Materials and supplies that are not incidental. File amendment   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. File amendment If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. File amendment Changing accounting method. File amendment   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. File amendment See Change in Accounting Method, later. File amendment More information. File amendment    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. File amendment For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. File amendment Items included in inventory. File amendment   If you are required to account for inventories, include the following items when accounting for your inventory. File amendment Merchandise or stock in trade. File amendment Raw materials. File amendment Work in process. File amendment Finished products. File amendment Supplies that physically become a part of the item intended for sale. File amendment Valuing inventory. File amendment   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). File amendment To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. File amendment   Inventory valuation rules cannot be the same for all kinds of businesses. File amendment The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. File amendment Your inventory practices must be consistent from year to year. File amendment More information. File amendment   For more information about inventories, see Publication 538. File amendment Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. File amendment Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. File amendment You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. File amendment Activities subject to the uniform capitalization rules. File amendment   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. File amendment Produce real or tangible personal property. File amendment For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. File amendment Acquire property for resale. File amendment Exceptions. File amendment   These rules do not apply to the following property. File amendment Personal property you acquire for resale if your average annual gross receipts are $10 million or less. File amendment Property you produce if you meet either of the following conditions. File amendment Your indirect costs of producing the property are $200,000 or less. File amendment You use the cash method of accounting and do not account for inventories. File amendment For more information, see Inventories, earlier. File amendment Special Methods There are special methods of accounting for certain items of income or expense. File amendment These include the following. File amendment Amortization, discussed in chapter 8 of Publication 535, Business Expenses. File amendment Bad debts, discussed in chapter 10 of Publication 535. File amendment Depletion, discussed in chapter 9 of Publication 535. File amendment Depreciation, discussed in Publication 946, How To Depreciate Property. File amendment Installment sales, discussed in Publication 537, Installment Sales. File amendment Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. File amendment A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. File amendment To get approval, you must file Form 3115, Application for Change in Accounting Method. File amendment You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. File amendment You may have to pay a user fee. File amendment For more information, see the form instructions. File amendment Automatic change procedures. File amendment   Certain taxpayers can presume to have IRS approval to change their method of accounting. File amendment The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. File amendment No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. File amendment   Generally, you must use Form 3115 to request an automatic change. File amendment For more information, see the Instructions for Form 3115. File amendment Prev  Up  Next   Home   More Online Publications