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H And R Block Efile

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H And R Block Efile

H and r block efile Publication 538 - Main Content Table of Contents Accounting PeriodsCalendar Year Fiscal Year Short Tax Year Improper Tax Year Change in Tax Year Individuals Partnerships, S Corporations, and Personal Service Corporations (PSCs) Corporations (Other Than S Corporations and PSCs) Accounting MethodsSpecial methods. H and r block efile Hybrid method. H and r block efile Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). H and r block efile Accounting Periods You must use a tax year to figure your taxable income. H and r block efile A tax year is an annual accounting period for keeping records and reporting income and expenses. H and r block efile An annual accounting period does not include a short tax year (discussed later). H and r block efile You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). H and r block efile Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. H and r block efile A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. H and r block efile You cannot adopt a tax year by merely: Filing an application for an extension of time to file an income tax return; Filing an application for an employer identification number (Form SS-4); or Paying estimated taxes. H and r block efile This section discusses: A calendar year. H and r block efile A fiscal year (including a period of 52 or 53 weeks). H and r block efile A short tax year. H and r block efile An improper tax year. H and r block efile A change in tax year. H and r block efile Special situations that apply to individuals. H and r block efile Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. H and r block efile Special situations that apply to corporations. H and r block efile Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. H and r block efile If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year. H and r block efile If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you obtain approval from the IRS to change it, or are otherwise allowed to change it without IRS approval. H and r block efile See Change in Tax Year, later. H and r block efile Generally, anyone can adopt the calendar year. H and r block efile However, you must adopt the calendar year if: You keep no books or records; You have no annual accounting period; Your present tax year does not qualify as a fiscal year; or You are required to use a calendar year by a provision in the Internal Revenue Code or the Income Tax Regulations. H and r block efile Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. H and r block efile If you are allowed to adopt a fiscal year, you must consistently maintain your books and records and report your income and expenses using the time period adopted. H and r block efile 52-53-Week Tax Year You can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. H and r block efile If you make this election, your 52-53-week tax year must always end on the same day of the week. H and r block efile Your 52-53-week tax year must always end on: Whatever date this same day of the week last occurs in a calendar month, or Whatever date this same day of the week falls that is nearest to the last day of the calendar month. H and r block efile For example, if you elect a tax year that always ends on the last Monday in March, your 2012 tax year will end on March 25, 2013. H and r block efile Election. H and r block efile   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. H and r block efile The month in which the new 52-53-week tax year ends. H and r block efile The day of the week on which the tax year always ends. H and r block efile The date the tax year ends. H and r block efile It can be either of the following dates on which the chosen day: Last occurs in the month in (1), above, or Occurs nearest to the last day of the month in (1), above. H and r block efile   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. H and r block efile   To determine an effective date (or apply provisions of any law) expressed in terms of tax years beginning, including, or ending on the first or last day of a specified calendar month, a 52-53-week tax year is considered to: Begin on the first day of the calendar month beginning nearest to the first day of the 52-53-week tax year, and End on the last day of the calendar month ending nearest to the last day of the 52-53-week tax year. H and r block efile Example. H and r block efile Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. H and r block efile For this purpose, a 52-53-week tax year that begins on the last Tuesday of June, which falls on June 26, 2012, is treated as beginning on July 1, 2012. H and r block efile Short Tax Year A short tax year is a tax year of less than 12 months. H and r block efile A short period tax return may be required when you (as a taxable entity): Are not in existence for an entire tax year, or Change your accounting period. H and r block efile Tax on a short period tax return is figured differently for each situation. H and r block efile Not in Existence Entire Year Even if a taxable entity was not in existence for the entire year, a tax return is required for the time it was in existence. H and r block efile Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year. H and r block efile Example 1. H and r block efile XYZ Corporation was organized on July 1, 2012. H and r block efile It elected the calendar year as its tax year. H and r block efile Therefore, its first tax return was due March 15, 2013. H and r block efile This short period return will cover the period from July 1, 2012, through December 31, 2012. H and r block efile Example 2. H and r block efile A calendar year corporation dissolved on July 23, 2012. H and r block efile Its final return is due by October 15, 2012. H and r block efile It will cover the short period from January 1, 2012, through July 23, 2012. H and r block efile Death of individual. H and r block efile   When an individual dies, a tax return must be filed for the decedent by the 15th day of the 4th month after the close of the individual's regular tax year. H and r block efile The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. H and r block efile In the case of a decedent who dies on December 31st, the last day of the regular tax year, a full calendar-year tax return is required. H and r block efile Example. H and r block efile   Agnes Green was a single, calendar year taxpayer. H and r block efile She died on March 6, 2012. H and r block efile Her final income tax return must be filed by April 15, 2013. H and r block efile It will cover the short period from January 1, 2012, to March 6, 2012. H and r block efile Figuring Tax for Short Year If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period. H and r block efile The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year. H and r block efile Figure tax for a short year under the general rule, explained below. H and r block efile You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. H and r block efile General rule. H and r block efile   Income tax for a short tax year must be annualized. H and r block efile However, self-employment tax is figured on the actual self-employment income for the short period. H and r block efile Individuals. H and r block efile   An individual must figure income tax for the short tax year as follows. H and r block efile Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. H and r block efile You must itemize deductions when you file a short period tax return. H and r block efile Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. H and r block efile Subtract the amount in (2) from the amount in (1). H and r block efile The result is your modified taxable income. H and r block efile Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. H and r block efile The result is your annualized income. H and r block efile Figure the total tax on your annualized income using the appropriate tax rate schedule. H and r block efile Multiply the total tax by the number of months in the short tax year and divide the result by 12. H and r block efile The result is your tax for the short tax year. H and r block efile Relief procedure. H and r block efile   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. H and r block efile It may result in less tax. H and r block efile Under this procedure, the tax is figured by two separate methods. H and r block efile If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid. H and r block efile For more information, see section 443(b)(2) of the Internal Revenue Code. H and r block efile Alternative minimum tax. H and r block efile   To figure the alternative minimum tax (AMT) due for a short tax year: Figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps. H and r block efile Multiply the AMTI by 12. H and r block efile Divide the result by the number of months in the short tax year. H and r block efile Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. H and r block efile The result is the annualized AMT. H and r block efile Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. H and r block efile   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. H and r block efile For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. H and r block efile Tax withheld from wages. H and r block efile   You can claim a credit against your income tax liability for federal income tax withheld from your wages. H and r block efile Federal income tax is withheld on a calendar year basis. H and r block efile The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. H and r block efile Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. H and r block efile For example, if a taxpayer began business on March 15 and adopted a tax year ending on March 14 (a period of exactly 12 months), this would be an improper tax year. H and r block efile See Accounting Periods, earlier, for a description of permissible tax years. H and r block efile To change to a proper tax year, you must do one of the following. H and r block efile If you are requesting a change to a calendar tax year, file an amended income tax return based on a calendar tax year that corrects the most recently filed tax return that was filed on the basis of an improper tax year. H and r block efile Attach a completed Form 1128 to the amended tax return. H and r block efile Write “FILED UNDER REV. H and r block efile PROC. H and r block efile 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. H and r block efile If you are requesting a change to a fiscal tax year, file Form 1128 in accordance with the form instructions to request IRS approval for the change. H and r block efile Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. H and r block efile See the Instructions for Form 1128 for exceptions. H and r block efile If you qualify for an automatic approval request, a user fee is not required. H and r block efile Individuals Generally, individuals must adopt the calendar year as their tax year. H and r block efile An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year. H and r block efile Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. H and r block efile A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. H and r block efile The entity does not have to use the required tax year if it receives IRS approval to use another permitted tax year or makes an election under section 444 of the Internal Revenue Code (discussed later). H and r block efile The following discussions provide the rules for partnerships, S corporations, and PSCs. H and r block efile Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. H and r block efile The partnership makes an election under section 444 of the Internal Revenue Code to have a tax year other than a required tax year by filing Form 8716. H and r block efile The partnership elects to use a 52-53-week tax year that ends with reference to either its required tax year or a tax year elected under section 444. H and r block efile The partnership can establish a business purpose for a different tax year. H and r block efile The rules for the required tax year for partnerships are as follows. H and r block efile If one or more partners having the same tax year own a majority interest (more than 50%) in partnership profits and capital, the partnership must use the tax year of those partners. H and r block efile If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. H and r block efile A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. H and r block efile If there is no majority interest tax year and the principal partners do not have the same tax year, the partnership generally must use a tax year that results in the least aggregate deferral of income to the partners. H and r block efile If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. H and r block efile Least aggregate deferral of income. H and r block efile   The tax year that results in the least aggregate deferral of income is determined as follows. H and r block efile Figure the number of months of deferral for each partner using one partner's tax year. H and r block efile Find the months of deferral by counting the months from the end of that tax year forward to the end of each other partner's tax year. H and r block efile Multiply each partner's months of deferral figured in step (1) by that partner's share of interest in the partnership profits for the year used in step (1). H and r block efile Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). H and r block efile Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. H and r block efile   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. H and r block efile If the calculation results in more than one tax year qualifying as the tax year with the least aggregate deferral, the partnership can choose any one of those tax years as its tax year. H and r block efile However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. H and r block efile Example. H and r block efile A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. H and r block efile A uses the calendar year and B uses a fiscal year ending November 30. H and r block efile P must change its tax year to a fiscal year ending November 30 because this results in the least aggregate deferral of income to the partners, as shown in the following table. H and r block efile Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. H and r block efile 5 -0- -0- B 11/30 0. H and r block efile 5 11 5. H and r block efile 5 Total Deferral 5. H and r block efile 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. H and r block efile 5 1 0. H and r block efile 5 B 11/30 0. H and r block efile 5 -0- -0- Total Deferral 0. H and r block efile 5 When determination is made. H and r block efile   The determination of the tax year under the least aggregate deferral rules must generally be made at the beginning of the partnership's current tax year. H and r block efile However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. H and r block efile This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. H and r block efile Short period return. H and r block efile   When a partnership changes its tax year, a short period return must be filed. H and r block efile The short period return covers the months between the end of the partnership's prior tax year and the beginning of its new tax year. H and r block efile   If a partnership changes to the tax year resulting in the least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to determine that tax year. H and r block efile The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. H and r block efile 706-1. H and r block efile ” More information. H and r block efile   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. H and r block efile S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. H and r block efile A permitted tax year is any of the following. H and r block efile The calendar year. H and r block efile A tax year elected under section 444 of the Internal Revenue Code. H and r block efile See Section 444 Election, below for details. H and r block efile A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. H and r block efile Any other tax year for which the corporation establishes a business purpose. H and r block efile If an electing S corporation wishes to adopt a tax year other than a calendar year, it must request IRS approval using Form 2553, instead of filing Form 1128. H and r block efile For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. H and r block efile Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. H and r block efile The corporation makes an election under section 444 of the Internal Revenue Code. H and r block efile See Section 444 Election, below for details. H and r block efile The corporation elects to use a 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. H and r block efile The corporation establishes a business purpose for a fiscal year. H and r block efile See the Instructions for Form 1120 for general information about PSCs. H and r block efile For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. H and r block efile Section 444 Election A partnership, S corporation, electing S corporation, or PSC can elect under section 444 of the Internal Revenue Code to use a tax year other than its required tax year. H and r block efile Certain restrictions apply to the election. H and r block efile A partnership or an S corporation that makes a section 444 election must make certain required payments and a PSC must make certain distributions (discussed later). H and r block efile The section 444 election does not apply to any partnership, S corporation, or PSC that establishes a business purpose for a different period, explained later. H and r block efile A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. H and r block efile It is not a member of a tiered structure (defined in section 1. H and r block efile 444-2T of the regulations). H and r block efile It has not previously had a section 444 election in effect. H and r block efile It elects a year that meets the deferral period requirement. H and r block efile Deferral period. H and r block efile   The determination of the deferral period depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax year with a section 444 election. H and r block efile Retaining tax year. H and r block efile   Generally, a partnership, S corporation, or PSC can make a section 444 election to retain its tax year only if the deferral period of the new tax year is 3 months or less. H and r block efile This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. H and r block efile Adopting or changing tax year. H and r block efile   If the partnership, S corporation, or PSC is adopting or changing to a tax year other than its required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year. H and r block efile The IRS will allow a section 444 election only if the deferral period of the new tax year is less than the shorter of: Three months, or The deferral period of the tax year being changed. H and r block efile This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. H and r block efile If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. H and r block efile Example 1. H and r block efile BD Partnership uses a calendar year, which is also its required tax year. H and r block efile BD cannot make a section 444 election because the deferral period is zero. H and r block efile Example 2. H and r block efile E, a newly formed partnership, began operations on December 1. H and r block efile E is owned by calendar year partners. H and r block efile E wants to make a section 444 election to adopt a September 30 tax year. H and r block efile E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. H and r block efile Making the election. H and r block efile   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. H and r block efile Form 8716 must be filed by the earlier of: The due date (not including extensions) of the income tax return for the tax year resulting from the section 444 election, or The 15th day of the 6th month of the tax year for which the election will be effective. H and r block efile For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. H and r block efile Note. H and r block efile If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. H and r block efile   Attach a copy of Form 8716 to Form 1065, Form 1120S, or Form 1120 for the first tax year for which the election is made. H and r block efile Example 1. H and r block efile AB, a partnership, begins operations on September 13, 2012, and is qualified to make a section 444 election to use a September 30 tax year for its tax year beginning September 13, 2012. H and r block efile AB must file Form 8716 by January 15, 2013, which is the due date of the partnership's tax return for the period from September 13, 2012, to September 30, 2012. H and r block efile Example 2. H and r block efile The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. H and r block efile AB must file Form 8716 by March 17, 2013. H and r block efile Example 3. H and r block efile B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. H and r block efile B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. H and r block efile B must file Form 8716 by December 17, 2012, the due date of the income tax return for the short period from September 1, 2012, to September 30, 2012. H and r block efile Note. H and r block efile The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. H and r block efile Extension of time for filing. H and r block efile   There is an automatic extension of 12 months to make this election. H and r block efile See the Form 8716 instructions for more information. H and r block efile Terminating the election. H and r block efile   The section 444 election remains in effect until it is terminated. H and r block efile If the election is terminated, another section 444 election cannot be made for any tax year. H and r block efile   The election ends when any of the following applies to the partnership, S corporation, or PSC. H and r block efile The entity changes to its required tax year. H and r block efile The entity liquidates. H and r block efile The entity becomes a member of a tiered structure. H and r block efile The IRS determines that the entity willfully failed to comply with the required payments or distributions. H and r block efile   The election will also end if either of the following events occur. H and r block efile An S corporation's S election is terminated. H and r block efile However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. H and r block efile A PSC ceases to be a PSC. H and r block efile If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. H and r block efile Required payment for partnership or S corporation. H and r block efile   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. H and r block efile The required payment for that year (or any preceding tax year) is more than $500. H and r block efile    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. H and r block efile   Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. H and r block efile If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. H and r block efile If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount. H and r block efile Applicable election year. H and r block efile   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. H and r block efile Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins. H and r block efile Required distribution for PSC. H and r block efile   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. H and r block efile If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. H and r block efile The amount deferred is treated as paid or incurred in the following tax year. H and r block efile   For information on the minimum distribution, see the instructions for Part I of Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC). H and r block efile Back-up election. H and r block efile   A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. H and r block efile If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). H and r block efile Making back-up election. H and r block efile   The general rules for making a section 444 election, as discussed earlier, apply. H and r block efile When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. H and r block efile However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print “FORM 1128 (or FORM 2553) BACK-UP ELECTION” at the top of Form 8716. H and r block efile Activating election. H and r block efile   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. H and r block efile The due date for filing Form 8752 and making the payment is the later of the following dates. H and r block efile May 15 of the calendar year following the calendar year in which the applicable election year begins. H and r block efile 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. H and r block efile   A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, “ACTIVATING BACK-UP ELECTION. H and r block efile ” 52-53-Week Tax Year A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year (discussed earlier) that ends with reference to either its required tax year or a tax year elected under section 444 (discussed earlier). H and r block efile A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. H and r block efile However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128. H and r block efile Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. H and r block efile See the Instructions for Form 1128 for details. H and r block efile Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. H and r block efile A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. H and r block efile An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. H and r block efile Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures. H and r block efile See the Instructions for Form 1128 for details. H and r block efile Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. H and r block efile Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. H and r block efile You choose an accounting method when you file your first tax return. H and r block efile If you later want to change your accounting method, you must get IRS approval. H and r block efile See Change in Accounting Method, later. H and r block efile No single accounting method is required of all taxpayers. H and r block efile You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. H and r block efile In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. H and r block efile You must use the same accounting method from year to year. H and r block efile An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. H and r block efile If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income. H and r block efile Methods you can use. H and r block efile   In general, you can compute your taxable income under any of the following accounting methods. H and r block efile Cash method. H and r block efile Accrual method. H and r block efile Special methods of accounting for certain items of income and expenses. H and r block efile A hybrid method which combines elements of two or more of the above accounting methods. H and r block efile The cash and accrual methods of accounting are explained later. H and r block efile Special methods. H and r block efile   This publication does not discuss special methods of accounting for certain items of income or expenses. H and r block efile For information on reporting income using one of the long-term contract methods, see section 460 of the Internal Revenue Code and the related regulations. H and r block efile The following publications also discuss special methods of reporting income or expenses. H and r block efile Publication 225, Farmer's Tax Guide. H and r block efile Publication 535, Business Expenses. H and r block efile Publication 537, Installment Sales. H and r block efile Publication 946, How To Depreciate Property. H and r block efile Hybrid method. H and r block efile   Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. H and r block efile However, the following restrictions apply. H and r block efile If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. H and r block efile See Exceptions under Inventories, later. H and r block efile Generally, you can use the cash method for all other items of income and expenses. H and r block efile See Inventories, later. H and r block efile If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. H and r block efile If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. H and r block efile Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. H and r block efile Business and personal items. H and r block efile   You can account for business and personal items using different accounting methods. H and r block efile For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items. H and r block efile Two or more businesses. H and r block efile   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. H and r block efile No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. H and r block efile Note. H and r block efile If you use different accounting methods to create or shift profits or losses between businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct. H and r block efile Cash Method Most individuals and many small businesses use the cash method of accounting. H and r block efile Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. H and r block efile See Inventories, later, for exceptions to this rule. H and r block efile Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. H and r block efile If you receive property and services, you must include their fair market value (FMV) in income. H and r block efile Constructive receipt. H and r block efile   Income is constructively received when an amount is credited to your account or made available to you without restriction. H and r block efile You need not have possession of it. H and r block efile If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. H and r block efile Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. H and r block efile Example. H and r block efile You are a calendar year taxpayer. H and r block efile Your bank credited, and made available, interest to your bank account in December 2012. H and r block efile You did not withdraw it or enter it into your books until 2013. H and r block efile You must include the amount in gross income for 2012, the year you constructively received it. H and r block efile You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. H and r block efile You must report the income in the year the property is received or made available to you without restriction. H and r block efile Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. H and r block efile This includes business expenses for which you contest liability. H and r block efile However, you may not be able to deduct an expense paid in advance. H and r block efile Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. H and r block efile Expense paid in advance. H and r block efile   An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. H and r block efile   Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. H and r block efile 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. H and r block efile   If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule. H and r block efile See Change in Accounting Method, later. H and r block efile Example 1. H and r block efile You are a calendar year taxpayer and pay $3,000 in 2012 for a business insurance policy that is effective for three years (36 months), beginning on July 1, 2012. H and r block efile The general rule that an expense paid in advance is deductible only in the year to which it applies is applicable to this payment because the payment does not qualify for the 12-month rule. H and r block efile Therefore, only $500 (6/36 x $3,000) is deductible in 2012, $1,000 (12/36 x $3,000) is deductible in 2013, $1,000 (12/36 x $3,000) is deductible in 2014, and the remaining $500 is deductible in 2015. H and r block efile Example 2. H and r block efile You are a calendar year taxpayer and pay $10,000 on July 1, 2012, for a business insurance policy that is effective for only one year beginning on July 1, 2012. H and r block efile The 12-month rule applies. H and r block efile Therefore, the full $10,000 is deductible in 2012. H and r block efile Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. H and r block efile (See Special rules for farming businesses, later. H and r block efile ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. H and r block efile See Gross receipts test, below. H and r block efile A partnership with a corporation (other than an S corporation) as a partner, and with the partnership having average annual gross receipts exceeding $5 million. H and r block efile See Gross receipts test, below. H and r block efile A tax shelter. H and r block efile Exceptions The following entities are not prohibited from using the cash method of accounting. H and r block efile Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. H and r block efile A qualified personal service corporation (PSC). H and r block efile Gross receipts test. H and r block efile   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. H and r block efile A corporation or a partnership meets the test if, for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or less. H and r block efile    An entity's average annual gross receipts for a prior tax year is determined by: Adding the gross receipts for that tax year and the 2 preceding tax years; and Dividing the total by 3. H and r block efile See Gross receipts test for qualifying taxpayers, for more information. H and r block efile Generally, a partnership applies the test at the partnership level. H and r block efile Gross receipts for a short tax year are annualized. H and r block efile Aggregation rules. H and r block efile   Organizations that are members of an affiliated service group or a controlled group of corporations treated as a single employer for tax purposes are required to aggregate their gross receipts to determine whether the gross receipts test is met. H and r block efile Change to accrual method. H and r block efile   A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test. H and r block efile Special rules for farming businesses. H and r block efile   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. H and r block efile However, certain corporations (other than S corporations) and partnerships that have a partner that is a corporation must use an accrual method for their farming business. H and r block efile For this purpose, farming does not include the operation of a nursery or sod farm or the raising or harvesting of trees (other than fruit and nut trees). H and r block efile   There is an exception to the requirement to use an accrual method for corporations with gross receipts of $1 million or less for each prior tax year after 1975. H and r block efile For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. H and r block efile See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. H and r block efile Qualified PSC. H and r block efile   A PSC that meets the following function and ownership tests can use the cash method. H and r block efile Function test. H and r block efile   A corporation meets the function test if at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting. H and r block efile Ownership test. H and r block efile   A corporation meets the ownership test if at least 95% of its stock is owned, directly or indirectly, at all times during the year by one or more of the following. H and r block efile Employees performing services for the corporation in a field qualifying under the function test. H and r block efile Retired employees who had performed services in those fields. H and r block efile The estate of an employee described in (1) or (2). H and r block efile Any other person who acquired the stock by reason of the death of an employee referred to in (1) or (2), but only for the 2-year period beginning on the date of death. H and r block efile   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. H and r block efile Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. H and r block efile Other forms of indirect stock ownership, such as stock owned by family members, are generally not considered when determining if the ownership test is met. H and r block efile   For purposes of the ownership test, a person is not considered an employee of a corporation unless that person performs more than minimal services for the corporation. H and r block efile Change to accrual method. H and r block efile   A corporation that fails to meet the function test for any tax year; or fails to meet the ownership test at any time during any tax year must change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. H and r block efile A corporation that fails to meet the function test or the ownership test is not treated as a qualified PSC for any part of that tax year. H and r block efile Accrual Method Under the accrual method of accounting, generally you report income in the year it is earned and deduct or capitalize expenses in the year incurred. H and r block efile The purpose of an accrual method of accounting is to match income and expenses in the correct year. H and r block efile Income Generally, you include an amount in gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. H and r block efile Under this rule, you report an amount in your gross income on the earliest of the following dates. H and r block efile When you receive payment. H and r block efile When the income amount is due to you. H and r block efile When you earn the income. H and r block efile When title has passed. H and r block efile Estimated income. H and r block efile   If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination. H and r block efile Change in payment schedule. H and r block efile   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a reduced rate. H and r block efile Continue this procedure until you complete the services, then account for the difference. H and r block efile Advance Payment for Services Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. H and r block efile However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. H and r block efile However, you cannot postpone including any payment beyond that tax year. H and r block efile Service agreement. H and r block efile   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. H and r block efile This includes an agreement providing for incidental replacement of parts or materials. H and r block efile However, this applies only if you offer the property without a service agreement in the normal course of business. H and r block efile Postponement not allowed. H and r block efile   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. H and r block efile You are to perform any part of the service after the end of the tax year immediately following the year you receive the advance payment. H and r block efile You are to perform any part of the service at any unspecified future date that may be after the end of the tax year immediately following the year you receive the advance payment. H and r block efile Examples. H and r block efile   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. H and r block efile Example 1. H and r block efile You manufacture, sell, and service computers. H and r block efile You received payment in 2012 for a one-year contingent service contract on a computer you sold. H and r block efile You can postpone including in income the part of the payment you did not earn in 2012 if, in the normal course of your business, you offer computers for sale without a contingent service contract. H and r block efile Example 2. H and r block efile You are in the television repair business. H and r block efile You received payments in 2012 for one-year contracts under which you agree to repair or replace certain parts that fail to function properly in television sets manufactured and sold by unrelated parties. H and r block efile You include the payments in gross income as you earn them. H and r block efile Example 3. H and r block efile You own a dance studio. H and r block efile On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. H and r block efile You give eight lessons in 2012. H and r block efile Under this method of including advance payments, you must include one-sixth (8/48) of the payment in income for 2012, and five-sixths (40/48) of the payment in 2013, even if you do not give all the lessons by the end of 2013. H and r block efile Example 4. H and r block efile Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. H and r block efile You must include the entire payment in income in 2012 since part of the services may be performed after the following year. H and r block efile Guarantee or warranty. H and r block efile   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. H and r block efile Prepaid rent. H and r block efile   You cannot postpone reporting income from prepaid rent. H and r block efile Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. H and r block efile You provide significant service when you supply space in a hotel, boarding house, tourist home, motor court, motel, or apartment house that furnishes hotel services. H and r block efile Books and records. H and r block efile   Any advance payment you include in gross receipts on your tax return for the year you receive payment must not be less than the payment you include in income for financial reports under the method of accounting used for those reports. H and r block efile Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. H and r block efile IRS approval. H and r block efile   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. H and r block efile Advance Payment for Sales Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. H and r block efile However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. H and r block efile An agreement includes a gift certificate that can be redeemed for goods. H and r block efile Amounts due and payable are considered received. H and r block efile How to report payments. H and r block efile   Generally, include an advance payment in income in the year in which you receive it. H and r block efile However, you can use the alternative method, discussed next. H and r block efile Alternative method of reporting. H and r block efile   Under the alternative method, generally include an advance payment in income in the earlier tax year in which you: Include advance payments in gross receipts under the method of accounting you use for tax purposes, or Include any part of advance payments in income for financial reports under the method of accounting used for those reports. H and r block efile Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. H and r block efile Example 1. H and r block efile You are a retailer. H and r block efile You use an accrual method of accounting and account for the sale of goods when you ship the goods. H and r block efile You use this method for both tax and financial reporting purposes. H and r block efile You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. H and r block efile However, see Exception for inventory goods, later. H and r block efile Example 2. H and r block efile You are a calendar year taxpayer. H and r block efile You manufacture household furniture and use an accrual method of accounting. H and r block efile Under this method, you accrue income for your financial reports when you ship the furniture. H and r block efile For tax purposes, you do not accrue income until the furniture has been delivered and accepted. H and r block efile In 2012, you received an advance payment of $8,000 for an order of furniture to be manufactured for a total price of $20,000. H and r block efile You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. H and r block efile For tax purposes, you include the $8,000 advance payment in gross income for 2012; and include the remaining $12,000 of the contract price in gross income for 2013. H and r block efile Information schedule. H and r block efile   If you use the alternative method of reporting advance payments, you must attach a statement with the following information to your tax return each year. H and r block efile Total advance payments received in the current tax year. H and r block efile Total advance payments received in earlier tax years and not included in income before the current tax year. H and r block efile Total payments received in earlier tax years included in income for the current tax year. H and r block efile Exception for inventory goods. H and r block efile   If you have an agreement to sell goods properly included in inventory, you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet the following requirements. H and r block efile You account for the advance payment under the alternative method (discussed earlier). H and r block efile You have received a substantial advance payment on the agreement (discussed next). H and r block efile You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. H and r block efile These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. H and r block efile   If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments. H and r block efile You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. H and r block efile If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. H and r block efile Note. H and r block efile You must report any advance payments you receive after the second year in the year received. H and r block efile No further deferral is allowed. H and r block efile Substantial advance payments. H and r block efile   Under an agreement for a future sale, you have substantial advance payments if, by the end of the tax year, the total advance payments received during that year and preceding tax years are equal to or more than the total costs reasonably estimated to be includible in inventory because of the agreement. H and r block efile Example. H and r block efile You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. H and r block efile In 2008, you entered into a contract for the sale of goods properly includible in your inventory. H and r block efile The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. H and r block efile You receive the following advance payments under the contract. H and r block efile 2009 $17,500 2010 10,000 2011 7,500 2012 5,000 2013 5,000 2014 5,000 Total contract price $50,000   Your customer asked you to deliver the goods in 2015. H and r block efile In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. H and r block efile Since the advance payments you had received by the end of 2010 were more than the costs you estimated, the payments are substantial advance payments. H and r block efile   For 2012, include in income all payments you received by the end of 2012, the second tax year following the tax year in which you received substantial advance payments. H and r block efile You must include $40,000 in sales for 2012 (the total amounts received from 2009 through 2012) and include in inventory the cost of the goods (or similar goods) on hand. H and r block efile If no such goods are on hand, then estimate the cost necessary to satisfy the contract. H and r block efile   No further deferral is allowed. H and r block efile You must include in gross income the advance payment you receive each remaining year of the contract. H and r block efile Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. H and r block efile IRS approval. H and r block efile   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. H and r block efile Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. H and r block efile The all-events test has been met. H and r block efile The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. H and r block efile Economic performance has occurred. H and r block efile Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. H and r block efile If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or the property is used. H and r block efile If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. H and r block efile Example. H and r block efile You are a calendar year taxpayer. H and r block efile You buy office supplies in December 2012. H and r block efile You receive the supplies and the bill in December, but you pay the bill in January 2013. H and r block efile You can deduct the expense in 2012 because all events have occurred to fix the liability, the amount of the liability can be determined, and economic performance occurred in 2012. H and r block efile Your office supplies may qualify as a recurring item, discussed later. H and r block efile If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). H and r block efile Workers' compensation and tort liability. H and r block efile   If you are required to make payments under workers' compensation laws or in satisfaction of any tort liability, economic performance occurs as you make the payments. H and r block efile If you are required to make payments to a special designated settlement fund established by court order for a tort liability, economic performance occurs as you make the payments. H and r block efile Taxes. H and r block efile   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. H and r block efile are paid. H and r block efile However, you can elect to treat taxes as a recurring item, discussed later. H and r block efile You can also elect to ratably accrue real estate taxes. H and r block efile See chapter 5 of Publication 535 for information about real estate taxes. H and r block efile Other liabilities. H and r block efile   Other liabilities for which economic performance occurs as you make payments include liabilities for breach of contract (to the extent of incidental, consequential, and liquidated damages), violation of law, rebates and refunds, awards, prizes, jackpots, insurance, and warranty and service contracts. H and r block efile Interest. H and r block efile   Economic performance occurs with the passage of time (as the borrower uses, and the lender forgoes use of, the lender's money) rather than as payments are made. H and r block efile Compensation for services. H and r block efile   Generally, economic performance occurs as an employee renders service to the employer. H and r block efile However, deductions for compensation or other benefits paid to an employee in a year subsequent to economic performance are subject to the rules governing deferred compensation, deferred benefits, and funded welfare benefit plans. H and r block efile For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. H and r block efile Vacation pay. H and r block efile   You can take a current deduction for vacation pay earned by your employees if you pay it during the year or, if the amount is vested, within 2½ months after the end of the year. H and r block efile If you pay it later than this, you must deduct it in the year actually paid. H and r block efile An amount is vested if your right to it cannot be nullified or cancelled. H and r block efile Exception for recurring items. H and r block efile   An exception to the economic performance rule allows certain recurring items to be treated as incurred during the tax year even though economic performance has not occurred. H and r block efile The exception applies if all the following requirements are met. H and r block efile The all-events test, discussed earlier, is met. H and r block efile Economic performance occurs by the earlier of the following dates. H and r block efile 8½ months after the close of the year. H and r block efile The date you file a timely return (including extensions) for the year. H and r block efile The item is recurring in nature and you consistently treat similar items as incurred in the tax year in which the all-events test is met. H and r block efile Either: The item is not material, or Accruing the item in the year in which the all-events test is met results in a better match against income than accruing the item in the year of economic performance. H and r block efile This exception does not apply to workers' compensation or tort liabilities. H and r block efile Amended return. H and r block efile   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. H and r block efile You can do so if economic performance for the liability occurs after you file your tax return for the year, but within 8½ months after the close of the tax year. H and r block efile Recurrence and consistency. H and r block efile   To determine whether an item is recurring and consistently reported, consider the frequency with which the item and similar items are incurred (or expected to be incurred) and how you report these items for tax purposes. H and r block efile A new expense or an expense not incurred every year can be treated as recurring if it is reasonable to expect that it will be incurred regularly in the future. H and r block efile Materiality. H and r block efile   Factors to consider in determining the materiality of a recurring item include the size of the item (both in absolute terms and in relation to your income and other expenses) and the treatment of the item on your financial statements. H and r block efile   An item considered material for financial statement purposes is also considered material for tax purposes. H and r block efile However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. H and r block efile Matching expenses with income. H and r block efile   Costs directly associated with the revenue of a period are properly allocable to that period. H and r block efile To determine whether the accrual of an expense in a particular year results in a better match with the income to which it relates, generally accepted accounting principles (GAAP; visit www. H and r block efile fasab. H and r block efile gov/accepted. H and r block efile html) are an important factor. H and r block efile   For example, if you report sales income in the year of sale, but you do not ship the goods until the following year, the shipping costs are more properly matched to income in the year of sale than the year the goods are shipped. H and r block efile Expenses that cannot be practically associated with income of a particular period, such as advertising costs, should be assigned to the period the costs are incurred. H and r block efile However, the matching requirement is considered met for certain types of expenses. H and r block efile These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. H and r block efile Expenses Paid in Advance An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. H and r block efile Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. H and r block efile 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. H and r block efile If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must get IRS approval before using the general rule and/or the 12-month rule. H and r block efile See Change in Accounting Method, later, for information on how to get IRS approval. H and r block efile See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. H and r block efile Related Persons Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. H and r block efile Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. H and r block efile See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. H and r block efile Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. H and r block efile If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. H and r block efile However, see Exceptions, next. H and r block efile See also Accrual Method, earlier. H and r block efile To figure taxable income, you must value your inventory at the beginning and end of each tax year. H and r block efile To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. H and r block efile See Identifying Cost and Valuing Inventory, later. H and r block efile The rules for valuing inventory are not the same for all businesses. H and r block efile The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. H and r block efile Your inventory practices must be consistent from year to year. H and r block efile The rules discussed here apply only if they do not conflict with the uniform capitalization rules of section 263A and the mark-to-market rules of section 475. H and r block efile Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. H and r block efile These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). H and r block efile A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. H and r block efile irs. H and r block efile gov/pub/irs-irbs/irb01–02. H and r block efile pdf. H and r block efile A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. H and r block efile irs. H and r block efile gov/pub/irs-irbs/irb02–18. H and r block efile pdf. H and r block efile In addition to the information provided in this publication, you should see the revenue procedures referenced in the list, above, and the instructions for Form 3115 for information you will need to adopt or change to these accounting methods (see Changing methods, later). H and r block efile Qualifying taxpayer. H and r block efile   You are a qualifying taxpayer under Revenue Procedure 2001-10 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 17, 1998 (see Gross receipts test for qualifying taxpayers, next). H and r block efile Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. H and r block efile You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. H and r block efile Gross receipts test for qualifying taxpayers. H and r block efile   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. H and r block efile List each of the test years. H and r block efile For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. H and r block efile Step 2. H and r block efile Determine your average annual gross receipts for each test year listed in Step 1. H and r block efile Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. H and r block efile Step 3. H and r block efile You meet the gross receipts test for qualifying taxpayers if your average annual gross receipts for each test year listed in Step 1 is $1 million or less. H and r block efile Qualifying small business taxpayer. H and r block efile   You are a qualifying small business taxpayer under Revenue Procedure 2002-28 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 31, 2000 (see Gross receipts test for qualifying small business taxpayers, next). H and r block efile Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. H and r block efile You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. H and r block efile Your principle business activity is an eligible business. H and r block efile See Eligible business, later. H and r block efile You have not changed (or have not been required to change) from the cash method because you became ineligible to use the cash method under Revenue Procedure 2002-28. H and r block efile Note. H and r block efile Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. H and r block efile A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. H and r block efile See Special rules for farming businesses under Cash Method, earlier. H and r block efile Gross receipts test for qualifying small business taxpayers. H and r block efile   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. H and r block efile List each of the test years. H and r block efile For qualifying small business taxpayers under Revenue Procedure 2002-28, the test years are each prior tax year ending on or after December 31, 2000. H and r block efile Step 2. H and r block efile Determine your average annual gross receipts for each test year listed in Step 1. H and r block efile Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. H and r block efile Step 3. H and r block efile You meet the gross receipts test for qualifying small business taxpayers if your average annual gross receipts for each test year listed in Step 1 is $10 million or less. H and r block efile Eligible business. H and r block efile   An eligible business is any business for which a qualified small business taxpayer can use the cash method and choose to not keep an inventory. H and r block efile You have an eligible business if you meet any of the following requirements. H and r block efile Your principal business activity is described in a North American Industry Classification System (NAICS) code other than any of the following NAICS subsector codes: NAICS codes 211 and 212 (mining activities). H and r block efile NAICS codes 31-33 (manufacturing). H and r block efile NAICS code 42 (wholesale trade). H and r block efile NAICS codes 44-45 (retail trade). H and r block efile NAICS codes 5111 and 5122 (information industries). H and r block efile Your principal business activity is the provision of services, including the provision of property incident to those services. H and r block efile Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. H and r block efile   Information about the NAICS codes can be found at http://www. H and r block efile census. H and r block efile gov/naics or in the instructions for your federal income tax return. H and r block efile Gross receipts. H and r block efile   In general, gross receipts must include all receipts from all your trades or businesses that must be recognized under the method of accounting you used for that tax year for federal income tax purposes. H and r block efile See the definit
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Understanding your CP11A Notice

We made changes to your return because we believe there's a miscalculation involving your Earned Income Credit. You owe money on your taxes as a result of these changes.

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully ― it will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us within 60 days of the date of your notice if you disagree with the change we made.
  • Correct the copy of your tax return that you kept for your records.

You may want to...


Answers to Common Questions

How can I find out what caused my tax return to change?
Please contact us at the number listed on your notice for specific information concerning your tax return.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll free number listed on the top right corner of your notice.

If you contact us in writing within 60 days of the date of this notice, we'll reverse the change we made to your account. However, if you're unable to provide us additional information that justifies the reversal and we believe the reversal is in error, we'll forward your case for audit. This step gives you formal appeal rights, including the right to appeal our decision in court before you have to pay the additional tax. After we forward your case, the audit staff will contact you within five to six weeks to fully explain the audit process and your rights. If you don’t contact us within the 60-day period, you'll lose your right to appeal our decision before payment of tax.

If you don't contact us within 60 days, the change won’t be reversed and you must pay the additional tax. You may then file a claim for refund. You must submit the claim within three years of the date you filed the tax return, or within two years of the date of your last payment for this tax.

What happens if I can’t pay the full amount I owe?
You can arrange to make a payment plan with us if you can’t pay the full amount you owe.

Am I charged interest on the money I owe?
Not if you pay the full amount you owe by the date on the payment coupon. However interest accrues on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you will receive a late payment penalty. You can contact us at the number given on your notice at 1-800-829-0922 if you're unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

What's the difference between the "Child Tax Credit" and the "Additional Child Tax Credit?" Can I qualify for both?
The Child Tax Credit is for people who have a qualifying child and meet the eligibility requirements. The maximum amount you can claim is $1000 for each qualifying child. The Additional Child Tax Credit is for eligible individuals who receive less than the full amount of Child Tax Credit. You may qualify for both the Child Tax Credit and the Additional Child Tax Credit. For more information, see:

How do I claim an Additional Child Tax Credit?
You can claim the credit by completing a Form 1040 Schedule 8812, Child Tax Credit and attaching it to your income tax return.

My child is turning 18 this year. Can I still get the Additional Child Tax Credit?
No. Your child must be under age 17 at the end of 2009 to qualify for both the Child Tax Credit and the Additional Child Tax Credit.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Use the EITC Assistant on our website to help you complete your Schedule EIC, Earned Income Credit and claim your Earned Income Credit.

If you have any dependent children, remember to check out if you are eligible to claim the Child Tax Credit and the Additional Child Tax Credit the next time you file your income tax return. Instructions for claiming the Child Tax Credit are found in the Form 1040 Instruction booklet. Use Form 1040 Schedule 8812, Child Tax Credit to claim the Additional Child Tax Credit, if you are eligible.

Page Last Reviewed or Updated: 28-Mar-2014

The H And R Block Efile

H and r block efile Publication 550 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionOrdering forms and publications. H and r block efile Tax questions. H and r block efile Future Developments For the latest information about developments related to Publication 550, such as legislation enacted after it was published, go to www. H and r block efile irs. H and r block efile gov/pub550. H and r block efile What's New Net investment income tax (NIIT). H and r block efile  Beginning in 2013, you may be subject to the NIIT. H and r block efile The NIIT applies at a rate of 3. H and r block efile 8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts. H and r block efile See Net investment income tax (NIIT) , later. H and r block efile Maximum capital gain rates. H and r block efile  For 2013, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. H and r block efile See Capital Gain Tax Rates , later, for more information. H and r block efile Gift tax exclusion amount increased. H and r block efile  For calendar year 2013, the first $14,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts. H and r block efile See Property Received as a Gift , later. H and r block efile Reminders Mutual fund distributions. H and r block efile  Publication 564, Mutual Fund Distributions, has been incorporated into this publication. H and r block efile Foreign source income. H and r block efile  If you are a U. H and r block efile S. H and r block efile citizen with investment income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U. H and r block efile S. H and r block efile law. H and r block efile This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. H and r block efile Employee stock options. H and r block efile  If you received an option to buy or sell stock or other property as payment for your services, see Publication 525, Taxable and Nontaxable Income, for the special tax rules that apply. H and r block efile Photographs of missing children. H and r block efile  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. H and r block efile Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. H and r block efile You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. H and r block efile Introduction This publication provides information on the tax treatment of investment income and expenses. H and r block efile It includes information on the tax treatment of investment income and expenses for individual shareholders of mutual funds or other regulated investment companies, such as money market funds. H and r block efile It explains what investment income is taxable and what investment expenses are deductible. H and r block efile It explains when and how to show these items on your tax return. H and r block efile It also explains how to determine and report gains and losses on the disposition of investment property and provides information on property trades and tax shelters. H and r block efile The glossary at the end of this publication defines many of the terms used. H and r block efile Investment income. H and r block efile   This generally includes interest, dividends, capital gains, and other types of distributions including mutual fund distributions. H and r block efile Investment expenses. H and r block efile   These include interest paid or incurred to acquire investment property and expenses to manage or collect income from investment property. H and r block efile Qualified retirement plans and IRAs. H and r block efile   The rules in this publication do not apply to mutual fund shares held in individual retirement arrangements (IRAs), section 401(k) plans, and other qualified retirement plans. H and r block efile The value of the mutual fund shares and earnings allocated to you are included in your retirement plan assets and stay tax free generally until the plan distributes them to you. H and r block efile The tax rules that apply to retirement plan distributions are explained in the following publications. H and r block efile Publication 560, Retirement Plans for Small Business. H and r block efile Publication 571, Tax-Sheltered Annuity Plans. H and r block efile Publication 575, Pension and Annuity Income. H and r block efile Publication 590, Individual Retirement Arrangements (IRAs). H and r block efile Publication 721, Tax Guide to U. H and r block efile S. H and r block efile Civil Service Retirement Benefits. H and r block efile    Comments and suggestions. H and r block efile   We welcome your comments about this publication and your suggestions for future editions. H and r block efile   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. H and r block efile NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. H and r block efile Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. H and r block efile   You can send your comments from www. H and r block efile irs. H and r block efile gov/formspubs/. H and r block efile Click on “More Information” and then on “Comment on Tax Forms and Publications. H and r block efile ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. H and r block efile Ordering forms and publications. H and r block efile   Visit www. H and r block efile irs. H and r block efile gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. H and r block efile Internal Revenue Service 1201 N. H and r block efile Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. H and r block efile   If you have a tax question, check the information available on IRS. H and r block efile gov or call 1-800-829-1040. H and r block efile We cannot answer tax questions sent to either of the above addresses. H and r block efile Prev  Up  Next   Home   More Online Publications