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Income Tax Preparations

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Income Tax Preparations

Income tax preparations Publication 15 - Main Content Table of Contents 1. Income tax preparations Employer Identification Number (EIN) 2. Income tax preparations Who Are Employees?Relief provisions. Income tax preparations Business Owned and Operated by Spouses 3. Income tax preparations Family Employees 4. Income tax preparations Employee's Social Security Number (SSN)Registering for SSNVS. Income tax preparations 5. Income tax preparations Wages and Other CompensationAccountable plan. Income tax preparations Nonaccountable plan. Income tax preparations Per diem or other fixed allowance. Income tax preparations 50% test. Income tax preparations Health Savings Accounts and medical savings accounts. Income tax preparations Nontaxable fringe benefits. Income tax preparations When fringe benefits are treated as paid. Income tax preparations Valuation of fringe benefits. Income tax preparations Withholding on fringe benefits. Income tax preparations Depositing taxes on fringe benefits. Income tax preparations 6. Income tax preparations TipsOrdering rule. Income tax preparations 7. Income tax preparations Supplemental Wages 8. Income tax preparations Payroll Period 9. Income tax preparations Withholding From Employees' WagesIncome Tax Withholding Social Security and Medicare Taxes Part-Time Workers 10. Income tax preparations Required Notice to Employees About the Earned Income Credit (EIC) 11. Income tax preparations Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties 12. Income tax preparations Filing Form 941 or Form 944 13. Income tax preparations Reporting Adjustments to Form 941 or Form 944Current Period Adjustments Prior Period Adjustments Wage Repayments 14. Income tax preparations Federal Unemployment (FUTA) TaxSuccessor employer. Income tax preparations Household employees. Income tax preparations When to deposit. Income tax preparations Household employees. Income tax preparations Electronic filing by reporting agents. Income tax preparations 16. Income tax preparations How To Use the Income Tax Withholding TablesWage Bracket Method Percentage Method Alternative Methods of Income Tax Withholding How To Get Tax Help 1. Income tax preparations Employer Identification Number (EIN) If you are required to report employment taxes or give tax statements to employees or annuitants, you need an EIN. Income tax preparations The EIN is a nine-digit number the IRS issues. Income tax preparations The digits are arranged as follows: 00-0000000. Income tax preparations It is used to identify the tax accounts of employers and certain others who have no employees. Income tax preparations Use your EIN on all of the items you send to the IRS and SSA. Income tax preparations For more information, see Publication 1635, Employer Identification Number: Understanding Your EIN. Income tax preparations If you do not have an EIN, you may apply for one online. Income tax preparations Go to the IRS. Income tax preparations gov and click on the Apply for an EIN Online link under Tools. Income tax preparations You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Income tax preparations Do not use an SSN in place of an EIN. Income tax preparations You should have only one EIN. Income tax preparations If you have more than one and are not sure which one to use, call 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Income tax preparations Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Income tax preparations The IRS will tell you which number to use. Income tax preparations If you took over another employer's business (see Successor employer in section 9), do not use that employer's EIN. Income tax preparations If you have applied for an EIN but do not have your EIN by the time a return is due, file a paper return and write “Applied For” and the date you applied for it in the space shown for the number. Income tax preparations 2. Income tax preparations Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. Income tax preparations See Publication 15-A for details on statutory employees and nonemployees. Income tax preparations Employee status under common law. Income tax preparations   Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Income tax preparations This is so even when you give the employee freedom of action. Income tax preparations What matters is that you have the right to control the details of how the services are performed. Income tax preparations See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Income tax preparations   Generally, people in business for themselves are not employees. Income tax preparations For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. Income tax preparations However, if the business is incorporated, corporate officers who work in the business are employees of the corporation. Income tax preparations   If an employer-employee relationship exists, it does not matter what it is called. Income tax preparations The employee may be called an agent or independent contractor. Income tax preparations It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Income tax preparations Statutory employees. Income tax preparations   If someone who works for you is not an employee under the common law rules discussed earlier, do not withhold federal income tax from his or her pay, unless backup withholding applies. Income tax preparations Although the following persons may not be common law employees, they are considered employees by statute for social security, Medicare, and FUTA tax purposes under certain conditions. Income tax preparations An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else. Income tax preparations A full-time life insurance salesperson who sells primarily for one company. Income tax preparations A homeworker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates. Income tax preparations A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. Income tax preparations The orders must be for merchandise for resale or supplies for use in the customer's business. Income tax preparations The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging. Income tax preparations    Statutory nonemployees. Income tax preparations   Direct sellers, qualified real estate agents, and certain companion sitters are, by law, considered nonemployees. Income tax preparations They are generally treated as self-employed for all federal tax purposes, including income and employment taxes. Income tax preparations H-2A agricultural workers. Income tax preparations   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Income tax preparations Treating employees as nonemployees. Income tax preparations   You will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a nonemployee. Income tax preparations You may be able to calculate your liability using special section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding. Income tax preparations The applicable rates depend on whether you filed required Forms 1099. Income tax preparations You cannot recover the employee share of social security, or Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. Income tax preparations You are liable for the income tax withholding regardless of whether the employee paid income tax on the wages. Income tax preparations You continue to owe the full employer share of social security and Medicare taxes. Income tax preparations The employee remains liable for the employee share of social security and Medicare taxes. Income tax preparations See Internal Revenue Code section 3509 for details. Income tax preparations Also see the Instructions for Form 941-X. Income tax preparations   Section 3509 rates are not available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. Income tax preparations Section 3509 is not available for reclassifying statutory employees. Income tax preparations See Statutory employees , earlier in this section. Income tax preparations   If the employer issued required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Income tax preparations 2% plus 20% of the employee rate (see the Instructions for Form 941-X). Income tax preparations For Medicare taxes; employer rate of 1. Income tax preparations 45% plus 20% of the employee rate of 1. Income tax preparations 45%, for a total rate of 1. Income tax preparations 74% of wages. Income tax preparations For Additional Medicare Tax; 0. Income tax preparations 18% (20% of the employee rate of 0. Income tax preparations 9%) of wages subject to Additional Medicare Tax. Income tax preparations For income tax withholding, the rate is 1. Income tax preparations 5% of wages. Income tax preparations   If the employer did not issue required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Income tax preparations 2% plus 40% of the employee rate (see the Instructions for Form 941-X). Income tax preparations For Medicare taxes; employer rate of 1. Income tax preparations 45% plus 40% of the employee rate of 1. Income tax preparations 45%, for a total rate of 2. Income tax preparations 03% of wages. Income tax preparations For Additional Medicare Tax; 0. Income tax preparations 36% (40% of the employee rate of 0. Income tax preparations 9%) of wages subject to Additional Medicare Tax. Income tax preparations For income tax withholding, the rate is 3. Income tax preparations 0% of wages. Income tax preparations Relief provisions. Income tax preparations   If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. Income tax preparations To get this relief, you must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker. Income tax preparations You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Income tax preparations See Publication 1976, Do You Qualify for Relief Under Section 530. Income tax preparations IRS help. Income tax preparations   If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Income tax preparations Voluntary Classification Settlement Program (VCSP). Income tax preparations   Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. Income tax preparations To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Income tax preparations For more information visit IRS. Income tax preparations gov and enter “VCSP” in the search box. Income tax preparations Business Owned and Operated by Spouses If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Income tax preparations See Publication 541, Partnerships, for more details. Income tax preparations The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Income tax preparations Exception—Qualified joint venture. Income tax preparations   For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. Income tax preparations A qualified joint venture conducts a trade or business where: The only members of the joint venture are spouses who file a joint income tax return, Both spouses materially participate (see Material participation in the Instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property is not enough), Both spouses elect to not be treated as a partnership, and The business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or limited liability company (LLC). Income tax preparations   To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse's interest in the venture, and reported on separate Schedules C or F as sole proprietors. Income tax preparations Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. Income tax preparations   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. Income tax preparations If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse's sole proprietorship. Income tax preparations Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. Income tax preparations However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return. Income tax preparations    Note. Income tax preparations If your spouse is your employee, not your partner, see One spouse employed by another in section 3. Income tax preparations   For more information on qualified joint ventures, visit IRS. Income tax preparations gov and enter “qualified joint venture” in the search box. Income tax preparations Exception—Community income. Income tax preparations   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Income tax preparations S. Income tax preparations possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. Income tax preparations You may still make an election to be taxed as a qualified joint venture instead of a partnership. Income tax preparations See Exception—Qualified joint venture , earlier. Income tax preparations 3. Income tax preparations Family Employees Child employed by parents. Income tax preparations   Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Income tax preparations If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to social security and Medicare taxes until the child reaches age 21. Income tax preparations However, see Covered services of a child or spouse , later in this section. Income tax preparations Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to FUTA tax. Income tax preparations Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child is not regularly employed to do such work. Income tax preparations One spouse employed by another. Income tax preparations   The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax. Income tax preparations However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, are not subject to social security, Medicare, and FUTA taxes. Income tax preparations Covered services of a child or spouse. Income tax preparations   The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for: A corporation, even if it is controlled by the child's parent or the individual's spouse; A partnership, even if the child's parent is a partner, unless each partner is a parent of the child; A partnership, even if the individual's spouse is a partner; or An estate, even if it is the estate of a deceased parent. Income tax preparations Parent employed by son or daughter. Income tax preparations   When the employer is a son or daughter employing his or her parent the following rules apply. Income tax preparations Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes. Income tax preparations Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes. Income tax preparations    Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply: The parent is employed by his or her son or daughter; The son or daughter (the employer) has a child or stepchild living in the home; The son or daughter (the employer) is a widow or widower, divorced, or living with a spouse who, because of a mental or physical condition, cannot care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition. Income tax preparations   Payments made to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. Income tax preparations 4. Income tax preparations Employee's Social Security Number (SSN) You are required to get each employee's name and SSN and to enter them on Form W-2. Income tax preparations This requirement also applies to resident and nonresident alien employees. Income tax preparations You should ask your employee to show you his or her social security card. Income tax preparations The employee may show the card if it is available. Income tax preparations Do not accept a social security card that says “Not valid for employment. Income tax preparations ” A social security number issued with this legend does not permit employment. Income tax preparations You may, but are not required to, photocopy the social security card if the employee provides it. Income tax preparations If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. Income tax preparations See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs, for information on the requirement to solicit the employee's SSN. Income tax preparations Applying for a social security card. Income tax preparations   Any employee who is legally eligible to work in the United States and does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation. Income tax preparations You can get Form SS-5 at SSA offices, by calling 1-800-772-1213, or from the SSA website at www. Income tax preparations socialsecurity. Income tax preparations gov/online/ss-5. Income tax preparations html. Income tax preparations The employee must complete and sign Form SS-5; it cannot be filed by the employer. Income tax preparations You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. Income tax preparations Applying for a social security number. Income tax preparations   If you file Form W-2 on paper and your employee applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. Income tax preparations If you are filing electronically, enter all zeros (000-00-000) in the social security number field. Income tax preparations When the employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's SSN. Income tax preparations Furnish copies B, C, and 2 of Form W-2c to the employee. Income tax preparations Up to 25 Forms W-2c for each Form W-3c, Transmittal of Corrected Wage and Tax Statements, may now be filed per session over the Internet, with no limit on the number of sessions. Income tax preparations For more information, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. Income tax preparations socialsecurity. Income tax preparations gov/employer. Income tax preparations Advise your employee to correct the SSN on his or her original Form W-2. Income tax preparations Correctly record the employee's name and SSN. Income tax preparations   Record the name and number of each employee as they are shown on the employee's social security card. Income tax preparations If the employee's name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. Income tax preparations Continue to report the employee's wages under the old name until the employee shows you an updated social security card with the new name. Income tax preparations If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported for the most recently filed Form W-2. Income tax preparations It is not necessary to correct other years if the previous name and number were used for years before the most recent Form W-2. Income tax preparations IRS individual taxpayer identification numbers (ITINs) for aliens. Income tax preparations   Do not accept an ITIN in place of an SSN for employee identification or for work. Income tax preparations An ITIN is only available to resident and nonresident aliens who are not eligible for U. Income tax preparations S. Income tax preparations employment and need identification for other tax purposes. Income tax preparations You can identify an ITIN because it is a nine-digit number, beginning with the number “9” with either a “7” or “8” as the fourth digit and is formatted like an SSN (for example, 9NN-7N-NNNN). Income tax preparations    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. Income tax preparations If the individual is currently eligible to work in the United States, instruct the individual to apply for an SSN and follow the instructions under Applying for a social security number, earlier. Income tax preparations Do not use an ITIN in place of an SSN on Form W-2. Income tax preparations Verification of social security numbers. Income tax preparations   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive the results the next business day. Income tax preparations Visit www. Income tax preparations socialsecurity. Income tax preparations gov/employer/ssnv. Income tax preparations htm for more information. Income tax preparations Registering for SSNVS. Income tax preparations   You must register online and receive authorization from your employer to use SSNVS. Income tax preparations To register, visit SSA's website at www. Income tax preparations ssa. Income tax preparations gov/employer and click on the Business Services Online link. Income tax preparations Follow the registration instructions to obtain a user identification (ID) and password. Income tax preparations You will need to provide the following information about yourself and your company. Income tax preparations Name. Income tax preparations SSN. Income tax preparations Date of birth. Income tax preparations Type of employer. Income tax preparations EIN. Income tax preparations Company name, address, and telephone number. Income tax preparations Email address. Income tax preparations   When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Income tax preparations You must enter the activation code online to use SSNVS. Income tax preparations 5. Income tax preparations Wages and Other Compensation Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. Income tax preparations The pay may be in cash or in other forms. Income tax preparations It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. Income tax preparations It does not matter how you measure or make the payments. Income tax preparations Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. Income tax preparations Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes. Income tax preparations More information. Income tax preparations   See section 6 for a discussion of tips and section 7 for a discussion of supplemental wages. Income tax preparations Also, see section 15 for exceptions to the general rules for wages. Income tax preparations Publication 15-A provides additional information on wages, including nonqualified deferred compensation, and other compensation. Income tax preparations Publication 15-B provides information on other forms of compensation, including: Accident and health benefits, Achievement awards, Adoption assistance, Athletic facilities, De minimis (minimal) benefits, Dependent care assistance, Educational assistance, Employee discounts, Employee stock options, Employer-provided cell phones, Group-term life insurance coverage, Health Savings Accounts, Lodging on your business premises, Meals, Moving expense reimbursements, No-additional-cost services, Retirement planning services, Transportation (commuting) benefits, Tuition reduction, and Working condition benefits. Income tax preparations Employee business expense reimbursements. Income tax preparations   A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees' business expenses. Income tax preparations How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan. Income tax preparations If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement. Income tax preparations   These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee. Income tax preparations Accountable plan. Income tax preparations   To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules. Income tax preparations They must have paid or incurred deductible expenses while performing services as your employees. Income tax preparations The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee. Income tax preparations They must substantiate these expenses to you within a reasonable period of time. Income tax preparations They must return any amounts in excess of substantiated expenses within a reasonable period of time. Income tax preparations   Amounts paid under an accountable plan are not wages and are not subject to income, social security, Medicare, and FUTA taxes. Income tax preparations   If the expenses covered by this arrangement are not substantiated (or amounts in excess of substantiated expenses are not returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. Income tax preparations This amount is subject to income, social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period of time. Income tax preparations   A reasonable period of time depends on the facts and circumstances. Income tax preparations Generally, it is considered reasonable if your employees receive their advance within 30 days of the time they incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. Income tax preparations Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days. Income tax preparations Nonaccountable plan. Income tax preparations   Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. Income tax preparations Your payments are treated as paid under a nonaccountable plan if: Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses, You advance or pay an amount to your employee regardless of whether you reasonably expect the employee to have business expenses related to your business, or You pay an amount as a reimbursement you would have otherwise paid as wages. Income tax preparations   See section 7 for more information on supplemental wages. Income tax preparations Per diem or other fixed allowance. Income tax preparations   You may reimburse your employees by travel days, miles, or some other fixed allowance under the applicable revenue procedure. Income tax preparations In these cases, your employee is considered to have accounted to you if your reimbursement does not exceed rates established by the Federal Government. Income tax preparations The 2013 standard mileage rate for auto expenses was 56. Income tax preparations 5 cents per mile. Income tax preparations The rate for 2014 is 56 cents per mile. Income tax preparations   The government per diem rates for meals and lodging in the continental United States are listed in Publication 1542, Per Diem Rates. Income tax preparations Other than the amount of these expenses, your employees' business expenses must be substantiated (for example, the business purpose of the travel or the number of business miles driven). Income tax preparations   If the per diem or allowance paid exceeds the amounts substantiated, you must report the excess amount as wages. Income tax preparations This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Income tax preparations Show the amount equal to the substantiated amount (for example, the nontaxable portion) in box 12 of Form W-2 using code “L. Income tax preparations ” Wages not paid in money. Income tax preparations   If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a check, you are said to pay them “in kind. Income tax preparations ” Payments in kind may be in the form of goods, lodging, food, clothing, or services. Income tax preparations Generally, the fair market value of such payments at the time they are provided is subject to federal income tax withholding and social security, Medicare, and FUTA taxes. Income tax preparations   However, noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social security, Medicare, and FUTA taxes. Income tax preparations Withhold income tax on these payments only if you and the employee agree to do so. Income tax preparations Nonetheless, noncash payments for agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash payment. Income tax preparations Moving expenses. Income tax preparations   Reimbursed and employer-paid qualified moving expenses (those that would otherwise be deductible by the employee) paid under an accountable plan are not includible in an employee's income unless you have knowledge the employee deducted the expenses in a prior year. Income tax preparations Reimbursed and employer-paid nonqualified moving expenses are includible in income and are subject to employment taxes and income tax withholding. Income tax preparations For more information on moving expenses, see Publication 521, Moving Expenses. Income tax preparations Meals and lodging. Income tax preparations   The value of meals is not taxable income and is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the meals are furnished for the employer's convenience and on the employer's premises. Income tax preparations The value of lodging is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the lodging is furnished for the employer's convenience, on the employer's premises, and as a condition of employment. Income tax preparations    “For the convenience of the employer” means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. Income tax preparations For example, meals you provide at the place of work so that an employee is available for emergencies during his or her lunch period are generally considered to be for your convenience. Income tax preparations   However, whether meals or lodging are provided for the convenience of the employer depends on all of the facts and circumstances. Income tax preparations A written statement that the meals or lodging are for your convenience is not sufficient. Income tax preparations 50% test. Income tax preparations   If over 50% of the employees who are provided meals on an employer's business premises receive these meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Income tax preparations If this 50% test is met, the value of the meals is excludable from income for all employees and is not subject to federal income tax withholding or employment taxes. Income tax preparations For more information, see Publication 15-B. Income tax preparations Health insurance plans. Income tax preparations   If you pay the cost of an accident or health insurance plan for your employees, including an employee's spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Income tax preparations Generally, this exclusion also applies to qualified long-term care insurance contracts. Income tax preparations However, for income tax withholding, the value of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation (2% shareholders). Income tax preparations For social security, Medicare, and FUTA taxes, the health insurance benefits are excluded from the wages only for employees and their dependents or for a class or classes of employees and their dependents. Income tax preparations See Announcement 92-16 for more information. Income tax preparations You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5. Income tax preparations Health Savings Accounts and medical savings accounts. Income tax preparations   Your contributions to an employee's Health Savings Account (HSA) or Archer medical savings account (MSA) are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they will be excludable from the income of the employee. Income tax preparations To the extent it is not reasonable to believe they will be excludable, your contributions are subject to these taxes. Income tax preparations Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. Income tax preparations However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. Income tax preparations For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs). Income tax preparations Medical care reimbursements. Income tax preparations   Generally, medical care reimbursements paid for an employee under an employer's self-insured medical reimbursement plan are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Income tax preparations See Publication 15-B for an exception for highly compensated employees. Income tax preparations Differential wage payments. Income tax preparations   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represent all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer. Income tax preparations   Differential wage payments are wages for income tax withholding, but are not subject to social security, Medicare, or FUTA taxes. Income tax preparations Employers should report differential wage payments in box 1 of Form W-2. Income tax preparations For more information about the tax treatment of differential wage payments, visit IRS. Income tax preparations gov and enter “employees in a combat zone” in the search box. Income tax preparations Fringe benefits. Income tax preparations   You generally must include fringe benefits in an employee's gross income (but see Nontaxable fringe benefits next). Income tax preparations The benefits are subject to income tax withholding and employment taxes. Income tax preparations Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. Income tax preparations In general, the amount you must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount the law excludes. Income tax preparations There are other special rules you and your employees may use to value certain fringe benefits. Income tax preparations See Publication 15-B for more information. Income tax preparations Nontaxable fringe benefits. Income tax preparations   Some fringe benefits are not taxable (or are minimally taxable) if certain conditions are met. Income tax preparations See Publication 15-B for details. Income tax preparations The following are some examples of nontaxable fringe benefits. Income tax preparations Services provided to your employees at no additional cost to you. Income tax preparations Qualified employee discounts. Income tax preparations Working condition fringes that are property or services the employee could deduct as a business expense if he or she had paid for it. Income tax preparations Examples include a company car for business use and subscriptions to business magazines. Income tax preparations Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals are not furnished at below cost). Income tax preparations Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, any transit pass, and qualified parking). Income tax preparations Qualified moving expense reimbursement. Income tax preparations See Moving expenses , earlier in this section, for details. Income tax preparations The use of on-premises athletic facilities, if substantially all of the use is by employees, their spouses, and their dependent children. Income tax preparations Qualified tuition reduction an educational organization provides to its employees for education. Income tax preparations For more information, see Publication 970, Tax Benefits for Education. Income tax preparations Employer-provided cell phones provided primarily for a noncompensatory business reason. Income tax preparations   However, do not exclude the following fringe benefits from the income of highly compensated employees unless the benefit is available to other employees on a nondiscriminatory basis. Income tax preparations No-additional-cost services. Income tax preparations Qualified employee discounts. Income tax preparations Meals provided at an employer operated eating facility. Income tax preparations Reduced tuition for education. Income tax preparations  For more information, including the definition of a highly compensated employee, see Publication 15-B. Income tax preparations When fringe benefits are treated as paid. Income tax preparations   You may choose to treat certain noncash fringe benefits as paid by the pay period, by the quarter, or on any other basis you choose as long as you treat the benefits as paid at least once a year. Income tax preparations You do not have to make a formal choice of payment dates or notify the IRS of the dates you choose. Income tax preparations You do not have to make this choice for all employees. Income tax preparations You may change methods as often as you like, as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year. Income tax preparations See Publication 15-B for more information, including a discussion of the special accounting rule for fringe benefits provided during November and December. Income tax preparations Valuation of fringe benefits. Income tax preparations   Generally, you must determine the value of fringe benefits no later than January 31 of the next year. Income tax preparations Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. Income tax preparations Withholding on fringe benefits. Income tax preparations   You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold federal income tax on the value of the fringe benefits at the optional flat 25% supplemental wage rate. Income tax preparations However, see Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages during the calendar year in section 7. Income tax preparations   You may choose not to withhold income tax on the value of an employee's personal use of a vehicle you provide. Income tax preparations You must, however, withhold social security and Medicare taxes on the use of the vehicle. Income tax preparations See Publication 15-B for more information on this election. Income tax preparations Depositing taxes on fringe benefits. Income tax preparations   Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. Income tax preparations To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period. Income tax preparations   If you determine by January 31 you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a refund for the overpayment or have it applied to your next employment tax return. Income tax preparations See Valuation of fringe benefits , earlier. Income tax preparations If you underestimated the value and deposited too little, you may be subject to a failure-to-deposit penalty. Income tax preparations See section 11 for information on deposit penalties. Income tax preparations   If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income taxes you deposited on his or her behalf, and included in the employee's Form W-2. Income tax preparations However, you must recover the income taxes before April 1 of the following year. Income tax preparations Sick pay. Income tax preparations   In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. Income tax preparations These amounts are sometimes paid by a third party, such as an insurance company or an employees' trust. Income tax preparations In either case, these payments are subject to social security, Medicare, and FUTA taxes. Income tax preparations Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. Income tax preparations The payments are always subject to federal income tax. Income tax preparations See Publication 15-A for more information. Income tax preparations 6. Income tax preparations Tips Tips your employee receives from customers are generally subject to withholding. Income tax preparations Your employee must report cash tips to you by the 10th of the month after the month the tips are received. Income tax preparations The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. Income tax preparations Both directly and indirectly tipped employees must report tips to you. Income tax preparations No report is required for months when tips are less than $20. Income tax preparations Your employee reports the tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. Income tax preparations The statement must be signed by the employee and must include: The employee's name, address, and SSN, Your name and address, The month or period the report covers, and The total of tips received during the month or period. Income tax preparations Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. Income tax preparations You are permitted to establish a system for electronic tip reporting by employees. Income tax preparations See Regulations section 31. Income tax preparations 6053-1(d). Income tax preparations Collecting taxes on tips. Income tax preparations   You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. Income tax preparations The withholding rules for withholding an employee's share of Medicare tax on tips also apply to withholding the Additional Medicare Tax once wages and tips exceed $200,000 in the calendar year. Income tax preparations If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax. Income tax preparations   You can collect these taxes from the employee's wages or from other funds he or she makes available. Income tax preparations See Tips treated as supplemental wages in section 7 for more information. Income tax preparations Stop collecting the employee social security tax when his or her wages and tips for tax year 2014 reach $117,000; collect the income and employee Medicare taxes for the whole year on all wages and tips. Income tax preparations You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. Income tax preparations You are responsible for the employer Medicare tax for the whole year on all wages and tips. Income tax preparations File Form 941 or Form 944 to report withholding and employment taxes on tips. Income tax preparations Ordering rule. Income tax preparations   If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. Income tax preparations If there are not enough funds available, withhold taxes in the following order. Income tax preparations Withhold on regular wages and other compensation. Income tax preparations Withhold social security and Medicare taxes on tips. Income tax preparations Withhold income tax on tips. Income tax preparations Reporting tips. Income tax preparations   Report tips and any collected and uncollected social security and Medicare taxes on Form W-2 and on Form 941, lines 5b, 5c, and 5d (Form 944, lines 4b, 4c, and 4d). Income tax preparations Report an adjustment on Form 941, line 9 (Form 944, line 6), for the uncollected social security and Medicare taxes. Income tax preparations Enter the amount of uncollected social security tax and Medicare tax on Form W-2, box 12, with codes “A” and “B. Income tax preparations ” Do not include any uncollected Additional Medicare Tax in box 12 of Form W-2. Income tax preparations See section 13 and the General Instructions for Forms W-2 and W-3. Income tax preparations   Revenue Ruling 2012-18 provides guidance for employers regarding social security and Medicare taxes imposed on tips, including information on the reporting of the employer share of social security and Medicare taxes under section 3121(q), the difference between tips and service charges, and the section 45B credit. Income tax preparations See Revenue Ruling 2012-18, 2012-26 I. Income tax preparations R. Income tax preparations B. Income tax preparations 1032, available at www. Income tax preparations irs. Income tax preparations gov/irb/2012-26_IRB/ar07. Income tax preparations html. Income tax preparations Allocated tips. Income tax preparations   If you operate a large food or beverage establishment, you must report allocated tips under certain circumstances. Income tax preparations However, do not withhold income, social security, or Medicare taxes on allocated tips. Income tax preparations   A large food or beverage establishment is one that provides food or beverages for consumption on the premises, where tipping is customary, and where there were normally more than 10 employees on a typical business day during the preceding year. Income tax preparations   The tips may be allocated by one of three methods—hours worked, gross receipts, or good faith agreement. Income tax preparations For information about these allocation methods, including the requirement to file Forms 8027 electronically if 250 or more forms are filed, see the Instructions for Form 8027. Income tax preparations For information on filing Form 8027 electronically with the IRS, see Publication 1239. Income tax preparations Tip Rate Determination and Education Program. Income tax preparations   Employers may participate in the Tip Rate Determination and Education Program. Income tax preparations The program primarily consists of two voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. Income tax preparations The two agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). Income tax preparations A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the gaming (casino) industry. Income tax preparations To get more information about TRDA and TRAC agreements, see Publication 3144, Tips on Tips. Income tax preparations Additionally, visit IRS. Income tax preparations gov and enter “MSU tips” in the search box to get more information about GITCA, TRDA, or TRAC agreements. Income tax preparations 7. Income tax preparations Supplemental Wages Supplemental wages are wage payments to an employee that are not regular wages. Income tax preparations They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Income tax preparations Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. Income tax preparations How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. Income tax preparations See Regulations section 31. Income tax preparations 3402(g)-1 for additional guidance for wages paid after January 1, 2007. Income tax preparations Also see Revenue Ruling 2008-29, 2008-24 I. Income tax preparations R. Income tax preparations B. Income tax preparations 1149, available at www. Income tax preparations irs. Income tax preparations gov/irb/2008-24_IRB/ar08. Income tax preparations html. Income tax preparations Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages from you during the calendar year. Income tax preparations   Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1 million. Income tax preparations If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39. Income tax preparations 6% (or the highest rate of income tax for the year). Income tax preparations Withhold using the 39. Income tax preparations 6% rate without regard to the employee's Form W-4. Income tax preparations In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. Income tax preparations For more information, see Treasury Decision 9276, 2006-37 I. Income tax preparations R. Income tax preparations B. Income tax preparations 423, available at www. Income tax preparations irs. Income tax preparations gov/irb/2006-37_IRB/ar09. Income tax preparations html. Income tax preparations Withholding on supplemental wage payments to an employee who does not receive $1 million of supplemental wages during the calendar year. Income tax preparations   If the supplemental wages paid to the employee during the calendar year are less than or equal to $1 million, the following rules apply in determining the amount of income tax to be withheld. Income tax preparations Supplemental wages combined with regular wages. Income tax preparations   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period. Income tax preparations Supplemental wages identified separately from regular wages. Income tax preparations   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. Income tax preparations If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. Income tax preparations Withhold a flat 25% (no other percentage allowed). Income tax preparations If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. Income tax preparations If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Income tax preparations Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Income tax preparations Subtract the tax withheld from the regular wages. Income tax preparations Withhold the remaining tax from the supplemental wages. Income tax preparations If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. Income tax preparations If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. Income tax preparations This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Income tax preparations Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes. Income tax preparations Example 1. Income tax preparations You pay John Peters a base salary on the 1st of each month. Income tax preparations He is single and claims one withholding allowance. Income tax preparations In January he is paid $1,000. Income tax preparations Using the wage bracket tables, you withhold $50 from this amount. Income tax preparations In February, he receives salary of $1,000 plus a commission of $2,000, which you combine with regular wages and do not separately identify. Income tax preparations You figure the withholding based on the total of $3,000. Income tax preparations The correct withholding from the tables is $338. Income tax preparations Example 2. Income tax preparations You pay Sharon Warren a base salary on the 1st of each month. Income tax preparations She is single and claims one allowance. Income tax preparations Her May 1 pay is $2,000. Income tax preparations Using the wage bracket tables, you withhold $188. Income tax preparations On May 14 she receives a bonus of $1,000. Income tax preparations Electing to use supplemental wage withholding method 1-b, you: Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 = $3,000). Income tax preparations Determine the amount of withholding on the combined $3,000 amount to be $338 using the wage bracket tables. Income tax preparations Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($338 – $188 = $150). Income tax preparations Withhold $150 from the bonus payment. Income tax preparations Example 3. Income tax preparations The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. Income tax preparations You withhold 25% of $1,000, or $250, from Sharon's bonus payment. Income tax preparations Example 4. Income tax preparations The facts are the same as in Example 2, except you elect to pay Sharon a second bonus of $2,000 on May 28. Income tax preparations Using supplemental wage withholding method 1-b, you: Add the first and second bonus amounts to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 + $2,000 = $5,000). Income tax preparations Determine the amount of withholding on the combined $5,000 amount to be $781 using the wage bracket tables. Income tax preparations Subtract the amounts withheld from wages on the most recent base salary pay date (May 1) and the amounts withheld from the first bonus payment from the combined withholding amount ($781 – $188 – $150 = $443). Income tax preparations Withhold $443 from the second bonus payment. Income tax preparations Tips treated as supplemental wages. Income tax preparations   Withhold income tax on tips from wages earned by the employee or from other funds the employee makes available. Income tax preparations If an employee receives regular wages and reports tips, figure income tax withholding as if the tips were supplemental wages. Income tax preparations If you have not withheld income tax from the regular wages, add the tips to the regular wages. Income tax preparations Then withhold income tax on the total. Income tax preparations If you withheld income tax from the regular wages, you can withhold on the tips by method 1-a or 1-b discussed earlier in this section under Supplemental wages identified separately from regular wages. Income tax preparations Vacation pay. Income tax preparations   Vacation pay is subject to withholding as if it were a regular wage payment. Income tax preparations When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. Income tax preparations If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. Income tax preparations 8. Income tax preparations Payroll Period Your payroll period is a period of service for which you usually pay wages. Income tax preparations When you have a regular payroll period, withhold income tax for that time period even if your employee does not work the full period. Income tax preparations No regular payroll period. Income tax preparations   When you do not have a regular payroll period, withhold the tax as if you paid wages for a daily or miscellaneous payroll period. Income tax preparations Figure the number of days (including Sundays and holidays) in the period covered by the wage payment. Income tax preparations If the wages are unrelated to a specific length of time (for example, commissions paid on completion of a sale), count back the number of days from the payment period to the latest of: The last wage payment made during the same calendar year, The date employment began, if during the same calendar year, or January 1 of the same year. Income tax preparations Employee paid for period less than 1 week. Income tax preparations   When you pay an employee for a period of less than one week, and the employee signs a statement under penalties of perjury indicating he or she is not working for any other employer during the same week for wages subject to withholding, figure withholding based on a weekly payroll period. Income tax preparations If the employee later begins to work for another employer for wages subject to withholding, the employee must notify you within 10 days. Income tax preparations You then figure withholding based on the daily or miscellaneous period. Income tax preparations 9. Income tax preparations Withholding From Employees' Wages Income Tax Withholding Using Form W-4 to figure withholding. Income tax preparations   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. Income tax preparations Encourage your employees to file an updated Form W-4 for 2014, especially if they owed taxes or received a large refund when filing their 2013 tax return. Income tax preparations Advise your employees to use the IRS Withholding Calculator on the IRS website at www. Income tax preparations irs. Income tax preparations gov/individuals for help in determining how many withholding allowances to claim on their Forms W-4. Income tax preparations   Ask all new employees to give you a signed Form W-4 when they start work. Income tax preparations Make the form effective with the first wage payment. Income tax preparations If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances. Income tax preparations Form in Spanish. Income tax preparations   You can provide Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, in place of Form W-4, to your Spanish-speaking employees. Income tax preparations For more information, see Publicación 17(SP), El Impuesto Federal sobre los Ingresos (Para Personas Físicas). Income tax preparations The rules discussed in this section that apply to Form W-4 also apply to Formulario W-4(SP). Income tax preparations Electronic system to receive Form W-4. Income tax preparations   You may establish a system to electronically receive Forms W-4 from your employees. Income tax preparations See Regulations section 31. Income tax preparations 3402(f)(5)-1(c) for more information. Income tax preparations Effective date of Form W-4. Income tax preparations   A Form W-4 remains in effect until the employee gives you a new one. Income tax preparations When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. Income tax preparations If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. Income tax preparations For exceptions, see Exemption from federal income tax withholding , IRS review of requested Forms W-4 , and Invalid Forms W-4 , later in this section. Income tax preparations A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. Income tax preparations Successor employer. Income tax preparations   If you are a successor employer (see Successor employer , later in this section), secure new Forms W-4 from the transferred employees unless the “Alternative Procedure” in section 5 of Revenue Procedure 2004-53 applies. Income tax preparations See Revenue Procedure 2004-53, 2004-34 I. Income tax preparations R. Income tax preparations B. Income tax preparations 320, available at www. Income tax preparations irs. Income tax preparations gov/irb/2004-34_IRB/ar13. Income tax preparations html. Income tax preparations Completing Form W-4. Income tax preparations   The amount of any federal income tax withholding must be based on marital status and withholding allowances. Income tax preparations Your employees may not base their withholding amounts on a fixed dollar amount or percentage. Income tax preparations However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4. Income tax preparations Employees may claim fewer withholding allowances than they are entitled to claim. Income tax preparations They may wish to claim fewer allowances to ensure they have enough withholding or to offset the tax on other sources of taxable income not subject to withholding. Income tax preparations See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. Income tax preparations Along with Form W-4, you may wish to order Publication 505 for use by your employees. Income tax preparations Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. Income tax preparations If they require additional withholding, they should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals, or by using the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. Income tax preparations Exemption from federal income tax withholding. Income tax preparations   Generally, an employee may claim exemption from federal income tax withholding because he or she had no income tax liability last year and expects none this year. Income tax preparations See the Form W-4 instructions for more information. Income tax preparations However, the wages are still subject to social security and Medicare taxes. Income tax preparations See also Invalid Forms W-4 , later in this section. Income tax preparations   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. Income tax preparations To continue to be exempt from withholding in the next calendar year, an employee must give you a new Form W-4 by February 15. Income tax preparations If the employee does not give you a new Form W-4 by February 15, begin withholding based on the last Form W-4 for the employee that did not claim an exemption from withholding or, if one was not filed, then withhold tax as if he or she is single with zero withholding allowances. Income tax preparations If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages but do not refund any taxes already withheld. Income tax preparations Withholding income taxes on the wages of nonresident alien employees. Income tax preparations   In general, you must withhold federal income taxes on the wages of nonresident alien employees. Income tax preparations However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. Income tax preparations Also see section 3 of Publication 51 (Circular A), Agricultural Employer's Tax Guide, for guidance on H-2A visa workers. Income tax preparations Withholding adjustment for nonresident alien employees. Income tax preparations   For 2014, apply the procedure discussed next to figure the amount of income tax to withhold from the wages of nonresident alien employees performing services within the United States. Income tax preparations Nonresident alien students from India and business apprentices from India are not subject to this procedure. Income tax preparations Instructions. Income tax preparations   To figure how much income tax to withhold from the wages paid to a nonresident alien employee performing services in the United States, use the following steps. Income tax preparations Step 1. Income tax preparations   Add to the wages paid to the nonresident alien employee for the payroll period the amount shown in the chart below for the applicable payroll period. Income tax preparations    Amount to Add to Nonresident Alien Employee's Wages for Calculating Income Tax Withholding Only   Payroll Period Add Additional     Weekly $ 43. Income tax preparations 30     Biweekly 86. Income tax preparations 50     Semimonthly 93. Income tax preparations 80     Monthly 187. Income tax preparations 50     Quarterly 562. Income tax preparations 50     Semiannually 1,125. Income tax preparations 00     Annually 2,250. Income tax preparations 00     Daily or Miscellaneous (each day of the payroll period) 8. Income tax preparations 70   Step 2. Income tax preparations   Use the amount figured in Step 1 and the number of withholding allowances claimed (generally limited to one allowance) to figure income tax withholding. Income tax preparations Determine the value of withholding allowances by multiplying the number of withholding allowances claimed by the appropriate amount from Table 5. Income tax preparations Percentage Method—2014 Amount for One Withholding Allowance shown on page 41. Income tax preparations If you are using the Percentage Method Tables for Income Tax Withholding, provided on pages 43–44, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure the income tax withholding. Income tax preparations If you are using the Wage Bracket Method for Income Tax Withholding, provided on pages 45–64, use the amount figured in Step 1 and the number of withholding allowances to figure income tax withholding. Income tax preparations The amounts from the chart above are added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee. Income tax preparations The amounts from the chart should not be included in any box on the employee's Form W-2 and do not increase the income tax liability of the employee. Income tax preparations Also, the amounts from the chart do not increase the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Income tax preparations This procedure only applies to nonresident alien employees who have wages subject to income tax withholding. Income tax preparations Example. Income tax preparations An employer using the percentage method of withholding pays wages of $500 for a biweekly payroll period to a married nonresident alien employee. Income tax preparations The nonresident alien has properly completed Form W-4, entering marital status as “single” with one withholding allowance and indicating status as a nonresident alien on Form W-4, line 6 (see Nonresident alien employee's Form W-4 , later in this section). Income tax preparations The employer determines the wages to be used in the withholding tables by adding to the $500 amount of wages paid the amount of $86. Income tax preparations 50 from the chart under Step 1 ($586. Income tax preparations 50 total). Income tax preparations The employer then applies the applicable tables to determine the income tax withholding for nonresident aliens (see Step 2 ). Income tax preparations Reminder: If you use the Percentage Method Tables for Income Tax Withholding, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure income tax withholding. Income tax preparations The $86. Income tax preparations 50 added to wages for calculating income tax withholding is not reported on Form W-2, and does not increase the income tax liability of the employee. Income tax preparations Also, the $86. Income tax preparations 50 added to wages does not affect the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Income tax preparations Supplemental wage payment. Income tax preparations   This procedure for determining the amount of income tax withholding does not apply to a supplemental wage payment (see section 7) if the 39. Income tax preparations 6% mandatory flat rate withholding applies or if the 25% optional flat rate withholding is being used to calculate income tax withholding on the supplemental wage payment. Income tax preparations Nonresident alien employee's Form W-4. Income tax preparations   When completing Forms W-4, nonresident aliens are required to: Not claim exemption from income tax withholding, Request withholding as if they are single, regardless of their actual marital status, Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or South Korea, or a student or business apprentice from India, he or she may claim more than one allowance), and Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4. Income tax preparations   If you maintain an electronic Form W-4 system, you should provide a field for nonresident aliens to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. Income tax preparations A nonresident alien employee may request additional withholding at his or her option for other purposes, although such additions should not be necessary for withholding to cover federal income tax liability related to employment. Income tax preparations Form 8233. Income tax preparations   If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty, instead of Form W-4. Income tax preparations See Publication 515 for details. Income tax preparations IRS review of requested Forms W-4. Income tax preparations   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. Income tax preparations You may also be directed to send certain Forms W-4 to the IRS. Income tax preparations You may receive a notice from the IRS requiring you to submit a copy of Form W-4 for one or more of your named employees. Income tax preparations Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. Income tax preparations The IRS may also require you to submit copies of Form W-4 to the IRS as directed by Treasury Decision 9337, 2007-35 I. Income tax preparations R. Income tax preparations B. Income tax preparations 455, which is available at www. Income tax preparations irs. Income tax preparations gov/irb/2007-35_IRB/ar10. Income tax preparations html. Income tax preparations When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. Income tax preparations After submitting a copy of a requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid (see Invalid Forms W-4 , later in this section). Income tax preparations However, if the IRS later notifies you in writing the employee is not entitled to claim exemption from withholding or a claimed number of withholding allowances, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the IRS notice (commonly referred to as a "lock-in letter
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The Income Tax Preparations

Income tax preparations Publication 542 - Main Content Table of Contents Businesses Taxed as CorporationsPersonal services. Income tax preparations Employee-owners. Income tax preparations Other rules. Income tax preparations Other rules. Income tax preparations Property Exchanged for StockNonqualified preferred stock. Income tax preparations Liabilities. Income tax preparations Election to reduce basis. Income tax preparations Capital Contributions Filing and Paying Income TaxesIncome Tax Return Penalties Estimated Tax U. Income tax preparations S. Income tax preparations Real Property Interest Accounting MethodsSection 481(a) adjustment. Income tax preparations Accounting Periods Recordkeeping Income, Deductions, and Special ProvisionsCosts of Going Into Business Related Persons Income From Qualifying Shipping Activities Election to Expense Qualified Refinery Property Deduction to Comply With EPA Sulfur Regulations Energy-Efficient Commercial Building Property Deduction Corporate Preference Items Dividends-Received Deduction Extraordinary Dividends Below-Market Loans Charitable Contributions Capital Losses Net Operating Losses At-Risk Limits Passive Activity Limits Figuring TaxTax Rate Schedule Alternative Minimum Tax (AMT) Credits Recapture Taxes Accumulated Earnings Tax Distributions to ShareholdersMoney or Property Distributions Distributions of Stock or Stock Rights Constructive Distributions Reporting Dividends and Other Distributions How To Get Tax Help Businesses Taxed as Corporations The rules you must use to determine whether a business is taxed as a corporation changed for businesses formed after 1996. Income tax preparations Business formed before 1997. Income tax preparations   A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as a corporation. Income tax preparations Business formed after 1996. Income tax preparations   The following businesses formed after 1996 are taxed as corporations. Income tax preparations A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic. Income tax preparations A business formed under a state law that refers to it as a joint-stock company or joint-stock association. Income tax preparations An insurance company. Income tax preparations Certain banks. Income tax preparations A business wholly owned by a state or local government. Income tax preparations A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Income tax preparations Certain foreign businesses. Income tax preparations Any other business that elects to be taxed as a corporation. Income tax preparations For example, a limited liability company (LLC) can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. Income tax preparations For more information about LLCs, see Publication 3402, Taxation of Limited Liability Companies. Income tax preparations S corporations. Income tax preparations   Some corporations may meet the qualifications for electing to be S corporations. Income tax preparations For information on S corporations, see the instructions for Form 1120S, U. Income tax preparations S. Income tax preparations Income Tax Return for an S Corporation. Income tax preparations Personal service corporations. Income tax preparations   A corporation is a personal service corporation if it meets all of the following requirements. Income tax preparations Its principal activity during the “testing period” is performing personal services (defined later). Income tax preparations Generally, the testing period for any tax year is the prior tax year. Income tax preparations If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: The last day of its tax year, or The last day of the calendar year in which its tax year begins. Income tax preparations Its employee-owners substantially perform the services in (1), above. Income tax preparations This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners. Income tax preparations Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period. Income tax preparations Personal services. Income tax preparations   Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. Income tax preparations Employee-owners. Income tax preparations   A person is an employee-owner of a personal service corporation if both of the following apply. Income tax preparations He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he or she is an independent contractor for other purposes) on any day of the testing period. Income tax preparations He or she owns any stock in the corporation at any time during the testing period. Income tax preparations Other rules. Income tax preparations   For other rules that apply to personal service corporations see Accounting Periods, later. Income tax preparations Closely held corporations. Income tax preparations   A corporation is closely held if all of the following apply. Income tax preparations It is not a personal service corporation. Income tax preparations At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is, directly or indirectly, owned by or for five or fewer individuals. Income tax preparations “Individual” includes certain trusts and private foundations. Income tax preparations Other rules. Income tax preparations   For the at-risk rules that apply to closely held corporations, seeAt-Risk Limits, later. Income tax preparations Property Exchanged for Stock If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. Income tax preparations This rule applies both to individuals and to groups who transfer property to a corporation. Income tax preparations It also applies whether the corporation is being formed or is already operating. Income tax preparations It does not apply in the following situations. Income tax preparations The corporation is an investment company. Income tax preparations You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors. Income tax preparations The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt. Income tax preparations Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange. Income tax preparations For more information, see section 1. Income tax preparations 351-3 of the Regulations. Income tax preparations Control of a corporation. Income tax preparations   To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock. Income tax preparations Example 1. Income tax preparations You and Bill Jones buy property for $100,000. Income tax preparations You both organize a corporation when the property has a fair market value of $300,000. Income tax preparations You transfer the property to the corporation for all its authorized capital stock, which has a par value of $300,000. Income tax preparations No gain is recognized by you, Bill, or the corporation. Income tax preparations Example 2. Income tax preparations You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value of $300,000. Income tax preparations This represents only 75% of each class of stock of the corporation. Income tax preparations The other 25% was already issued to someone else. Income tax preparations You and Bill recognize a taxable gain of $200,000 on the transaction. Income tax preparations Services rendered. Income tax preparations   The term property does not include services rendered or to be rendered to the issuing corporation. Income tax preparations The value of stock received for services is income to the recipient. Income tax preparations Example. Income tax preparations You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. Income tax preparations Right after the exchange, you own 85% of the outstanding stock. Income tax preparations No gain is recognized on the exchange of property. Income tax preparations However, you recognize ordinary income of $3,000 as payment for services you rendered to the corporation. Income tax preparations Property of relatively small value. Income tax preparations   The term property does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors. Income tax preparations   Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor. Income tax preparations Stock received in disproportion to property transferred. Income tax preparations   If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in proportion to his or her interest in the property transferred. Income tax preparations If a disproportionate transfer takes place, it will be treated for tax purposes in accordance with its true nature. Income tax preparations It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations. Income tax preparations Money or other property received. Income tax preparations   If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other than stock, you may have to recognize gain. Income tax preparations You must recognize gain only up to the amount of money plus the fair market value of the other property you receive. Income tax preparations The rules for figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed in Publication 544 under Like-Kind Exchanges. Income tax preparations If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary income from depreciation. Income tax preparations See chapter 3 of Publication 544. Income tax preparations No loss is recognized. Income tax preparations Nonqualified preferred stock. Income tax preparations   Nonqualified preferred stock is treated as property other than stock. Income tax preparations Generally, it is preferred stock with any of the following features. Income tax preparations The holder has the right to require the issuer or a related person to redeem or buy the stock. Income tax preparations The issuer or a related person is required to redeem or buy the stock. Income tax preparations The issuer or a related person has the right to redeem or buy the stock and, on the issue date, it is more likely than not that the right will be exercised. Income tax preparations The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices. Income tax preparations For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code. Income tax preparations Liabilities. Income tax preparations   If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. Income tax preparations There are two exceptions to this treatment. Income tax preparations If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized up to the difference. Income tax preparations However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized. Income tax preparations If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange is to avoid federal income tax, the assumption is treated as if you received money in the amount of the liabilities. Income tax preparations For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. Income tax preparations Example. Income tax preparations You transfer property to a corporation for stock. Income tax preparations Immediately after the transfer, you control the corporation. Income tax preparations You also receive $10,000 in the exchange. Income tax preparations Your adjusted basis in the transferred property is $20,000. Income tax preparations The stock you receive has a fair market value (FMV) of $16,000. Income tax preparations The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. Income tax preparations Gain is realized as follows. Income tax preparations FMV of stock received $16,000 Cash received 10,000 Liability assumed by corporation 5,000 Total received $31,000 Minus: Adjusted basis of property transferred 20,000 Realized gain $11,000   The liability assumed is not treated as money or other property. Income tax preparations The recognized gain is limited to $10,000, the cash received. Income tax preparations Loss on exchange. Income tax preparations   If you have a loss from an exchange and own, directly or indirectly, more than 50% of the corporation's stock, you cannot deduct the loss. Income tax preparations For more information, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Income tax preparations Basis of stock or other property received. Income tax preparations   The basis of the stock you receive is generally the adjusted basis of the property you transfer. Income tax preparations Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Income tax preparations Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Income tax preparations Also decrease this amount by the amount of any liability the corporation or another party to the exchange assumed from you, unless payment of the liability gives rise to a deduction when paid. Income tax preparations    Further decreases may be required when the corporation or another party to the exchange assumes from you a liability that gives rise to a deduction when paid, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange. Income tax preparations This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or the trade or business with which the liability is associated. Income tax preparations The basis of any other property you receive is its fair market value on the date of the trade. Income tax preparations Basis of property transferred. Income tax preparations   A corporation that receives property from you in exchange for its stock generally has the same basis you had in the property, increased by any gain you recognized on the exchange. Income tax preparations However, the increase for the gain recognized may be limited. Income tax preparations For more information, see section 362 of the Internal Revenue Code. Income tax preparations Election to reduce basis. Income tax preparations   In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market value, the transferor and transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal to the fair market value of the property transferred. Income tax preparations The transferor and transferee make this election by attaching a statement to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. Income tax preparations However, if the transferor makes the election by including the certification provided in Notice 2005-70, 2005-41, I. Income tax preparations R. Income tax preparations B. Income tax preparations 694, on or with its tax return filed by the due date (including extensions), then no election need be made by the transferee. Income tax preparations    For more information on making this election, see section 362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70. Income tax preparations Capital Contributions This section explains the tax treatment of contributions from shareholders and nonshareholders. Income tax preparations Paid-in capital. Income tax preparations   Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. Income tax preparations These contributions are not taxable to the corporation. Income tax preparations Basis. Income tax preparations   The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. Income tax preparations However, the increase for the gain recognized may be limited. Income tax preparations For more information, see Basis of property transferred, above, and section 362 of the Internal Revenue Code. Income tax preparations   The basis of property contributed to capital by a person other than a shareholder is zero. Income tax preparations   If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce the basis of any property acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount of the contribution. Income tax preparations If the amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other properties held by the corporation on the last day of the 12-month period in the following order. Income tax preparations Depreciable property. Income tax preparations Amortizable property. Income tax preparations Property subject to cost depletion but not to percentage depletion. Income tax preparations All other remaining properties. Income tax preparations   Reduce the basis of property in each category to zero before going on to the next category. Income tax preparations   There may be more than one piece of property in each category. Income tax preparations Base the reduction of the basis of each property on the following ratio:   Basis of each piece of property   Bases of all properties (within that category) If the corporation wishes to make this adjustment in some other way, it must get IRS approval. Income tax preparations The corporation files a request for approval with its income tax return for the tax year in which it receives the contribution. Income tax preparations Filing and Paying Income Taxes The federal income tax is a pay-as-you-go tax. Income tax preparations A corporation generally must make estimated tax payments as it earns or receives income during its tax year. Income tax preparations After the end of the year, the corporation must file an income tax return. Income tax preparations This section will help you determine when and how to pay and file corporate income taxes. Income tax preparations For certain corporations affected by Presidentially declared disasters such as hurricanes, the due dates for filing returns, paying taxes, and performing other time-sensitive acts may be extended. Income tax preparations The IRS may also forgive the interest and penalties on any underpaid tax for the length of any extension. Income tax preparations For more information, visit www. Income tax preparations irs. Income tax preparations gov/newsroom/article/0,,id=108362. Income tax preparations 00. Income tax preparations Income Tax Return This section will help you determine when and how to report a corporation's income tax. Income tax preparations Who must file. Income tax preparations   Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a tax year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. Income tax preparations Which form to file. Income tax preparations   A corporation generally must file Form 1120, U. Income tax preparations S. Income tax preparations Corporation Income Tax Return, to report its income, gains, losses, deductions, credits, and to figure its income tax liability. Income tax preparations Certain organizations and entities must file special returns. Income tax preparations For more information, see Special Returns for Certain Organizations, in the Instructions for Form 1120. Income tax preparations Electronic filing. Income tax preparations   Corporations can generally electronically file (e-file) Form 1120 and certain related forms, schedules, and attachments. Income tax preparations Certain corporations with total assets of $10 million or more, that file at least 250 returns a year must e-file Form 1120. Income tax preparations However, in certain instances, these corporations can request a waiver. Income tax preparations For more information regarding electronic filing, visit www. Income tax preparations irs. Income tax preparations gov/efile. Income tax preparations When to file. Income tax preparations   Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. Income tax preparations A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. Income tax preparations A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved. Income tax preparations Example 1. Income tax preparations A corporation's tax year ends December 31. Income tax preparations It must file its income tax return by March 15th. Income tax preparations Example 2. Income tax preparations A corporation's tax year ends June 30. Income tax preparations It must file its income tax return by September 15th. Income tax preparations   If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. Income tax preparations Extension of time to file. Income tax preparations   File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, to request an extension of time to file a corporation income tax return. Income tax preparations The IRS will grant the extension if you complete the form properly, file it, and pay any tax due by the original due date for the return. Income tax preparations   Form 7004 does not extend the time for paying the tax due on the return. Income tax preparations Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. Income tax preparations The interest is figured from the original due date of the return to the date of payment. Income tax preparations   For more information, see the instructions for Form 7004. Income tax preparations How to pay your taxes. Income tax preparations   A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year. Income tax preparations Electronic Federal Tax Payment System (EFTPS). Income tax preparations   Corporations generally must use EFTPS to make deposits of all tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes). Income tax preparations For more information on EFTPS and enrollment, visit www. Income tax preparations eftps. Income tax preparations gov or call 1-800-555-4477. Income tax preparations Also see Publication 966, The Secure Way to Pay Your Federal Taxes. Income tax preparations Note. Income tax preparations Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used to make federal tax deposits. Income tax preparations Penalties Generally, if the corporation receives a notice about interest and penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. Income tax preparations Do not attach an explanation when the corporation's return is filed. Income tax preparations See the instructions for your income tax return. Income tax preparations Late filing of return. Income tax preparations    A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. Income tax preparations If the corporation is charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. Income tax preparations The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. Income tax preparations The penalty will not be imposed if the corporation can show the failure to file on time was due to a reasonable cause. Income tax preparations Late payment of tax. Income tax preparations    A corporation that does not pay the tax when due may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. Income tax preparations The penalty will not be imposed if the corporation can show that the failure to pay on time was due to a reasonable cause. Income tax preparations Trust fund recovery penalty. Income tax preparations   If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Income tax preparations The penalty is the full amount of the unpaid trust fund tax. Income tax preparations This penalty may apply to you if these unpaid taxes cannot be immediately collected from the business. Income tax preparations   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying these taxes, and who acted willfully in not doing so. Income tax preparations   A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee. Income tax preparations A responsible person also may include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds. Income tax preparations   Willfully means voluntarily, consciously, and intentionally. Income tax preparations A responsible person acts willfully if the person knows the required actions are not taking place. Income tax preparations   For more information on withholding and paying these taxes, see Publication 15 (Circular E), Employer's Tax Guide, and Publication 51, (Circular A), Agricultural Employer's Tax Guide. Income tax preparations Other penalties. Income tax preparations   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. Income tax preparations See sections 6662, 6662A, and 6663 of the Internal Revenue Code. Income tax preparations Estimated Tax Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. Income tax preparations If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. Income tax preparations This section will explain how to avoid this penalty. Income tax preparations When to pay estimated tax. Income tax preparations   Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. Income tax preparations Example 1. Income tax preparations Your corporation's tax year ends December 31. Income tax preparations Installment payments are due on April 15, June 15, September 15, and December 15. Income tax preparations Example 2. Income tax preparations Your corporation's tax year ends June 30. Income tax preparations Installment payments are due on October 15, December 15, March 15, and June 15. Income tax preparations   If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day. Income tax preparations How to figure each required installment. Income tax preparations   Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure each required installment of estimated tax. Income tax preparations You will generally use one of the following two methods to figure each required installment. Income tax preparations You should use the method that yields the smallest installment payments. Income tax preparations Note. Income tax preparations In these discussions, “return” generally refers to the corporation's original return. Income tax preparations However, an amended return is considered the original return if it is filed by the due date (including extensions) of the original return. Income tax preparations Method 1. Income tax preparations   Each required installment is 25% of the income tax the corporation will show on its return for the current year. Income tax preparations Method 2. Income tax preparations   Each required installment is 25% of the income tax shown on the corporation's return for the previous year. Income tax preparations   To use Method 2: The corporation must have filed a return for the previous year, The return must have been for a full 12 months, and The return must have shown a positive tax liability (not zero). Income tax preparations Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only. Income tax preparations   See the Instructions for Form 1120-W, for the definition of a large corporation and other special rules for large corporations. Income tax preparations Other methods. Income tax preparations   If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may be able to lower the amount of one or more required installments by using one or both of the following methods. Income tax preparations The annualized income installment method. Income tax preparations The adjusted seasonal installment method. Income tax preparations Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any required installments. Income tax preparations Refiguring required installments. Income tax preparations   If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will be more or less than originally estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. Income tax preparations An immediate catchup payment should be made to reduce any penalty resulting from the underpayment of any earlier installments. Income tax preparations Underpayment penalty. Income tax preparations   If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. Income tax preparations The penalty is figured separately for each installment due date. Income tax preparations The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. Income tax preparations This is true even if the corporation is due a refund when its return is filed. Income tax preparations Form 2220. Income tax preparations   Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and to figure the amount of the penalty. Income tax preparations   If the corporation is charged a penalty, the amount of the penalty depends on the following three factors. Income tax preparations The amount of the underpayment. Income tax preparations The period during which the underpayment was due and unpaid. Income tax preparations The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin. Income tax preparations   A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any penalty and bill the corporation. Income tax preparations However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax return if any of the following apply. Income tax preparations The annualized income installment method was used to figure any required installment. Income tax preparations The adjusted seasonal installment method was used to figure any required installment. Income tax preparations The corporation is a large corporation figuring its first required installment based on the prior year's tax. Income tax preparations How to pay estimated tax. Income tax preparations   A corporation is generally required to use EFTPS to pay its taxes. Income tax preparations See Electronic Federal Tax Payment System (EFTPS), earlier. Income tax preparations Also see the Instructions for Form 1120-W. Income tax preparations Quick refund of overpayments. Income tax preparations   A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Income tax preparations Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to apply for a quick refund of an overpayment of estimated tax. Income tax preparations A corporation can apply for a quick refund if the overpayment is: At least 10% of its expected tax liability, and At least $500. Income tax preparations Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax. Income tax preparations File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income tax return. Income tax preparations Do not file Form 4466 before the end of the corporation's tax year. Income tax preparations An extension of time to file the corporation's income tax return will not extend the time for filing Form 4466. Income tax preparations The IRS will act on the form within 45 days from the date you file it. Income tax preparations U. Income tax preparations S. Income tax preparations Real Property Interest If a domestic corporation acquires a U. Income tax preparations S. Income tax preparations real property interest from a foreign person or firm, the corporation may have to withhold tax on the amount it pays for the property. Income tax preparations The amount paid includes cash, the fair market value of other property, and any assumed liability. Income tax preparations If a domestic corporation distributes a U. Income tax preparations S. Income tax preparations real property interest to a foreign person or firm, it may have to withhold tax on the fair market value of the property. Income tax preparations A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. Income tax preparations For more information, see section 1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288, U. Income tax preparations S. Income tax preparations Withholding Tax Return for Dispositions by Foreign Persons of U. Income tax preparations S. Income tax preparations Real Property Interests; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U. Income tax preparations S. Income tax preparations Real Property Interests. Income tax preparations Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Income tax preparations Taxable income should be determined using the method of accounting regularly used in keeping the corporation's books and records. Income tax preparations In all cases, the method used must clearly show taxable income. Income tax preparations Generally, permissible methods include: Cash, Accrual, or Any other method authorized by the Internal Revenue Code. Income tax preparations Accrual method. Income tax preparations   Generally, a corporation (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. Income tax preparations A corporation engaged in farming operations also must use the accrual method. Income tax preparations   If inventories are required, the accrual method generally must be used for sales and purchases of merchandise. Income tax preparations However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method for eligible trades or businesses and may account for inventoriable items as materials and supplies that are not incidental. Income tax preparations   Under the accrual method, an amount is includable in income when: All the events have occurred that fix the right to receive the income, which is the earliest of the date: The required performance takes place, Payment is due, or Payment is received; and The amount can be determined with reasonable accuracy. Income tax preparations   Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when: All events that determine the liability have occurred, The amount of the liability can be figured with reasonable accuracy, and Economic performance takes place with respect to the expense. Income tax preparations   There are exceptions to the economic performance rule for certain items, including recurring expenses. Income tax preparations See section 461(h) of the Internal Revenue Code and the related regulations for the rules for determining when economic performance takes place. Income tax preparations Nonaccrual experience method. Income tax preparations   Accrual method corporations are not required to maintain accruals for certain amounts from the performance of services that, on the basis of their experience, will not be collected, if: The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; or The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million. Income tax preparations   This provision does not apply if interest is required to be paid on the amount or if there is any penalty for failure to pay the amount timely. Income tax preparations Percentage of completion method. Income tax preparations   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460 of the Internal Revenue Code. Income tax preparations Mark-to-market accounting method. Income tax preparations   Generally, dealers in securities must use the mark-to-market accounting method described in section 475 of the Internal Revenue Code. Income tax preparations Under this method any security held by a dealer as inventory must be included in inventory at its FMV. Income tax preparations Any security not held as inventory at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Income tax preparations Any gain or loss must be taken into account in determining gross income. Income tax preparations The gain or loss taken into account is treated as ordinary gain or loss. Income tax preparations   Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. Income tax preparations Change in accounting method. Income tax preparations   A corporation can change its method of accounting used to report taxable income (for income as a whole or for the treatment of any material item). Income tax preparations The corporation must file Form 3115, Application for Change in Accounting Method. Income tax preparations For more information, see Form 3115 and Publication 538. Income tax preparations Section 481(a) adjustment. Income tax preparations   The corporation may have to make an adjustment under section 481(a) of the Internal Revenue Code to prevent amounts of income or expense from being duplicated or omitted. Income tax preparations The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. Income tax preparations However, a corporation can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. Income tax preparations The corporation must complete the appropriate lines of Form 3115 to make the election. Income tax preparations See the Instructions for Form 3115. Income tax preparations Accounting Periods A corporation must figure its taxable income on the basis of a tax year. Income tax preparations A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Income tax preparations Generally, corporations can use either a calendar year or a fiscal year as its tax year. Income tax preparations Unless special rules apply, a corporation generally adopts a tax year by filing its first federal income tax return using that tax year. Income tax preparations For more information, see Publication 538. Income tax preparations Personal service corporation. Income tax preparations   A personal service corporation must use a calendar year as its tax year unless: It elects to use a 52–53 week tax year that ends with reference to the calendar year; It can establish a business purpose for a different tax year and obtains approval of the IRS. Income tax preparations See Form 1128, Application To Adopt, Change, or Retain a Tax Year, and Publication 538; or It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. Income tax preparations Use Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, to make the election. Income tax preparations   If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners may be limited. Income tax preparations See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction. Income tax preparations Change of tax year. Income tax preparations   Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. Income tax preparations However, under certain conditions, a corporation can change its tax year without getting the consent. Income tax preparations For more information, see Form 1128 and Publication 538. Income tax preparations Recordkeeping A corporation should keep its records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Income tax preparations Usually records that support items of income, deductions, or credits on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Income tax preparations Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property. Income tax preparations The corporation should keep copies of all filed returns. Income tax preparations They help in preparing future and amended returns and in the calculation of earnings and profits. Income tax preparations Income, Deductions, and Special Provisions Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. Income tax preparations However, the following special provisions apply only to corporations. Income tax preparations Costs of Going Into Business When you go into business, treat all costs you incur to get your business started as capital expenses. Income tax preparations However, a corporation can elect to deduct a limited amount of start-up or organizational costs. Income tax preparations Any costs not deducted can be amortized. Income tax preparations Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Income tax preparations Organizational costs are the direct costs of creating the corporation. Income tax preparations For more information on deducting or amortizing start-up and organizational costs, see the instructions for your income tax return. Income tax preparations Also see, Publication 535, chapter 7, Costs You Can Deduct or Capitalize, and chapter 8, Amortization. Income tax preparations Related Persons A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income. Income tax preparations Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Income tax preparations If a deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the expense or interest is includible in the gross income of that person. Income tax preparations These rules also deny the deduction of losses on the sale or exchange of property between related persons. Income tax preparations Related persons. Income tax preparations   For purposes of this rule, the following persons are related to a corporation. Income tax preparations Another corporation, that is a member of the same controlled group (as defined in section 267(f) of the Internal Revenue Code). Income tax preparations An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Income tax preparations A trust fiduciary, when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Income tax preparations An S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Income tax preparations A partnership, if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Income tax preparations Any employee-owner, if the corporation is a personal service corporation (see Personal service corporation, earlier), regardless of the amount of stock owned by the employee-owner. Income tax preparations Ownership of stock. Income tax preparations   To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following apply. Income tax preparations Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries. Income tax preparations An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. Income tax preparations Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants. Income tax preparations Any individual owning (other than by applying (2), above) stock in a corporation, is treated as also owning the stock owned directly or indirectly by that individual's partner. Income tax preparations To apply (1), (2), or (3), above, stock constructively owned by a person under (1) is treated as actually owned by that person. Income tax preparations But stock constructively owned by an individual under (2) or (3) is not treated as actually owned by the individual for applying either (2) or (3) to make another person the constructive owner of that stock. Income tax preparations Reallocation of income and deductions. Income tax preparations   Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions, credits, or allowances between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests. Income tax preparations Complete liquidations. Income tax preparations   The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating distributions. Income tax preparations More information. Income tax preparations   For more information about the related person rules, see Publication 544. Income tax preparations Income From Qualifying Shipping Activities A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. Income tax preparations If a corporation makes this election it may exclude income from qualifying shipping activities from gross income. Income tax preparations Also if the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. Income tax preparations A corporation making this election may also elect to defer gain on the disposition of a qualifying vessel. Income tax preparations A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative tax. Income tax preparations For more information regarding the election, see Form 8902. Income tax preparations Election to Expense Qualified Refinery Property A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50% of the cost of qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed in service before January 1, 2014. Income tax preparations The deduction is allowed for the year in which the property is placed in service. Income tax preparations A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate this deduction to its owners based on their ownership interest. Income tax preparations For more information, see section 179C of the Internal Revenue Code and the related Regulations. Income tax preparations Deduction to Comply With EPA Sulfur Regulations A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct up to 75% of qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency (EPA). Income tax preparations A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to allocate the deduction to its owners based on their ownership interest. Income tax preparations For more information, see sections 45H and 179B of the Internal Revenue Code and the related Regulations. Income tax preparations Energy-Efficient Commercial Building Property Deduction A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service before January 1, 2014. Income tax preparations In order to qualify for the deduction: The costs must be associated with depreciable or amortizable property in a Standard 90. Income tax preparations 1-2001 domestic building; The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system, or the building envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50% or more. Income tax preparations The deduction is limited to $1. Income tax preparations 80 per square foot of the building less the total amount of deductions taken for this property in prior tax years. Income tax preparations Other rules and limitations apply. Income tax preparations The corporation must reduce the basis of any property by any deduction taken. Income tax preparations The deduction is subject to recapture if the corporation fails to fully implement an energy savings plan. Income tax preparations For more information, see section 179D of the Internal Revenue Code. Income tax preparations Also see Notice 2006-52, 2006-26 I. Income tax preparations R. Income tax preparations B. Income tax preparations 1175, clarified and amplified by Notice 2008-40, 2008-14 I. Income tax preparations R. Income tax preparations B. Income tax preparations 725, and any successor. Income tax preparations Corporate Preference Items A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. Income tax preparations These items are known as corporate preference items and they include the following. Income tax preparations Gain on the disposition of section 1250 property. Income tax preparations For more information, see section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Income tax preparations Percentage depletion for iron ore and coal (including lignite). Income tax preparations For more information, see Mines and Geothermal Deposits under Mineral Property in chapter 9 of Publication 535. Income tax preparations Amortization of pollution control facilities. Income tax preparations For more information, see Pollution Control Facilities in chapter 8 of Publication 535 and section 291(a)(5) of the Internal Revenue Code. Income tax preparations Mineral exploration and development costs. Income tax preparations For more information, see Exploration Costs and Development Costs in chapter 7 of Publication 535. Income tax preparations For more information on corporate preference items, see section 291 of the Internal Revenue Code. Income tax preparations Dividends-Received Deduction A corporation can deduct a percentage of certain dividends received during its tax year. Income tax preparations This section discusses the general rules that apply. Income tax preparations The deduction is figured on Form 1120, Schedule C, or the applicable schedule of your income tax return. Income tax preparations For more information, see the Instructions for Form 1120, or the instructions for your applicable income tax return. Income tax preparations Dividends from domestic corporations. Income tax preparations   A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. Income tax preparations If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 80% of the dividends received. Income tax preparations Ownership. Income tax preparations   Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other than certain preferred stock) the receiving corporation owns. Income tax preparations Small business investment companies. Income tax preparations   Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations. Income tax preparations Dividends from regulated investment companies. Income tax preparations   Regulated investment company dividends received are subject to certain limits. Income tax preparations Capital gain dividends received from a regulated investment company do not qualify for the deduction. Income tax preparations For more information, see section 854 of the Internal Revenue Code. Income tax preparations No deduction allowed for certain dividends. Income tax preparations   Corporations cannot take a deduction for dividends received from the following entities. Income tax preparations A real estate investment trust (REIT). Income tax preparations A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution or the preceding tax year. Income tax preparations A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend with respect to the dividend. Income tax preparations Ex-dividend means the holder has no rights to the dividend. Income tax preparations A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock became ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 366 days. Income tax preparations Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Income tax preparations Dividends on deposits. Income tax preparations   Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative banks, and similar organizations are interest, not dividends. Income tax preparations They do not qualify for this deduction. Income tax preparations Limit on deduction for dividends. Income tax preparations   The total deduction for dividends received or accrued is generally limited (in the following order) to: 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20%-owned corporations, then 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations). Income tax preparations Figuring the limit. Income tax preparations   In figuring the limit, determine taxable income without the following items. Income tax preparations The net operating loss deduction. Income tax preparations The domestic production activities deduction. Income tax preparations The deduction for dividends received. Income tax preparations Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below). Income tax preparations Any capital loss carryback to the tax year. Income tax preparations Effect of net operating loss. Income tax preparations   If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not apply. Income tax preparations To determine whether a corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit. Income tax preparations Example 1. Income tax preparations A corporation loses $25,000 from operations. Income tax preparations It receives $100,000 in dividends from a 20%-owned corporation. Income tax preparations Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. Income tax preparations If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Income tax preparations Therefore, the 80% of taxable income limit does not apply. Income tax preparations The corporation can deduct the full $80,000. Income tax preparations Example 2. Income tax preparations Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. Income tax preparations Its taxable income is $85,000 before the deduction for dividends received. Income tax preparations After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable income is $5,000. Income tax preparations Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received deduction is limited to 80% of its taxable income, or $68,000 ($85,000 × 80%). Income tax preparations Extraordinary Dividends If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it generally must reduce its basis in the stock by the nontaxed part of the dividend. Income tax preparations The nontaxed part is any dividends-received deduction allowable for the dividends. Income tax preparations Extraordinary dividend. Income tax preparations   An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's adjusted basis in the stock. Income tax preparations The percentages are: 5% for stock preferred as to dividends, or 10% for other stock. Income tax preparations Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. Income tax preparations Treat all dividends received that have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds 20% of the corporation's adjusted basis in the stock. Income tax preparations Disqualified preferred stock. Income tax preparations   Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time the corporation held the stock. Income tax preparations   Disqualified preferred stock is any stock preferred as to dividends if any of the following apply. Income tax preparations The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future. Income tax preparations The issue price of the stock exceeds its liquidation rights or stated redemption price. Income tax preparations The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce tax through a combination of dividends-received deductions and loss on the disposition of the stock. Income tax preparations   These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect on that date, and thereafter, before the issuance of the stock. Income tax preparations More information. Income tax preparations   For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code. Income tax preparations Below-Market Loans If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest. Income tax preparations A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Income tax preparations A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following: A loan in exchange for a note that requires payment of interest at the applicable federal rate, and An additional payment in an amount equal to the forgone interest. Income tax preparations Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Income tax preparations Foregone interest. Income tax preparations   For any period, forgone interest is equal to: The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Income tax preparations See Below-market loans, in chapter 4 of Publication 535 for more information. Income tax preparations Charitable Contributions A corporation can claim a limited deduction for charitable contributions made in cash or other property. Income tax preparations The contribution is deductible if made to, or for the use of, a qualified organization. Income tax preparations For more information on qualified organizations, see Publication 526, Charitable Contributions. Income tax preparations Also see, Exempt Organizations Select Check (EO Select Check) at www. Income tax preparations irs. Income tax preparations gov/charities, the on-line search tool for finding information on organizations eligible to receive tax-deductible contributions. Income tax preparations Note. Income tax preparations You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual. Income tax preparations Cash method corporation. Income tax preparations   A corporation using the cash method of accounting deducts contributions in the tax year paid. Income tax preparations Accrual method corporation. Income tax preparations   A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Income tax preparations Make the choice by reporting the contribution on the corporation's return for the tax year. Income tax preparations A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. Income tax preparations The declaration must include the date the resolution was adopted. Income tax preparations Limitations on deduction. Income tax preparations   A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Income tax preparations Figure taxable income for this purpose without the following. Income tax preparations The deduction for charitable contributions. Income tax preparations The dividends-received deduction. Income tax preparations The deduction allowed under section 249 of the Internal Revenue Code. Income tax preparations The domestic production activities deduction. Income tax preparations Any net operating loss carryback to the tax year. Income tax preparations Any capital loss carryback to the tax year. Income tax preparations Farmers and ranchers. Income tax preparations    Corporations that are farmers and ranchers should see section 170(b)(2) of the Internal Revenue Code for special rules that may affect the deduction limit. Income tax preparations Carryover of excess contributions. Income tax preparations   You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. Income tax preparations You lose any excess not used within that period. Income tax preparations For example, if a corporation has a carryover of excess contributions paid in 2010 and it does not use all the excess on its return for 2011, it can carry any excess over to 2012, 2013, 2014, and 2015, if applicable. Income tax preparations Any excess not used in 2015 is lost. Income tax preparations Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). Income tax preparations You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover. Income tax preparations Cash contributions. Income tax preparations   A corporation must maintain a record of any contribution of cash, check, or other monetary contribution, regardless of the amount. Income tax preparations The record can be a bank record, receipt, letter, or other written communication from the donee indicating the name of the organization, the date of the contribution, and the amount of the contribution. Income tax preparations Keep the record of the contribution with the other corporate records. Income tax preparations Do not attach the records to the corporation's return. Income tax preparations For more information on cash contributions, see Publication 526. Income tax preparations Gifts of $250 or more. Income tax preparations   Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. Income tax preparations The acknowledgement should show the amount of cash contributed, a description of the property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. Income tax preparations The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. Income tax preparations Keep the acknowledgement with other corporate records. Income tax preparations Do not attach the acknowledgement to the return. Income tax preparations Contributions of property other than cash. Income tax preparations   If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. Income tax preparations In addition the corporation should keep a record of: The approximate date and manner of acquisition of the donated property and The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution. Income tax preparations   Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. Income tax preparations For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return. Income tax preparations   A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. Income tax preparations A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. Income tax preparations The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work. Income tax preparations   See Form 8283 for more information. Income tax preparations Qualified conservation contributions. Income tax preparations   If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. Income tax preparations For more information, see section 170(h) of the Internal Revenue Code. Income tax preparations Contributions of used vehicles. Income tax preparations   A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. Income tax preparations The deduction is limited, and other special rules apply. Income tax preparations For more information, see Publication 526. Income tax preparations Reduction for contributions of certain property. Income tax preparations   For a charitable contribution of property, the corporation must reduce the contribution by the sum of: The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV. Income tax preparations   The reduction for the long-term capital gain applies to: Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption; Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property. Income tax preparations Larger deduction. Income tax preparations   A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. Income tax preparations This deduction may be allowed for certain contributions of: Certain inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants. Income tax preparations Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. Income tax preparations The property must be donated to a qualified organization and its original use must be by the donee for research, experimentation, or research training within the United States in the area of physical or biological science. Income tax preparations Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial completion of construction to an educational organization for educational purposes within the United States. Income tax preparations Contributions to organizations conducting lobbying activities. Income tax preparations   Contributions made to an organization that conducts lobbying activities are not deductible if: The lobbying activities relate to matters of direct financial interest to the donor's trade or business and The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor. Income tax preparations More information. Income tax preparations   For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 of the Internal Revenue Code, the related regulations, and Publication 526. Income tax preparations Capital Losses A corporation can deduct capital losses only up to the amount of its capital gains. Income tax preparations In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Income tax preparations Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years. Income tax preparations A capital loss is carried to other years in the following order. Income tax preparations 3 years prior to the loss year. Income tax preparations 2 years prior to the loss year. Income tax preparations 1 year prior to the loss year. Income tax preparations Any loss remaining is carried forward for 5 years. Income tax preparations When you carry a net capital loss to another tax year, treat it as a short-term loss. Income tax preparations It does not retain its original identity as long term or short term. Income tax preparations Example. Income tax preparations A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. Income tax preparations The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. Income tax preparations The corporation treats this $6,000 as a short-term loss when carried back or forward. Income tax preparations The corporation carries the $6,000 short-term loss back 3 years. Income tax preparations In year 1, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. Income tax preparations It subtracts the $6,000 short-term loss first from the net short-term gain. Income tax preparations This results in a net capital gain for year 1 of $7,000. Income tax preparations This consists of a net short-term capital gain of $2,000 ($8,000 − $6,000) and a net long-term capital gain of $5,000. Income tax preparations S corporation status. Income tax preparations   A corporation may not carry a capital loss from, or to, a year for which it is an S corporation. Income tax preparations Rules for carryover and carryback. Income tax preparations   When carrying a capital loss from one year to another, the following rules apply. Income tax preparations When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. Income tax preparations In other words, you can carry capital losses only to years that would otherwise have a total net capital gain. Income tax preparations If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first. Income tax preparations You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back. Income tax preparations Refunds. Income tax preparations   When you carry back a capital loss to an earlier tax year, refigure your tax for that year. Income tax preparations If your corrected tax is less than the tax you originally owed, use either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U. Income tax preparations S. Income tax preparations Corporation Income Tax Return, to apply for a refund. Income tax preparations Form 1139. Income tax preparations    A corporation can get a refund faster by using Form 1139. Income tax preparations It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss. Income tax preparations Form 1120X. Income tax preparations   If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. Income tax preparations The corporation must file the Form 1120X within 3 years of the due date, includin