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Irs 2012 Tax Forms 1040ez

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Irs 2012 Tax Forms 1040ez

Irs 2012 tax forms 1040ez 5. Irs 2012 tax forms 1040ez   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Irs 2012 tax forms 1040ez Short-term lease. Irs 2012 tax forms 1040ez Retail space. Irs 2012 tax forms 1040ez Qualified long-term real property. Irs 2012 tax forms 1040ez Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Irs 2012 tax forms 1040ez If there is a connection between any income you receive and your business, the income is business income. Irs 2012 tax forms 1040ez A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Irs 2012 tax forms 1040ez You can have business income even if you are not involved in the activity on a regular full-time basis. Irs 2012 tax forms 1040ez Income from work you do on the side in addition to your regular job can be business income. Irs 2012 tax forms 1040ez You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Irs 2012 tax forms 1040ez But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Irs 2012 tax forms 1040ez For information on selling business assets, see chapter 3. Irs 2012 tax forms 1040ez Nonemployee compensation. Irs 2012 tax forms 1040ez Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Irs 2012 tax forms 1040ez This includes amounts reported as nonemployee compensation in box 7 of the form. Irs 2012 tax forms 1040ez You can find more information in the instructions on the back of the Form 1099-MISC you received. Irs 2012 tax forms 1040ez Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Irs 2012 tax forms 1040ez In most cases, your business income will be in the form of cash, checks, and credit card charges. Irs 2012 tax forms 1040ez But business income can be in other forms, such as property or services. Irs 2012 tax forms 1040ez These and other types of income are explained next. Irs 2012 tax forms 1040ez If you are a U. Irs 2012 tax forms 1040ez S. Irs 2012 tax forms 1040ez citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Irs 2012 tax forms 1040ez S. Irs 2012 tax forms 1040ez law. Irs 2012 tax forms 1040ez If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Irs 2012 tax forms 1040ez For details, see Publication 54, Tax Guide for U. Irs 2012 tax forms 1040ez S. Irs 2012 tax forms 1040ez Citizens and Resident Aliens Abroad. Irs 2012 tax forms 1040ez Bartering for Property or Services Bartering is an exchange of property or services. Irs 2012 tax forms 1040ez You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Irs 2012 tax forms 1040ez If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Irs 2012 tax forms 1040ez Example 1. Irs 2012 tax forms 1040ez You are a self-employed lawyer. Irs 2012 tax forms 1040ez You perform legal services for a client, a small corporation. Irs 2012 tax forms 1040ez In payment for your services, you receive shares of stock in the corporation. Irs 2012 tax forms 1040ez You must include the fair market value of the shares in income. Irs 2012 tax forms 1040ez Example 2. Irs 2012 tax forms 1040ez You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Irs 2012 tax forms 1040ez You must include the fair rental value of the apartment in your gross receipts. Irs 2012 tax forms 1040ez Your landlord must include the fair market value of the work of art in his or her rental income. Irs 2012 tax forms 1040ez Example 3. Irs 2012 tax forms 1040ez You are a self-employed accountant. Irs 2012 tax forms 1040ez Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Irs 2012 tax forms 1040ez Members get in touch with other members directly and bargain for the value of the services to be performed. Irs 2012 tax forms 1040ez In return for accounting services you provided for the house painter's business, the house painter painted your home. Irs 2012 tax forms 1040ez You must include in gross receipts the fair market value of the services you received from the house painter. Irs 2012 tax forms 1040ez The house painter must include the fair market value of your accounting services in his or her gross receipts. Irs 2012 tax forms 1040ez Example 4. Irs 2012 tax forms 1040ez You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Irs 2012 tax forms 1040ez As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Irs 2012 tax forms 1040ez You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Irs 2012 tax forms 1040ez The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Irs 2012 tax forms 1040ez It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Irs 2012 tax forms 1040ez See Publication 15 (Circular E), Employer's Tax Guide. Irs 2012 tax forms 1040ez Example 5. Irs 2012 tax forms 1040ez You operate a plumbing business and use the cash method of accounting. Irs 2012 tax forms 1040ez You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Irs 2012 tax forms 1040ez Each member has access to a directory that lists the members of the club and the services available. Irs 2012 tax forms 1040ez Members contact each other directly and request services to be performed. Irs 2012 tax forms 1040ez You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Irs 2012 tax forms 1040ez You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Irs 2012 tax forms 1040ez Information returns. Irs 2012 tax forms 1040ez   If you are involved in a bartering transaction, you may have to file either of the following forms. Irs 2012 tax forms 1040ez Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Irs 2012 tax forms 1040ez Form 1099-MISC, Miscellaneous Income. Irs 2012 tax forms 1040ez For information about these forms, see the General Instructions for Certain Information Returns. Irs 2012 tax forms 1040ez Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Irs 2012 tax forms 1040ez , who provides services (maid services, etc. Irs 2012 tax forms 1040ez ) for guests, report the rental income and expenses on Schedule C or C-EZ. Irs 2012 tax forms 1040ez If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Irs 2012 tax forms 1040ez For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Irs 2012 tax forms 1040ez Real estate dealer. Irs 2012 tax forms 1040ez   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Irs 2012 tax forms 1040ez Rent you receive from real estate held for sale to customers is subject to SE tax. Irs 2012 tax forms 1040ez However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Irs 2012 tax forms 1040ez Trailer park owner. Irs 2012 tax forms 1040ez   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Irs 2012 tax forms 1040ez    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Irs 2012 tax forms 1040ez Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Irs 2012 tax forms 1040ez   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Irs 2012 tax forms 1040ez   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Irs 2012 tax forms 1040ez Hotels, boarding houses, and apartments. Irs 2012 tax forms 1040ez   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Irs 2012 tax forms 1040ez   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Irs 2012 tax forms 1040ez An example of a service that is not normally provided for the convenience of the occupants is maid service. Irs 2012 tax forms 1040ez However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Irs 2012 tax forms 1040ez Prepaid rent. Irs 2012 tax forms 1040ez   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Irs 2012 tax forms 1040ez This is true no matter what accounting method or period you use. Irs 2012 tax forms 1040ez Lease bonus. Irs 2012 tax forms 1040ez   A bonus you receive from a lessee for granting a lease is an addition to the rent. Irs 2012 tax forms 1040ez Include it in your gross receipts in the year received. Irs 2012 tax forms 1040ez Lease cancellation payments. Irs 2012 tax forms 1040ez   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Irs 2012 tax forms 1040ez Payments to third parties. Irs 2012 tax forms 1040ez   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Irs 2012 tax forms 1040ez A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Irs 2012 tax forms 1040ez Settlement payments. Irs 2012 tax forms 1040ez   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Irs 2012 tax forms 1040ez Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Irs 2012 tax forms 1040ez ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Irs 2012 tax forms 1040ez Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Irs 2012 tax forms 1040ez If you receive any of those payments, include them in your gross receipts as explained in that discussion. Irs 2012 tax forms 1040ez Interest and Dividend Income Interest and dividends may be considered business income. Irs 2012 tax forms 1040ez Interest. Irs 2012 tax forms 1040ez   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Irs 2012 tax forms 1040ez Interest received on loans is business income if you are in the business of lending money. Irs 2012 tax forms 1040ez Uncollectible loans. Irs 2012 tax forms 1040ez   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Irs 2012 tax forms 1040ez If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Irs 2012 tax forms 1040ez See Bad Debts in chapter 8. Irs 2012 tax forms 1040ez Unstated interest. Irs 2012 tax forms 1040ez   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Irs 2012 tax forms 1040ez See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Irs 2012 tax forms 1040ez Dividends. Irs 2012 tax forms 1040ez   Generally, dividends are business income to dealers in securities. Irs 2012 tax forms 1040ez For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Irs 2012 tax forms 1040ez If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Irs 2012 tax forms 1040ez   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Irs 2012 tax forms 1040ez To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Irs 2012 tax forms 1040ez Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Irs 2012 tax forms 1040ez General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Irs 2012 tax forms 1040ez Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Irs 2012 tax forms 1040ez If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Irs 2012 tax forms 1040ez Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Irs 2012 tax forms 1040ez Price reduced after purchase. Irs 2012 tax forms 1040ez   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Irs 2012 tax forms 1040ez Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Irs 2012 tax forms 1040ez Deductible debt. Irs 2012 tax forms 1040ez   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Irs 2012 tax forms 1040ez Example. Irs 2012 tax forms 1040ez You get accounting services for your business on credit. Irs 2012 tax forms 1040ez Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Irs 2012 tax forms 1040ez Your accountant forgives part of the amount you owe for the accounting services. Irs 2012 tax forms 1040ez How you treat the canceled debt depends on your method of accounting. Irs 2012 tax forms 1040ez Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Irs 2012 tax forms 1040ez Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Irs 2012 tax forms 1040ez   For information on the cash and accrual methods of accounting, see chapter 2. Irs 2012 tax forms 1040ez Exclusions Do not include canceled debt in income in the following situations. Irs 2012 tax forms 1040ez However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Irs 2012 tax forms 1040ez For more information, see Form 982. Irs 2012 tax forms 1040ez The cancellation takes place in a bankruptcy case under title 11 of the U. Irs 2012 tax forms 1040ez S. Irs 2012 tax forms 1040ez Code (relating to bankruptcy). Irs 2012 tax forms 1040ez See Publication 908, Bankruptcy Tax Guide. Irs 2012 tax forms 1040ez The cancellation takes place when you are insolvent. Irs 2012 tax forms 1040ez You can exclude the canceled debt to the extent you are insolvent. Irs 2012 tax forms 1040ez See Publication 908. Irs 2012 tax forms 1040ez The canceled debt is a qualified farm debt owed to a qualified person. Irs 2012 tax forms 1040ez See chapter 3 in Publication 225, Farmer's Tax Guide. Irs 2012 tax forms 1040ez The canceled debt is a qualified real property business debt. Irs 2012 tax forms 1040ez This situation is explained later. Irs 2012 tax forms 1040ez The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Irs 2012 tax forms 1040ez See Form 982. Irs 2012 tax forms 1040ez If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Irs 2012 tax forms 1040ez If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Irs 2012 tax forms 1040ez Debt. Irs 2012 tax forms 1040ez   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Irs 2012 tax forms 1040ez Qualified real property business debt. Irs 2012 tax forms 1040ez   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Irs 2012 tax forms 1040ez If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Irs 2012 tax forms 1040ez Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Irs 2012 tax forms 1040ez However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Irs 2012 tax forms 1040ez Cancellation of qualified real property business debt. Irs 2012 tax forms 1040ez   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Irs 2012 tax forms 1040ez It was incurred or assumed in connection with real property used in a trade or business. Irs 2012 tax forms 1040ez It was secured by such real property. Irs 2012 tax forms 1040ez It was incurred or assumed at either of the following times. Irs 2012 tax forms 1040ez Before January 1, 1993. Irs 2012 tax forms 1040ez After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Irs 2012 tax forms 1040ez It is debt to which you choose to apply these rules. Irs 2012 tax forms 1040ez   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Irs 2012 tax forms 1040ez   You cannot exclude more than either of the following amounts. Irs 2012 tax forms 1040ez The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Irs 2012 tax forms 1040ez The total adjusted bases of depreciable real property held by you immediately before the cancellation. Irs 2012 tax forms 1040ez These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Irs 2012 tax forms 1040ez Do not take into account depreciable real property acquired in contemplation of the cancellation. Irs 2012 tax forms 1040ez Election. Irs 2012 tax forms 1040ez   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Irs 2012 tax forms 1040ez You must file your return by the due date (including extensions). Irs 2012 tax forms 1040ez If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs 2012 tax forms 1040ez For more information, see When To File in the form instructions. Irs 2012 tax forms 1040ez Other Income The following discussion explains how to treat other types of business income you may receive. Irs 2012 tax forms 1040ez Restricted property. Irs 2012 tax forms 1040ez   Restricted property is property that has certain restrictions that affect its value. Irs 2012 tax forms 1040ez If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Irs 2012 tax forms 1040ez However, you can choose to be taxed in the year you receive the property. Irs 2012 tax forms 1040ez For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Irs 2012 tax forms 1040ez Gains and losses. Irs 2012 tax forms 1040ez   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Irs 2012 tax forms 1040ez Instead, you must report these gains and losses on other forms. Irs 2012 tax forms 1040ez For more information, see chapter 3. Irs 2012 tax forms 1040ez Promissory notes. Irs 2012 tax forms 1040ez   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Irs 2012 tax forms 1040ez In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Irs 2012 tax forms 1040ez Lost income payments. Irs 2012 tax forms 1040ez   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Irs 2012 tax forms 1040ez Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Irs 2012 tax forms 1040ez Damages. Irs 2012 tax forms 1040ez   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Irs 2012 tax forms 1040ez Patent infringement. Irs 2012 tax forms 1040ez Breach of contract or fiduciary duty. Irs 2012 tax forms 1040ez Antitrust injury. Irs 2012 tax forms 1040ez Economic injury. Irs 2012 tax forms 1040ez   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Irs 2012 tax forms 1040ez Your deduction is the smaller of the following amounts. Irs 2012 tax forms 1040ez The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Irs 2012 tax forms 1040ez Your loss from the injury that you have not yet deducted. Irs 2012 tax forms 1040ez Punitive damages. Irs 2012 tax forms 1040ez   You must also include punitive damages in income. Irs 2012 tax forms 1040ez Kickbacks. Irs 2012 tax forms 1040ez   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Irs 2012 tax forms 1040ez However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Irs 2012 tax forms 1040ez Recovery of items previously deducted. Irs 2012 tax forms 1040ez   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Irs 2012 tax forms 1040ez However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Irs 2012 tax forms 1040ez If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Irs 2012 tax forms 1040ez Example. Irs 2012 tax forms 1040ez Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Irs 2012 tax forms 1040ez He also had 2 personal exemptions for a total of $7,800. Irs 2012 tax forms 1040ez He would not pay income tax even if he did not deduct the bad debt. Irs 2012 tax forms 1040ez Therefore, he will not report as income any part of the $300 he may recover in any future year. Irs 2012 tax forms 1040ez Exception for depreciation. Irs 2012 tax forms 1040ez   This rule does not apply to depreciation. Irs 2012 tax forms 1040ez You recover depreciation using the rules explained next. Irs 2012 tax forms 1040ez Recapture of depreciation. Irs 2012 tax forms 1040ez   In the following situations, you have to recapture the depreciation deduction. Irs 2012 tax forms 1040ez This means you include in income part or all of the depreciation you deducted in previous years. Irs 2012 tax forms 1040ez Listed property. Irs 2012 tax forms 1040ez   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Irs 2012 tax forms 1040ez You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Irs 2012 tax forms 1040ez Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Irs 2012 tax forms 1040ez For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Irs 2012 tax forms 1040ez That chapter explains how to determine whether property is used more than 50% in your business. Irs 2012 tax forms 1040ez Section 179 property. Irs 2012 tax forms 1040ez   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Irs 2012 tax forms 1040ez You do this by including in income on Schedule C part of the deduction you took. Irs 2012 tax forms 1040ez Use Part IV of Form 4797 to figure the amount to include on Schedule C. Irs 2012 tax forms 1040ez See chapter 2 in Publication 946 to find out when you recapture the deduction. Irs 2012 tax forms 1040ez Sale or exchange of depreciable property. Irs 2012 tax forms 1040ez   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Irs 2012 tax forms 1040ez You figure the income due to depreciation recapture in Part III of Form 4797. Irs 2012 tax forms 1040ez For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Irs 2012 tax forms 1040ez Items That Are Not Income In some cases the property or money you receive is not income. Irs 2012 tax forms 1040ez Appreciation. Irs 2012 tax forms 1040ez   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Irs 2012 tax forms 1040ez Consignments. Irs 2012 tax forms 1040ez   Consignments of merchandise to others to sell for you are not sales. Irs 2012 tax forms 1040ez The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Irs 2012 tax forms 1040ez Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Irs 2012 tax forms 1040ez Merchandise you have shipped out on consignment is included in your inventory until it is sold. Irs 2012 tax forms 1040ez   Do not include merchandise you receive on consignment in your inventory. Irs 2012 tax forms 1040ez Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Irs 2012 tax forms 1040ez Construction allowances. Irs 2012 tax forms 1040ez   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Irs 2012 tax forms 1040ez Under a short-term lease of retail space. Irs 2012 tax forms 1040ez For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Irs 2012 tax forms 1040ez Amount you can exclude. Irs 2012 tax forms 1040ez   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Irs 2012 tax forms 1040ez Short-term lease. Irs 2012 tax forms 1040ez   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Irs 2012 tax forms 1040ez The following rules apply in determining whether the lease is for 15 years or less. Irs 2012 tax forms 1040ez Take into account options to renew when figuring whether the lease is for 15 years or less. Irs 2012 tax forms 1040ez But do not take into account any option to renew at fair market value determined at the time of renewal. Irs 2012 tax forms 1040ez Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Irs 2012 tax forms 1040ez Retail space. Irs 2012 tax forms 1040ez   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Irs 2012 tax forms 1040ez Qualified long-term real property. Irs 2012 tax forms 1040ez   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Irs 2012 tax forms 1040ez Exchange of like-kind property. Irs 2012 tax forms 1040ez   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Irs 2012 tax forms 1040ez This means that the gain is not taxable and the loss is not deductible. Irs 2012 tax forms 1040ez A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Irs 2012 tax forms 1040ez For more information, see Form 8824. Irs 2012 tax forms 1040ez Leasehold improvements. Irs 2012 tax forms 1040ez   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Irs 2012 tax forms 1040ez However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Irs 2012 tax forms 1040ez Loans. Irs 2012 tax forms 1040ez   Money borrowed through a bona fide loan is not income. Irs 2012 tax forms 1040ez Sales tax. Irs 2012 tax forms 1040ez   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Irs 2012 tax forms 1040ez Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Irs 2012 tax forms 1040ez Direct seller. Irs 2012 tax forms 1040ez   You must report all income you receive as a direct seller on Schedule C or C-EZ. Irs 2012 tax forms 1040ez This includes any of the following. Irs 2012 tax forms 1040ez Income from sales—payments you receive from customers for products they buy from you. Irs 2012 tax forms 1040ez Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Irs 2012 tax forms 1040ez Prizes, awards, and gifts you receive from your selling business. Irs 2012 tax forms 1040ez You must report this income regardless of whether it is reported to you on an information return. Irs 2012 tax forms 1040ez   You are a direct seller if you meet all the following conditions. Irs 2012 tax forms 1040ez You are engaged in one of the following trades or businesses. Irs 2012 tax forms 1040ez Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Irs 2012 tax forms 1040ez Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Irs 2012 tax forms 1040ez Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Irs 2012 tax forms 1040ez Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Irs 2012 tax forms 1040ez Executor or administrator. Irs 2012 tax forms 1040ez   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Irs 2012 tax forms 1040ez A nonprofessional fiduciary (personal representative) and both of the following apply. Irs 2012 tax forms 1040ez The estate includes an active trade or business in which you actively participate. Irs 2012 tax forms 1040ez Your fees are related to the operation of that trade or business. Irs 2012 tax forms 1040ez A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Irs 2012 tax forms 1040ez    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Irs 2012 tax forms 1040ez Fishing crew member. Irs 2012 tax forms 1040ez    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Irs 2012 tax forms 1040ez Insurance agent, former. Irs 2012 tax forms 1040ez   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Irs 2012 tax forms 1040ez You received payments after your agreement to perform services for the company ended. Irs 2012 tax forms 1040ez You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Irs 2012 tax forms 1040ez You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Irs 2012 tax forms 1040ez The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Irs 2012 tax forms 1040ez The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Irs 2012 tax forms 1040ez Insurance agent, retired. Irs 2012 tax forms 1040ez   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Irs 2012 tax forms 1040ez Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Irs 2012 tax forms 1040ez   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Irs 2012 tax forms 1040ez Newspaper carrier or distributor. Irs 2012 tax forms 1040ez   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Irs 2012 tax forms 1040ez You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Irs 2012 tax forms 1040ez Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Irs 2012 tax forms 1040ez You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Irs 2012 tax forms 1040ez   This rule applies whether or not you hire others to help you make deliveries. Irs 2012 tax forms 1040ez It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Irs 2012 tax forms 1040ez Newspaper or magazine vendor. Irs 2012 tax forms 1040ez   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Irs 2012 tax forms 1040ez You sell newspapers or magazines to ultimate consumers. Irs 2012 tax forms 1040ez You sell them at a fixed price. Irs 2012 tax forms 1040ez Your earnings are based on the difference between the sales price and your cost of goods sold. Irs 2012 tax forms 1040ez   This rule applies whether or not you are guaranteed a minimum amount of earnings. Irs 2012 tax forms 1040ez It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Irs 2012 tax forms 1040ez Notary public. Irs 2012 tax forms 1040ez   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Irs 2012 tax forms 1040ez These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Irs 2012 tax forms 1040ez Public official. Irs 2012 tax forms 1040ez   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Irs 2012 tax forms 1040ez This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Irs 2012 tax forms 1040ez Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Irs 2012 tax forms 1040ez   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Irs 2012 tax forms 1040ez Real estate agent or direct seller. Irs 2012 tax forms 1040ez   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Irs 2012 tax forms 1040ez Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Irs 2012 tax forms 1040ez You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Irs 2012 tax forms 1040ez Securities dealer. Irs 2012 tax forms 1040ez   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Irs 2012 tax forms 1040ez For more information, see sections 1256 and 1402(i). Irs 2012 tax forms 1040ez Securities trader. Irs 2012 tax forms 1040ez   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Irs 2012 tax forms 1040ez As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Irs 2012 tax forms 1040ez However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Irs 2012 tax forms 1040ez For more information about securities traders, see Publication 550, Investment Income and Expenses. Irs 2012 tax forms 1040ez Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Irs 2012 tax forms 1040ez This section discusses some of the more common differences that may affect business transactions. Irs 2012 tax forms 1040ez Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Irs 2012 tax forms 1040ez If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Irs 2012 tax forms 1040ez Dealers in real estate are not allowed to use inventories. Irs 2012 tax forms 1040ez For more information on inventories, see chapter 2. Irs 2012 tax forms 1040ez Income paid to a third party. Irs 2012 tax forms 1040ez   All income you earn is taxable to you. Irs 2012 tax forms 1040ez You cannot avoid tax by having the income paid to a third party. Irs 2012 tax forms 1040ez Example. Irs 2012 tax forms 1040ez You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Irs 2012 tax forms 1040ez The amount paid to your son is gross income to you. Irs 2012 tax forms 1040ez Cash discounts. Irs 2012 tax forms 1040ez   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Irs 2012 tax forms 1040ez For income tax purposes, you can use either of the following two methods to account for cash discounts. Irs 2012 tax forms 1040ez Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Irs 2012 tax forms 1040ez Credit the cash discount to a discount income account. Irs 2012 tax forms 1040ez You must use the chosen method every year for all your purchase discounts. Irs 2012 tax forms 1040ez   If you use the second method, the credit balance in the account at the end of your tax year is business income. Irs 2012 tax forms 1040ez Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Irs 2012 tax forms 1040ez When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Irs 2012 tax forms 1040ez Trade discounts. Irs 2012 tax forms 1040ez   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Irs 2012 tax forms 1040ez Do not enter these discounts on your books of account. Irs 2012 tax forms 1040ez Instead, use only the net amount as the cost of the merchandise purchased. Irs 2012 tax forms 1040ez For more information, see Trade discounts in chapter 6. Irs 2012 tax forms 1040ez Payment placed in escrow. Irs 2012 tax forms 1040ez   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Irs 2012 tax forms 1040ez However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Irs 2012 tax forms 1040ez Sales returns and allowances. Irs 2012 tax forms 1040ez   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Irs 2012 tax forms 1040ez Advance payments. Irs 2012 tax forms 1040ez   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Irs 2012 tax forms 1040ez Insurance proceeds. Irs 2012 tax forms 1040ez   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Irs 2012 tax forms 1040ez You cannot deduct the reimbursed part of a casualty or theft loss. Irs 2012 tax forms 1040ez   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Irs 2012 tax forms 1040ez Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of Severe Storms, Tornadoes, Flooding, Mudslides and Landslides in West Virginia

Updated 4/19/2012 to include Harrison, Preston and Wayne counties

WVA-2012-1, March 19, 2012

CHARLESTON — Victims of the severe storms, tornadoes, flooding, mudslides and landslides that began on Feb. 29, 2012 in parts of West Virginia may qualify for tax relief from the Internal Revenue Service.

The President has declared Harrison, Lincoln, Marion, Preston, Taylor and Wayne counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Feb. 29, and on or before May 31, have been postponed to May 31, 2012. This includes the April 17 deadline for filing 2011 individual income tax returns, making income tax payments and making 2011 contributions to an individual retirement account (IRA).  

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Feb. 29, and on or before March 15, as long as the deposits are made by March 15, 2012.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until May 31 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Feb. 29 and on or before May 31.

The IRS also gives affected taxpayers until May 31 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Feb. 29 and on or before May 31.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after Feb. 29 and on or before March 15 provided the taxpayer makes these deposits by March 15.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “West Virginia/Severe Storms, Tornadoes, Flooding, Mudslides, and Landslides” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 800-TAX-FORM (800-829-3676). The IRS toll-free number for general tax questions is 800-829-1040.

Related Information

Page Last Reviewed or Updated: 06-Mar-2014

The Irs 2012 Tax Forms 1040ez

Irs 2012 tax forms 1040ez 1. Irs 2012 tax forms 1040ez   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Irs 2012 tax forms 1040ez At-risk limits. Irs 2012 tax forms 1040ez Passive activities. Irs 2012 tax forms 1040ez Net operating loss. Irs 2012 tax forms 1040ez When Can I Deduct an Expense?Economic performance. Irs 2012 tax forms 1040ez Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Irs 2012 tax forms 1040ez  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Irs 2012 tax forms 1040ez See Optional safe harbor method under Business use of your home , later. Irs 2012 tax forms 1040ez Introduction This chapter covers the general rules for deducting business expenses. Irs 2012 tax forms 1040ez Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Irs 2012 tax forms 1040ez Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Irs 2012 tax forms 1040ez What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Irs 2012 tax forms 1040ez An ordinary expense is one that is common and accepted in your industry. Irs 2012 tax forms 1040ez A necessary expense is one that is helpful and appropriate for your trade or business. Irs 2012 tax forms 1040ez An expense does not have to be indispensable to be considered necessary. Irs 2012 tax forms 1040ez Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Irs 2012 tax forms 1040ez In some cases you may not be allowed to deduct the expense at all. Irs 2012 tax forms 1040ez Therefore, it is important to distinguish usual business expenses from expenses that include the following. Irs 2012 tax forms 1040ez The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Irs 2012 tax forms 1040ez Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Irs 2012 tax forms 1040ez Some of your business expenses may be included in figuring cost of goods sold. Irs 2012 tax forms 1040ez Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Irs 2012 tax forms 1040ez If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Irs 2012 tax forms 1040ez The following are types of expenses that go into figuring cost of goods sold. Irs 2012 tax forms 1040ez The cost of products or raw materials, including freight. Irs 2012 tax forms 1040ez Storage. Irs 2012 tax forms 1040ez Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Irs 2012 tax forms 1040ez Factory overhead. Irs 2012 tax forms 1040ez Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Irs 2012 tax forms 1040ez Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Irs 2012 tax forms 1040ez This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Irs 2012 tax forms 1040ez For more information, see the following sources. Irs 2012 tax forms 1040ez Cost of goods sold—chapter 6 of Publication 334. Irs 2012 tax forms 1040ez Inventories—Publication 538. Irs 2012 tax forms 1040ez Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Irs 2012 tax forms 1040ez Capital Expenses You must capitalize, rather than deduct, some costs. Irs 2012 tax forms 1040ez These costs are a part of your investment in your business and are called “capital expenses. Irs 2012 tax forms 1040ez ” Capital expenses are considered assets in your business. Irs 2012 tax forms 1040ez In general, you capitalize three types of costs. Irs 2012 tax forms 1040ez Business start-up costs (See Tip below). Irs 2012 tax forms 1040ez Business assets. Irs 2012 tax forms 1040ez Improvements. Irs 2012 tax forms 1040ez You can elect to deduct or amortize certain business start-up costs. Irs 2012 tax forms 1040ez See chapters 7 and 8. Irs 2012 tax forms 1040ez Cost recovery. Irs 2012 tax forms 1040ez   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Irs 2012 tax forms 1040ez These recovery methods allow you to deduct part of your cost each year. Irs 2012 tax forms 1040ez In this way, you are able to recover your capital expense. Irs 2012 tax forms 1040ez See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Irs 2012 tax forms 1040ez A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Irs 2012 tax forms 1040ez A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Irs 2012 tax forms 1040ez See Publication 946 for details. Irs 2012 tax forms 1040ez Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Irs 2012 tax forms 1040ez These costs may include expenses for advertising, travel, or wages for training employees. Irs 2012 tax forms 1040ez If you go into business. Irs 2012 tax forms 1040ez   When you go into business, treat all costs you had to get your business started as capital expenses. Irs 2012 tax forms 1040ez   Usually you recover costs for a particular asset through depreciation. Irs 2012 tax forms 1040ez Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Irs 2012 tax forms 1040ez However, you can choose to amortize certain costs for setting up your business. Irs 2012 tax forms 1040ez See Starting a Business in chapter 8 for more information on business start-up costs. Irs 2012 tax forms 1040ez If your attempt to go into business is unsuccessful. Irs 2012 tax forms 1040ez   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Irs 2012 tax forms 1040ez The costs you had before making a decision to acquire or begin a specific business. Irs 2012 tax forms 1040ez These costs are personal and nondeductible. Irs 2012 tax forms 1040ez They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Irs 2012 tax forms 1040ez The costs you had in your attempt to acquire or begin a specific business. Irs 2012 tax forms 1040ez These costs are capital expenses and you can deduct them as a capital loss. Irs 2012 tax forms 1040ez   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Irs 2012 tax forms 1040ez   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Irs 2012 tax forms 1040ez You cannot take a deduction for these costs. Irs 2012 tax forms 1040ez You will recover the costs of these assets when you dispose of them. Irs 2012 tax forms 1040ez Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Irs 2012 tax forms 1040ez You must fully capitalize the cost of these assets, including freight and installation charges. Irs 2012 tax forms 1040ez Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Irs 2012 tax forms 1040ez See Regulations section 1. Irs 2012 tax forms 1040ez 263A-2 for information on these rules. Irs 2012 tax forms 1040ez Improvements Improvements are generally major expenditures. Irs 2012 tax forms 1040ez Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Irs 2012 tax forms 1040ez The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Irs 2012 tax forms 1040ez Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Irs 2012 tax forms 1040ez Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Irs 2012 tax forms 1040ez However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Irs 2012 tax forms 1040ez Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Irs 2012 tax forms 1040ez Restoration plan. Irs 2012 tax forms 1040ez   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Irs 2012 tax forms 1040ez This applies even if some of the work would by itself be classified as repairs. Irs 2012 tax forms 1040ez Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Irs 2012 tax forms 1040ez Motor vehicles. Irs 2012 tax forms 1040ez   You usually capitalize the cost of a motor vehicle you use in your business. Irs 2012 tax forms 1040ez You can recover its cost through annual deductions for depreciation. Irs 2012 tax forms 1040ez   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Irs 2012 tax forms 1040ez See Publication 463. Irs 2012 tax forms 1040ez   Generally, repairs you make to your business vehicle are currently deductible. Irs 2012 tax forms 1040ez However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Irs 2012 tax forms 1040ez Roads and driveways. Irs 2012 tax forms 1040ez    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Irs 2012 tax forms 1040ez The cost of maintaining a private road on your business property is a deductible expense. Irs 2012 tax forms 1040ez Tools. Irs 2012 tax forms 1040ez   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Irs 2012 tax forms 1040ez Machinery parts. Irs 2012 tax forms 1040ez   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Irs 2012 tax forms 1040ez Heating equipment. Irs 2012 tax forms 1040ez   The cost of changing from one heating system to another is a capital expense. Irs 2012 tax forms 1040ez Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Irs 2012 tax forms 1040ez However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Irs 2012 tax forms 1040ez You can deduct the business part. Irs 2012 tax forms 1040ez For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Irs 2012 tax forms 1040ez The remaining 30% is personal interest and generally is not deductible. Irs 2012 tax forms 1040ez See chapter 4 for information on deducting interest and the allocation rules. Irs 2012 tax forms 1040ez Business use of your home. Irs 2012 tax forms 1040ez   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Irs 2012 tax forms 1040ez These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Irs 2012 tax forms 1040ez   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Irs 2012 tax forms 1040ez The business part of your home must be used exclusively and regularly for your trade or business. Irs 2012 tax forms 1040ez The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Irs 2012 tax forms 1040ez   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Irs 2012 tax forms 1040ez   Your home office qualifies as your principal place of business if you meet the following requirements. Irs 2012 tax forms 1040ez You use the office exclusively and regularly for administrative or management activities of your trade or business. Irs 2012 tax forms 1040ez You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Irs 2012 tax forms 1040ez   If you have more than one business location, determine your principal place of business based on the following factors. Irs 2012 tax forms 1040ez The relative importance of the activities performed at each location. Irs 2012 tax forms 1040ez If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Irs 2012 tax forms 1040ez Optional safe harbor method. Irs 2012 tax forms 1040ez   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Irs 2012 tax forms 1040ez This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Irs 2012 tax forms 1040ez   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Irs 2012 tax forms 1040ez Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Irs 2012 tax forms 1040ez You are not required to allocate these deductions between personal and business use, as is required under the regular method. Irs 2012 tax forms 1040ez If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Irs 2012 tax forms 1040ez   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Irs 2012 tax forms 1040ez All of the requirements discussed earlier under Business use of your home still apply. Irs 2012 tax forms 1040ez   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Irs 2012 tax forms 1040ez    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Irs 2012 tax forms 1040ez Business use of your car. Irs 2012 tax forms 1040ez   If you use your car exclusively in your business, you can deduct car expenses. Irs 2012 tax forms 1040ez If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Irs 2012 tax forms 1040ez Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Irs 2012 tax forms 1040ez   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Irs 2012 tax forms 1040ez Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Irs 2012 tax forms 1040ez Beginning in 2013, the standard mileage rate is 56. Irs 2012 tax forms 1040ez 5 cents per mile. Irs 2012 tax forms 1040ez   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Irs 2012 tax forms 1040ez   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Irs 2012 tax forms 1040ez How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Irs 2012 tax forms 1040ez Recovery of amount deducted (tax benefit rule). Irs 2012 tax forms 1040ez   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Irs 2012 tax forms 1040ez If you have a recovery in a later year, include the recovered amount in income in that year. Irs 2012 tax forms 1040ez However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Irs 2012 tax forms 1040ez   For more information on recoveries and the tax benefit rule, see Publication 525. Irs 2012 tax forms 1040ez Payments in kind. Irs 2012 tax forms 1040ez   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Irs 2012 tax forms 1040ez You cannot deduct the cost of your own labor. Irs 2012 tax forms 1040ez   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Irs 2012 tax forms 1040ez If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Irs 2012 tax forms 1040ez Limits on losses. Irs 2012 tax forms 1040ez   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Irs 2012 tax forms 1040ez There may be limits on how much of the loss you can deduct. Irs 2012 tax forms 1040ez Not-for-profit limits. Irs 2012 tax forms 1040ez   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Irs 2012 tax forms 1040ez See Not-for-Profit Activities , later. Irs 2012 tax forms 1040ez At-risk limits. Irs 2012 tax forms 1040ez   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Irs 2012 tax forms 1040ez You are at risk in any activity for the following. Irs 2012 tax forms 1040ez The money and adjusted basis of property you contribute to the activity. Irs 2012 tax forms 1040ez Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Irs 2012 tax forms 1040ez For more information, see Publication 925. Irs 2012 tax forms 1040ez Passive activities. Irs 2012 tax forms 1040ez   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Irs 2012 tax forms 1040ez In general, deductions for losses from passive activities only offset income from passive activities. Irs 2012 tax forms 1040ez You cannot use any excess deductions to offset other income. Irs 2012 tax forms 1040ez In addition, passive activity credits can only offset the tax on net passive income. Irs 2012 tax forms 1040ez Any excess loss or credits are carried over to later years. Irs 2012 tax forms 1040ez Suspended passive losses are fully deductible in the year you completely dispose of the activity. Irs 2012 tax forms 1040ez For more information, see Publication 925. Irs 2012 tax forms 1040ez Net operating loss. Irs 2012 tax forms 1040ez   If your deductions are more than your income for the year, you may have a “net operating loss. Irs 2012 tax forms 1040ez ” You can use a net operating loss to lower your taxes in other years. Irs 2012 tax forms 1040ez See Publication 536 for more information. Irs 2012 tax forms 1040ez   See Publication 542 for information about net operating losses of corporations. Irs 2012 tax forms 1040ez When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Irs 2012 tax forms 1040ez An accounting method is a set of rules used to determine when and how income and expenses are reported. Irs 2012 tax forms 1040ez The two basic methods are the cash method and the accrual method. Irs 2012 tax forms 1040ez Whichever method you choose must clearly reflect income. Irs 2012 tax forms 1040ez For more information on accounting methods, see Publication 538. Irs 2012 tax forms 1040ez Cash method. Irs 2012 tax forms 1040ez   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Irs 2012 tax forms 1040ez Accrual method. Irs 2012 tax forms 1040ez   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Irs 2012 tax forms 1040ez The all-events test has been met. Irs 2012 tax forms 1040ez The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Irs 2012 tax forms 1040ez Economic performance has occurred. Irs 2012 tax forms 1040ez Economic performance. Irs 2012 tax forms 1040ez   You generally cannot deduct or capitalize a business expense until economic performance occurs. Irs 2012 tax forms 1040ez 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 the property is used. Irs 2012 tax forms 1040ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Irs 2012 tax forms 1040ez Example. Irs 2012 tax forms 1040ez Your tax year is the calendar year. Irs 2012 tax forms 1040ez In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Irs 2012 tax forms 1040ez You paid it by check in January 2014. Irs 2012 tax forms 1040ez If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Irs 2012 tax forms 1040ez If you use the cash method of accounting, deduct the expense on your 2014 return. Irs 2012 tax forms 1040ez Prepayment. Irs 2012 tax forms 1040ez   You generally cannot deduct expenses in advance, even if you pay them in advance. Irs 2012 tax forms 1040ez This rule applies to both the cash and accrual methods. Irs 2012 tax forms 1040ez It applies to prepaid interest, prepaid insurance premiums, and any other 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. Irs 2012 tax forms 1040ez Example. Irs 2012 tax forms 1040ez In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Irs 2012 tax forms 1040ez Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Irs 2012 tax forms 1040ez You can deduct the rent for 2014 and 2015 on your tax returns for those years. Irs 2012 tax forms 1040ez Contested liability. Irs 2012 tax forms 1040ez   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Irs 2012 tax forms 1040ez Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Irs 2012 tax forms 1040ez S. Irs 2012 tax forms 1040ez possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Irs 2012 tax forms 1040ez However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Irs 2012 tax forms 1040ez See Regulations section 1. Irs 2012 tax forms 1040ez 461-2. Irs 2012 tax forms 1040ez Related person. Irs 2012 tax forms 1040ez   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Irs 2012 tax forms 1040ez However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Irs 2012 tax forms 1040ez Your deduction is allowed when the amount is includible in income by the related cash method payee. Irs 2012 tax forms 1040ez See Related Persons in Publication 538. Irs 2012 tax forms 1040ez Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Irs 2012 tax forms 1040ez Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Irs 2012 tax forms 1040ez The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Irs 2012 tax forms 1040ez It does not apply to corporations other than S corporations. Irs 2012 tax forms 1040ez In determining whether you are carrying on an activity for profit, several factors are taken into account. Irs 2012 tax forms 1040ez No one factor alone is decisive. Irs 2012 tax forms 1040ez Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Irs 2012 tax forms 1040ez Presumption of profit. Irs 2012 tax forms 1040ez   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Irs 2012 tax forms 1040ez Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Irs 2012 tax forms 1040ez The activity must be substantially the same for each year within this period. Irs 2012 tax forms 1040ez You have a profit when the gross income from an activity exceeds the deductions. Irs 2012 tax forms 1040ez   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Irs 2012 tax forms 1040ez   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Irs 2012 tax forms 1040ez This means the limits discussed here will not apply. Irs 2012 tax forms 1040ez You can take all your business deductions from the activity, even for the years that you have a loss. Irs 2012 tax forms 1040ez You can rely on this presumption unless the IRS later shows it to be invalid. Irs 2012 tax forms 1040ez Using the presumption later. Irs 2012 tax forms 1040ez   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Irs 2012 tax forms 1040ez   You can elect to do this by filing Form 5213. Irs 2012 tax forms 1040ez Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Irs 2012 tax forms 1040ez   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Irs 2012 tax forms 1040ez Accordingly, it will not restrict your deductions. Irs 2012 tax forms 1040ez Rather, you will gain time to earn a profit in the required number of years. Irs 2012 tax forms 1040ez If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Irs 2012 tax forms 1040ez If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Irs 2012 tax forms 1040ez   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Irs 2012 tax forms 1040ez The period is extended only for deductions of the activity and any related deductions that might be affected. Irs 2012 tax forms 1040ez    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Irs 2012 tax forms 1040ez Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Irs 2012 tax forms 1040ez Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Irs 2012 tax forms 1040ez You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Irs 2012 tax forms 1040ez However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Irs 2012 tax forms 1040ez Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Irs 2012 tax forms 1040ez If you are an individual, these deductions may be taken only if you itemize. Irs 2012 tax forms 1040ez These deductions may be taken on Schedule A (Form 1040). Irs 2012 tax forms 1040ez Category 1. Irs 2012 tax forms 1040ez   Deductions you can take for personal as well as for business activities are allowed in full. Irs 2012 tax forms 1040ez For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Irs 2012 tax forms 1040ez Deduct them on the appropriate lines of Schedule A (Form 1040). Irs 2012 tax forms 1040ez For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Irs 2012 tax forms 1040ez The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Irs 2012 tax forms 1040ez The reduction amount returns to $100 for tax years beginning after December 31, 2009. Irs 2012 tax forms 1040ez See Publication 547 for more information on casualty losses. Irs 2012 tax forms 1040ez For the limits that apply to home mortgage interest, see Publication 936. Irs 2012 tax forms 1040ez Category 2. Irs 2012 tax forms 1040ez   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Irs 2012 tax forms 1040ez Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Irs 2012 tax forms 1040ez Category 3. Irs 2012 tax forms 1040ez   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Irs 2012 tax forms 1040ez Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Irs 2012 tax forms 1040ez Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Irs 2012 tax forms 1040ez    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Irs 2012 tax forms 1040ez They are subject to the 2%-of-adjusted-gross-income limit. Irs 2012 tax forms 1040ez See Publication 529 for information on this limit. Irs 2012 tax forms 1040ez Example. Irs 2012 tax forms 1040ez Adriana is engaged in a not-for-profit activity. Irs 2012 tax forms 1040ez The income and expenses of the activity are as follows. Irs 2012 tax forms 1040ez Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Irs 2012 tax forms 1040ez The limit is reached in category (3), as follows. Irs 2012 tax forms 1040ez Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Irs 2012 tax forms 1040ez $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Irs 2012 tax forms 1040ez Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Irs 2012 tax forms 1040ez The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Irs 2012 tax forms 1040ez Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Irs 2012 tax forms 1040ez Partnerships and S corporations. Irs 2012 tax forms 1040ez   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Irs 2012 tax forms 1040ez They are reflected in the individual shareholder's or partner's distributive shares. Irs 2012 tax forms 1040ez More than one activity. Irs 2012 tax forms 1040ez   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Irs 2012 tax forms 1040ez The following are the most significant facts and circumstances in making this determination. Irs 2012 tax forms 1040ez The degree of organizational and economic interrelationship of various undertakings. Irs 2012 tax forms 1040ez The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Irs 2012 tax forms 1040ez The similarity of the undertakings. Irs 2012 tax forms 1040ez   The IRS will generally accept your characterization if it is supported by facts and circumstances. Irs 2012 tax forms 1040ez    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Irs 2012 tax forms 1040ez Figure separately whether each is a not-for-profit activity. Irs 2012 tax forms 1040ez Then figure the limit on deductions and losses separately for each activity that is not for profit. Irs 2012 tax forms 1040ez Prev  Up  Next   Home   More Online Publications