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Income Tax Return Filing

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Income Tax Return Filing

Income tax return filing 6. Income tax return filing   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Income tax return filing However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Income tax return filing This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Income tax return filing This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Income tax return filing However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Income tax return filing If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Income tax return filing For more information, see chapter 2. Income tax return filing Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Income tax return filing These lines are reproduced below and are explained in the discussion that follows. Income tax return filing 35 Inventory at beginning of year. Income tax return filing If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Income tax return filing Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Income tax return filing Subtract line 41 from line 40. Income tax return filing  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Income tax return filing If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Income tax return filing Opening inventory usually will be identical to the closing inventory of the year before. Income tax return filing You must explain any difference in a schedule attached to your return. Income tax return filing Donation of inventory. Income tax return filing   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Income tax return filing The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Income tax return filing You must remove the amount of your contribution deduction from your opening inventory. Income tax return filing It is not part of the cost of goods sold. Income tax return filing   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Income tax return filing Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Income tax return filing For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Income tax return filing   A special rule may apply to certain donations of food inventory. Income tax return filing See Publication 526, Charitable Contributions. Income tax return filing Example 1. Income tax return filing You are a calendar year taxpayer who uses an accrual method of accounting. Income tax return filing In 2013, you contributed property from inventory to a church. Income tax return filing It had a fair market value of $600. Income tax return filing The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Income tax return filing The charitable contribution allowed for 2013 is $400 ($600 − $200). Income tax return filing The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Income tax return filing The cost of goods sold you use in determining gross income for 2013 must not include the $400. Income tax return filing You remove that amount from opening inventory for 2013. Income tax return filing Example 2. Income tax return filing If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Income tax return filing You would not be allowed any charitable contribution deduction for the contributed property. Income tax return filing Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Income tax return filing If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Income tax return filing Trade discounts. Income tax return filing   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Income tax return filing You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Income tax return filing Do not show the discount amount separately as an item in gross income. Income tax return filing   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Income tax return filing Cash discounts. Income tax return filing   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Income tax return filing There are two methods of accounting for cash discounts. Income tax return filing You can either credit them to a separate discount account or deduct them from total purchases for the year. Income tax return filing Whichever method you use, you must be consistent. Income tax return filing If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Income tax return filing For more information, see Change in Accounting Method in chapter 2. Income tax return filing   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Income tax return filing If you use this method, do not reduce your cost of goods sold by the cash discounts. Income tax return filing Purchase returns and allowances. Income tax return filing   You must deduct all returns and allowances from your total purchases during the year. Income tax return filing Merchandise withdrawn from sale. Income tax return filing   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Income tax return filing Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Income tax return filing You must also charge the amount to your drawing account. Income tax return filing   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Income tax return filing As stated above, you also use it to record withdrawals of merchandise for personal or family use. Income tax return filing This account is also known as a “withdrawals account” or “personal account. Income tax return filing ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Income tax return filing Small merchandisers (wholesalers, retailers, etc. Income tax return filing ) usually do not have labor costs that can properly be charged to cost of goods sold. Income tax return filing In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Income tax return filing Direct labor. Income tax return filing   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Income tax return filing They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Income tax return filing Indirect labor. Income tax return filing   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Income tax return filing Other labor. Income tax return filing   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Income tax return filing Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Income tax return filing Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Income tax return filing Those that are not used in the manufacturing process are treated as deferred charges. Income tax return filing You deduct them as a business expense when you use them. Income tax return filing Business expenses are discussed in chapter 8. Income tax return filing Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Income tax return filing Containers. Income tax return filing   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Income tax return filing If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Income tax return filing Freight-in. Income tax return filing   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Income tax return filing Overhead expenses. Income tax return filing   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Income tax return filing The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Income tax return filing Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Income tax return filing Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Income tax return filing Inventory at the end of the year is also known as closing or ending inventory. Income tax return filing Your ending inventory will usually become the beginning inventory of your next tax year. Income tax return filing Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Income tax return filing Prev  Up  Next   Home   More Online Publications
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The Income Tax Return Filing

Income tax return filing 2. Income tax return filing   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Income tax return filing You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Income tax return filing This chapter discusses accounting methods. Income tax return filing For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Income tax return filing Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Income tax return filing Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Income tax return filing Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Income tax return filing A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Income tax return filing An item considered material for financial statement purposes is generally also considered material for income tax purposes. Income tax return filing See Publication 538 for more information. Income tax return filing You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Income tax return filing If you later want to change your accounting method, you generally must get IRS approval. Income tax return filing How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Income tax return filing Types of accounting methods. Income tax return filing   Generally, you can use any of the following accounting methods. Income tax return filing Each method is discussed in detail below. Income tax return filing Cash method. Income tax return filing Accrual method. Income tax return filing Special methods of accounting for certain items of income and expenses. Income tax return filing Combination (hybrid) method using elements of two or more of the above. Income tax return filing Business and other items. Income tax return filing   You can account for business and personal items using different accounting methods. Income tax return filing For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Income tax return filing Two or more businesses. Income tax return filing   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Income tax return filing Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Income tax return filing Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Income tax return filing However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Income tax return filing See Accrual Method Required , later. Income tax return filing Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Income tax return filing Items of income include money received as well as property or services received. Income tax return filing If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Income tax return filing See chapter 3 for information on how to report farm income on your income tax return. Income tax return filing Constructive receipt. Income tax return filing   Income is constructively received when an amount is credited to your account or made available to you without restriction. Income tax return filing You do not need to have possession of the income for it to be treated as income for the tax year. Income tax return filing If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Income tax return filing Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Income tax return filing Direct payments and counter-cyclical payments. Income tax return filing   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Income tax return filing Delaying receipt of income. Income tax return filing   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Income tax return filing You must report the income in the year the money or property is received or made available to you without restriction. Income tax return filing Example. Income tax return filing Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Income tax return filing She was told in December that her payment was available. Income tax return filing She requested not to be paid until January 2014. Income tax return filing However, she must still include this payment in her 2013 income because it was made available to her in 2013. Income tax return filing Debts paid by another person or canceled. Income tax return filing   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Income tax return filing If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Income tax return filing See Cancellation of Debt in chapter 3. Income tax return filing Deferred payment contract. Income tax return filing   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Income tax return filing However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Income tax return filing Example. Income tax return filing You are a farmer who uses the cash method and a calendar tax year. Income tax return filing You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Income tax return filing You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Income tax return filing However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Income tax return filing Repayment of income. Income tax return filing   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Income tax return filing If the repayment is more than $3,000, a special rule applies. Income tax return filing For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Income tax return filing Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Income tax return filing This includes business expenses for which you contest liability. Income tax return filing However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Income tax return filing See chapter 4 for information on how to deduct farm business expenses on your income tax return. Income tax return filing Prepayment. Income tax return filing   Generally, you cannot deduct expenses paid in advance. Income tax return filing This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Income tax return filing Example. Income tax return filing On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Income tax return filing In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Income tax return filing In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Income tax return filing An exception applies if the expense qualifies for the 12-month rule. Income tax return filing See Publication 538 for more information and examples. Income tax return filing See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Income tax return filing Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Income tax return filing The purpose of an accrual method of accounting is to correctly match income and expenses. Income tax return filing Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Income tax return filing See Accrual Method Required and Farm Inventory , later. Income tax return filing Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Income tax return filing Under this rule, include an amount in income on the earliest of the following dates. Income tax return filing When you receive payment. Income tax return filing When the income amount is due to you. Income tax return filing When you earn the income. Income tax return filing When title passes. Income tax return filing If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Income tax return filing Inventory. Income tax return filing   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Income tax return filing An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Income tax return filing See Publication 538 for more information. Income tax return filing Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Income tax return filing Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Income tax return filing The all-events test has been met. Income tax return filing This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Income tax return filing Economic performance has occurred. Income tax return filing Economic performance. Income tax return filing   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Income tax return filing If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Income tax return filing If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Income tax return filing Example. Income tax return filing Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Income tax return filing She entered into a contract with ABC Farm Consulting in 2012. Income tax return filing The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Income tax return filing It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Income tax return filing Jane paid ABC Farm Consulting $2,000 in December 2012. Income tax return filing Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Income tax return filing Economic performance for Jane's liability in the contract occurs as the services are provided. Income tax return filing Jane incurs the $2,000 cost in 2013. Income tax return filing An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Income tax return filing For more information, see Economic Performance in Publication 538. Income tax return filing Special rule for related persons. Income tax return filing   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Income tax return filing Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Income tax return filing For more information, see Internal Revenue Code section 267. Income tax return filing Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Income tax return filing A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Income tax return filing A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Income tax return filing A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Income tax return filing A tax shelter. Income tax return filing Note. Income tax return filing Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Income tax return filing Family corporation. Income tax return filing   A family corporation is generally a corporation that meets one of the following ownership requirements. Income tax return filing Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Income tax return filing Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Income tax return filing Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Income tax return filing For more information on family corporations, see Internal Revenue Code section 447. Income tax return filing Tax shelter. Income tax return filing   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Income tax return filing Its principal purpose is the avoidance or evasion of federal income tax. Income tax return filing It is a farming syndicate. Income tax return filing A farming syndicate is an entity that meets either of the following tests. Income tax return filing Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Income tax return filing More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Income tax return filing   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Income tax return filing   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Income tax return filing Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Income tax return filing This record should show the actual count or measurement of the inventory. Income tax return filing It should also show all factors that enter into its valuation, including quality and weight, if applicable. Income tax return filing Hatchery business. Income tax return filing   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Income tax return filing Products held for sale. Income tax return filing   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Income tax return filing , must be included in inventory. Income tax return filing Supplies. Income tax return filing   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Income tax return filing Deduct the cost of supplies in the year used or consumed in operations. Income tax return filing Do not include incidental supplies in inventory as these are deductible in the year of purchase. Income tax return filing Livestock. Income tax return filing   Livestock held primarily for sale must be included in inventory. Income tax return filing Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Income tax return filing See also Unit-livestock-price method , later. Income tax return filing If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Income tax return filing Growing crops. Income tax return filing   Generally, growing crops are not required to be included in inventory. Income tax return filing However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Income tax return filing See Uniform capitalization rules below. Income tax return filing Also see Uniform Capitalization Rules in  chapter 6. Income tax return filing Items to include in inventory. Income tax return filing   Your inventory should include all items held for sale, or for use as feed, seed, etc. Income tax return filing , whether raised or purchased, that are unsold at the end of the year. Income tax return filing Uniform capitalization rules. Income tax return filing   The following applies if you are required to use an accrual method of accounting. Income tax return filing The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Income tax return filing The costs of animals are subject to the uniform capitalization rules. Income tax return filing Inventory valuation methods. Income tax return filing   The following methods, described below, are those generally available for valuing inventory. Income tax return filing The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Income tax return filing Cost. Income tax return filing Lower of cost or market. Income tax return filing Farm-price method. Income tax return filing Unit-livestock-price method. Income tax return filing Cost and lower of cost or market methods. Income tax return filing   See Publication 538 for information on these valuation methods. Income tax return filing If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Income tax return filing However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Income tax return filing Farm-price method. Income tax return filing   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Income tax return filing Market price is the current price at the nearest market in the quantities you usually sell. Income tax return filing Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Income tax return filing If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Income tax return filing Unit-livestock-price method. Income tax return filing   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Income tax return filing You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Income tax return filing The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Income tax return filing Unit prices and classifications are subject to approval by the IRS on examination of your return. Income tax return filing You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Income tax return filing IRS approval is not required for these adjustments. Income tax return filing Any other changes in unit prices or classifications do require IRS approval. Income tax return filing   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Income tax return filing This method accounts only for the increase in cost of raising an animal to maturity. Income tax return filing It does not provide for any decrease in the animal's market value after it reaches maturity. Income tax return filing Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Income tax return filing   Do not include sold or lost animals in the year-end inventory. Income tax return filing If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Income tax return filing The animals on hand at the end of the year are considered those most recently acquired. Income tax return filing   You must include in inventory all livestock purchased primarily for sale. Income tax return filing You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Income tax return filing However, you must be consistent from year to year, regardless of the method you have chosen. Income tax return filing You cannot change your method without obtaining approval from the IRS. Income tax return filing   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Income tax return filing If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Income tax return filing However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Income tax return filing This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Income tax return filing It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Income tax return filing Uniform capitalization rules. Income tax return filing   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Income tax return filing This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Income tax return filing Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Income tax return filing Example 1. Income tax return filing You are a farmer who uses an accrual method of accounting. Income tax return filing You keep your books on the calendar year basis. Income tax return filing You sell grain in December 2013 but you are not paid until January 2014. Income tax return filing Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Income tax return filing Example 2. Income tax return filing Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Income tax return filing Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Income tax return filing Deduct the costs of producing the grain in the year you pay for them. Income tax return filing Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Income tax return filing Crop method. Income tax return filing   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Income tax return filing You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Income tax return filing Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Income tax return filing    See chapter 4 for details on deducting the costs of operating a farm. Income tax return filing Also see Regulations section 1. Income tax return filing 162-12. Income tax return filing Other special methods. Income tax return filing   Other special methods of accounting apply to the following items. Income tax return filing Amortization, see chapter 7. Income tax return filing Casualties, see chapter 11. Income tax return filing Condemnations, see chapter 11. Income tax return filing Depletion, see chapter 7. Income tax return filing Depreciation, see chapter 7. Income tax return filing Farm business expenses, see chapter 4. Income tax return filing Farm income, see chapter 3. Income tax return filing Installment sales, see chapter 10. Income tax return filing Soil and water conservation expenses, see chapter 5. Income tax return filing Thefts, see chapter 11. Income tax return filing Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Income tax return filing However, the following restrictions apply. Income tax return filing If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Income tax return filing If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Income tax return filing Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Income tax return filing Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Income tax return filing You may also have to pay a fee. Income tax return filing To obtain approval, you must generally file Form 3115. Income tax return filing There are instances when you can obtain automatic consent to change certain methods of accounting. Income tax return filing See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Income tax return filing For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Income tax return filing Also see Publication 538. Income tax return filing Prev  Up  Next   Home   More Online Publications