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Hr Block Free Tax Filing

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Hr Block Free Tax Filing

Hr block free tax filing 8. Hr block free tax filing   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Hr block free tax filing Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Hr block free tax filing Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Hr block free tax filing Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Hr block free tax filing Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Hr block free tax filing This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Hr block free tax filing A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Hr block free tax filing An exchange is a transfer of property for other property or services. Hr block free tax filing Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Hr block free tax filing If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Hr block free tax filing If the adjusted basis of the property is more than the amount you realize, you will have a loss. Hr block free tax filing Basis and adjusted basis. Hr block free tax filing   The basis of property you buy is usually its cost. Hr block free tax filing The adjusted basis of property is basis plus certain additions and minus certain deductions. Hr block free tax filing See chapter 6 for more information about basis and adjusted basis. Hr block free tax filing Amount realized. Hr block free tax filing   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Hr block free tax filing The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Hr block free tax filing   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Hr block free tax filing Amount recognized. Hr block free tax filing   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Hr block free tax filing A recognized gain is a gain you must include in gross income and report on your income tax return. Hr block free tax filing A recognized loss is a loss you deduct from gross income. Hr block free tax filing However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Hr block free tax filing See Like-Kind Exchanges next. Hr block free tax filing Also, a loss from the disposition of property held for personal use is not deductible. Hr block free tax filing Like-Kind Exchanges Certain exchanges of property are not taxable. Hr block free tax filing This means any gain from the exchange is not recognized, and any loss cannot be deducted. Hr block free tax filing Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Hr block free tax filing The exchange of property for the same kind of property is the most common type of nontaxable exchange. Hr block free tax filing To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Hr block free tax filing Qualifying property. Hr block free tax filing Like-kind property. Hr block free tax filing These two requirements are discussed later. Hr block free tax filing Multiple-party transactions. Hr block free tax filing   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Hr block free tax filing Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Hr block free tax filing Receipt of title from third party. Hr block free tax filing   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Hr block free tax filing Basis of property received. Hr block free tax filing   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Hr block free tax filing See chapter 6 for more information. Hr block free tax filing Money paid. Hr block free tax filing   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Hr block free tax filing The basis of the property received is the basis of the property given up, increased by the money paid. Hr block free tax filing Example. Hr block free tax filing You traded an old tractor with an adjusted basis of $15,000 for a new one. Hr block free tax filing The new tractor costs $300,000. Hr block free tax filing You were allowed $80,000 for the old tractor and paid $220,000 cash. Hr block free tax filing You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Hr block free tax filing If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Hr block free tax filing In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Hr block free tax filing Reporting the exchange. Hr block free tax filing   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Hr block free tax filing The Instructions for Form 8824 explain how to report the details of the exchange. Hr block free tax filing   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Hr block free tax filing You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Hr block free tax filing See chapter 9 for more information. Hr block free tax filing Qualifying property. Hr block free tax filing   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Hr block free tax filing Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Hr block free tax filing Nonqualifying property. Hr block free tax filing   The rules for like-kind exchanges do not apply to exchanges of the following property. Hr block free tax filing Property you use for personal purposes, such as your home and family car. Hr block free tax filing Stock in trade or other property held primarily for sale, such as crops and produce. Hr block free tax filing Stocks, bonds, or notes. Hr block free tax filing However, see Qualifying property above. Hr block free tax filing Other securities or evidences of indebtedness, such as accounts receivable. Hr block free tax filing Partnership interests. Hr block free tax filing However, you may have a nontaxable exchange under other rules. Hr block free tax filing See Other Nontaxable Exchanges in chapter 1 of Publication 544. Hr block free tax filing Like-kind property. Hr block free tax filing   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Hr block free tax filing Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Hr block free tax filing Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Hr block free tax filing For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Hr block free tax filing   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Hr block free tax filing An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Hr block free tax filing The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Hr block free tax filing For example, the exchange of a bull for a cow is not a like-kind exchange. Hr block free tax filing An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Hr block free tax filing    Note. Hr block free tax filing Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Hr block free tax filing Personal property. Hr block free tax filing   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Hr block free tax filing Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Hr block free tax filing Property classified in any General Asset Class may not be classified within a Product Class. Hr block free tax filing Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Hr block free tax filing General Asset Classes. Hr block free tax filing   General Asset Classes describe the types of property frequently used in many businesses. Hr block free tax filing They include, but are not limited to, the following property. Hr block free tax filing Office furniture, fixtures, and equipment (asset class 00. Hr block free tax filing 11). Hr block free tax filing Information systems, such as computers and peripheral equipment (asset class 00. Hr block free tax filing 12). Hr block free tax filing Data handling equipment except computers (asset class 00. Hr block free tax filing 13). Hr block free tax filing Automobiles and taxis (asset class 00. Hr block free tax filing 22). Hr block free tax filing Light general purpose trucks (asset class 00. Hr block free tax filing 241). Hr block free tax filing Heavy general purpose trucks (asset class 00. Hr block free tax filing 242). Hr block free tax filing Tractor units for use over-the-road (asset class 00. Hr block free tax filing 26). Hr block free tax filing Trailers and trailer-mounted containers (asset class 00. Hr block free tax filing 27). Hr block free tax filing Industrial steam and electric generation and/or distribution systems (asset class 00. Hr block free tax filing 4). Hr block free tax filing Product Classes. Hr block free tax filing   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Hr block free tax filing The latest version of the manual can be accessed at www. Hr block free tax filing census. Hr block free tax filing gov/eos/www/naics/. Hr block free tax filing Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Hr block free tax filing ntis. Hr block free tax filing gov/products/naics. Hr block free tax filing aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Hr block free tax filing A CD-ROM version with search and retrieval software is also available from NTIS. Hr block free tax filing    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Hr block free tax filing Partially nontaxable exchange. Hr block free tax filing   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Hr block free tax filing You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Hr block free tax filing A loss is not deductible. Hr block free tax filing Example 1. Hr block free tax filing You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Hr block free tax filing You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Hr block free tax filing However, only $10,000, the cash received, is recognized (included in income). Hr block free tax filing Example 2. Hr block free tax filing Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Hr block free tax filing Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Hr block free tax filing Example 3. Hr block free tax filing Assume in Example 1 that the FMV of the land you received was only $15,000. Hr block free tax filing Your $5,000 loss is not recognized. Hr block free tax filing Unlike property given up. Hr block free tax filing   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Hr block free tax filing The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Hr block free tax filing Like-kind exchanges between related persons. Hr block free tax filing   Special rules apply to like-kind exchanges between related persons. Hr block free tax filing These rules affect both direct and indirect exchanges. Hr block free tax filing Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Hr block free tax filing The gain or loss on the original exchange must be recognized as of the date of the later disposition. Hr block free tax filing The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Hr block free tax filing Related persons. Hr block free tax filing   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Hr block free tax filing ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Hr block free tax filing   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Hr block free tax filing Example. Hr block free tax filing You used a grey pickup truck in your farming business. Hr block free tax filing Your sister used a red pickup truck in her landscaping business. Hr block free tax filing In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Hr block free tax filing At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Hr block free tax filing The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Hr block free tax filing You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Hr block free tax filing Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Hr block free tax filing However, because this was a like-kind exchange, you recognized no gain. Hr block free tax filing Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Hr block free tax filing She recognized gain only to the extent of the money she received, $200. Hr block free tax filing Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Hr block free tax filing In 2013, you sold the red pickup truck to a third party for $7,000. Hr block free tax filing Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Hr block free tax filing On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Hr block free tax filing You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Hr block free tax filing In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Hr block free tax filing Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Hr block free tax filing Exceptions to the rules for related persons. Hr block free tax filing   The following property dispositions are excluded from these rules. Hr block free tax filing Dispositions due to the death of either related person. Hr block free tax filing Involuntary conversions. Hr block free tax filing Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Hr block free tax filing Multiple property exchanges. Hr block free tax filing   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Hr block free tax filing However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Hr block free tax filing Transfer and receive properties in two or more exchange groups. Hr block free tax filing Transfer or receive more than one property within a single exchange group. Hr block free tax filing   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Hr block free tax filing Deferred exchange. Hr block free tax filing   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Hr block free tax filing A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Hr block free tax filing The property you receive is replacement property. Hr block free tax filing The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Hr block free tax filing In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Hr block free tax filing   For more information see Deferred Exchanges in chapter 1 of Publication 544. Hr block free tax filing Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Hr block free tax filing This rule does not apply if the recipient is a nonresident alien. Hr block free tax filing Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Hr block free tax filing Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Hr block free tax filing The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Hr block free tax filing This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Hr block free tax filing This rule applies for determining loss as well as gain. Hr block free tax filing Any gain recognized on a transfer in trust increases the basis. Hr block free tax filing For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Hr block free tax filing Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Hr block free tax filing You may also have a capital gain if your section 1231 transactions result in a net gain. Hr block free tax filing See Section 1231 Gains and Losses in  chapter 9. Hr block free tax filing To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Hr block free tax filing Your net capital gains may be taxed at a lower tax rate than ordinary income. Hr block free tax filing See Capital Gains Tax Rates , later. Hr block free tax filing Your deduction for a net capital loss may be limited. Hr block free tax filing See Treatment of Capital Losses , later. Hr block free tax filing Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Hr block free tax filing The following items are examples of capital assets. Hr block free tax filing A home owned and occupied by you and your family. Hr block free tax filing Household furnishings. Hr block free tax filing A car used for pleasure. Hr block free tax filing If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Hr block free tax filing Stocks and bonds. Hr block free tax filing However, there are special rules for gains on qualified small business stock. Hr block free tax filing For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Hr block free tax filing Personal-use property. Hr block free tax filing   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Hr block free tax filing Loss from the sale or exchange of personal-use property is not deductible. Hr block free tax filing You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Hr block free tax filing For information on casualties and thefts, see chapter 11. Hr block free tax filing Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Hr block free tax filing The time you own an asset before disposing of it is the holding period. Hr block free tax filing If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Hr block free tax filing Report it in Part I of Schedule D (Form 1040). Hr block free tax filing If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Hr block free tax filing Report it in Part II of Schedule D (Form 1040). Hr block free tax filing Holding period. Hr block free tax filing   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Hr block free tax filing The day you disposed of the property is part of your holding period. Hr block free tax filing Example. Hr block free tax filing If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Hr block free tax filing If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Hr block free tax filing Inherited property. Hr block free tax filing   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Hr block free tax filing This rule does not apply to livestock used in a farm business. Hr block free tax filing See Holding period under Livestock , later. Hr block free tax filing Nonbusiness bad debt. Hr block free tax filing   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Hr block free tax filing See chapter 4 of Publication 550. Hr block free tax filing Nontaxable exchange. Hr block free tax filing   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Hr block free tax filing That is, it begins on the same day as your holding period for the old property. Hr block free tax filing Gift. Hr block free tax filing   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Hr block free tax filing Real property. Hr block free tax filing   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Hr block free tax filing   However, taking possession of real property under an option agreement is not enough to start the holding period. Hr block free tax filing The holding period cannot start until there is an actual contract of sale. Hr block free tax filing The holding period of the seller cannot end before that time. Hr block free tax filing Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Hr block free tax filing Net short-term capital gain or loss. Hr block free tax filing   Combine your short-term capital gains and losses. Hr block free tax filing Do this by adding all of your short-term capital gains. Hr block free tax filing Then add all of your short-term capital losses. Hr block free tax filing Subtract the lesser total from the greater. Hr block free tax filing The difference is your net short-term capital gain or loss. Hr block free tax filing Net long-term capital gain or loss. Hr block free tax filing   Follow the same steps to combine your long-term capital gains and losses. Hr block free tax filing The result is your net long-term capital gain or loss. Hr block free tax filing Net gain. Hr block free tax filing   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Hr block free tax filing However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Hr block free tax filing See Capital Gains Tax Rates , later. Hr block free tax filing Net loss. Hr block free tax filing   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Hr block free tax filing But there are limits on how much loss you can deduct and when you can deduct it. Hr block free tax filing See Treatment of Capital Losses next. Hr block free tax filing Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Hr block free tax filing For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Hr block free tax filing If your other income is low, you may not be able to use the full $3,000. Hr block free tax filing The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Hr block free tax filing Capital loss carryover. Hr block free tax filing   Generally, you have a capital loss carryover if either of the following situations applies to you. Hr block free tax filing Your net loss on Schedule D (Form 1040), is more than the yearly limit. Hr block free tax filing Your taxable income without your deduction for exemptions is less than zero. Hr block free tax filing If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Hr block free tax filing    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Hr block free tax filing Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Hr block free tax filing These lower rates are called the maximum capital gains rates. Hr block free tax filing The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Hr block free tax filing See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Hr block free tax filing Also see Publication 550. Hr block free tax filing Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Hr block free tax filing A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Hr block free tax filing Property held for sale in the ordinary course of your farm business. Hr block free tax filing   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Hr block free tax filing Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Hr block free tax filing The treatment of this property is discussed in chapter 3. Hr block free tax filing Land and depreciable properties. Hr block free tax filing   Land and depreciable property you use in farming are not capital assets. Hr block free tax filing Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Hr block free tax filing However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Hr block free tax filing The sales of these business assets are reported on Form 4797. Hr block free tax filing See chapter 9 for more information. Hr block free tax filing Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Hr block free tax filing Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Hr block free tax filing A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Hr block free tax filing The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Hr block free tax filing A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Hr block free tax filing Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Hr block free tax filing Hedging transactions. Hr block free tax filing Transactions that are not hedging transactions. Hr block free tax filing Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Hr block free tax filing There is a limit on the amount of capital losses you can deduct each year. Hr block free tax filing Hedging transactions are not subject to the mark-to-market rules. Hr block free tax filing If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Hr block free tax filing They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Hr block free tax filing The gain or loss on the termination of these hedges is generally ordinary gain or loss. Hr block free tax filing Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Hr block free tax filing Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Hr block free tax filing Examples include fuel and feed. Hr block free tax filing If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Hr block free tax filing Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Hr block free tax filing It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Hr block free tax filing Retain the identification of each hedging transaction with your books and records. Hr block free tax filing Also, identify the item(s) or aggregate risk that is being hedged in your records. Hr block free tax filing Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Hr block free tax filing For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Hr block free tax filing Accounting methods for hedging transactions. Hr block free tax filing   The accounting method you use for a hedging transaction must clearly reflect income. Hr block free tax filing This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Hr block free tax filing There are requirements and limits on the method you can use for certain hedging transactions. Hr block free tax filing See Regulations section 1. Hr block free tax filing 446-4(e) for those requirements and limits. Hr block free tax filing   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Hr block free tax filing Cash method. Hr block free tax filing Farm-price method. Hr block free tax filing Unit-livestock-price method. Hr block free tax filing   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Hr block free tax filing   Your books and records must describe the accounting method used for each type of hedging transaction. Hr block free tax filing They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Hr block free tax filing You must make the additional identification no more than 35 days after entering into the hedging transaction. Hr block free tax filing Example of a hedging transaction. Hr block free tax filing   You file your income tax returns on the cash method. Hr block free tax filing On July 2 you anticipate a yield of 50,000 bushels of corn this year. Hr block free tax filing The December futures price is $5. Hr block free tax filing 75 a bushel, but there are indications that by harvest time the price will drop. Hr block free tax filing To protect yourself against a drop in the price, you enter into the following hedging transaction. Hr block free tax filing You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Hr block free tax filing 75 a bushel. Hr block free tax filing   The price did not drop as anticipated but rose to $6 a bushel. Hr block free tax filing In November, you sell your crop at a local elevator for $6 a bushel. Hr block free tax filing You also close out your futures position by buying ten December contracts for $6 a bushel. Hr block free tax filing You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Hr block free tax filing   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Hr block free tax filing Your loss on the hedge is 25 cents a bushel. Hr block free tax filing In effect, the net selling price of your corn is $5. Hr block free tax filing 75 a bushel. Hr block free tax filing   Report the results of your futures transactions and your sale of corn separately on Schedule F. Hr block free tax filing See the instructions for the 2013 Schedule F (Form 1040). Hr block free tax filing   The loss on your futures transactions is $13,900, figured as follows. Hr block free tax filing July 2 - Sold December corn futures (50,000 bu. Hr block free tax filing @$5. Hr block free tax filing 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Hr block free tax filing @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Hr block free tax filing   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Hr block free tax filing × $6). Hr block free tax filing Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Hr block free tax filing   Assume you were right and the price went down 25 cents a bushel. Hr block free tax filing In effect, you would still net $5. Hr block free tax filing 75 a bushel, figured as follows. Hr block free tax filing Sold cash corn, per bushel $5. Hr block free tax filing 50 Gain on hedge, per bushel . Hr block free tax filing 25 Net price, per bushel $5. Hr block free tax filing 75       The gain on your futures transactions would have been $11,100, figured as follows. Hr block free tax filing July 2 - Sold December corn futures (50,000 bu. Hr block free tax filing @$5. Hr block free tax filing 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Hr block free tax filing @$5. Hr block free tax filing 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Hr block free tax filing   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Hr block free tax filing Livestock This part discusses the sale or exchange of livestock used in your farm business. Hr block free tax filing Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Hr block free tax filing However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Hr block free tax filing See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Hr block free tax filing The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Hr block free tax filing The sale of this livestock is reported on Schedule F. Hr block free tax filing See chapter 3. Hr block free tax filing Also, special rules apply to sales or exchanges caused by weather-related conditions. Hr block free tax filing See chapter 3. Hr block free tax filing Holding period. Hr block free tax filing   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Hr block free tax filing Livestock. Hr block free tax filing   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Hr block free tax filing Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Hr block free tax filing Livestock used in farm business. Hr block free tax filing   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Hr block free tax filing The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Hr block free tax filing An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Hr block free tax filing However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Hr block free tax filing Example 1. Hr block free tax filing You discover an animal that you intend to use for breeding purposes is sterile. Hr block free tax filing You dispose of it within a reasonable time. Hr block free tax filing This animal was held for breeding purposes. Hr block free tax filing Example 2. Hr block free tax filing You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Hr block free tax filing These young animals were held for breeding or dairy purposes. Hr block free tax filing Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Hr block free tax filing See Sales Caused by Weather-Related Conditions in chapter 3. Hr block free tax filing Example 3. Hr block free tax filing You are in the business of raising hogs for slaughter. Hr block free tax filing Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Hr block free tax filing You sell the brood sows after obtaining the litter. Hr block free tax filing Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Hr block free tax filing Example 4. Hr block free tax filing You are in the business of raising registered cattle for sale to others for use as breeding cattle. Hr block free tax filing The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Hr block free tax filing Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Hr block free tax filing Such use does not demonstrate that you are holding the cattle for breeding purposes. Hr block free tax filing However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Hr block free tax filing The same applies to hog and sheep breeders. Hr block free tax filing Example 5. Hr block free tax filing You breed, raise, and train horses for racing purposes. Hr block free tax filing Every year you cull horses from your racing stable. Hr block free tax filing In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Hr block free tax filing These horses are all considered held for sporting purposes. Hr block free tax filing Figuring gain or loss on the cash method. Hr block free tax filing   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Hr block free tax filing Raised livestock. Hr block free tax filing   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Hr block free tax filing Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Hr block free tax filing The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Hr block free tax filing However, see Uniform Capitalization Rules in chapter 6. Hr block free tax filing Purchased livestock. Hr block free tax filing   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Hr block free tax filing Example. Hr block free tax filing A farmer sold a breeding cow on January 8, 2013, for $1,250. Hr block free tax filing Expenses of the sale were $125. Hr block free tax filing The cow was bought July 2, 2009, for $1,300. Hr block free tax filing Depreciation (not less than the amount allowable) was $867. Hr block free tax filing Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Hr block free tax filing Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Hr block free tax filing Any loss on the disposition of such property is treated as a long-term capital loss. Hr block free tax filing Converted wetland. Hr block free tax filing   This is generally land that was drained or filled to make the production of agricultural commodities possible. Hr block free tax filing It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Hr block free tax filing   A wetland (before conversion) is land that meets all the following conditions. Hr block free tax filing It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Hr block free tax filing It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Hr block free tax filing It supports, under normal circumstances, mostly plants that grow in saturated soil. Hr block free tax filing Highly erodible cropland. Hr block free tax filing   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Hr block free tax filing Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Hr block free tax filing Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Hr block free tax filing Successor. Hr block free tax filing   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Hr block free tax filing Timber Standing timber you held as investment property is a capital asset. Hr block free tax filing Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Hr block free tax filing If you held the timber primarily for sale to customers, it is not a capital asset. Hr block free tax filing Gain or loss on its sale is ordinary business income or loss. Hr block free tax filing It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Hr block free tax filing See the Instructions for Schedule F (Form 1040). Hr block free tax filing Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Hr block free tax filing Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Hr block free tax filing , are ordinary farm income and expenses reported on Schedule F. Hr block free tax filing Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Hr block free tax filing Timber considered cut. Hr block free tax filing   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Hr block free tax filing This is true whether the timber is cut under contract or whether you cut it yourself. Hr block free tax filing Christmas trees. Hr block free tax filing   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Hr block free tax filing They qualify for both rules discussed below. Hr block free tax filing Election to treat cutting as a sale or exchange. Hr block free tax filing   Under the general rule, the cutting of timber results in no gain or loss. Hr block free tax filing It is not until a sale or exchange occurs that gain or loss is realized. Hr block free tax filing But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Hr block free tax filing Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Hr block free tax filing Any later sale results in ordinary business income or loss. Hr block free tax filing See the example below. Hr block free tax filing   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Hr block free tax filing Making the election. Hr block free tax filing   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Hr block free tax filing You do not have to make the election in the first year you cut the timber. Hr block free tax filing You can make it in any year to which the election would apply. Hr block free tax filing If the timber is partnership property, the election is made on the partnership return. Hr block free tax filing This election cannot be made on an amended return. Hr block free tax filing   Once you have made the election, it remains in effect for all later years unless you revoke it. Hr block free tax filing Election under section 631(a) may be revoked. Hr block free tax filing   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Hr block free tax filing The prior election (and revocation) is disregarded for purposes of making a subsequent election. Hr block free tax filing See Form T (Timber), Forest Activities Schedule, for more information. Hr block free tax filing Gain or loss. Hr block free tax filing   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Hr block free tax filing   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Hr block free tax filing Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Hr block free tax filing 611-3. Hr block free tax filing   Depletion of timber is discussed in chapter 7. Hr block free tax filing Example. Hr block free tax filing   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Hr block free tax filing It had an adjusted basis for depletion of $40 per MBF. Hr block free tax filing You are a calendar year taxpayer. Hr block free tax filing On January 1, 2013, the timber had a FMV of $350 per MBF. Hr block free tax filing It was cut in April for sale. Hr block free tax filing On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Hr block free tax filing You report the difference between the FMV and your adjusted basis for depletion as a gain. Hr block free tax filing This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Hr block free tax filing You figure your gain as follows. Hr block free tax filing FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Hr block free tax filing Outright sales of timber. Hr block free tax filing   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Hr block free tax filing However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Hr block free tax filing Cutting contract. Hr block free tax filing   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Hr block free tax filing You are the owner of the timber. Hr block free tax filing You held the timber longer than 1 year before its disposal. Hr block free tax filing You kept an economic interest in the timber. Hr block free tax filing   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Hr block free tax filing   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Hr block free tax filing Include this amount on Form 4797 along with your other section 1231 gains or losses. Hr block free tax filing Date of disposal. Hr block free tax filing   The date of disposal is the date the timber is cut. Hr block free tax filing However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Hr block free tax filing   This election applies only to figure the holding period of the timber. Hr block free tax filing It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Hr block free tax filing   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Hr block free tax filing The statement must identify the advance payments subject to the election and the contract under which they were made. Hr block free tax filing   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Hr block free tax filing Attach the statement to the amended return and write “Filed pursuant to section 301. Hr block free tax filing 9100-2” at the top of the statement. Hr block free tax filing File the amended return at the same address the original return was filed. Hr block free tax filing Owner. Hr block free tax filing   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Hr block free tax filing You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Hr block free tax filing Tree stumps. Hr block free tax filing   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Hr block free tax filing Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Hr block free tax filing However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Hr block free tax filing Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Hr block free tax filing   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Hr block free tax filing Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Hr block free tax filing If you have a gain from the sale, you may be allowed to exclude the gain on your home. Hr block free tax filing For more information, see Publication 523, Selling Your Home. Hr block free tax filing The gain on the sale of your business property is taxable. Hr block free tax filing A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Hr block free tax filing Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Hr block free tax filing See chapter 9. Hr block free tax filing Losses from personal-use property, other than casualty or theft losses, are not deductible. Hr block free tax filing If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Hr block free tax filing See chapter 10 for information about installment sales. Hr block free tax filing When you sell your farm, the gain or loss on each asset is figured separately. Hr block free tax filing The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Hr block free tax filing Each of the assets sold must be classified as one of the following. Hr block free tax filing Capital asset held 1 year or less. Hr block free tax filing Capital asset held longer than 1 year. Hr block free tax filing Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Hr block free tax filing Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Hr block free tax filing Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Hr block free tax filing Allocation of consideration paid for a farm. Hr block free tax filing   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Hr block free tax filing The residual method is required only if the group of assets sold constitutes a trade or business. Hr block free tax filing This method determines gain or loss from the transfer of each asset. Hr block free tax filing It also determines the buyer's basis in the business assets. Hr block free tax filing For more information, see Sale of a Business in chapter 2 of Publication 544. Hr block free tax filing Property used in farm operation. Hr block free tax filing   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Hr block free tax filing Recognized gains and losses on business property must be reported on your return for the year of the sale. Hr block free tax filing If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Hr block free tax filing Example. Hr block free tax filing You sell your farm, including your main home, which you have owned since December 2001. Hr block free tax filing You realize gain on the sale as follows. Hr block free tax filing   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Hr block free tax filing All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Hr block free tax filing Treat the balance as section 1231 gain. Hr block free tax filing The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Hr block free tax filing Partial sale. Hr block free tax filing   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Hr block free tax filing You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Hr block free tax filing For a detailed discussion on installment sales, see Publication 544. Hr block free tax filing Adjusted basis of the part sold. Hr block free tax filing   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Hr block free tax filing , on the part sold. Hr block free tax filing If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Hr block free tax filing Example. Hr block free tax filing You bought a 600-acre farm for $700,000. Hr block free tax filing The farm included land and buildings. Hr block free tax filing The purchase contract designated $600,000 of the purchase price to the land. Hr block free tax filing You later sold 60 acres of land on which you had installed a fence. Hr block free tax filing Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Hr block free tax filing Use this amount to determine your gain or loss on the sale of the 60 acres. Hr block free tax filing Assessed values for local property taxes. Hr block free tax filing   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Hr block free tax filing Example. Hr block free tax filing Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Hr block free tax filing However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Hr block free tax filing The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Hr block free tax filing Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Hr block free tax filing The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Hr block free tax filing Sale of your home. Hr block free tax filing   Your home is a capital asset and not property used in the trade or business of farming. Hr block free tax filing If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Hr block free tax filing Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Hr block free tax filing   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Hr block free tax filing For more information on basis, see chapter 6. Hr block free tax filing More information. Hr block free tax filing   For more information on selling your home, see Publication 523. Hr block free tax filing Gain from condemnation. Hr block free tax filing   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Hr block free tax filing However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Hr block free tax filing Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Hr block free tax filing The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Hr block free tax filing This is true even if you voluntarily return the property to the lender. Hr block free tax filing You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Hr block free tax filing Buyer's (borrower's) gain or loss. Hr block free tax filing   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Hr block free tax filing The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Hr block free tax filing See Determining Gain or Loss , earlier. Hr block free tax filing Worksheet 8-1. Hr block free tax filing Worksheet for Foreclosures andRepossessions Part 1. Hr block free tax filing Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Hr block free tax filing Complete this part only if you were personally liable for the debt. Hr block free tax filing Otherwise, go to Part 2. Hr block free tax filing   1. Hr block free tax filing Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Hr block free tax filing Enter the Fair Market Value of the transferred property   3. Hr block free tax filing Ordinary income from cancellation of debt upon foreclosure or repossession. Hr block free tax filing * Subtract line 2 from line 1. Hr block free tax filing If zero or less, enter -0-   Part 2. Hr block free tax filing Figure your gain or loss from foreclosure or repossession. Hr block free tax filing   4. Hr block free tax filing If you completed Part 1, enter the smaller of line 1 or line 2. Hr block free tax filing If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Hr block free tax filing Enter any proceeds you received from the foreclosure sale   6. Hr block free tax filing Add lines 4 and 5   7. Hr block free tax filing Enter the adjusted basis of the transferred property   8. Hr block free tax filing Gain or loss from foreclosure or repossession. Hr block free tax filing Subtract line 7  from line 6   * The income may not be taxable. Hr block free tax filing See Cancellation of debt . Hr block free tax filing    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Hr block free tax filing Amount realized on a nonrecourse debt. Hr block free tax filing   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Hr block free tax filing The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Hr block free tax filing Example 1. Hr block free tax filing Ann paid $200,000 for land used in her farming business. Hr block free tax filing She paid $15,000 down and borrowed the remaining $185,000 from a bank. Hr block free tax filing Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Hr block free tax filing The bank foreclosed on the loan 2 years after Ann stopped making payments. Hr block free tax filing When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Hr block free tax filing The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Hr block free tax filing She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Hr block free tax filing She has a $20,000 deductible loss. Hr block free tax filing Example 2. Hr block free tax filing Assume the same facts as in Example 1 except the FMV of the land was $210,000. Hr block free tax filing The result is the same. Hr block free tax filing The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Hr block free tax filing Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Hr block free tax filing Amount realized on a recourse debt. Hr block free tax filing   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Hr block free tax filing   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Hr block free tax filing The amount realized does not include the canceled debt that is your income from cancellation of debt. Hr block free tax filing See Cancellation of debt , later. Hr block free tax filing Example 3. Hr block free tax filing Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Hr block free tax filing In this case, the amount she realizes is $170,000. Hr block free tax filing This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Hr block free tax filing Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Hr block free tax filing She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Hr block free tax filing She is also treated as receiving ordinary income from cancellation of debt. Hr block free tax filing That income is $10,000 ($180,000 − $170,000). Hr block free tax filing This is the part of the canceled debt not included in the amount realized. Hr block free tax filing She reports this as other income on Schedule F, line 8. Hr block free tax filing Seller's (lender's) gain or loss on repossession. Hr block free tax filing   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Hr block free tax filing For more information, see Repossession in Publication 537, Installment Sales. Hr block free tax filing Cancellation of debt. Hr block free tax filing   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Hr block free tax filing This income is separate from any gain or loss realized from the foreclosure or repossession. Hr block free tax filing Report the income from cancellation of a business debt on Schedule F, line 8. Hr block free tax filing Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Hr block free tax filing    You can use Worksheet 8-1 to figure your income from cancellation of debt. Hr block free tax filing   However, income from cancellation of debt is not taxed if any of the following apply. Hr block free tax filing The cancellation is intended as a gift. Hr block free tax filing The debt is qualified farm debt (see chapter 3). Hr block free tax filing The debt is qualified real property business debt (see chapter 5 of Publication 334). Hr block free tax filing You are insolvent or bankrupt (see  chapter 3). Hr block free tax filing The debt is qualified principal residence indebtedness (see chapter 3). Hr block free tax filing   Use Form 982 to report the income exclusion. Hr block free tax filing Abandonment The abandonment of property is a disposition of property. Hr block free tax filing You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Hr block free tax filing Business or investment property. Hr block free tax filing   Loss from abandonment of business or investment property is deductible as a loss. Hr block free tax filing Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Hr block free tax filing If your adjusted basis is more than the amount you realize (if any), then you have a loss. Hr block free tax filing If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Hr block free tax filing This rule also applies to leasehold improvements the lessor made for the lessee. Hr block free tax filing However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Hr block free tax filing   If the abandoned property is secured by debt, special rules apply. Hr block free tax filing The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Hr block free tax filing For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Hr block free tax filing The abandonment loss is deducted in the tax year in which the loss is sustained. Hr block free tax filing Report the loss on Form 4797, Part II, line 10. Hr block free tax filing Personal-use property. Hr block free tax filing   You cannot deduct any loss from abandonment of your home or other property held for personal use. Hr block free tax filing Canceled debt. Hr block free tax filing   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Hr block free tax filing This income is separate from any loss realized from abandonment of the property. Hr block free tax filing Report income from cancellation of a debt related to a business or rental activity as business or rental income. Hr block free tax filing Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Hr block free tax filing   However, income from cancellation of debt is not taxed in certain circumstances. Hr block free tax filing See Cancellation of debt earlier under Foreclosure or Repossession . Hr block free tax filing Forms 1099-A and 1099-C. Hr block free tax filing   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Hr block free tax filing However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Hr block free tax filing The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Hr block free tax filing For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Hr block free tax filing Prev  Up  Next   Home   More Online Publications
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Columbia, SC

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The Hr Block Free Tax Filing

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