File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Free State Tax Return Only

2011 Tax Forms InstructionsH&r Block State Tax Fee2013 1040 Ez Form2012 Income TaxHow Do I File An Amended Tax Return2012 Irs Form 1040ezFederal Tax Forms And State FormsAmend Federal Tax ReturnFree Irs Tax Filing 2012Turbo Tax AmendmentForm 1040ez Mailing AddressForm 1040aWww.myfreetaxes.comAarp Tax PreparationFreetaxusa 20111040nr Ez Instructions1040 EzFree Online Tax Extension Form2012 Federal And State Tax Forms1040ez Form 20112011 Tax FilingFiling State TaxAmended Tax Return Form 2012Free Federal Tax FilingStatetaxreturnTurbotax LoginFederal Income Tax TableHow Do You File An Amended Federal Tax ReturnTax Extension For UnemployedFree Tax Filing Hr BlockFederal Tax 1040ezHow To File Late Tax ReturnsHow Do I File 2010 TaxesCan I Use Free File File Last Year TaxesOne Source Talent ChicagoFiling 2012 Taxes In 2013How To Fill Out 1040 EzIrs Website For For 1040ezWhere To File Tax Return 2012Where Can I Get A 1040x Tax Form

Free State Tax Return Only

Free state tax return only Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. Free state tax return only More information. Free state tax return only Exception—Community Income. Free state tax return only Exception—Qualified joint venture. Free state tax return only More information. Free state tax return only More information. Free state tax return only Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. Free state tax return only Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. Free state tax return only Table 1 can help you learn what those responsibilities are. Free state tax return only Ask yourself each question listed in the table, then see the related discussion to find the answer. Free state tax return only In addition to knowing about federal taxes, you need to make some basic business decisions. Free state tax return only Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. Free state tax return only For information on how to contact the SBA, see How to Get More Information, later. Free state tax return only Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. Free state tax return only When beginning a business, you must decide which form of business to use. Free state tax return only Legal and tax considerations enter into this decision. Free state tax return only Only tax considerations are discussed in this publication. Free state tax return only Your form of business determines which income tax return form you have to file. Free state tax return only See Table 2 to find out which form you have to file. Free state tax return only Sole proprietorships. Free state tax return only   A sole proprietorship is an unincorporated business that is owned by one individual. Free state tax return only It is the simplest form of business organization to start and maintain. Free state tax return only The business has no existence apart from you, the owner. Free state tax return only Its liabilities are your personal liabilities. Free state tax return only You undertake the risks of the business for all assets owned, whether or not used in the business. Free state tax return only You include the income and expenses of the business on your personal tax return. Free state tax return only More information. Free state tax return only   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. Free state tax return only If you are a farmer, see Publication 225, Farmer's Tax Guide. Free state tax return only Partnerships. Free state tax return only   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Free state tax return only Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Free state tax return only   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. Free state tax return only , from its operations, but it does not pay income tax. Free state tax return only Instead, it “passes through” any profits or losses to its partners. Free state tax return only Each partner includes his or her share of the partnership's items on his or her tax return. Free state tax return only More information. Free state tax return only   For more information on partnerships, see Publication 541, Partnerships. Free state tax return only Husband and wife business. Free state tax return only   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Free state tax return only Do not use Schedule C or C-EZ. Free state tax return only Instead, file Form 1065, U. Free state tax return only S. Free state tax return only Return of Partnership Income. Free state tax return only For more information, see Publication 541, Partnerships. Free state tax return only Exception—Community Income. Free state tax return only   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Free state tax return only S. Free state tax return only possession, you can treat the business either as a sole proprietorship or a partnership. Free state tax return only The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Free state tax return only A change in your reporting position will be treated as a conversion of the entity. Free state tax return only Exception—Qualified joint venture. Free state tax return only   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Free state tax return only Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Free state tax return only For an explanation of "material participation," see the Instructions for Schedule C, line G. Free state tax return only   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Free state tax return only Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Free state tax return only For more information, see Qualified Joint Venture in the Instructions for Schedule SE. Free state tax return only Corporations. Free state tax return only   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. Free state tax return only A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. Free state tax return only A corporation can also take special deductions. Free state tax return only   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. Free state tax return only However, shareholders cannot deduct any loss of the corporation. Free state tax return only More information. Free state tax return only   For more information on corporations, see Publication 542, Corporations. Free state tax return only S corporations. Free state tax return only   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Free state tax return only Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Free state tax return only On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. Free state tax return only More information. Free state tax return only   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. Free state tax return only S. Free state tax return only Income Tax Return for an S Corporation. Free state tax return only Limited liability company. Free state tax return only   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Free state tax return only The members of an LLC are not personally liable for its debts. Free state tax return only An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. Free state tax return only 7701-3. Free state tax return only For more information, see the instructions for Form 8832, Entity Classification Election. Free state tax return only Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. Free state tax return only The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). Free state tax return only An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. Free state tax return only An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. Free state tax return only You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. Free state tax return only You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. Free state tax return only This includes returns or documents filed to report the following information. Free state tax return only Interest, dividends, royalties, etc. Free state tax return only , paid to you. Free state tax return only Any amount paid to you as a dependent care provider. Free state tax return only Certain other amounts paid to you that total $600 or more for the year. Free state tax return only If you do not furnish your identification number as required, you may be subject to penalties. Free state tax return only See Penalties, later. Free state tax return only Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. Free state tax return only If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. Free state tax return only Applying for an EIN. Free state tax return only   You may apply for an EIN: Online—Click on the EIN link at www. Free state tax return only irs. Free state tax return only gov/businesses/small. Free state tax return only The EIN is issued immediately once the application information is validated. Free state tax return only By telephone at 1-800-829-4933. Free state tax return only By mailing or faxing Form SS-4, Application for Employer Identification Number. Free state tax return only When to apply. Free state tax return only   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. Free state tax return only If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. Free state tax return only If you apply by telephone or through the IRS website, you can get an EIN immediately. Free state tax return only If you apply by fax, you can get an EIN within 4 business days. Free state tax return only   If you do not receive your EIN by the time a return is due, file your return anyway. Free state tax return only Write “Applied for” and the date you applied for the number in the space for the EIN. Free state tax return only Do not use your social security number as a substitute for an EIN on your tax returns. Free state tax return only More than one EIN. Free state tax return only   You should have only one EIN. Free state tax return only If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. Free state tax return only Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Free state tax return only The IRS will tell you which number to use. Free state tax return only More information. Free state tax return only   For more information about EINs, see Publication 1635, Understanding Your EIN. Free state tax return only Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). Free state tax return only The forms used to report these payments must include the payee's identification number. Free state tax return only Employee. Free state tax return only   If you have employees, you must get an SSN from each of them. Free state tax return only Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Free state tax return only If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Free state tax return only This may occur, for example, if the employee's name has changed due to marriage or divorce. Free state tax return only   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. Free state tax return only This form is available at SSA offices or by calling 1-800-772-1213. Free state tax return only It is also available from the SSA website at www. Free state tax return only ssa. Free state tax return only gov. Free state tax return only Other payee. Free state tax return only   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. Free state tax return only If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. Free state tax return only   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Free state tax return only This form is available from IRS offices or by calling 1-800-829-3676. Free state tax return only It is also available from the IRS website at IRS. Free state tax return only gov. Free state tax return only    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. Free state tax return only For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Free state tax return only Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. Free state tax return only A tax year is usually 12 consecutive months. Free state tax return only There are two kinds of tax years. Free state tax return only Calendar tax year. Free state tax return only A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Free state tax return only Fiscal tax year. Free state tax return only A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Free state tax return only 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. Free state tax return only 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 get IRS approval to change it or are otherwise allowed to change it without IRS approval. Free state tax return only You must use a calendar tax year if: You keep no books. Free state tax return only You have no annual accounting period. Free state tax return only Your present tax year does not qualify as a fiscal year. Free state tax return only You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. Free state tax return only For more information, see Publication 538, Accounting Periods and Methods. Free state tax return only First-time filer. Free state tax return only   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. Free state tax return only You adopt a tax year by filing your first income tax return using that tax year. Free state tax return only You have not adopted a tax year if you merely did any of the following. Free state tax return only Filed an application for an extension of time to file an income tax return. Free state tax return only Filed an application for an employer identification number. Free state tax return only Paid estimated taxes for that tax year. Free state tax return only Changing your tax year. Free state tax return only   Once you have adopted your tax year, you may have to get IRS approval to change it. Free state tax return only To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free state tax return only You may have to pay a fee. Free state tax return only For more information, see Publication 538. Free state tax return only Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. Free state tax return only You choose an accounting method for your business when you file your first income tax return. Free state tax return only There are two basic accounting methods. Free state tax return only Cash method. Free state tax return only Under the cash method, you report income in the tax year you receive it. Free state tax return only You usually deduct or capitalize expenses in the tax year you pay them. Free state tax return only Accrual method. Free state tax return only Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. Free state tax return only You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. Free state tax return only For other methods, see Publication 538. Free state tax return only If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Free state tax return only Inventories include goods held for sale in the normal course of business. Free state tax return only They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Free state tax return only Inventories are explained in Publication 538. Free state tax return only Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. Free state tax return only For more information, see Publication 538. Free state tax return only You must use the same accounting method to figure your taxable income and to keep your books. Free state tax return only Also, you must use an accounting method that clearly shows your income. Free state tax return only In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. Free state tax return only An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. Free state tax return only More than one business. Free state tax return only   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. Free state tax return only You must keep a complete and separate set of books and records for each business. Free state tax return only Changing your method of accounting. Free state tax return only   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Free state tax return only A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. Free state tax return only For examples of changes that require approval and information on how to get approval for the change, see Publication 538. Free state tax return only Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. Free state tax return only The following are the four general kinds of business taxes. Free state tax return only Income tax. Free state tax return only Self-employment tax. Free state tax return only Employment taxes. Free state tax return only Excise taxes. Free state tax return only See Table 2 for the forms you file to report these taxes. Free state tax return only You may want to get Publication 509. Free state tax return only It has tax calendars that tell you when to file returns and make tax payments. Free state tax return only Income Tax All businesses except partnerships must file an annual income tax return. Free state tax return only Partnerships file an information return. Free state tax return only Which form you use depends on how your business is organized. Free state tax return only See Table 2 to find out which return you have to file. Free state tax return only The federal income tax is a pay-as-you-go tax. Free state tax return only You must pay the tax as you earn or receive income during the year. Free state tax return only An employee usually has income tax withheld from his or her pay. Free state tax return only If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Free state tax return only If you are not required to make estimated tax payments, you may pay any tax due when you file your return. Free state tax return only Table 2. Free state tax return only Which Forms Must I File? IF you are a. Free state tax return only . Free state tax return only . Free state tax return only   THEN you may be liable for. Free state tax return only . Free state tax return only . Free state tax return only   Use Form. Free state tax return only . Free state tax return only . Free state tax return only Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. Free state tax return only 2 Various other schedules may be needed. Free state tax return only Estimated tax. Free state tax return only   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. Free state tax return only Sole proprietors, partners, and S corporation shareholders. Free state tax return only   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Free state tax return only Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Free state tax return only For more information, see Publication 505, Tax Withholding and Estimated Tax. Free state tax return only Corporations. Free state tax return only   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Free state tax return only Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. Free state tax return only You must deposit the payments as explained later under Depositing Taxes. Free state tax return only For more information, see Publication 542. Free state tax return only Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Free state tax return only Your payments of SE tax contribute to your coverage under the social security system. Free state tax return only Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Free state tax return only You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Free state tax return only Your net earnings from self-employment were $400 or more. Free state tax return only You had church employee income of $108. Free state tax return only 28 or more. Free state tax return only Use Schedule SE (Form 1040) to figure your SE tax. Free state tax return only For more information, see Publication 334, Tax Guide for Small Business. Free state tax return only You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. Free state tax return only The Social Security Administration (SSA) time limit for posting self-employment income. Free state tax return only   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Free state tax return only If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. Free state tax return only The SSA will not change its records to increase your self-employment income. Free state tax return only Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. Free state tax return only Employment taxes include the following. Free state tax return only Social security and Medicare taxes. Free state tax return only Federal income tax withholding. Free state tax return only Federal unemployment (FUTA) tax. Free state tax return only If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. Free state tax return only If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. Free state tax return only These publications explain your tax responsibilities as an employer. Free state tax return only If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Free state tax return only That publication has information to help you determine whether an individual is an employee or an independent contractor. Free state tax return only If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. Free state tax return only An independent contractor is someone who is self-employed. Free state tax return only Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. Free state tax return only Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. Free state tax return only To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. Free state tax return only Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Free state tax return only Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Free state tax return only Medicare tax pays for benefits under the hospital insurance part of FICA. Free state tax return only You withhold part of these taxes from your employee's wages and you pay a part yourself. Free state tax return only To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. Free state tax return only Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. Free state tax return only (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Free state tax return only ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Free state tax return only You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. Free state tax return only You pay FUTA tax only from your own funds. Free state tax return only Employees do not pay this tax or have it withheld from their pay. Free state tax return only Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Free state tax return only See Publication 15 to find out if you can use this form. Free state tax return only Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. Free state tax return only Form I-9. Free state tax return only   You must verify that each new employee is legally eligible to work in the United States. Free state tax return only Both you and the employee must complete the U. Free state tax return only S. Free state tax return only Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Free state tax return only You can get the form from USCIS offices or from the USCIS website at www. Free state tax return only uscis. Free state tax return only gov. Free state tax return only Call the USCIS at 1-800-375-5283 for more information about your responsibilities. Free state tax return only Form W-4. Free state tax return only   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. Free state tax return only You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. Free state tax return only For more information, see Publication 15. Free state tax return only Employees claiming more than 10 withholding allowances. Free state tax return only   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. Free state tax return only See section 16 of Publication 15. Free state tax return only Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. Free state tax return only You must also send copies to the Social Security Administration. Free state tax return only See Information Returns, later, for more information on Form W-2. Free state tax return only Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Free state tax return only Manufacture or sell certain products. Free state tax return only Operate certain kinds of businesses. Free state tax return only Use various kinds of equipment, facilities, or products. Free state tax return only Receive payment for certain services. Free state tax return only For more information on excise taxes, see Publication 510, Excise Taxes. Free state tax return only Form 720. Free state tax return only   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Free state tax return only Environmental taxes. Free state tax return only Communications and air transportation taxes. Free state tax return only Fuel taxes. Free state tax return only Tax on the first retail sale of heavy trucks, trailers, and tractors. Free state tax return only Manufacturers taxes on the sale or use of a variety of different articles. Free state tax return only Form 2290. Free state tax return only   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. Free state tax return only The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Free state tax return only Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Free state tax return only For more information, see the instructions for Form 2290. Free state tax return only Form 730. Free state tax return only   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Free state tax return only Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. Free state tax return only Form 11-C. Free state tax return only   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. Free state tax return only Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Free state tax return only Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). Free state tax return only Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Free state tax return only Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. Free state tax return only Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Free state tax return only The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Free state tax return only You must give a copy of each information return you are required to file to the recipient or payer. Free state tax return only In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Free state tax return only For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Free state tax return only Form 1099-MISC. Free state tax return only   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. Free state tax return only These payments include the following items. Free state tax return only Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. Free state tax return only Rent payments of $600 or more, other than rents paid to real estate agents. Free state tax return only Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Free state tax return only Royalty payments of $10 or more. Free state tax return only Payments to certain crew members by operators of fishing boats. Free state tax return only You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Free state tax return only Form W-2. Free state tax return only   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. Free state tax return only For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. Free state tax return only Form 8300. Free state tax return only   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. Free state tax return only Cash includes U. Free state tax return only S. Free state tax return only and foreign coin and currency. Free state tax return only It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Free state tax return only For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Free state tax return only Penalties The law provides penalties for not filing returns or paying taxes as required. Free state tax return only Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. Free state tax return only Failure to file tax returns. Free state tax return only   If you do not file your tax return by the due date, you may have to pay a penalty. Free state tax return only The penalty is based on the tax not paid by the due date. Free state tax return only See your tax return instructions for more information about this penalty. Free state tax return only Failure to pay tax. Free state tax return only   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. Free state tax return only For more information, see your tax return instructions. Free state tax return only Failure to withhold, deposit, or pay taxes. Free state tax return only   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. Free state tax return only You may also be subject to penalties if you deposit the taxes late. Free state tax return only For more information, see Publication 15. Free state tax return only Failure to follow information reporting requirements. Free state tax return only   The following penalties apply if you are required to file information returns. Free state tax return only For more information, see the General Instructions for Certain Information Returns. Free state tax return only Failure to file information returns. Free state tax return only A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. Free state tax return only Failure to furnish correct payee statements. Free state tax return only A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. Free state tax return only Waiver of penalty. Free state tax return only   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. Free state tax return only   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. Free state tax return only (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. Free state tax return only ) Failure to supply taxpayer identification number. Free state tax return only   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. Free state tax return only You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. Free state tax return only Business Expenses You can deduct business expenses on your income tax return. Free state tax return only These are the current operating costs of running your business. Free state tax return only To be deductible, a business expense must be both ordinary and necessary. Free state tax return only An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Free state tax return only A necessary expense is one that is helpful and appropriate for your business, trade, or profession. Free state tax return only An expense does not have to be indispensable to be considered necessary. Free state tax return only The following are brief explanations of some expenses that are of interest to people starting a business. Free state tax return only There are many other expenses that you may be able to deduct. Free state tax return only See your form instructions and Publication 535, Business Expenses. Free state tax return only Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. Free state tax return only Your business start-up costs will depend on the type of business you are starting. Free state tax return only They may include costs for advertising, travel, surveys, and training. Free state tax return only These costs are generally capital expenses. Free state tax return only You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Free state tax return only You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Free state tax return only The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Free state tax return only Any remaining cost must be amortized. Free state tax return only For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. Free state tax return only Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Free state tax return only You must spread the cost over more than one tax year and deduct part of it each year. Free state tax return only This method of deducting the cost of business property is called depreciation. Free state tax return only Business property you must depreciate includes the following items. Free state tax return only Office furniture. Free state tax return only Buildings. Free state tax return only Machinery and equipment. Free state tax return only You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Free state tax return only This deduction is known as the “section 179 deduction. Free state tax return only ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. Free state tax return only Depreciation must be taken in the year it is allowable. Free state tax return only Allowable depreciation not taken in a prior year cannot be taken in the current year. Free state tax return only If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. Free state tax return only S. Free state tax return only Individual Income Tax Return, or by changing your accounting method. Free state tax return only For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. Free state tax return only Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. Free state tax return only Even then, your deduction may be limited. Free state tax return only To qualify to claim expenses for business use of your home, you must meet both the following tests. Free state tax return only Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. Free state tax return only Exclusive use. Free state tax return only   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Free state tax return only The area used for business can be a room or other separately identifiable space. Free state tax return only The space does not need to be marked off by a permanent partition. Free state tax return only   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Free state tax return only Exceptions to exclusive use. Free state tax return only   You do not have to meet the exclusive use test if either of the following applies. Free state tax return only You use part of your home for the storage of inventory or product samples. Free state tax return only You use part of your home as a daycare facility. Free state tax return only For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Free state tax return only Principal place of business. Free state tax return only   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Free state tax return only You use it exclusively and regularly for administrative or management activities of your trade or business. Free state tax return only You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Free state tax return only   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Free state tax return only The relative importance of the activities performed at each location. Free state tax return only If the relative importance factor does not determine your principal place of business, the time spent at each location. Free state tax return only    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Free state tax return only However, for other ways to qualify to deduct home office expenses, see Publication 587. Free state tax return only Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Free state tax return only If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. Free state tax return only More information. Free state tax return only   For more information about business use of your home, see Publication 587. Free state tax return only Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. Free state tax return only You generally can deduct either your actual expenses or the standard mileage rate. Free state tax return only Actual expenses. Free state tax return only   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Free state tax return only You can divide your expenses based on the miles driven for each purpose. Free state tax return only Example. Free state tax return only You are the sole proprietor of a flower shop. Free state tax return only You drove your van 20,000 miles during the year. Free state tax return only 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. Free state tax return only You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Free state tax return only Standard mileage rate. Free state tax return only   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Free state tax return only You can use the standard mileage rate for a vehicle you own or lease. Free state tax return only The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. Free state tax return only It is announced annually by the IRS. Free state tax return only To figure your deduction, multiply your business miles by the standard mileage rate for the year. Free state tax return only    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. Free state tax return only However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. Free state tax return only Choosing the standard mileage rate. Free state tax return only   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Free state tax return only In later years, you can choose to use either the standard mileage rate or actual expenses. Free state tax return only   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Free state tax return only Additional information. Free state tax return only   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Free state tax return only Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. Free state tax return only It also explains how long you must keep your records for federal tax purposes. Free state tax return only A sample recordkeeping system is illustrated at the end of this part. Free state tax return only Why Keep Records? Everyone in business must keep records. Free state tax return only Good records will help you do the following. Free state tax return only Monitor the progress of your business. Free state tax return only   You need good records to monitor the progress of your business. Free state tax return only Records can show whether your business is improving, which items are selling, or what changes you need to make. Free state tax return only Good records can increase the likelihood of business success. Free state tax return only Prepare your financial statements. Free state tax return only   You need good records to prepare accurate financial statements. Free state tax return only These include income (profit and loss) statements and balance sheets. Free state tax return only These statements can help you in dealing with your bank or creditors and help you manage your business. Free state tax return only An income statement shows the income and expenses of the business for a given period of time. Free state tax return only A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Free state tax return only Identify source of receipts. Free state tax return only   You will receive money or property from many sources. Free state tax return only Your records can identify the source of your receipts. Free state tax return only You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. Free state tax return only Keep track of deductible expenses. Free state tax return only   You may forget expenses when you prepare your tax return unless you record them when they occur. Free state tax return only Prepare your tax returns. Free state tax return only   You need good records to prepare your tax returns. Free state tax return only These records must support the income, expenses, and credits you report. Free state tax return only Generally, these are the same records you use to monitor your business and prepare your financial statements. Free state tax return only Support items reported on tax returns. Free state tax return only   You must keep your business records available at all times for inspection by the IRS. Free state tax return only If the IRS examines any of your tax returns, you may be asked to explain the items reported. Free state tax return only A complete set of records will speed up the examination. Free state tax return only Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Free state tax return only You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Free state tax return only The business you are in affects the type of records you need to keep for federal tax purposes. Free state tax return only You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Free state tax return only See Accounting Method, earlier. Free state tax return only If you are in more than one business, you should keep a complete and separate set of records for each business. Free state tax return only A corporation should keep minutes of board of directors' meetings. Free state tax return only Your recordkeeping system should include a summary of your business transactions. Free state tax return only This summary is ordinarily made in your books (for example, accounting journals and ledgers). Free state tax return only Your books must show your gross income, as well as your deductions and credits. Free state tax return only For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. Free state tax return only In addition, you must keep supporting documents, explained later. Free state tax return only Electronic records. Free state tax return only   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Free state tax return only When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Free state tax return only An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Free state tax return only The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Free state tax return only All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Free state tax return only Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Free state tax return only   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Free state tax return only You still have the responsibility of retaining any other books and records that are required to be retained. Free state tax return only   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Free state tax return only This test is not considered an examination and the results must be shared with you. Free state tax return only If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Free state tax return only If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. Free state tax return only For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. Free state tax return only Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Free state tax return only Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Free state tax return only These documents contain information you need to record in your books. Free state tax return only It is important to keep these documents because they support the entries in your books and on your tax return. Free state tax return only Keep them in an orderly fashion and in a safe place. Free state tax return only For instance, organize them by year and type of income or expense. Free state tax return only Gross receipts. Free state tax return only   Gross receipts are the income you receive from your business. Free state tax return only You should keep supporting documents that show the amounts and sources of your gross receipts. Free state tax return only Documents that show gross receipts include the following. Free state tax return only Cash register tapes. Free state tax return only Bank deposit slips. Free state tax return only Receipt books. Free state tax return only Invoices. Free state tax return only Credit card charge slips. Free state tax return only Forms 1099-MISC. Free state tax return only Purchases. Free state tax return only   Purchases are the items you buy and resell to customers. Free state tax return only If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Free state tax return only Your supporting documents should show the amount paid and that the amount was for purchases. Free state tax return only Documents for purchases include the following. Free state tax return only Canceled checks. Free state tax return only Cash register tape receipts. Free state tax return only Credit card sales slips. Free state tax return only Invoices. Free state tax return only These records will help you determine the value of your inventory at the end of the year. Free state tax return only See Publication 538 for information on methods for valuing inventory. Free state tax return only Expenses. Free state tax return only   Expenses are the costs you incur (other than purchases) to carry on your business. Free state tax return only Your supporting documents should show the amount paid and that the amount was for a business expense. Free state tax return only Documents for expenses include the following. Free state tax return only Canceled checks. Free state tax return only Cash register tapes. Free state tax return only Account statements. Free state tax return only Credit card sales slips. Free state tax return only Invoices. Free state tax return only Petty cash slips for small cash payments. Free state tax return only    A petty cash fund allows you to make small payments without having to write checks for small amounts. Free state tax return only Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. Free state tax return only Travel, transportation, entertainment, and gift expenses. Free state tax return only   Specific recordkeeping rules apply to these expenses. Free state tax return only For more information, see Publication 463. Free state tax return only Employment taxes. Free state tax return only   There are specific employment tax records you must keep. Free state tax return only For a list, see Publication 15. Free state tax return only Assets. Free state tax return only   Assets are the property, such as machinery and furniture you own and use in your business. Free state tax return only You must keep records to verify certain information about your business assets. Free state tax return only You need records to figure the annual depreciation and the gain or loss when you sell the assets. Free state tax return only Your records should show the following information. Free state tax return only When and how you acquired the asset. Free state tax return only Purchase price. Free state tax return only Cost of any improvements. Free state tax return only Section 179 deduction taken. Free state tax return only Deductions taken for depreciation. Free state tax return only Deductions taken for casualty losses, such as losses resulting from fires or storms. Free state tax return only How you used the asset. Free state tax return only When and how you disposed of the asset. Free state tax return only Selling price. Free state tax return only Expenses of sale. Free state tax return only   The following documents may show this information. Free state tax return only Purchase and sales invoices. Free state tax return only Real estate closing statements. Free state tax return only Canceled checks. Free state tax return only What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Free state tax return only These include account statements prepared for the financial institution by a third party. Free state tax return only These account statements must be highly legible. Free state tax return only The following table lists acceptable account statements. Free state tax return only  IF payment is by. Free state tax return only . Free state tax return only . Free state tax return only THEN the statement must show the. Free state tax return only . Free state tax return only . Free state tax return only Check Check number. Free state tax return only Amount. Free state tax return only Payee's name. Free state tax return only Date the check amount was posted to the account by the financial institution. Free state tax return only Electronic funds transfer Amount transferred. Free state tax return only Payee's name. Free state tax return only Date the transfer was posted to the account by the financial institution. Free state tax return only Credit card Amount charged. Free state tax return only Payee's name. Free state tax return only Transaction date. Free state tax return only    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Free state tax return only You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Free state tax return only Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. Free state tax return only (Your business transactions are shown on the supporting documents just discussed. Free state tax return only ) Business transactions are ordinarily summarized in books called journals and ledgers. Free state tax return only You can buy them at your local stationery or office supply store. Free state tax return only A journal is a book where you record each business transaction shown on your supporting documents. Free state tax return only You may have to keep separate journals for transactions that occur frequently. Free state tax return only A ledger is a book that contains the totals from all of your journals. Free state tax return only It is organized into different accounts. Free state tax return only Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. Free state tax return only For example, a recordkeeping system for a small business might include the following items. Free state tax return only Business checkbook. Free state tax return only Daily summary of cash receipts. Free state tax return only Monthly summary of cash receipts. Free state tax return only Check disbursements journal. Free state tax return only Depreciation worksheet. Free state tax return only Employee compensation record. Free state tax return only The business checkbook is explained next. Free state tax return only The other items are illustrated later under Sample Record System. Free state tax return only The system you use to record business transactions will be more effective if you follow good recordkeeping practices. Free state tax return only For example, record expenses when they occur, and identify the source of recorded receipts. Free state tax return only Generally, it is best to record transactions on a daily basis. Free state tax return only Business checkbook. Free state tax return only   One of the first things you should do when you start a business is open a business checking account. Free state tax return only You should keep your business account separate from your personal checking account. Free state tax return only   The business checkbook is your basic source of information for recording your business expenses. Free state tax return only You should deposit all daily receipts in your business checking account. Free state tax return only You should check your account for errors by reconciling it. Free state tax return only See Reconciling the checking account, later. Free state tax return only   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. Free state tax return only You should also note on the deposit slip the source of the deposit and keep copies of all slips. Free state tax return only   You should make all payments by check to document business expenses. Free state tax return only Write checks payable to yourself only when making withdrawals from your business for personal use. Free state tax return only Avoid writing checks payable to cash. Free state tax return only If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. Free state tax return only If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Free state tax return only    Use the business account for business purposes only. Free state tax return only Indicate the source of deposits and the type of expense in the checkbook. Free state tax return only Reconciling the checking account. Free state tax return only   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. Free state tax return only The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. Free state tax return only   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. Free state tax return only    You should reconcile your checking account each month. Free state tax return only     Before you reconcile your monthly bank statement, check your own figures. Free state tax return only Begin with the balance shown in your checkbook at the end of the previous month. Free state tax return only To this balance, add the total cash deposited during the month and subtract the total cash disbursements. Free state tax return only   After checking your figures, the result should agree with your checkbook balance at the end of the month. Free state tax return only If the result does not agree, you may have made an error in recording a check or deposit. Free state tax return only You can find the error by doing the following. Free state tax return only Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. Free state tax return only If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. Free state tax return only Adding the deposit amounts in your checkbook. Free state tax return only Compare that total with the monthly total in your cash receipt book, if you have one. Free state tax return only If the totals do not agree, check the individual amounts to find any errors. Free state tax return only   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. Free state tax return only   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Free state tax return only Many banks print a reconciliation worksheet on the back of the statement. Free state tax return only   To reconcile your account, follow these steps. Free state tax return only Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Free state tax return only Note all differences in the dollar amounts. Free state tax return only Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Free state tax return only Note all differences in the dollar amounts. Free state tax return only Mark the check number in the checkbook as having cleared the bank. Free state tax return only After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Free state tax return only Prepare a bank reconciliation. Free state tax return only One is illustrated later under Sample Record System. Free state tax return only Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. Free state tax return only At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. Free state tax return only If you still have differences, check the previous steps to find the errors. Free state tax return only   Table 3. Free state tax return only Period of Limitations IF you. Free state tax return only . Free state tax return only . Free state tax return only   THEN the period is. Free state tax return only . Free state tax return only . Free state tax return only 1. Free state tax return only Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. Free state tax return only Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. Free state tax return only File a fraudulent return   Not limited 4. Free state tax return only Do not file a return   Not limited 5. Free state tax return only File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. Free state tax return only File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. Free state tax return only The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. Free state tax return only You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Free state tax return only Single-entry. Free state tax return only   A single-entry system is based on the income statement (profit or loss statement). Free state tax return only It can be a simple and practical system if you are starting a small business. Free state tax return only The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. Free state tax return only Double-entry. Free state tax return only   A double-entry bookkeeping system uses journals and ledgers. Free state tax return only Transactions are first entered in a journal and then posted to ledger accounts. Free state tax return only These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). Free state tax return only You close income and expense accounts at the end of each tax year. Free state tax return only You keep asset, liability, and net worth accounts open on a permanent basis. Free state tax return only   In the double-entry system, each account has a left side for debits and a right side for credits. Free state tax return only It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. Free state tax return only   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. Free state tax return only If the amounts do not balance, you have made an error and you must find and correct it. Free state tax return only   An example of a journal entry exhibiting a payment of rent in October is shown next. Free state tax return only General Journal Date Description of Entry Debit  Credit Oct. Free state tax return only 5 Rent expense 780. Free state tax return only 00     Cash   780. Free state tax return only 00                 Computerized System There are computer software packages you can use for recordkeeping. Free state tax return only They can be purchased in many retail stores. Free state tax return only These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. Free state tax return only If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. Free state tax return only To meet this qualification, the machine-sensible records must reconcile with your books and return. Free state tax return only These records must provide enough detail to identify the underlying source documents. Free state tax return only You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. Free state tax return only This documentation must be sufficiently detailed to show all of the following items. Free state tax return only Functions being performed as the data flows through the system. Free state tax return only Controls used to ensure accurate and reliable processing. Free state tax return only Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. Free state tax return only Charts of accounts and detailed account descriptions. Free state tax return only See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. Free state tax return only How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Free state tax return only Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. Free state tax return only The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. Free state tax return only Table 3 contains the periods of limitations that apply to income tax returns. Free state tax return only Unless otherwise stated, the years refer to the period after the return was filed. Free state tax return only Returns filed before the due date are treated as filed on the due date. Free state tax return only Keep copies of your filed tax returns. Free state tax return only They help in preparing future tax returns and making computations if you file an amended return. Free state tax return only Employment taxes. Free state tax return only   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Free state tax return only For more information about recordkeeping for employment taxes, see Publication 15. Free state tax return only Assets. Free state tax return only   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Free state tax return only You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. Free state tax return only   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. Free state tax return only You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Free state tax return only Records for nontax purposes. Free state tax return only   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Free state tax return only For example, your insurance company or creditors may require you to keep them longer than the IRS does. Free state tax return only Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. Free state tax return only Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. Free state tax return only These sample records should not be viewed as a recommendation of how to keep your records. Free state tax return only They are intended only to show how one business keeps its records. Free state tax return only 1. Free state tax return only Daily Summary of Cash Receipts This summary is a record of cash sales for the day. Free state tax return only It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. Free state tax return only Henry takes the cash sales entry from his cash register tape. Free state tax return only If he had no cash register, he would simply total his cash sale slips and any other cash received that day. Free state tax return only He carries the total receipts shown in this summary for January 3 ($267. Free state tax return only 80), including cash sales ($263. Free state tax return only 60) and sales tax ($4. Free state tax return only 20), to the Monthly Summary of Cash Receipts. Free state tax return only Petty cash fund. Free state tax return only   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Free state tax return only Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. Free state tax return only He sets up a fixed amount ($50) in his petty cash fund. Free state tax return only The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. Free state tax return only When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. Free state tax return only (See the Check Disbursements Journal entry for check number 92. Free state tax return only ) This restores the fund to its fixed amount of $50. Free state tax return only He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. Free state tax return only 2. Free state tax return only Monthly Summary of Cash Receipts This shows the income activity for the month. Free state tax return only Henry carries the total monthly net sales shown in this summary for January ($4,865. Free state tax return only 05) to his Annual Summary. Free state tax return only To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. Free state tax return only He cannot take a deduction for sales tax turned over to the state because he only collected the tax. Free state tax return only He does not include the tax in his income. Free state tax return only 3. Free state tax return only Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. Free state tax return only All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. Free state tax return only Frequent expenses have their own headings across the sheet. Free state tax return only He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Free state tax return only Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. Free state tax return only Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. Free state tax return only If he did, he would record them in the journal, even though he could not deduct them as business expenses. Free state tax return only Henry carries the January total of expenses for materials ($1,083. Free state tax return only 50) to the Annual Summary. Free state tax return only Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. Free state tax return only , in the appropriate columns of that summary. Free state tax return only 4. Free state tax return only Employee Compensation Record This record shows the following information. Free state tax return only The number of hours Henry's employee worked in a pay period. Free state tax return only The employee's total pay for the period. Free state tax return only The deductions Henry withheld in figuring the employee's net pay. Free state tax return only The monthly gross payroll. Free state tax return only Henry carries the January gross payroll ($520) to the Annual Summary. Free state tax return only 5. Free state tax return only Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. Free state tax return only He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. Free state tax return only He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. Free state tax return only As in the journal, he keeps each major expense in a separate column. Free state tax return only Henry carries the cash receipts total shown in the annual summary ($47,440. Free state tax return only 9
Español

  • BBB and AMSA Offer Advice on Avoiding Moving Scams this Summer
    Following a few simple rules when selecting a mover will go a long way toward protecting yourself from being victimized by scams this summer, according to Better Business Bureau (BBB) and the American Moving & Storage Association (AMSA). Chief among them: make sure you know who you're hiring and know your rights.

The Free State Tax Return Only

Free state tax return only 3. Free state tax return only   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Free state tax return only Other income (nonpassive income). Free state tax return only Expenses. Free state tax return only Additional information. Free state tax return only Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Free state tax return only Basis. Free state tax return only How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Free state tax return only Including mutual fund or REMIC expenses in income. Free state tax return only Nondeductible ExpensesUsed as collateral. Free state tax return only Short-sale expenses. Free state tax return only Expenses for both tax-exempt and taxable income. Free state tax return only State income taxes. Free state tax return only Nondeductible amount. Free state tax return only Basis adjustment. Free state tax return only How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Free state tax return only Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Free state tax return only Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Free state tax return only The at-risk rules and passive activity rules are explained briefly in this section. Free state tax return only The limit on investment interest is explained later in this chapter under Interest Expenses . Free state tax return only The 2% limit is explained later in this chapter under Expenses of Producing Income . Free state tax return only At-risk rules. Free state tax return only   Special at-risk rules apply to most income-producing activities. Free state tax return only These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Free state tax return only Generally, this is the cash and the adjusted basis of property you contribute to the activity. Free state tax return only It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Free state tax return only For more information, see Publication 925. Free state tax return only Passive activity losses and credits. Free state tax return only   The amount of losses and tax credits you can claim from passive activities is limited. Free state tax return only Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Free state tax return only Also, you can use credits from passive activities only against tax on the income from passive activities. Free state tax return only There are exceptions for certain activities, such as rental real estate activities. Free state tax return only Passive activity. Free state tax return only   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Free state tax return only However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Free state tax return only More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Free state tax return only You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Free state tax return only  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Free state tax return only However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Free state tax return only   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Free state tax return only Other income (nonpassive income). Free state tax return only    Generally, you can use losses from passive activities only to offset income from passive activities. Free state tax return only You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Free state tax return only Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Free state tax return only It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Free state tax return only This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Free state tax return only   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Free state tax return only Expenses. Free state tax return only   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Free state tax return only However, this interest and other expenses may be subject to other limits. Free state tax return only These limits are explained in the rest of this chapter. Free state tax return only Additional information. Free state tax return only   For more information about determining and reporting income and losses from passive activities, see Publication 925. Free state tax return only Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Free state tax return only For information on business interest, see chapter 4 of Publication 535. Free state tax return only You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Free state tax return only Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Free state tax return only You can deduct investment interest subject to the limit discussed later. Free state tax return only However, you cannot deduct interest you incurred to produce tax-exempt income. Free state tax return only See Tax-exempt income under Nondeductible Expenses, later. Free state tax return only You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Free state tax return only Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Free state tax return only Investment property. Free state tax return only   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Free state tax return only It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Free state tax return only Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Free state tax return only Partners, shareholders, and beneficiaries. Free state tax return only   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Free state tax return only Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Free state tax return only Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Free state tax return only The allocation is not affected by the use of property that secures the debt. Free state tax return only Example 1. Free state tax return only You borrow $10,000 and use $8,000 to buy stock. Free state tax return only You use the other $2,000 to buy items for your home. Free state tax return only Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Free state tax return only The other 20% is nondeductible personal interest. Free state tax return only Debt proceeds received in cash. Free state tax return only   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Free state tax return only Debt proceeds deposited in account. Free state tax return only   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Free state tax return only But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Free state tax return only Example 2. Free state tax return only Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Free state tax return only You did not buy the household items until June 1. Free state tax return only You had deposited the $2,000 in the bank. Free state tax return only You had no other transactions on the bank account until June. Free state tax return only You did not sell the stock, and you made no principal payments on the debt. Free state tax return only You paid interest from another account. Free state tax return only The $8,000 is treated as being used for an investment purpose. Free state tax return only The $2,000 is treated as being used for an investment purpose for the 3-month period. Free state tax return only Your total interest expense for 3 months on this debt is investment interest. Free state tax return only In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Free state tax return only Amounts paid within 30 days. Free state tax return only   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Free state tax return only This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Free state tax return only   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Free state tax return only Payments on debt may require new allocation. Free state tax return only   As you repay a debt used for more than one purpose, you must reallocate the balance. Free state tax return only You must first reduce the amount allocated to personal purposes by the repayment. Free state tax return only You then reallocate the rest of the debt to find what part is for investment purposes. Free state tax return only Example 3. Free state tax return only If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Free state tax return only The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Free state tax return only Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Free state tax return only Pass-through entities. Free state tax return only   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Free state tax return only If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Free state tax return only Additional allocation rules. Free state tax return only   For more information about allocating interest expense, see chapter 4 of Publication 535. Free state tax return only When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Free state tax return only If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Free state tax return only For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Free state tax return only Example. Free state tax return only You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Free state tax return only On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Free state tax return only If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Free state tax return only If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Free state tax return only Interest paid in advance. Free state tax return only   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Free state tax return only You can deduct in each year only the interest for that year. Free state tax return only Interest on margin accounts. Free state tax return only   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Free state tax return only You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Free state tax return only Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Free state tax return only   You cannot deduct any interest on money borrowed for personal reasons. Free state tax return only Limit on interest deduction for market discount bonds. Free state tax return only   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Free state tax return only This limit does not apply if you accrue the market discount and include it in your income currently. Free state tax return only   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Free state tax return only Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Free state tax return only Interest not deducted due to limit. Free state tax return only   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Free state tax return only Choosing to deduct disallowed interest expense before the year of disposition. Free state tax return only   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Free state tax return only The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Free state tax return only Net interest income. Free state tax return only   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Free state tax return only Limit on interest deduction for short-term obligations. Free state tax return only   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Free state tax return only   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Free state tax return only The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Free state tax return only Interest not deducted due to limit. Free state tax return only   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Free state tax return only Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Free state tax return only Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Free state tax return only You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Free state tax return only The interest carried over is treated as investment interest paid or accrued in that next year. Free state tax return only You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Free state tax return only Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Free state tax return only Investment income. Free state tax return only   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Free state tax return only Investment income does not include Alaska Permanent Fund dividends. Free state tax return only It also does not include qualified dividends or net capital gain unless you choose to include them. Free state tax return only Choosing to include qualified dividends. Free state tax return only   Investment income generally does not include qualified dividends, discussed in chapter 1. Free state tax return only However, you can choose to include all or part of your qualified dividends in investment income. Free state tax return only   You make this choice by completing Form 4952, line 4g, according to its instructions. Free state tax return only   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Free state tax return only Choosing to include net capital gain. Free state tax return only    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Free state tax return only However, you can choose to include all or part of your net capital gain in investment income. Free state tax return only   You make this choice by completing Form 4952, line 4g, according to its instructions. Free state tax return only   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Free state tax return only   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Free state tax return only    Before making either choice, consider the overall effect on your tax liability. Free state tax return only Compare your tax if you make one or both of these choices with your tax if you do not. Free state tax return only Investment income of child reported on parent's return. Free state tax return only   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Free state tax return only If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. Free state tax return only Include it on line 4a of Form 4952. Free state tax return only Example. Free state tax return only Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Free state tax return only You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Free state tax return only Also enter $200 on Form 1040, line 21. Free state tax return only Your investment income includes this $200. Free state tax return only Child's qualified dividends. Free state tax return only   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Free state tax return only However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Free state tax return only   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Free state tax return only Child's Alaska Permanent Fund dividends. Free state tax return only   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Free state tax return only To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Free state tax return only Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Free state tax return only Subtract the result from the amount on Form 8814, line 12. Free state tax return only Example. Free state tax return only Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Free state tax return only You choose to report this on your return. Free state tax return only You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Free state tax return only You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Free state tax return only You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Free state tax return only Child's capital gain distributions. Free state tax return only   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Free state tax return only However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Free state tax return only   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Free state tax return only Investment expenses. Free state tax return only   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Free state tax return only Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Free state tax return only Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Free state tax return only See Expenses of Producing Income , later, for a discussion of the 2% limit. Free state tax return only Losses from passive activities. Free state tax return only   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Free state tax return only See Publication 925 for information about passive activities. Free state tax return only Example. Free state tax return only Ted is a partner in a partnership that operates a business. Free state tax return only However, he does not materially participate in the partnership's business. Free state tax return only Ted's interest in the partnership is considered a passive activity. Free state tax return only Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Free state tax return only His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Free state tax return only His investment interest expense is $8,000. Free state tax return only Ted also has income from the partnership of $2,000. Free state tax return only Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Free state tax return only His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Free state tax return only Form 4952 Use Form 4952 to figure your deduction for investment interest. Free state tax return only See Form 4952 for more information. Free state tax return only Exception to use of Form 4952. Free state tax return only   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Free state tax return only Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Free state tax return only You do not have any other deductible investment expenses. Free state tax return only You have no carryover of investment interest expense from 2012. Free state tax return only   If you meet all of these tests, you can deduct all of your investment interest. Free state tax return only    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Free state tax return only If the bond yields taxable interest, you can choose to amortize the premium. Free state tax return only This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Free state tax return only If you make this choice, you must reduce your basis in the bond by the amortization for the year. Free state tax return only If the bond yields tax-exempt interest, you must amortize the premium. Free state tax return only This amortized amount is not deductible in determining taxable income. Free state tax return only However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Free state tax return only Bond premium. Free state tax return only   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Free state tax return only For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Free state tax return only Special rules to determine amounts payable on a bond. Free state tax return only   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Free state tax return only 171-3. Free state tax return only Basis. Free state tax return only   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Free state tax return only However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Free state tax return only See Regulations section 1. Free state tax return only 171-1(e). Free state tax return only Dealers. Free state tax return only   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Free state tax return only   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Free state tax return only How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Free state tax return only Constant yield method. Free state tax return only   Figure the bond premium amortization for each accrual period as follows. Free state tax return only Step 1: Determine your yield. Free state tax return only   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Free state tax return only Figure the yield as of the date you got the bond. Free state tax return only It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Free state tax return only   If you do not know the yield, consult your broker or tax advisor. Free state tax return only Databases available to them are likely to show the yield at the date of purchase. Free state tax return only Step 2: Determine the accrual periods. Free state tax return only   You can choose the accrual periods to use. Free state tax return only They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Free state tax return only The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Free state tax return only Step 3: Determine the bond premium for the accrual period. Free state tax return only   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Free state tax return only Then subtract the result from the qualified stated interest for the period. Free state tax return only   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Free state tax return only After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Free state tax return only Example. Free state tax return only On February 1, 2012, you bought a taxable bond for $110,000. Free state tax return only The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Free state tax return only The bond pays qualified stated interest of $10,000 on February 1 of each year. Free state tax return only Your yield is 8. Free state tax return only 07439% compounded annually. Free state tax return only You choose to use annual accrual periods ending on February 1 of each year. Free state tax return only To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Free state tax return only When you subtract the result ($8,881. Free state tax return only 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Free state tax return only 17. Free state tax return only Special rules to figure amortization. Free state tax return only   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Free state tax return only 171-3. Free state tax return only Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Free state tax return only Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Free state tax return only Straight-line method. Free state tax return only   Under this method, the amount of your bond premium amortization is the same each month. Free state tax return only Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Free state tax return only Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Free state tax return only This gives you your bond premium amortization for the year. Free state tax return only Revenue Ruling 82-10 method. Free state tax return only   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Free state tax return only This method is explained in Revenue Ruling 82-10, 1982-1 C. Free state tax return only B. Free state tax return only 46. Free state tax return only Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Free state tax return only You should attach a statement to your return that you are making this choice under section 171. Free state tax return only See How To Report Amortization, next. Free state tax return only This choice is binding for the year you make it and for later tax years. Free state tax return only It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Free state tax return only You can change your decision to amortize bond premium only with the written approval of the IRS. Free state tax return only To request approval, use Form 3115. Free state tax return only For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Free state tax return only You can find Revenue Procedure 2011-14 at www. Free state tax return only irs. Free state tax return only gov/irb/2011-04_IRB/ar08. Free state tax return only html. Free state tax return only How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Free state tax return only Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Free state tax return only Under your last entry on line 1, put a subtotal of all interest listed on line 1. Free state tax return only Below this subtotal, print “ABP Adjustment,” and the total interest you received. Free state tax return only Subtract this amount from the subtotal, and enter the result on line 2. Free state tax return only Bond premium amortization more than interest. Free state tax return only   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Free state tax return only    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Free state tax return only Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Free state tax return only Pre-1998 election to amortize bond premium. Free state tax return only   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Free state tax return only Bonds acquired before October 23, 1986. Free state tax return only   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Free state tax return only Bonds acquired after October 22, 1986, but before 1988. Free state tax return only    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Free state tax return only Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Free state tax return only To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Free state tax return only The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Free state tax return only The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Free state tax return only The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Free state tax return only For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Free state tax return only Attorney or accounting fees. Free state tax return only   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Free state tax return only However, in some cases, attorney or accounting fees are part of the basis of property. Free state tax return only See Basis of Investment Property in chapter 4. Free state tax return only Automatic investment service and dividend reinvestment plans. Free state tax return only   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Free state tax return only Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Free state tax return only Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Free state tax return only   A corporation in which you own stock also may have a dividend reinvestment plan. Free state tax return only This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Free state tax return only   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Free state tax return only If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Free state tax return only Deduct the charges in the year you pay them. Free state tax return only Clerical help and office rent. Free state tax return only   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Free state tax return only Cost of replacing missing securities. Free state tax return only   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Free state tax return only You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Free state tax return only   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Free state tax return only Under certain types of insurance policies, you can recover some of the expenses. Free state tax return only   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Free state tax return only If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Free state tax return only Fees to collect income. Free state tax return only   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Free state tax return only Fees to buy or sell. Free state tax return only   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Free state tax return only You must add the fee to the cost of the property. Free state tax return only See Basis of Investment Property in chapter 4. Free state tax return only    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Free state tax return only They can be used only to figure gain or loss from the sale. Free state tax return only See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Free state tax return only Investment counsel and advice. Free state tax return only   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Free state tax return only This includes amounts you pay for investment advisory services. Free state tax return only Safe deposit box rent. Free state tax return only   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Free state tax return only If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Free state tax return only See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Free state tax return only State and local transfer taxes. Free state tax return only   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Free state tax return only If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Free state tax return only If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Free state tax return only Trustee's commissions for revocable trust. Free state tax return only   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Free state tax return only However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Free state tax return only   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Free state tax return only You cannot deduct the entire amount in the year you pay it. Free state tax return only Investment expenses from pass-through entities. Free state tax return only   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Free state tax return only A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Free state tax return only A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Free state tax return only Publicly-offered mutual funds are discussed later. Free state tax return only   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Free state tax return only Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Free state tax return only   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Free state tax return only Including mutual fund or REMIC expenses in income. Free state tax return only   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Free state tax return only You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Free state tax return only If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Free state tax return only If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Free state tax return only If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Free state tax return only Publicly-offered mutual funds. Free state tax return only   Most mutual funds are publicly offered. Free state tax return only These mutual funds, generally, are traded on an established securities exchange. Free state tax return only These funds do not pass investment expenses through to you. Free state tax return only Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Free state tax return only As a result, you cannot deduct the expenses on your return. Free state tax return only   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Free state tax return only    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Free state tax return only Contact your mutual fund if you are not sure whether it is publicly offered. Free state tax return only Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Free state tax return only Stockholders' meetings. Free state tax return only   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Free state tax return only This is true even if your purpose in attending is to get information that would be useful in making further investments. Free state tax return only Investment-related seminar. Free state tax return only   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Free state tax return only Single-premium life insurance, endowment, and annuity contracts. Free state tax return only   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Free state tax return only Used as collateral. Free state tax return only   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Free state tax return only Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Free state tax return only Borrowing on insurance. Free state tax return only   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Free state tax return only This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Free state tax return only Tax-exempt income. Free state tax return only   You cannot deduct expenses you incur to produce tax-exempt income. Free state tax return only Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Free state tax return only Short-sale expenses. Free state tax return only   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Free state tax return only However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Free state tax return only Short sales are discussed in Short Sales in chapter 4. Free state tax return only Expenses for both tax-exempt and taxable income. Free state tax return only   You may have expenses that are for both tax-exempt and taxable income. Free state tax return only If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Free state tax return only You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Free state tax return only   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Free state tax return only If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Free state tax return only To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Free state tax return only Example. Free state tax return only You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Free state tax return only In earning this income, you had $500 of expenses. Free state tax return only You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Free state tax return only 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Free state tax return only You cannot deduct $400 (80% of $500) of the expenses. Free state tax return only You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Free state tax return only State income taxes. Free state tax return only   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Free state tax return only But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Free state tax return only Interest expense and carrying charges on straddles. Free state tax return only   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Free state tax return only The nondeductible interest and carrying charges are added to the basis of the straddle property. Free state tax return only However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Free state tax return only  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Free state tax return only   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Free state tax return only However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Free state tax return only   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Free state tax return only Nondeductible amount. Free state tax return only   Figure the nondeductible interest and carrying charges on straddle property as follows. Free state tax return only Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Free state tax return only Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Free state tax return only Basis adjustment. Free state tax return only   Add the nondeductible amount to the basis of your straddle property. Free state tax return only How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Free state tax return only Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Free state tax return only Include any deductible short sale expenses. Free state tax return only (See Short Sales in chapter 4 for information on these expenses. Free state tax return only ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Free state tax return only Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Free state tax return only List the type and amount of each expense on the dotted lines next to line 23. Free state tax return only (If necessary, you can show the required information on an attached statement. Free state tax return only ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Free state tax return only When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Free state tax return only If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Free state tax return only Also see When To Deduct Investment Interest , earlier in this chapter. Free state tax return only Unpaid expenses owed to related party. Free state tax return only   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Free state tax return only The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Free state tax return only If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Free state tax return only   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Free state tax return only It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Free state tax return only   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Free state tax return only This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Free state tax return only Prev  Up  Next   Home   More Online Publications