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Hrblock login Publication 15-A - Introductory Material Table of Contents Future Developments What's New Reminders Introduction Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 15-A, such as legislation enacted after it was published, go to www. Hrblock login irs. Hrblock login gov/pub15a. Hrblock login What's New Social security and Medicare tax for 2014. Hrblock login  The social security tax rate is 6. Hrblock login 2% each for the employee and employer, unchanged from 2013. Hrblock login The social security wage base limit is $117,000. Hrblock login The Medicare tax rate is 1. Hrblock login 45% each for the employee and employer, unchanged from 2013. Hrblock login There is no wage base limit for Medicare tax. Hrblock login Social security and Medicare taxes apply to the wages of household workers you pay $1,900 or more in cash or an equivalent form of compensation. Hrblock login Social security and Medicare taxes apply to election workers who are paid $1,600 or more in cash or an equivalent form of compensation. Hrblock login Withholding allowance. Hrblock login  The 2014 amount for one withholding allowance on an annual basis is $3,950. Hrblock login Same-sex marriage. Hrblock login  For federal tax purposes, individuals of the same sex are considered married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. Hrblock login For more information, see Revenue Ruling 2013-17, 2013-38 I. Hrblock login R. Hrblock login B. Hrblock login 201, available at www. Hrblock login irs. Hrblock login gov/irb/2013-38_IRB/ar07. Hrblock login html. Hrblock login Notice 2013-61 provides special administrative procedures for employers to make claims for refunds or adjustments of overpayments of social security and Medicare taxes with respect to certain same-sex spouse benefits before expiration of the period of limitations. Hrblock login Notice 2013-61, 2013-44 I. Hrblock login R. Hrblock login B. Hrblock login 432, is available at www. Hrblock login irs. Hrblock login gov/irb/2013-44_IRB/ar10. Hrblock login html. Hrblock login Reminders Additional Medicare Tax withholding. Hrblock login . Hrblock login  In addition to withholding Medicare tax at 1. Hrblock login 45%, you must withhold a 0. Hrblock login 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Hrblock login You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Hrblock login Additional Medicare Tax is only imposed on the employee. Hrblock login There is no employer share of Additional Medicare Tax. Hrblock login All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Hrblock login For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E), Employer's Tax Guide. Hrblock login For more information on Additional Medicare Tax, visit IRS. Hrblock login gov and enter “Additional Medicare Tax” in the search box. Hrblock login Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans. Hrblock login  The work opportunity tax credit is available for eligible unemployed veterans who begin work on or after November 22, 2011, and before January 1, 2014. Hrblock login Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Hrblock login For more information, visit IRS. Hrblock login gov and enter “work opportunity tax credit” in the search box. Hrblock login COBRA premium assistance credit. Hrblock login  The credit for COBRA premium assistance payments applies to premiums paid for employees involuntarily terminated between September 1, 2008, and May 31, 2010, and to premiums paid for up to 15 months. Hrblock login For more information, see COBRA premium assistance credit in Publication 15 (Circular E). Hrblock login Federal tax deposits must be made by electronic funds transfer. Hrblock login  You must use electronic funds transfer to make all federal tax deposits. Hrblock login Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). Hrblock login If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Hrblock login Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Hrblock login EFTPS is a free service provided by the Department of Treasury. Hrblock login Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Hrblock login For more information on making federal tax deposits, see How To Deposit in Publication 15 (Circular E). Hrblock login To get more information about EFTPS or to enroll in EFTPS, visit www. Hrblock login eftps. Hrblock login gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Hrblock login Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide To Getting Started. Hrblock login You must receive written notice from the IRS to file Form 944. Hrblock login  If you have been filing Forms 941, Employer's QUARTERLY Federal Tax Return (or Forms 941-SS, Employer's QUARTERLY Federal Tax Return—American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U. Hrblock login S. Hrblock login Virgin Islands, or Formularios 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono), and believe your employment taxes for the calendar year will be $1,000 or less, and you would like to file Form 944, Employer's ANNUAL Federal Tax Return, instead of Forms 941, you must contact the IRS to request to file Form 944. Hrblock login You must receive written notice from the IRS to file Form 944 instead of Forms 941 before you may file this form. Hrblock login For more information on requesting to file Form 944, visit IRS. Hrblock login gov and enter “file employment taxes annually” in the search box. Hrblock login Employers can request to file Forms 941 instead of Form 944. Hrblock login  If you received notice from the IRS and have been filing Form 944 but would like to file Forms 941 instead, you must contact the IRS to request to file Forms 941. Hrblock login You must receive written notice from the IRS to file Forms 941 instead of Form 944 before you may file these forms. Hrblock login For more information on requesting to file Form 944, visit IRS. Hrblock login gov and enter “file employment taxes annually” in the search box. Hrblock login Aggregate Form 941 filers. Hrblock login  Agents must complete Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, when filing an aggregate Form 941. Hrblock login Aggregate Forms 941 can only be filed by agents approved by the IRS under section 3504 of the Internal Revenue Code. Hrblock login To request approval to act as an agent for an employer, the agent must file Form 2678, Employer/Payer Appointment of Agent, with the IRS. Hrblock login Aggregate Form 940 filers. Hrblock login  Agents must complete Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers, when filing an aggregate Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Hrblock login Aggregate Forms 940 may only be filed by agents acting on behalf of home care service recipients who receive home care services through a program administered by a federal, state, or local government. Hrblock login To request approval to act as an agent on behalf of home care service recipients, the agent must file Form 2678 with the IRS. Hrblock login Electronic filing and payment. Hrblock login  Now, more than ever before, businesses can enjoy the benefits of filing and paying their federal taxes electronically. Hrblock login Whether you rely on a tax professional or handle your own taxes, the IRS offers you convenient programs to make filing and payment easier. Hrblock login Spend less time and worry about taxes and more time running your business. Hrblock login Use e-file and the Electronic Federal Tax Payment System (EFTPS) to your benefit. Hrblock login For e-file, visit www. Hrblock login irs. Hrblock login gov/efile for additional information. Hrblock login For EFTPS, visit www. Hrblock login eftps. Hrblock login gov or call EFTPS Customer Service at 1-800-555-4477 or 1-800-733-4829 (TDD). Hrblock login Electronic submission of Forms W-4, W-4P, W-4S and W-4V. Hrblock login  You may set up a system to electronically receive any or all of the following forms (and their Spanish versions, if available) from an employee or payee. Hrblock login Form W-4, Employee's Withholding Allowance Certificate. Hrblock login Form W-4P, Withholding Certificate for Pension or Annuity Payments. Hrblock login Form W-4S, Request for Federal Income Tax Withholding From Sick Pay. Hrblock login Form W-4V, Voluntary Withholding Request. Hrblock login For each form that you establish an electronic submission system for, you must meet each of the following five requirements. Hrblock login The electronic system must ensure that the information received by the payer is the information sent by the payee. Hrblock login The system must document all occasions of user access that result in a submission. Hrblock login In addition, the design and operation of the electronic system, including access procedures, must make it reasonably certain that the person accessing the system and submitting the form is the person identified on the form. Hrblock login The electronic system must provide exactly the same information as the paper form. Hrblock login The electronic submission must be signed with an electronic signature by the payee whose name is on the form. Hrblock login The electronic signature must be the final entry in the submission. Hrblock login Upon request, you must furnish a hard copy of any completed electronic form to the IRS and a statement that, to the best of the payer's knowledge, the electronic form was submitted by the named payee. Hrblock login The hard copy of the electronic form must provide exactly the same information as, but need not be a facsimile of, the paper form. Hrblock login For Form W-4, the signature must be under penalty of perjury, and must contain the same language that appears on the paper version of the form. Hrblock login The electronic system must inform the employee that he or she must make a declaration contained in the perjury statement and that the declaration is made by signing the Form W-4. Hrblock login You must also meet all recordkeeping requirements that apply to the paper forms. Hrblock login For more information, see: Regulations sections 31. Hrblock login 3402(f)(5)-1(c) (for Form W-4), and Announcement 99-6 (for Forms W-4P, W-4S, and W-4V). Hrblock login You can find Announcement 99-6 on page 24 of Internal Revenue Bulletin 1999-4 at www. Hrblock login irs. Hrblock login gov/pub/irs-irbs/irb99-04. Hrblock login pdf. Hrblock login Additional employment tax information. Hrblock login  Visit the IRS website at www. Hrblock login irs. Hrblock login gov/businesses and click on the Employment Taxes link under Businesses Topics. Hrblock login Telephone help. Hrblock login  You can call the IRS Business and Specialty Tax Line with your employment tax questions at 1-800-829-4933. Hrblock login Help for people with disabilities. Hrblock login  You may call 1-800-829-4059 (TDD/TTY for persons who are deaf, heard of hearing, or have a speech disability) with any tax question or to order forms and publications. Hrblock login You may also use this number for assistance with unresolved tax problems. Hrblock login Furnishing Form W-2 to employees electronically. Hrblock login  You may set up a system to furnish Form W-2, Wage and Tax Statement, electronically. Hrblock login Each employee participating must consent (either electronically or by paper document) to receive his or her Form W-2 electronically, and you must notify the employee of all hardware and software requirements to receive the form. Hrblock login You may not send a Form W-2 electronically to any employee who does not consent or who has revoked consent previously provided. Hrblock login To furnish Forms W-2 electronically, you must meet the following disclosure requirements and provide a clear and conspicuous statement of each requirement to your employees. Hrblock login The employee must be informed that he or she will receive a paper Form W-2 if consent is not given to receive it electronically. Hrblock login The employee must be informed of the scope and duration of the consent. Hrblock login The employee must be informed of any procedure for obtaining a paper copy of his or her Form W-2 and whether or not the request for a paper statement is treated as a withdrawal of his or her consent to receiving his or her Form W-2 electronically. Hrblock login The employee must be notified about how to withdraw a consent and the effective date and manner by which the employer will confirm the withdrawn consent. Hrblock login The employee must also be notified that the withdrawn consent does not apply to the previously issued Forms W-2. Hrblock login The employee must be informed about any conditions under which electronic Forms W-2 will no longer be furnished (for example, termination of employment). Hrblock login The employee must be informed of any procedures for updating his or her contact information that enables the employer to provide electronic Forms W-2. Hrblock login The employer must notify the employee of any changes to the employer's contact information. Hrblock login You must furnish electronic Forms W-2 by the same due date as the paper Forms W-2. Hrblock login For more information on furnishing Form W-2 to employees electronically, see Regulations section 31. Hrblock login 6051-1(j). Hrblock login Photographs of missing children. Hrblock login  The IRS is a proud partner with the National Center for Missing and Exploited Children. Hrblock login Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Hrblock login 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. Hrblock login Introduction This publication supplements Publication 15 (Circular E). Hrblock login It contains specialized and detailed employment tax information supplementing the basic information provided in Publication 15 (Circular E). Hrblock login This publication also contains tables for withholding on distributions of Indian gaming profits to tribal members. Hrblock login Publication 15-B, Employer's Tax Guide to Fringe Benefits, contains information about the employment tax treatment of various types of noncash compensation. Hrblock login Ordering publications and forms. Hrblock login   See Ordering Employer Tax Forms and Publications in Publication 15 (Circular E) and How To Get Tax Help , later, for more information on how to obtain forms and publications. Hrblock login Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 505 Tax Withholding and Estimated Tax 515 Withholding of Tax on Nonresident Aliens and Foreign Entities 583 Starting a Business and Keeping Records 1635 Employer Identification Number: Understanding Your EIN Comments and suggestions. Hrblock login   We welcome your comments about this publication and your suggestions for future editions. Hrblock login    You can write to us at the following address: Internal Revenue Service Tax Forms & Publications Division 1111 Constitution Ave. Hrblock login NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Hrblock login Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Hrblock login   You can also send us comments from www. Hrblock login irs. Hrblock login gov/formspubs. Hrblock login Click on More Information and then click on Comment on Tax Forms and Publications. Hrblock login   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, instructions, and publications. Hrblock login Prev  Up  Next   Home   More Online Publications
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Top 10 Tax Time Tips from the IRS

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IRS Tax Tip 2014-40, March 25, 2014                                                  

The tax filing season is almost over. You can make tax time easier if you don’t wait until the last minute. Here are 10 important tax time tips:

  1. Gather your records.  Collect all tax records you need to file your taxes. This includes receipts, canceled checks and records that support income, deductions or tax credits that you claim on your tax return. Store them in a safe place.

  2. Report all your income.  You will need to report your income from all of your Forms W-2, Wage and Tax Statements, and Form 1099 income statements when you file your tax return.

  3. Get answers.  Use the Interactive Tax Assistant tool on the IRS website to get answers to many of your questions about tax credits, deductions and many more topics.

  4. Use Free File.  You can prepare and e-file a tax return for free using IRS Free File, available exclusively on IRS.gov. If your income was $58,000 or less, you qualify to use free tax software. If your income was higher, or if you’re comfortable doing your own tax return, you can use Free File Fillable Forms, the electronic version of IRS paper forms. Visit IRS.gov/freefile to check your options.

  5. Try IRS e-file.  Electronic filing is the best way to file a tax return. It’s accurate, safe and easy. Last year, more than 122 million taxpayers used IRS e-file. If you owe taxes, you have the option to file early and pay by April 15.

  6. Weigh your filing options.  You have several options for filing your tax return. You can prepare it yourself or go to a tax preparer. You may be eligible for free, face-to-face help at a Volunteer Income Tax Assistance or Tax Counseling for the Elderly site. Weigh your options and choose the one that works best for you.

  7. Use direct deposit.  Combining e-file with direct deposit is the fastest and safest way to get your tax refund.

  8. Visit the IRS website 24/7.  IRS.gov is a great place to get everything you need to file your tax return. Visit ‘1040 Central’ for online tools, filing tips, answers to frequently asked questions and IRS forms and publications. Get them all anytime, day or night.

  9. Check out number 17.  IRS Publication 17, Your Federal Income Tax, is a complete tax resource. It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

  10. Review your return.  Mistakes slow down the receipt of your tax refund. Be sure to check all Social Security numbers and math calculations on your return, as these are the most common errors. If you run into a problem, remember the IRS is here to help. Start with IRS.gov.

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Page Last Reviewed or Updated: 27-Mar-2014

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