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Handrblock free 5. Handrblock free   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. Handrblock free Short-term lease. Handrblock free Retail space. Handrblock free Qualified long-term real property. Handrblock free 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. Handrblock free If there is a connection between any income you receive and your business, the income is business income. Handrblock free A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Handrblock free You can have business income even if you are not involved in the activity on a regular full-time basis. Handrblock free Income from work you do on the side in addition to your regular job can be business income. Handrblock free You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Handrblock free 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. Handrblock free For information on selling business assets, see chapter 3. Handrblock free Nonemployee compensation. Handrblock free Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Handrblock free This includes amounts reported as nonemployee compensation in box 7 of the form. Handrblock free You can find more information in the instructions on the back of the Form 1099-MISC you received. Handrblock free Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Handrblock free In most cases, your business income will be in the form of cash, checks, and credit card charges. Handrblock free But business income can be in other forms, such as property or services. Handrblock free These and other types of income are explained next. Handrblock free If you are a U. Handrblock free S. Handrblock free 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. Handrblock free S. Handrblock free law. Handrblock free If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Handrblock free For details, see Publication 54, Tax Guide for U. Handrblock free S. Handrblock free Citizens and Resident Aliens Abroad. Handrblock free Bartering for Property or Services Bartering is an exchange of property or services. Handrblock free 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. Handrblock free 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. Handrblock free Example 1. Handrblock free You are a self-employed lawyer. Handrblock free You perform legal services for a client, a small corporation. Handrblock free In payment for your services, you receive shares of stock in the corporation. Handrblock free You must include the fair market value of the shares in income. Handrblock free Example 2. Handrblock free You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Handrblock free You must include the fair rental value of the apartment in your gross receipts. Handrblock free Your landlord must include the fair market value of the work of art in his or her rental income. Handrblock free Example 3. Handrblock free You are a self-employed accountant. Handrblock free 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. Handrblock free Members get in touch with other members directly and bargain for the value of the services to be performed. Handrblock free In return for accounting services you provided for the house painter's business, the house painter painted your home. Handrblock free You must include in gross receipts the fair market value of the services you received from the house painter. Handrblock free The house painter must include the fair market value of your accounting services in his or her gross receipts. Handrblock free Example 4. Handrblock free 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. Handrblock free 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. Handrblock free 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. Handrblock free 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. Handrblock free It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Handrblock free See Publication 15 (Circular E), Employer's Tax Guide. Handrblock free Example 5. Handrblock free You operate a plumbing business and use the cash method of accounting. Handrblock free You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Handrblock free Each member has access to a directory that lists the members of the club and the services available. Handrblock free Members contact each other directly and request services to be performed. Handrblock free 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. Handrblock free 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. Handrblock free Information returns. Handrblock free   If you are involved in a bartering transaction, you may have to file either of the following forms. Handrblock free Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Handrblock free Form 1099-MISC, Miscellaneous Income. Handrblock free For information about these forms, see the General Instructions for Certain Information Returns. Handrblock free 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. Handrblock free , who provides services (maid services, etc. Handrblock free ) for guests, report the rental income and expenses on Schedule C or C-EZ. Handrblock free 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. Handrblock free For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Handrblock free Real estate dealer. Handrblock free   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. Handrblock free Rent you receive from real estate held for sale to customers is subject to SE tax. Handrblock free However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Handrblock free Trailer park owner. Handrblock free   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. Handrblock free    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. Handrblock free Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Handrblock free   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. Handrblock free   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Handrblock free Hotels, boarding houses, and apartments. Handrblock free   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. Handrblock free   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. Handrblock free An example of a service that is not normally provided for the convenience of the occupants is maid service. Handrblock free However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Handrblock free Prepaid rent. Handrblock free   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. Handrblock free This is true no matter what accounting method or period you use. Handrblock free Lease bonus. Handrblock free   A bonus you receive from a lessee for granting a lease is an addition to the rent. Handrblock free Include it in your gross receipts in the year received. Handrblock free Lease cancellation payments. Handrblock free   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Handrblock free Payments to third parties. Handrblock free   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. Handrblock free A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Handrblock free Settlement payments. Handrblock free   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. Handrblock free Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Handrblock free ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Handrblock free Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Handrblock free If you receive any of those payments, include them in your gross receipts as explained in that discussion. Handrblock free Interest and Dividend Income Interest and dividends may be considered business income. Handrblock free Interest. Handrblock free   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Handrblock free Interest received on loans is business income if you are in the business of lending money. Handrblock free Uncollectible loans. Handrblock free   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. Handrblock free If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Handrblock free See Bad Debts in chapter 8. Handrblock free Unstated interest. Handrblock free   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Handrblock free See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Handrblock free Dividends. Handrblock free   Generally, dividends are business income to dealers in securities. Handrblock free For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Handrblock free If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Handrblock free   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. Handrblock free To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Handrblock free Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Handrblock free 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. Handrblock free Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Handrblock free If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Handrblock free Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Handrblock free Price reduced after purchase. Handrblock free   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. Handrblock free Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Handrblock free Deductible debt. Handrblock free   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Handrblock free Example. Handrblock free You get accounting services for your business on credit. Handrblock free Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Handrblock free Your accountant forgives part of the amount you owe for the accounting services. Handrblock free How you treat the canceled debt depends on your method of accounting. Handrblock free Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Handrblock free Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Handrblock free   For information on the cash and accrual methods of accounting, see chapter 2. Handrblock free Exclusions Do not include canceled debt in income in the following situations. Handrblock free However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Handrblock free For more information, see Form 982. Handrblock free The cancellation takes place in a bankruptcy case under title 11 of the U. Handrblock free S. Handrblock free Code (relating to bankruptcy). Handrblock free See Publication 908, Bankruptcy Tax Guide. Handrblock free The cancellation takes place when you are insolvent. Handrblock free You can exclude the canceled debt to the extent you are insolvent. Handrblock free See Publication 908. Handrblock free The canceled debt is a qualified farm debt owed to a qualified person. Handrblock free See chapter 3 in Publication 225, Farmer's Tax Guide. Handrblock free The canceled debt is a qualified real property business debt. Handrblock free This situation is explained later. Handrblock free The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Handrblock free See Form 982. Handrblock free 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. Handrblock free If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Handrblock free Debt. Handrblock free   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Handrblock free Qualified real property business debt. Handrblock free   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Handrblock free If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Handrblock free Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Handrblock free However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Handrblock free Cancellation of qualified real property business debt. Handrblock free   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Handrblock free It was incurred or assumed in connection with real property used in a trade or business. Handrblock free It was secured by such real property. Handrblock free It was incurred or assumed at either of the following times. Handrblock free Before January 1, 1993. Handrblock free After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Handrblock free It is debt to which you choose to apply these rules. Handrblock free   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. Handrblock free   You cannot exclude more than either of the following amounts. Handrblock free 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. Handrblock free The total adjusted bases of depreciable real property held by you immediately before the cancellation. Handrblock free These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Handrblock free Do not take into account depreciable real property acquired in contemplation of the cancellation. Handrblock free Election. Handrblock free   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Handrblock free You must file your return by the due date (including extensions). Handrblock free 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). Handrblock free For more information, see When To File in the form instructions. Handrblock free Other Income The following discussion explains how to treat other types of business income you may receive. Handrblock free Restricted property. Handrblock free   Restricted property is property that has certain restrictions that affect its value. Handrblock free 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. Handrblock free However, you can choose to be taxed in the year you receive the property. Handrblock free For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Handrblock free Gains and losses. Handrblock free   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. Handrblock free Instead, you must report these gains and losses on other forms. Handrblock free For more information, see chapter 3. Handrblock free Promissory notes. Handrblock free   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. Handrblock free In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Handrblock free Lost income payments. Handrblock free   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. Handrblock free Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Handrblock free Damages. Handrblock free   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. Handrblock free Patent infringement. Handrblock free Breach of contract or fiduciary duty. Handrblock free Antitrust injury. Handrblock free Economic injury. Handrblock free   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Handrblock free Your deduction is the smaller of the following amounts. Handrblock free 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. Handrblock free Your loss from the injury that you have not yet deducted. Handrblock free Punitive damages. Handrblock free   You must also include punitive damages in income. Handrblock free Kickbacks. Handrblock free   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Handrblock free 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. Handrblock free Recovery of items previously deducted. Handrblock free   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. Handrblock free 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. Handrblock free If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Handrblock free Example. Handrblock free Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Handrblock free He also had 2 personal exemptions for a total of $7,800. Handrblock free He would not pay income tax even if he did not deduct the bad debt. Handrblock free Therefore, he will not report as income any part of the $300 he may recover in any future year. Handrblock free Exception for depreciation. Handrblock free   This rule does not apply to depreciation. Handrblock free You recover depreciation using the rules explained next. Handrblock free Recapture of depreciation. Handrblock free   In the following situations, you have to recapture the depreciation deduction. Handrblock free This means you include in income part or all of the depreciation you deducted in previous years. Handrblock free Listed property. Handrblock free   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. Handrblock free You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Handrblock free Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Handrblock free For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Handrblock free That chapter explains how to determine whether property is used more than 50% in your business. Handrblock free Section 179 property. Handrblock free   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. Handrblock free You do this by including in income on Schedule C part of the deduction you took. Handrblock free Use Part IV of Form 4797 to figure the amount to include on Schedule C. Handrblock free See chapter 2 in Publication 946 to find out when you recapture the deduction. Handrblock free Sale or exchange of depreciable property. Handrblock free   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. Handrblock free You figure the income due to depreciation recapture in Part III of Form 4797. Handrblock free For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Handrblock free Items That Are Not Income In some cases the property or money you receive is not income. Handrblock free Appreciation. Handrblock free   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Handrblock free Consignments. Handrblock free   Consignments of merchandise to others to sell for you are not sales. Handrblock free The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Handrblock free Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Handrblock free Merchandise you have shipped out on consignment is included in your inventory until it is sold. Handrblock free   Do not include merchandise you receive on consignment in your inventory. Handrblock free 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. Handrblock free Construction allowances. Handrblock free   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. Handrblock free Under a short-term lease of retail space. Handrblock free For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Handrblock free Amount you can exclude. Handrblock free   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Handrblock free Short-term lease. Handrblock free   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Handrblock free The following rules apply in determining whether the lease is for 15 years or less. Handrblock free Take into account options to renew when figuring whether the lease is for 15 years or less. Handrblock free But do not take into account any option to renew at fair market value determined at the time of renewal. Handrblock free 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. Handrblock free Retail space. Handrblock free   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. Handrblock free Qualified long-term real property. Handrblock free   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. Handrblock free Exchange of like-kind property. Handrblock free   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. Handrblock free This means that the gain is not taxable and the loss is not deductible. Handrblock free A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Handrblock free For more information, see Form 8824. Handrblock free Leasehold improvements. Handrblock free   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. Handrblock free However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Handrblock free Loans. Handrblock free   Money borrowed through a bona fide loan is not income. Handrblock free Sales tax. Handrblock free   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. Handrblock free 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). Handrblock free Direct seller. Handrblock free   You must report all income you receive as a direct seller on Schedule C or C-EZ. Handrblock free This includes any of the following. Handrblock free Income from sales—payments you receive from customers for products they buy from you. Handrblock free Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Handrblock free Prizes, awards, and gifts you receive from your selling business. Handrblock free You must report this income regardless of whether it is reported to you on an information return. Handrblock free   You are a direct seller if you meet all the following conditions. Handrblock free You are engaged in one of the following trades or businesses. Handrblock free 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. Handrblock free Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Handrblock free 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. Handrblock free 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. Handrblock free Executor or administrator. Handrblock free   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. Handrblock free A nonprofessional fiduciary (personal representative) and both of the following apply. Handrblock free The estate includes an active trade or business in which you actively participate. Handrblock free Your fees are related to the operation of that trade or business. Handrblock free 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. Handrblock free    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Handrblock free Fishing crew member. Handrblock free    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 . Handrblock free Insurance agent, former. Handrblock free   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. Handrblock free You received payments after your agreement to perform services for the company ended. Handrblock free 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. Handrblock free 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. Handrblock free 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. Handrblock free 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). Handrblock free Insurance agent, retired. Handrblock free   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. Handrblock free Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Handrblock free   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Handrblock free Newspaper carrier or distributor. Handrblock free   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Handrblock free You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Handrblock free Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Handrblock free You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Handrblock free   This rule applies whether or not you hire others to help you make deliveries. Handrblock free It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Handrblock free Newspaper or magazine vendor. Handrblock free   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. Handrblock free You sell newspapers or magazines to ultimate consumers. Handrblock free You sell them at a fixed price. Handrblock free Your earnings are based on the difference between the sales price and your cost of goods sold. Handrblock free   This rule applies whether or not you are guaranteed a minimum amount of earnings. Handrblock free It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Handrblock free Notary public. Handrblock free   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Handrblock free These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Handrblock free Public official. Handrblock free   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Handrblock free 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. Handrblock free 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. Handrblock free   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. Handrblock free Real estate agent or direct seller. Handrblock free   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. Handrblock free 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. Handrblock free You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Handrblock free Securities dealer. Handrblock free   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. Handrblock free For more information, see sections 1256 and 1402(i). Handrblock free Securities trader. Handrblock free   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Handrblock free As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Handrblock free However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Handrblock free For more information about securities traders, see Publication 550, Investment Income and Expenses. Handrblock free Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Handrblock free This section discusses some of the more common differences that may affect business transactions. Handrblock free Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Handrblock free 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. Handrblock free Dealers in real estate are not allowed to use inventories. Handrblock free For more information on inventories, see chapter 2. Handrblock free Income paid to a third party. Handrblock free   All income you earn is taxable to you. Handrblock free You cannot avoid tax by having the income paid to a third party. Handrblock free Example. Handrblock free You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Handrblock free The amount paid to your son is gross income to you. Handrblock free Cash discounts. Handrblock free   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Handrblock free For income tax purposes, you can use either of the following two methods to account for cash discounts. Handrblock free Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Handrblock free Credit the cash discount to a discount income account. Handrblock free You must use the chosen method every year for all your purchase discounts. Handrblock free   If you use the second method, the credit balance in the account at the end of your tax year is business income. Handrblock free Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Handrblock free 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. Handrblock free Trade discounts. Handrblock free   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Handrblock free Do not enter these discounts on your books of account. Handrblock free Instead, use only the net amount as the cost of the merchandise purchased. Handrblock free For more information, see Trade discounts in chapter 6. Handrblock free Payment placed in escrow. Handrblock free   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. Handrblock free 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. Handrblock free Sales returns and allowances. Handrblock free   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Handrblock free Advance payments. Handrblock free   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Handrblock free Insurance proceeds. Handrblock free   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. Handrblock free You cannot deduct the reimbursed part of a casualty or theft loss. Handrblock free   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Handrblock free Prev  Up  Next   Home   More Online Publications