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Free tax programs Publication 596 - Introductory Material Table of Contents Future Developments What is the EIC? Can I Claim the EIC? Do I Need This Publication? Do I Have To Have A Child To Qualify For The EIC? How Do I Figure the Amount of EIC? How Can I Quickly Locate Specific information? Is There Help Online? What's New for 2013 Reminders Future Developments For the latest information about developments related to Publication 596, such as legislation enacted after it was published, go to www. Free tax programs irs. Free tax programs gov/pub596. Free tax programs What is the EIC? The earned income credit (EIC) is a tax credit for certain people who work and have earned income under $51,567. Free tax programs A tax credit usually means more money in your pocket. Free tax programs It reduces the amount of tax you owe. Free tax programs The EIC may also give you a refund. Free tax programs Can I Claim the EIC? To claim the EIC, you must meet certain rules. Free tax programs These rules are summarized in Table 1. Free tax programs Table 1. Free tax programs Earned Income Credit in a Nutshell First, you must meet all the rules in this column. Free tax programs Second, you must meet all the rules in one of these columns, whichever applies. Free tax programs Third, you must meet the rule in this column. Free tax programs Chapter 1. Free tax programs  Rules for Everyone Chapter 2. Free tax programs  Rules If You Have a Qualifying Child Chapter 3. Free tax programs  Rules If You Do Not Have a Qualifying Child Chapter 4. Free tax programs  Figuring and Claiming the EIC 1. Free tax programs Your adjusted gross income (AGI) must be less than:  • $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children,  • $43,038 ($48,378 for married filing jointly) if you have two qualifying children,  • $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or   • $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Free tax programs 2. Free tax programs You must have a valid social security number. Free tax programs   3. Free tax programs Your filing status cannot be Married filing separately. Free tax programs   4. Free tax programs You must be a U. Free tax programs S. Free tax programs citizen or resident alien all year. Free tax programs   5. Free tax programs You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income). Free tax programs   6. Free tax programs Your investment income must be $3,300 or less. Free tax programs    7. Free tax programs You must have earned income. Free tax programs 8. Free tax programs Your child must meet the relationship, age, residency, and joint return tests. Free tax programs   9. Free tax programs Your qualifying child cannot be used by more than one person to claim the EIC. Free tax programs   10. Free tax programs You cannot be a qualifying child of another person. Free tax programs 11. Free tax programs You must be at least age 25 but under age 65. Free tax programs    12. Free tax programs You cannot be the dependent of another person. Free tax programs   13. Free tax programs You cannot be a qualifying child of another person. Free tax programs   14. Free tax programs You must have lived in the United States more than half of the year. Free tax programs 15. Free tax programs Your earned income must be less than:  • $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children,  • $43,038 ($48,378 for married filing jointly) if you have two qualifying children,  • $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or  • $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Free tax programs Do I Need This Publication? Certain people who file Form 1040 must use Worksheet 1 in this publication, instead of Step 2 in their Form 1040 instructions, when they are checking whether they can take the EIC. Free tax programs You are one of those people if any of the following statements are true for 2013. Free tax programs You are filing Schedule E (Form 1040). Free tax programs You are reporting income from the rental of personal property not used in a trade or business. Free tax programs You are reporting income on Form 1040, line 21, from Form 8814 (relating to election to report child's interest and dividends). Free tax programs You are reporting an amount on Form 1040, line 13, that includes an amount from Form 4797. Free tax programs If none of the statements above apply to you, your tax form instructions have all the information you need to find out if you can claim the EIC and to figure the amount of your EIC. Free tax programs You do not need this publication. Free tax programs But you can read it to find out whether you can take the EIC and to learn more about the EIC. Free tax programs Do I Have To Have A Child To Qualify For The EIC? No, you can qualify for the EIC without a qualifying child if you are at least age 25 but under age 65 and your earned income is less than $14,340 ($19,680 if married filing jointly). Free tax programs See chapter 3. Free tax programs How Do I Figure the Amount of EIC? If you can claim the EIC, you can either have the IRS figure the amount of your credit, or you can figure it yourself. Free tax programs To figure it yourself, you can complete a worksheet in the instructions for the form you file. Free tax programs To find out how to have the IRS figure it for you, see chapter 4. Free tax programs How Can I Quickly Locate Specific information? You can use the index to look up specific information. Free tax programs In most cases, index entries will point you to headings, tables, or a worksheet. Free tax programs Is There Help Online? Yes. Free tax programs You can use the EITC Assistant at www. Free tax programs irs. Free tax programs gov/eitc to find out if you may be eligible for the credit. Free tax programs The EITC Assistant is available in English and Spanish. Free tax programs What's New for 2013 Earned income amount is more. Free tax programs The maximum amount of income you can earn and still get the credit has increased. Free tax programs You may be able to take the credit if: You have three or more qualifying children and you earned less than $46,227 ($51,567 if married filing jointly), You have two qualifying children and you earned less than $43,038 ($48,378 if married filing jointly), You have one qualifying child and you earned less than $37,870 ($43,210 if married filing jointly), or You do not have a qualifying child and you earned less than $14,340 ($19,680 if married filing jointly). Free tax programs Your adjusted gross income also must be less than the amount in the above list that applies to you. Free tax programs For details, see Rules 1 and 15. Free tax programs Investment income amount is more. Free tax programs The maximum amount of investment income you can have and still get the credit has increased to $3,300. Free tax programs See Rule 6—Your Investment Income Must Be $3,300 or Less . Free tax programs Reminders Increased EIC on certain joint returns. Free tax programs . Free tax programs  A married person filing a joint return may get more EIC than someone with the same income but a different filing status. Free tax programs As a result, the EIC table has different columns for married persons filing jointly than for everyone else. Free tax programs When you look up your EIC in the EIC Table, be sure to use the correct column for your filing status and the number of children you have. Free tax programs Earned income credit has no effect on certain welfare benefits. Free tax programs  Any refund you receive because of the EIC cannot be counted as income when determining whether you or anyone else is eligible for benefits or assistance, or how much you or anyone else can receive, under any federal program or under any state or local program financed in whole or in part with federal funds. Free tax programs These programs include the following. Free tax programs Temporary Assistance for Needy Families (TANF). Free tax programs Medicaid. Free tax programs Supplemental security income (SSI). Free tax programs Supplemental Nutrition Assistance Program (food stamps). Free tax programs Low-income housing. Free tax programs In addition, when determining eligibility, the refund cannot be counted as a resource for at least 12 months after you receive it. Free tax programs Check with your local benefit coordinator to find out if your refund will affect your benefits. Free tax programs Do not overlook your state credit. Free tax programs  If you can claim the EIC on your federal income tax return, you may be able to take a similar credit on your state or local income tax return. Free tax programs For a list of states that offer a state EIC, go to www. Free tax programs irs. Free tax programs gov/eitc. Free tax programs EIC questioned by IRS. Free tax programs  The IRS may ask you to provide documents to prove you are entitled to claim the EIC. Free tax programs We will tell you what documents to send us. Free tax programs These may include: birth certificates, school records, etc. Free tax programs The process of establishing your eligibility will delay your refund. Free tax programs Spanish version of Publication 596. Free tax programs  You can order Publicación 596SP, Crédito por Ingreso del Trabajo, from the IRS. Free tax programs It is a Spanish translation of Publication 596. Free tax programs See How To Get Tax Help to find out how to order this and other IRS forms and publications. Free tax programs Photographs of missing children. Free tax programs  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free tax programs Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free tax programs 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. Free tax programs Comments and suggestions. Free tax programs  We welcome your comments about this publication and your suggestions for future editions. Free tax programs You can write to us at the following address:  Internal Revenue Service Individual Forms and Publications Branch 1111 Constitution Ave. Free tax programs NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Free tax programs Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free tax programs You can send your comments from www. Free tax programs irs. Free tax programs gov/formspubs/. Free tax programs Click on “More Information” and then on “Comment on Tax Forms and Publications. Free tax programs ” Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free tax programs Ordering forms and publications. Free tax programs  Visit www. Free tax programs irs. Free tax programs gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free tax programs  Internal Revenue Service 1201 N. Free tax programs Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free tax programs  If you have a tax question, check the information available on IRS. Free tax programs gov or call 1-800-829-1040. Free tax programs We cannot answer tax questions sent to either of the above addresses. Free tax programs Prev  Up  Next   Home   More Online Publications
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Free tax programs 2. Free tax programs   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. Free tax programs Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Free tax programs Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Free tax programs 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. Free tax programs The annual accounting period for your income tax return is called a tax year. Free tax programs You can use one of the following tax years. Free tax programs A calendar tax year. Free tax programs A fiscal tax year. Free tax programs Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Free tax programs A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Free tax programs Calendar tax year. Free tax programs   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Free tax programs   You must adopt the calendar tax year if any of the following apply. Free tax programs You do not keep books. Free tax programs You have no annual accounting period. Free tax programs Your present tax year does not qualify as a fiscal year. Free tax programs Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. Free tax programs   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. Free tax programs For more information, see Change in tax year, later. Free tax programs   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. Free tax programs Fiscal tax year. Free tax programs   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Free tax programs A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Free tax programs   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. Free tax programs   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Free tax programs Change in tax year. Free tax programs   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Free tax programs See the Instructions for Form 1128 for exceptions. Free tax programs If you qualify for an automatic approval request, a user fee is not required. Free tax programs If you do not qualify for automatic approval, a ruling must be requested. Free tax programs See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Free tax programs Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Free tax programs Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Free tax programs You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Free tax programs After that, if you want to change your accounting method, you must generally get IRS approval. Free tax programs See Change in Accounting Method, later. Free tax programs Kinds of methods. Free tax programs   Generally, you can use any of the following accounting methods. Free tax programs Cash method. Free tax programs An accrual method. Free tax programs Special methods of accounting for certain items of income and expenses. Free tax programs Combination method using elements of two or more of the above. Free tax programs You must use the same accounting method to figure your taxable income and to keep your books. Free tax programs Also, you must use an accounting method that clearly shows your income. Free tax programs Business and personal items. Free tax programs   You can account for business and personal items under different accounting methods. Free tax programs For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Free tax programs Two or more businesses. Free tax programs   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. Free tax programs They are separate and distinct only if you maintain complete and separate books and records for each business. Free tax programs 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. Free tax programs However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Free tax programs For more information, see Inventories, later. Free tax programs Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Free tax programs If you receive property or services, you must include their fair market value in income. Free tax programs Example. Free tax programs On December 30, 2012, Mrs. Free tax programs Sycamore sent you a check for interior decorating services you provided to her. Free tax programs You received the check on January 2, 2013. Free tax programs You must include the amount of the check in income for 2013. Free tax programs Constructive receipt. Free tax programs   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Free tax programs You do not need to have possession of it. Free tax programs 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. Free tax programs Example. Free tax programs Interest is credited to your bank account in December 2013. Free tax programs You do not withdraw it or enter it into your passbook until 2014. Free tax programs You must include it in your gross income for 2013. Free tax programs Delaying receipt of income. Free tax programs   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Free tax programs You must report the income in the year the property is received or made available to you without restriction. Free tax programs Example. Free tax programs Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Free tax programs She was told in December that her payment was available. Free tax programs At her request, she was not paid until January 2014. Free tax programs She must include this payment in her 2013 income because it was constructively received in 2013. Free tax programs Checks. Free tax programs   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. Free tax programs Example. Free tax programs Dr. Free tax programs Redd received a check for $500 on December 31, 2013, from a patient. Free tax programs She could not deposit the check in her business account until January 2, 2014. Free tax programs She must include this fee in her income for 2013. Free tax programs Debts paid by another person or canceled. Free tax programs   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. Free tax programs If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Free tax programs For more information, see Canceled Debt under Kinds of Income in chapter 5. Free tax programs Repayment of income. Free tax programs   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. Free tax programs If the amount you repay is over $3,000, a special rule applies. Free tax programs For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Free tax programs Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Free tax programs This includes business expenses for which you contest liability. Free tax programs 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. Free tax programs Expenses paid in advance. Free tax programs   You can deduct an expense you pay in advance only in the year to which it applies. Free tax programs Example. Free tax programs 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. Free tax programs You can deduct $500 in 2013 and $500 in 2014. Free tax programs 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. Free tax programs The purpose of an accrual method of accounting is to match income and expenses in the correct year. Free tax programs 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. Free tax programs Example. Free tax programs You are a calendar year accrual method taxpayer. Free tax programs You sold a computer on December 28, 2013. Free tax programs You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Free tax programs You must include the amount received for the computer in your 2013 income. Free tax programs Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Free tax programs Estimated income. Free tax programs   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. Free tax programs Change in payment schedule for services. Free tax programs   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. Free tax programs Advance payments for services. Free tax programs   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. Free tax programs 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. Free tax programs However, you cannot postpone including any payment beyond that tax year. Free tax programs   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Free tax programs That publication also explains special rules for reporting the following types of income. Free tax programs Advance payments for service agreements. Free tax programs Prepaid rent. Free tax programs Advance payments for sales. Free tax programs   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. Free tax programs 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. Free tax programs An agreement includes a gift certificate that can be redeemed for goods. Free tax programs Treat amounts that are due and payable as amounts you received. Free tax programs   You generally include an advance payment in income for the tax year in which you receive it. Free tax programs However, you can use an alternative method. Free tax programs For information about the alternative method, see Publication 538. Free tax programs Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Free tax programs The all-events test has been met. Free tax programs 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. Free tax programs Economic performance has occurred. Free tax programs Economic performance. Free tax programs   You generally cannot deduct or capitalize a business expense until economic performance occurs. Free tax programs 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. Free tax programs If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free tax programs An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Free tax programs For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Free tax programs Example. Free tax programs You are a calendar year taxpayer and use an accrual method of accounting. Free tax programs You buy office supplies in December 2013. Free tax programs You receive the supplies and the bill in December, but you pay the bill in January 2014. Free tax programs 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. Free tax programs Your office supplies may qualify as a recurring expense. Free tax programs In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Free tax programs Keeping inventories. Free tax programs   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. Free tax programs If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Free tax programs For more information, see Inventories , later. Free tax programs Special rule for related persons. Free tax programs   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. Free tax programs Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Free tax programs 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. Free tax programs   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Free tax programs For a list of other related persons, see section 267 of the Internal Revenue Code. Free tax programs 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. Free tax programs However, the following restrictions apply. Free tax programs If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Free tax programs (See, however, Inventories, later. Free tax programs ) You can use the cash method for all other items of income and expenses. Free tax programs If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Free tax programs If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Free tax programs If you use a combination method that includes the cash method, treat that combination method as the cash method. Free tax programs 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. Free tax programs However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Free tax programs These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Free tax programs A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Free tax programs A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Free tax programs Qualifying taxpayer. Free tax programs   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. Free tax programs (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. Free tax programs ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Free tax programs Qualifying small business taxpayer. Free tax programs   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. Free tax programs (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. Free tax programs ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Free tax programs Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Free tax programs Business not owned or not in existence for 3 years. Free tax programs   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. Free tax programs 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. Free tax programs Materials and supplies that are not incidental. Free tax programs   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. Free tax programs 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. Free tax programs Changing accounting method. Free tax programs   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. Free tax programs See Change in Accounting Method, later. Free tax programs More information. Free tax programs    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Free tax programs For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Free tax programs Items included in inventory. Free tax programs   If you are required to account for inventories, include the following items when accounting for your inventory. Free tax programs Merchandise or stock in trade. Free tax programs Raw materials. Free tax programs Work in process. Free tax programs Finished products. Free tax programs Supplies that physically become a part of the item intended for sale. Free tax programs Valuing inventory. Free tax programs   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). Free tax programs 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. Free tax programs   Inventory valuation rules cannot be the same for all kinds of businesses. Free tax programs The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Free tax programs Your inventory practices must be consistent from year to year. Free tax programs More information. Free tax programs   For more information about inventories, see Publication 538. Free tax programs 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. Free tax programs Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Free tax programs You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free tax programs Activities subject to the uniform capitalization rules. Free tax programs   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. Free tax programs Produce real or tangible personal property. Free tax programs For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Free tax programs Acquire property for resale. Free tax programs Exceptions. Free tax programs   These rules do not apply to the following property. Free tax programs Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Free tax programs Property you produce if you meet either of the following conditions. Free tax programs Your indirect costs of producing the property are $200,000 or less. Free tax programs You use the cash method of accounting and do not account for inventories. Free tax programs For more information, see Inventories, earlier. Free tax programs Special Methods There are special methods of accounting for certain items of income or expense. Free tax programs These include the following. Free tax programs Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Free tax programs Bad debts, discussed in chapter 10 of Publication 535. Free tax programs Depletion, discussed in chapter 9 of Publication 535. Free tax programs Depreciation, discussed in Publication 946, How To Depreciate Property. Free tax programs Installment sales, discussed in Publication 537, Installment Sales. Free tax programs 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. Free tax programs 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. Free tax programs To get approval, you must file Form 3115, Application for Change in Accounting Method. Free tax programs You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Free tax programs You may have to pay a user fee. Free tax programs For more information, see the form instructions. Free tax programs Automatic change procedures. Free tax programs   Certain taxpayers can presume to have IRS approval to change their method of accounting. Free tax programs 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. Free tax programs No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Free tax programs   Generally, you must use Form 3115 to request an automatic change. Free tax programs For more information, see the Instructions for Form 3115. Free tax programs Prev  Up  Next   Home   More Online Publications