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Federal Free State Tax

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Federal Free State Tax

Federal free state tax 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. Federal free state tax irs. Federal free state tax gov/pub15a. Federal free state tax What's New Social security and Medicare tax for 2014. Federal free state tax  The social security tax rate is 6. Federal free state tax 2% each for the employee and employer, unchanged from 2013. Federal free state tax The social security wage base limit is $117,000. Federal free state tax The Medicare tax rate is 1. Federal free state tax 45% each for the employee and employer, unchanged from 2013. Federal free state tax There is no wage base limit for Medicare tax. Federal free state tax 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. Federal free state tax Social security and Medicare taxes apply to election workers who are paid $1,600 or more in cash or an equivalent form of compensation. Federal free state tax Withholding allowance. Federal free state tax  The 2014 amount for one withholding allowance on an annual basis is $3,950. Federal free state tax Same-sex marriage. Federal free state tax  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. Federal free state tax For more information, see Revenue Ruling 2013-17, 2013-38 I. Federal free state tax R. Federal free state tax B. Federal free state tax 201, available at www. Federal free state tax irs. Federal free state tax gov/irb/2013-38_IRB/ar07. Federal free state tax html. Federal free state tax 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. Federal free state tax Notice 2013-61, 2013-44 I. Federal free state tax R. Federal free state tax B. Federal free state tax 432, is available at www. Federal free state tax irs. Federal free state tax gov/irb/2013-44_IRB/ar10. Federal free state tax html. Federal free state tax Reminders Additional Medicare Tax withholding. Federal free state tax . Federal free state tax  In addition to withholding Medicare tax at 1. Federal free state tax 45%, you must withhold a 0. Federal free state tax 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Federal free state tax 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. Federal free state tax Additional Medicare Tax is only imposed on the employee. Federal free state tax There is no employer share of Additional Medicare Tax. Federal free state tax 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. Federal free state tax 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. Federal free state tax For more information on Additional Medicare Tax, visit IRS. Federal free state tax gov and enter “Additional Medicare Tax” in the search box. Federal free state tax Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans. Federal free state tax  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. Federal free state tax 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. Federal free state tax For more information, visit IRS. Federal free state tax gov and enter “work opportunity tax credit” in the search box. Federal free state tax COBRA premium assistance credit. Federal free state tax  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. Federal free state tax For more information, see COBRA premium assistance credit in Publication 15 (Circular E). Federal free state tax Federal tax deposits must be made by electronic funds transfer. Federal free state tax  You must use electronic funds transfer to make all federal tax deposits. Federal free state tax Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). Federal free state tax 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. Federal free state tax Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Federal free state tax EFTPS is a free service provided by the Department of Treasury. Federal free state tax Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Federal free state tax For more information on making federal tax deposits, see How To Deposit in Publication 15 (Circular E). Federal free state tax To get more information about EFTPS or to enroll in EFTPS, visit www. Federal free state tax eftps. Federal free state tax gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Federal free state tax Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide To Getting Started. Federal free state tax You must receive written notice from the IRS to file Form 944. Federal free state tax  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. Federal free state tax S. Federal free state tax 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. Federal free state tax You must receive written notice from the IRS to file Form 944 instead of Forms 941 before you may file this form. Federal free state tax For more information on requesting to file Form 944, visit IRS. Federal free state tax gov and enter “file employment taxes annually” in the search box. Federal free state tax Employers can request to file Forms 941 instead of Form 944. Federal free state tax  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. Federal free state tax You must receive written notice from the IRS to file Forms 941 instead of Form 944 before you may file these forms. Federal free state tax For more information on requesting to file Form 944, visit IRS. Federal free state tax gov and enter “file employment taxes annually” in the search box. Federal free state tax Aggregate Form 941 filers. Federal free state tax  Agents must complete Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, when filing an aggregate Form 941. Federal free state tax Aggregate Forms 941 can only be filed by agents approved by the IRS under section 3504 of the Internal Revenue Code. Federal free state tax 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. Federal free state tax Aggregate Form 940 filers. Federal free state tax  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. Federal free state tax 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. Federal free state tax To request approval to act as an agent on behalf of home care service recipients, the agent must file Form 2678 with the IRS. Federal free state tax Electronic filing and payment. Federal free state tax  Now, more than ever before, businesses can enjoy the benefits of filing and paying their federal taxes electronically. Federal free state tax Whether you rely on a tax professional or handle your own taxes, the IRS offers you convenient programs to make filing and payment easier. Federal free state tax Spend less time and worry about taxes and more time running your business. Federal free state tax Use e-file and the Electronic Federal Tax Payment System (EFTPS) to your benefit. Federal free state tax For e-file, visit www. Federal free state tax irs. Federal free state tax gov/efile for additional information. Federal free state tax For EFTPS, visit www. Federal free state tax eftps. Federal free state tax gov or call EFTPS Customer Service at 1-800-555-4477 or 1-800-733-4829 (TDD). Federal free state tax Electronic submission of Forms W-4, W-4P, W-4S and W-4V. Federal free state tax  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. Federal free state tax Form W-4, Employee's Withholding Allowance Certificate. Federal free state tax Form W-4P, Withholding Certificate for Pension or Annuity Payments. Federal free state tax Form W-4S, Request for Federal Income Tax Withholding From Sick Pay. Federal free state tax Form W-4V, Voluntary Withholding Request. Federal free state tax For each form that you establish an electronic submission system for, you must meet each of the following five requirements. Federal free state tax The electronic system must ensure that the information received by the payer is the information sent by the payee. Federal free state tax The system must document all occasions of user access that result in a submission. Federal free state tax 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. Federal free state tax The electronic system must provide exactly the same information as the paper form. Federal free state tax The electronic submission must be signed with an electronic signature by the payee whose name is on the form. Federal free state tax The electronic signature must be the final entry in the submission. Federal free state tax 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. Federal free state tax The hard copy of the electronic form must provide exactly the same information as, but need not be a facsimile of, the paper form. Federal free state tax 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. Federal free state tax 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. Federal free state tax You must also meet all recordkeeping requirements that apply to the paper forms. Federal free state tax For more information, see: Regulations sections 31. Federal free state tax 3402(f)(5)-1(c) (for Form W-4), and Announcement 99-6 (for Forms W-4P, W-4S, and W-4V). Federal free state tax You can find Announcement 99-6 on page 24 of Internal Revenue Bulletin 1999-4 at www. Federal free state tax irs. Federal free state tax gov/pub/irs-irbs/irb99-04. Federal free state tax pdf. Federal free state tax Additional employment tax information. Federal free state tax  Visit the IRS website at www. Federal free state tax irs. Federal free state tax gov/businesses and click on the Employment Taxes link under Businesses Topics. Federal free state tax Telephone help. Federal free state tax  You can call the IRS Business and Specialty Tax Line with your employment tax questions at 1-800-829-4933. Federal free state tax Help for people with disabilities. Federal free state tax  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. Federal free state tax You may also use this number for assistance with unresolved tax problems. Federal free state tax Furnishing Form W-2 to employees electronically. Federal free state tax  You may set up a system to furnish Form W-2, Wage and Tax Statement, electronically. Federal free state tax 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. Federal free state tax You may not send a Form W-2 electronically to any employee who does not consent or who has revoked consent previously provided. Federal free state tax 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. Federal free state tax 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. Federal free state tax The employee must be informed of the scope and duration of the consent. Federal free state tax 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. Federal free state tax 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. Federal free state tax The employee must also be notified that the withdrawn consent does not apply to the previously issued Forms W-2. Federal free state tax The employee must be informed about any conditions under which electronic Forms W-2 will no longer be furnished (for example, termination of employment). Federal free state tax 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. Federal free state tax The employer must notify the employee of any changes to the employer's contact information. Federal free state tax You must furnish electronic Forms W-2 by the same due date as the paper Forms W-2. Federal free state tax For more information on furnishing Form W-2 to employees electronically, see Regulations section 31. Federal free state tax 6051-1(j). Federal free state tax Photographs of missing children. Federal free state tax  The IRS is a proud partner with the National Center for Missing and Exploited Children. Federal free state tax Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Federal free state tax 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. Federal free state tax Introduction This publication supplements Publication 15 (Circular E). Federal free state tax It contains specialized and detailed employment tax information supplementing the basic information provided in Publication 15 (Circular E). Federal free state tax This publication also contains tables for withholding on distributions of Indian gaming profits to tribal members. Federal free state tax Publication 15-B, Employer's Tax Guide to Fringe Benefits, contains information about the employment tax treatment of various types of noncash compensation. Federal free state tax Ordering publications and forms. Federal free state tax   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. Federal free state tax 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. Federal free state tax   We welcome your comments about this publication and your suggestions for future editions. Federal free state tax    You can write to us at the following address: Internal Revenue Service Tax Forms & Publications Division 1111 Constitution Ave. Federal free state tax NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Federal free state tax Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Federal free state tax   You can also send us comments from www. Federal free state tax irs. Federal free state tax gov/formspubs. Federal free state tax Click on More Information and then click on Comment on Tax Forms and Publications. Federal free state tax   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. 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The Federal Free State Tax

Federal free state tax 5. Federal free state tax   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Federal free state tax Short-term lease. Federal free state tax Retail space. Federal free state tax Qualified long-term real property. Federal free state tax Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Federal free state tax If there is a connection between any income you receive and your business, the income is business income. Federal free state tax A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Federal free state tax You can have business income even if you are not involved in the activity on a regular full-time basis. Federal free state tax Income from work you do on the side in addition to your regular job can be business income. Federal free state tax You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Federal free state tax But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Federal free state tax For information on selling business assets, see chapter 3. Federal free state tax Nonemployee compensation. Federal free state tax Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Federal free state tax This includes amounts reported as nonemployee compensation in box 7 of the form. Federal free state tax You can find more information in the instructions on the back of the Form 1099-MISC you received. Federal free state tax Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Federal free state tax In most cases, your business income will be in the form of cash, checks, and credit card charges. Federal free state tax But business income can be in other forms, such as property or services. Federal free state tax These and other types of income are explained next. Federal free state tax If you are a U. Federal free state tax S. Federal free state tax citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Federal free state tax S. Federal free state tax law. Federal free state tax If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Federal free state tax For details, see Publication 54, Tax Guide for U. Federal free state tax S. Federal free state tax Citizens and Resident Aliens Abroad. Federal free state tax Bartering for Property or Services Bartering is an exchange of property or services. Federal free state tax You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Federal free state tax If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Federal free state tax Example 1. Federal free state tax You are a self-employed lawyer. Federal free state tax You perform legal services for a client, a small corporation. Federal free state tax In payment for your services, you receive shares of stock in the corporation. Federal free state tax You must include the fair market value of the shares in income. Federal free state tax Example 2. Federal free state tax You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Federal free state tax You must include the fair rental value of the apartment in your gross receipts. Federal free state tax Your landlord must include the fair market value of the work of art in his or her rental income. Federal free state tax Example 3. Federal free state tax You are a self-employed accountant. Federal free state tax Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Federal free state tax Members get in touch with other members directly and bargain for the value of the services to be performed. Federal free state tax In return for accounting services you provided for the house painter's business, the house painter painted your home. Federal free state tax You must include in gross receipts the fair market value of the services you received from the house painter. Federal free state tax The house painter must include the fair market value of your accounting services in his or her gross receipts. Federal free state tax Example 4. Federal free state tax You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Federal free state tax As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Federal free state tax You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Federal free state tax The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Federal free state tax It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Federal free state tax See Publication 15 (Circular E), Employer's Tax Guide. Federal free state tax Example 5. Federal free state tax You operate a plumbing business and use the cash method of accounting. Federal free state tax You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Federal free state tax Each member has access to a directory that lists the members of the club and the services available. Federal free state tax Members contact each other directly and request services to be performed. Federal free state tax You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Federal free state tax You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Federal free state tax Information returns. Federal free state tax   If you are involved in a bartering transaction, you may have to file either of the following forms. Federal free state tax Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Federal free state tax Form 1099-MISC, Miscellaneous Income. Federal free state tax For information about these forms, see the General Instructions for Certain Information Returns. Federal free state tax Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Federal free state tax , who provides services (maid services, etc. Federal free state tax ) for guests, report the rental income and expenses on Schedule C or C-EZ. Federal free state tax If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Federal free state tax For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Federal free state tax Real estate dealer. Federal free state tax   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Federal free state tax Rent you receive from real estate held for sale to customers is subject to SE tax. Federal free state tax However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Federal free state tax Trailer park owner. Federal free state tax   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Federal free state tax    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Federal free state tax Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Federal free state tax   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Federal free state tax   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Federal free state tax Hotels, boarding houses, and apartments. Federal free state tax   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Federal free state tax   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Federal free state tax An example of a service that is not normally provided for the convenience of the occupants is maid service. Federal free state tax However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Federal free state tax Prepaid rent. Federal free state tax   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Federal free state tax This is true no matter what accounting method or period you use. Federal free state tax Lease bonus. Federal free state tax   A bonus you receive from a lessee for granting a lease is an addition to the rent. Federal free state tax Include it in your gross receipts in the year received. Federal free state tax Lease cancellation payments. Federal free state tax   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Federal free state tax Payments to third parties. Federal free state tax   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Federal free state tax A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Federal free state tax Settlement payments. Federal free state tax   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Federal free state tax Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Federal free state tax ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Federal free state tax Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Federal free state tax If you receive any of those payments, include them in your gross receipts as explained in that discussion. Federal free state tax Interest and Dividend Income Interest and dividends may be considered business income. Federal free state tax Interest. Federal free state tax   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Federal free state tax Interest received on loans is business income if you are in the business of lending money. Federal free state tax Uncollectible loans. Federal free state tax   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Federal free state tax If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Federal free state tax See Bad Debts in chapter 8. Federal free state tax Unstated interest. Federal free state tax   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Federal free state tax See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Federal free state tax Dividends. Federal free state tax   Generally, dividends are business income to dealers in securities. Federal free state tax For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Federal free state tax If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Federal free state tax   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Federal free state tax To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Federal free state tax Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Federal free state tax General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Federal free state tax Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Federal free state tax If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Federal free state tax Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Federal free state tax Price reduced after purchase. Federal free state tax   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Federal free state tax Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Federal free state tax Deductible debt. Federal free state tax   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Federal free state tax Example. Federal free state tax You get accounting services for your business on credit. Federal free state tax Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Federal free state tax Your accountant forgives part of the amount you owe for the accounting services. Federal free state tax How you treat the canceled debt depends on your method of accounting. Federal free state tax Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Federal free state tax Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Federal free state tax   For information on the cash and accrual methods of accounting, see chapter 2. Federal free state tax Exclusions Do not include canceled debt in income in the following situations. Federal free state tax However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Federal free state tax For more information, see Form 982. Federal free state tax The cancellation takes place in a bankruptcy case under title 11 of the U. Federal free state tax S. Federal free state tax Code (relating to bankruptcy). Federal free state tax See Publication 908, Bankruptcy Tax Guide. Federal free state tax The cancellation takes place when you are insolvent. Federal free state tax You can exclude the canceled debt to the extent you are insolvent. Federal free state tax See Publication 908. Federal free state tax The canceled debt is a qualified farm debt owed to a qualified person. Federal free state tax See chapter 3 in Publication 225, Farmer's Tax Guide. Federal free state tax The canceled debt is a qualified real property business debt. Federal free state tax This situation is explained later. Federal free state tax The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Federal free state tax See Form 982. Federal free state tax If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Federal free state tax If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Federal free state tax Debt. Federal free state tax   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Federal free state tax Qualified real property business debt. Federal free state tax   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Federal free state tax If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Federal free state tax Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Federal free state tax However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Federal free state tax Cancellation of qualified real property business debt. Federal free state tax   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Federal free state tax It was incurred or assumed in connection with real property used in a trade or business. Federal free state tax It was secured by such real property. Federal free state tax It was incurred or assumed at either of the following times. Federal free state tax Before January 1, 1993. Federal free state tax After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Federal free state tax It is debt to which you choose to apply these rules. Federal free state tax   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Federal free state tax   You cannot exclude more than either of the following amounts. Federal free state tax The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Federal free state tax The total adjusted bases of depreciable real property held by you immediately before the cancellation. Federal free state tax These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Federal free state tax Do not take into account depreciable real property acquired in contemplation of the cancellation. Federal free state tax Election. Federal free state tax   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Federal free state tax You must file your return by the due date (including extensions). Federal free state tax If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Federal free state tax For more information, see When To File in the form instructions. Federal free state tax Other Income The following discussion explains how to treat other types of business income you may receive. Federal free state tax Restricted property. Federal free state tax   Restricted property is property that has certain restrictions that affect its value. Federal free state tax If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Federal free state tax However, you can choose to be taxed in the year you receive the property. Federal free state tax For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Federal free state tax Gains and losses. Federal free state tax   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Federal free state tax Instead, you must report these gains and losses on other forms. Federal free state tax For more information, see chapter 3. Federal free state tax Promissory notes. Federal free state tax   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Federal free state tax In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Federal free state tax Lost income payments. Federal free state tax   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Federal free state tax Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Federal free state tax Damages. Federal free state tax   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Federal free state tax Patent infringement. Federal free state tax Breach of contract or fiduciary duty. Federal free state tax Antitrust injury. Federal free state tax Economic injury. Federal free state tax   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Federal free state tax Your deduction is the smaller of the following amounts. Federal free state tax The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Federal free state tax Your loss from the injury that you have not yet deducted. Federal free state tax Punitive damages. Federal free state tax   You must also include punitive damages in income. Federal free state tax Kickbacks. Federal free state tax   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Federal free state tax However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Federal free state tax Recovery of items previously deducted. Federal free state tax   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Federal free state tax However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Federal free state tax If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Federal free state tax Example. Federal free state tax Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Federal free state tax He also had 2 personal exemptions for a total of $7,800. Federal free state tax He would not pay income tax even if he did not deduct the bad debt. Federal free state tax Therefore, he will not report as income any part of the $300 he may recover in any future year. Federal free state tax Exception for depreciation. Federal free state tax   This rule does not apply to depreciation. Federal free state tax You recover depreciation using the rules explained next. Federal free state tax Recapture of depreciation. Federal free state tax   In the following situations, you have to recapture the depreciation deduction. Federal free state tax This means you include in income part or all of the depreciation you deducted in previous years. Federal free state tax Listed property. Federal free state tax   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Federal free state tax You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Federal free state tax Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Federal free state tax For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Federal free state tax That chapter explains how to determine whether property is used more than 50% in your business. Federal free state tax Section 179 property. Federal free state tax   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Federal free state tax You do this by including in income on Schedule C part of the deduction you took. Federal free state tax Use Part IV of Form 4797 to figure the amount to include on Schedule C. Federal free state tax See chapter 2 in Publication 946 to find out when you recapture the deduction. Federal free state tax Sale or exchange of depreciable property. Federal free state tax   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Federal free state tax You figure the income due to depreciation recapture in Part III of Form 4797. Federal free state tax For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Federal free state tax Items That Are Not Income In some cases the property or money you receive is not income. Federal free state tax Appreciation. Federal free state tax   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Federal free state tax Consignments. Federal free state tax   Consignments of merchandise to others to sell for you are not sales. Federal free state tax The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Federal free state tax Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Federal free state tax Merchandise you have shipped out on consignment is included in your inventory until it is sold. Federal free state tax   Do not include merchandise you receive on consignment in your inventory. Federal free state tax Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Federal free state tax Construction allowances. Federal free state tax   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Federal free state tax Under a short-term lease of retail space. Federal free state tax For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Federal free state tax Amount you can exclude. Federal free state tax   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Federal free state tax Short-term lease. Federal free state tax   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Federal free state tax The following rules apply in determining whether the lease is for 15 years or less. Federal free state tax Take into account options to renew when figuring whether the lease is for 15 years or less. Federal free state tax But do not take into account any option to renew at fair market value determined at the time of renewal. Federal free state tax Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Federal free state tax Retail space. Federal free state tax   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Federal free state tax Qualified long-term real property. Federal free state tax   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Federal free state tax Exchange of like-kind property. Federal free state tax   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Federal free state tax This means that the gain is not taxable and the loss is not deductible. Federal free state tax A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Federal free state tax For more information, see Form 8824. Federal free state tax Leasehold improvements. Federal free state tax   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Federal free state tax However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Federal free state tax Loans. Federal free state tax   Money borrowed through a bona fide loan is not income. Federal free state tax Sales tax. Federal free state tax   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Federal free state tax Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Federal free state tax Direct seller. Federal free state tax   You must report all income you receive as a direct seller on Schedule C or C-EZ. Federal free state tax This includes any of the following. Federal free state tax Income from sales—payments you receive from customers for products they buy from you. Federal free state tax Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Federal free state tax Prizes, awards, and gifts you receive from your selling business. Federal free state tax You must report this income regardless of whether it is reported to you on an information return. Federal free state tax   You are a direct seller if you meet all the following conditions. Federal free state tax You are engaged in one of the following trades or businesses. Federal free state tax Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Federal free state tax Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Federal free state tax Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Federal free state tax Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Federal free state tax Executor or administrator. Federal free state tax   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Federal free state tax A nonprofessional fiduciary (personal representative) and both of the following apply. Federal free state tax The estate includes an active trade or business in which you actively participate. Federal free state tax Your fees are related to the operation of that trade or business. Federal free state tax A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Federal free state tax    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Federal free state tax Fishing crew member. Federal free state tax    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Federal free state tax Insurance agent, former. Federal free state tax   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Federal free state tax You received payments after your agreement to perform services for the company ended. Federal free state tax You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Federal free state tax You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Federal free state tax The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Federal free state tax The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Federal free state tax Insurance agent, retired. Federal free state tax   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Federal free state tax Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Federal free state tax   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Federal free state tax Newspaper carrier or distributor. Federal free state tax   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Federal free state tax You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Federal free state tax Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Federal free state tax You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Federal free state tax   This rule applies whether or not you hire others to help you make deliveries. Federal free state tax It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Federal free state tax Newspaper or magazine vendor. Federal free state tax   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Federal free state tax You sell newspapers or magazines to ultimate consumers. Federal free state tax You sell them at a fixed price. Federal free state tax Your earnings are based on the difference between the sales price and your cost of goods sold. Federal free state tax   This rule applies whether or not you are guaranteed a minimum amount of earnings. Federal free state tax It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Federal free state tax Notary public. Federal free state tax   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Federal free state tax These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Federal free state tax Public official. Federal free state tax   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Federal free state tax This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Federal free state tax Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Federal free state tax   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Federal free state tax Real estate agent or direct seller. Federal free state tax   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Federal free state tax Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Federal free state tax You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Federal free state tax Securities dealer. Federal free state tax   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Federal free state tax For more information, see sections 1256 and 1402(i). Federal free state tax Securities trader. Federal free state tax   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Federal free state tax As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Federal free state tax However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Federal free state tax For more information about securities traders, see Publication 550, Investment Income and Expenses. Federal free state tax Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Federal free state tax This section discusses some of the more common differences that may affect business transactions. Federal free state tax Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Federal free state tax If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Federal free state tax Dealers in real estate are not allowed to use inventories. Federal free state tax For more information on inventories, see chapter 2. Federal free state tax Income paid to a third party. Federal free state tax   All income you earn is taxable to you. Federal free state tax You cannot avoid tax by having the income paid to a third party. Federal free state tax Example. Federal free state tax You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Federal free state tax The amount paid to your son is gross income to you. Federal free state tax Cash discounts. Federal free state tax   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Federal free state tax For income tax purposes, you can use either of the following two methods to account for cash discounts. Federal free state tax Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Federal free state tax Credit the cash discount to a discount income account. Federal free state tax You must use the chosen method every year for all your purchase discounts. Federal free state tax   If you use the second method, the credit balance in the account at the end of your tax year is business income. Federal free state tax Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Federal free state tax When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Federal free state tax Trade discounts. Federal free state tax   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Federal free state tax Do not enter these discounts on your books of account. Federal free state tax Instead, use only the net amount as the cost of the merchandise purchased. Federal free state tax For more information, see Trade discounts in chapter 6. Federal free state tax Payment placed in escrow. Federal free state tax   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Federal free state tax However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Federal free state tax Sales returns and allowances. Federal free state tax   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Federal free state tax Advance payments. Federal free state tax   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Federal free state tax Insurance proceeds. Federal free state tax   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Federal free state tax You cannot deduct the reimbursed part of a casualty or theft loss. Federal free state tax   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Federal free state tax Prev  Up  Next   Home   More Online Publications