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Irs Amendment Form

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Irs Amendment Form

Irs amendment form 3. Irs amendment form   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Irs amendment form Other income (nonpassive income). Irs amendment form Expenses. Irs amendment form Additional information. Irs amendment form Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Irs amendment form Basis. Irs amendment form How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Irs amendment form Including mutual fund or REMIC expenses in income. Irs amendment form Nondeductible ExpensesUsed as collateral. Irs amendment form Short-sale expenses. Irs amendment form Expenses for both tax-exempt and taxable income. Irs amendment form State income taxes. Irs amendment form Nondeductible amount. Irs amendment form Basis adjustment. Irs amendment form How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Irs amendment form Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Irs amendment form Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Irs amendment form The at-risk rules and passive activity rules are explained briefly in this section. Irs amendment form The limit on investment interest is explained later in this chapter under Interest Expenses . Irs amendment form The 2% limit is explained later in this chapter under Expenses of Producing Income . Irs amendment form At-risk rules. Irs amendment form   Special at-risk rules apply to most income-producing activities. Irs amendment form These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Irs amendment form Generally, this is the cash and the adjusted basis of property you contribute to the activity. Irs amendment form It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Irs amendment form For more information, see Publication 925. Irs amendment form Passive activity losses and credits. Irs amendment form   The amount of losses and tax credits you can claim from passive activities is limited. Irs amendment form Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Irs amendment form Also, you can use credits from passive activities only against tax on the income from passive activities. Irs amendment form There are exceptions for certain activities, such as rental real estate activities. Irs amendment form Passive activity. Irs amendment form   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Irs amendment form However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Irs amendment form More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Irs amendment form You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Irs amendment form  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Irs amendment form However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Irs amendment form   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Irs amendment form Other income (nonpassive income). Irs amendment form    Generally, you can use losses from passive activities only to offset income from passive activities. Irs amendment form You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Irs amendment form Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Irs amendment form It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Irs amendment form This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Irs amendment form   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Irs amendment form Expenses. Irs amendment form   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Irs amendment form However, this interest and other expenses may be subject to other limits. Irs amendment form These limits are explained in the rest of this chapter. Irs amendment form Additional information. Irs amendment form   For more information about determining and reporting income and losses from passive activities, see Publication 925. Irs amendment form Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Irs amendment form For information on business interest, see chapter 4 of Publication 535. Irs amendment form You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Irs amendment form Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Irs amendment form You can deduct investment interest subject to the limit discussed later. Irs amendment form However, you cannot deduct interest you incurred to produce tax-exempt income. Irs amendment form See Tax-exempt income under Nondeductible Expenses, later. Irs amendment form You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Irs amendment form Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Irs amendment form Investment property. Irs amendment form   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Irs amendment form It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Irs amendment form Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Irs amendment form Partners, shareholders, and beneficiaries. Irs amendment form   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Irs amendment form Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Irs amendment form Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Irs amendment form The allocation is not affected by the use of property that secures the debt. Irs amendment form Example 1. Irs amendment form You borrow $10,000 and use $8,000 to buy stock. Irs amendment form You use the other $2,000 to buy items for your home. Irs amendment form Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Irs amendment form The other 20% is nondeductible personal interest. Irs amendment form Debt proceeds received in cash. Irs amendment form   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Irs amendment form Debt proceeds deposited in account. Irs amendment form   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Irs amendment form But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Irs amendment form Example 2. Irs amendment form Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Irs amendment form You did not buy the household items until June 1. Irs amendment form You had deposited the $2,000 in the bank. Irs amendment form You had no other transactions on the bank account until June. Irs amendment form You did not sell the stock, and you made no principal payments on the debt. Irs amendment form You paid interest from another account. Irs amendment form The $8,000 is treated as being used for an investment purpose. Irs amendment form The $2,000 is treated as being used for an investment purpose for the 3-month period. Irs amendment form Your total interest expense for 3 months on this debt is investment interest. Irs amendment form In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Irs amendment form Amounts paid within 30 days. Irs amendment form   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Irs amendment form This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Irs amendment form   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Irs amendment form Payments on debt may require new allocation. Irs amendment form   As you repay a debt used for more than one purpose, you must reallocate the balance. Irs amendment form You must first reduce the amount allocated to personal purposes by the repayment. Irs amendment form You then reallocate the rest of the debt to find what part is for investment purposes. Irs amendment form Example 3. Irs amendment form If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Irs amendment form The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Irs amendment form Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Irs amendment form Pass-through entities. Irs amendment form   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Irs amendment form If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Irs amendment form Additional allocation rules. Irs amendment form   For more information about allocating interest expense, see chapter 4 of Publication 535. Irs amendment form When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Irs amendment form If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Irs amendment form For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Irs amendment form Example. Irs amendment form You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Irs amendment form On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Irs amendment form If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Irs amendment form If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Irs amendment form Interest paid in advance. Irs amendment form   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Irs amendment form You can deduct in each year only the interest for that year. Irs amendment form Interest on margin accounts. Irs amendment form   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Irs amendment form You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Irs amendment form Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Irs amendment form   You cannot deduct any interest on money borrowed for personal reasons. Irs amendment form Limit on interest deduction for market discount bonds. Irs amendment form   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Irs amendment form This limit does not apply if you accrue the market discount and include it in your income currently. Irs amendment form   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Irs amendment form Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Irs amendment form Interest not deducted due to limit. Irs amendment form   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Irs amendment form Choosing to deduct disallowed interest expense before the year of disposition. Irs amendment form   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Irs amendment form The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Irs amendment form Net interest income. Irs amendment form   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Irs amendment form Limit on interest deduction for short-term obligations. Irs amendment form   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Irs amendment form   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Irs amendment form The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Irs amendment form Interest not deducted due to limit. Irs amendment form   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Irs amendment form Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Irs amendment form Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Irs amendment form You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Irs amendment form The interest carried over is treated as investment interest paid or accrued in that next year. Irs amendment form You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Irs amendment form Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Irs amendment form Investment income. Irs amendment form   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Irs amendment form Investment income does not include Alaska Permanent Fund dividends. Irs amendment form It also does not include qualified dividends or net capital gain unless you choose to include them. Irs amendment form Choosing to include qualified dividends. Irs amendment form   Investment income generally does not include qualified dividends, discussed in chapter 1. Irs amendment form However, you can choose to include all or part of your qualified dividends in investment income. Irs amendment form   You make this choice by completing Form 4952, line 4g, according to its instructions. Irs amendment form   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Irs amendment form Choosing to include net capital gain. Irs amendment form    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Irs amendment form However, you can choose to include all or part of your net capital gain in investment income. Irs amendment form   You make this choice by completing Form 4952, line 4g, according to its instructions. Irs amendment form   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Irs amendment form   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Irs amendment form    Before making either choice, consider the overall effect on your tax liability. Irs amendment form Compare your tax if you make one or both of these choices with your tax if you do not. Irs amendment form Investment income of child reported on parent's return. Irs amendment form   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Irs amendment form If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. Irs amendment form Include it on line 4a of Form 4952. Irs amendment form Example. Irs amendment form Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Irs amendment form You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Irs amendment form Also enter $200 on Form 1040, line 21. Irs amendment form Your investment income includes this $200. Irs amendment form Child's qualified dividends. Irs amendment form   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Irs amendment form However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Irs amendment form   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Irs amendment form Child's Alaska Permanent Fund dividends. Irs amendment form   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Irs amendment form To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Irs amendment form Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Irs amendment form Subtract the result from the amount on Form 8814, line 12. Irs amendment form Example. Irs amendment form Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Irs amendment form You choose to report this on your return. Irs amendment form You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Irs amendment form You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Irs amendment form You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Irs amendment form Child's capital gain distributions. Irs amendment form   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Irs amendment form However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Irs amendment form   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Irs amendment form Investment expenses. Irs amendment form   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Irs amendment form Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Irs amendment form Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Irs amendment form See Expenses of Producing Income , later, for a discussion of the 2% limit. Irs amendment form Losses from passive activities. Irs amendment form   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Irs amendment form See Publication 925 for information about passive activities. Irs amendment form Example. Irs amendment form Ted is a partner in a partnership that operates a business. Irs amendment form However, he does not materially participate in the partnership's business. Irs amendment form Ted's interest in the partnership is considered a passive activity. Irs amendment form Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Irs amendment form His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Irs amendment form His investment interest expense is $8,000. Irs amendment form Ted also has income from the partnership of $2,000. Irs amendment form Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Irs amendment form His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Irs amendment form Form 4952 Use Form 4952 to figure your deduction for investment interest. Irs amendment form See Form 4952 for more information. Irs amendment form Exception to use of Form 4952. Irs amendment form   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Irs amendment form Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Irs amendment form You do not have any other deductible investment expenses. Irs amendment form You have no carryover of investment interest expense from 2012. Irs amendment form   If you meet all of these tests, you can deduct all of your investment interest. Irs amendment form    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Irs amendment form If the bond yields taxable interest, you can choose to amortize the premium. Irs amendment form This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Irs amendment form If you make this choice, you must reduce your basis in the bond by the amortization for the year. Irs amendment form If the bond yields tax-exempt interest, you must amortize the premium. Irs amendment form This amortized amount is not deductible in determining taxable income. Irs amendment form However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Irs amendment form Bond premium. Irs amendment form   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Irs amendment form For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Irs amendment form Special rules to determine amounts payable on a bond. Irs amendment form   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Irs amendment form 171-3. Irs amendment form Basis. Irs amendment form   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Irs amendment form However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Irs amendment form See Regulations section 1. Irs amendment form 171-1(e). Irs amendment form Dealers. Irs amendment form   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Irs amendment form   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Irs amendment form How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Irs amendment form Constant yield method. Irs amendment form   Figure the bond premium amortization for each accrual period as follows. Irs amendment form Step 1: Determine your yield. Irs amendment form   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Irs amendment form Figure the yield as of the date you got the bond. Irs amendment form It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Irs amendment form   If you do not know the yield, consult your broker or tax advisor. Irs amendment form Databases available to them are likely to show the yield at the date of purchase. Irs amendment form Step 2: Determine the accrual periods. Irs amendment form   You can choose the accrual periods to use. Irs amendment form They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Irs amendment form The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Irs amendment form Step 3: Determine the bond premium for the accrual period. Irs amendment form   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Irs amendment form Then subtract the result from the qualified stated interest for the period. Irs amendment form   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Irs amendment form After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Irs amendment form Example. Irs amendment form On February 1, 2012, you bought a taxable bond for $110,000. Irs amendment form The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Irs amendment form The bond pays qualified stated interest of $10,000 on February 1 of each year. Irs amendment form Your yield is 8. Irs amendment form 07439% compounded annually. Irs amendment form You choose to use annual accrual periods ending on February 1 of each year. Irs amendment form To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Irs amendment form When you subtract the result ($8,881. Irs amendment form 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Irs amendment form 17. Irs amendment form Special rules to figure amortization. Irs amendment form   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Irs amendment form 171-3. Irs amendment form Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Irs amendment form Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Irs amendment form Straight-line method. Irs amendment form   Under this method, the amount of your bond premium amortization is the same each month. Irs amendment form Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Irs amendment form Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Irs amendment form This gives you your bond premium amortization for the year. Irs amendment form Revenue Ruling 82-10 method. Irs amendment form   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Irs amendment form This method is explained in Revenue Ruling 82-10, 1982-1 C. Irs amendment form B. Irs amendment form 46. Irs amendment form Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Irs amendment form You should attach a statement to your return that you are making this choice under section 171. Irs amendment form See How To Report Amortization, next. Irs amendment form This choice is binding for the year you make it and for later tax years. Irs amendment form It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Irs amendment form You can change your decision to amortize bond premium only with the written approval of the IRS. Irs amendment form To request approval, use Form 3115. Irs amendment form For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Irs amendment form You can find Revenue Procedure 2011-14 at www. Irs amendment form irs. Irs amendment form gov/irb/2011-04_IRB/ar08. Irs amendment form html. Irs amendment form How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Irs amendment form Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Irs amendment form Under your last entry on line 1, put a subtotal of all interest listed on line 1. Irs amendment form Below this subtotal, print “ABP Adjustment,” and the total interest you received. Irs amendment form Subtract this amount from the subtotal, and enter the result on line 2. Irs amendment form Bond premium amortization more than interest. Irs amendment form   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Irs amendment form    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Irs amendment form Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Irs amendment form Pre-1998 election to amortize bond premium. Irs amendment form   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Irs amendment form Bonds acquired before October 23, 1986. Irs amendment form   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Irs amendment form Bonds acquired after October 22, 1986, but before 1988. Irs amendment form    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Irs amendment form Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Irs amendment form To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Irs amendment form The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Irs amendment form The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Irs amendment form The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Irs amendment form For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Irs amendment form Attorney or accounting fees. Irs amendment form   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Irs amendment form However, in some cases, attorney or accounting fees are part of the basis of property. Irs amendment form See Basis of Investment Property in chapter 4. Irs amendment form Automatic investment service and dividend reinvestment plans. Irs amendment form   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Irs amendment form Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Irs amendment form Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Irs amendment form   A corporation in which you own stock also may have a dividend reinvestment plan. Irs amendment form This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Irs amendment form   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Irs amendment form If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Irs amendment form Deduct the charges in the year you pay them. Irs amendment form Clerical help and office rent. Irs amendment form   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Irs amendment form Cost of replacing missing securities. Irs amendment form   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Irs amendment form You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Irs amendment form   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Irs amendment form Under certain types of insurance policies, you can recover some of the expenses. Irs amendment form   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Irs amendment form If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Irs amendment form Fees to collect income. Irs amendment form   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Irs amendment form Fees to buy or sell. Irs amendment form   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Irs amendment form You must add the fee to the cost of the property. Irs amendment form See Basis of Investment Property in chapter 4. Irs amendment form    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Irs amendment form They can be used only to figure gain or loss from the sale. Irs amendment form See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Irs amendment form Investment counsel and advice. Irs amendment form   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Irs amendment form This includes amounts you pay for investment advisory services. Irs amendment form Safe deposit box rent. Irs amendment form   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Irs amendment form If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Irs amendment form See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Irs amendment form State and local transfer taxes. Irs amendment form   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Irs amendment form If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Irs amendment form If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Irs amendment form Trustee's commissions for revocable trust. Irs amendment form   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Irs amendment form However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Irs amendment form   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Irs amendment form You cannot deduct the entire amount in the year you pay it. Irs amendment form Investment expenses from pass-through entities. Irs amendment form   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Irs amendment form A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Irs amendment form A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Irs amendment form Publicly-offered mutual funds are discussed later. Irs amendment form   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Irs amendment form Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Irs amendment form   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Irs amendment form Including mutual fund or REMIC expenses in income. Irs amendment form   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Irs amendment form You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Irs amendment form If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Irs amendment form If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Irs amendment form If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Irs amendment form Publicly-offered mutual funds. Irs amendment form   Most mutual funds are publicly offered. Irs amendment form These mutual funds, generally, are traded on an established securities exchange. Irs amendment form These funds do not pass investment expenses through to you. Irs amendment form Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Irs amendment form As a result, you cannot deduct the expenses on your return. Irs amendment form   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Irs amendment form    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Irs amendment form Contact your mutual fund if you are not sure whether it is publicly offered. Irs amendment form Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Irs amendment form Stockholders' meetings. Irs amendment form   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Irs amendment form This is true even if your purpose in attending is to get information that would be useful in making further investments. Irs amendment form Investment-related seminar. Irs amendment form   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Irs amendment form Single-premium life insurance, endowment, and annuity contracts. Irs amendment form   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Irs amendment form Used as collateral. Irs amendment form   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Irs amendment form Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Irs amendment form Borrowing on insurance. Irs amendment form   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Irs amendment form This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Irs amendment form Tax-exempt income. Irs amendment form   You cannot deduct expenses you incur to produce tax-exempt income. Irs amendment form Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Irs amendment form Short-sale expenses. Irs amendment form   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Irs amendment form However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Irs amendment form Short sales are discussed in Short Sales in chapter 4. Irs amendment form Expenses for both tax-exempt and taxable income. Irs amendment form   You may have expenses that are for both tax-exempt and taxable income. Irs amendment form If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Irs amendment form You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Irs amendment form   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Irs amendment form If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Irs amendment form To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Irs amendment form Example. Irs amendment form You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Irs amendment form In earning this income, you had $500 of expenses. Irs amendment form You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Irs amendment form 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Irs amendment form You cannot deduct $400 (80% of $500) of the expenses. Irs amendment form You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Irs amendment form State income taxes. Irs amendment form   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Irs amendment form But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Irs amendment form Interest expense and carrying charges on straddles. Irs amendment form   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Irs amendment form The nondeductible interest and carrying charges are added to the basis of the straddle property. Irs amendment form However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Irs amendment form  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Irs amendment form   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Irs amendment form However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Irs amendment form   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Irs amendment form Nondeductible amount. Irs amendment form   Figure the nondeductible interest and carrying charges on straddle property as follows. Irs amendment form Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Irs amendment form Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Irs amendment form Basis adjustment. Irs amendment form   Add the nondeductible amount to the basis of your straddle property. Irs amendment form How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Irs amendment form Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Irs amendment form Include any deductible short sale expenses. Irs amendment form (See Short Sales in chapter 4 for information on these expenses. Irs amendment form ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Irs amendment form Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Irs amendment form List the type and amount of each expense on the dotted lines next to line 23. Irs amendment form (If necessary, you can show the required information on an attached statement. Irs amendment form ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Irs amendment form When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Irs amendment form If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Irs amendment form Also see When To Deduct Investment Interest , earlier in this chapter. Irs amendment form Unpaid expenses owed to related party. Irs amendment form   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Irs amendment form The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Irs amendment form If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Irs amendment form   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Irs amendment form It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Irs amendment form   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Irs amendment form This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Irs amendment form Prev  Up  Next   Home   More Online Publications
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IRS Seeks Applications for the Electronic Tax Administration Advisory Committee

IR-2014-25 March 7, 2014

WASHINGTON — The Internal Revenue Service is opening the nomination and application process for membership on the Electronic Tax Administration Advisory Committee (ETAAC). The deadline for submitting applications is April 21, 2014.

ETAAC was established as required by the Internal Revenue Service Restructuring and Reform Act of 1998. The purpose of the ETAAC is to provide continued input into the development and implementation of the agency’s strategy for electronic tax administration as well as to provide an organized public forum for the discussion of issues in electronic tax administration.

Nominations of qualified individuals may be made by letter and received from individuals or professional associations. Applicants should complete the ETAAC application including a short statement of interest and a resume. Be sure to describe and document your qualifications, past and current affiliations, and dealings in electronic tax administration. A notice published in the Federal Register contains more details about the ETAAC and the application process.

Members are approved by Treasury to serve three-year terms, beginning in the fall of 2014. Members must pass an IRS tax compliance check and Federal Bureau of Investigation (FBI) background investigation and may not be federally registered lobbyists.

Questions about the application process can be sent to etaac@irs.gov.

 

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Page Last Reviewed or Updated: 07-Mar-2014

The Irs Amendment Form

Irs amendment form 2. Irs amendment form   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. Irs amendment form You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Irs amendment form This chapter discusses accounting methods. Irs amendment form 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. Irs amendment form 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. Irs amendment form 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. Irs amendment form Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Irs amendment form A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Irs amendment form An item considered material for financial statement purposes is generally also considered material for income tax purposes. Irs amendment form See Publication 538 for more information. Irs amendment form 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. Irs amendment form If you later want to change your accounting method, you generally must get IRS approval. Irs amendment form How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Irs amendment form Types of accounting methods. Irs amendment form   Generally, you can use any of the following accounting methods. Irs amendment form Each method is discussed in detail below. Irs amendment form Cash method. Irs amendment form Accrual method. Irs amendment form Special methods of accounting for certain items of income and expenses. Irs amendment form Combination (hybrid) method using elements of two or more of the above. Irs amendment form Business and other items. Irs amendment form   You can account for business and personal items using different accounting methods. Irs amendment form For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Irs amendment form Two or more businesses. Irs amendment form   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Irs amendment form Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Irs amendment form Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Irs amendment form However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Irs amendment form See Accrual Method Required , later. Irs amendment form Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Irs amendment form Items of income include money received as well as property or services received. Irs amendment form If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Irs amendment form See chapter 3 for information on how to report farm income on your income tax return. Irs amendment form Constructive receipt. Irs amendment form   Income is constructively received when an amount is credited to your account or made available to you without restriction. Irs amendment form You do not need to have possession of the income for it to be treated as income for the tax year. Irs amendment form 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. Irs amendment form Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Irs amendment form Direct payments and counter-cyclical payments. Irs amendment form   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. Irs amendment form Delaying receipt of income. Irs amendment form   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Irs amendment form You must report the income in the year the money or property is received or made available to you without restriction. Irs amendment form Example. Irs amendment form Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Irs amendment form She was told in December that her payment was available. Irs amendment form She requested not to be paid until January 2014. Irs amendment form However, she must still include this payment in her 2013 income because it was made available to her in 2013. Irs amendment form Debts paid by another person or canceled. Irs amendment form   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. Irs amendment form If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Irs amendment form See Cancellation of Debt in chapter 3. Irs amendment form Deferred payment contract. Irs amendment form   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. Irs amendment form 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. Irs amendment form Example. Irs amendment form You are a farmer who uses the cash method and a calendar tax year. Irs amendment form You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Irs amendment form You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Irs amendment form 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. Irs amendment form Repayment of income. Irs amendment form   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. Irs amendment form If the repayment is more than $3,000, a special rule applies. Irs amendment form For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Irs amendment form Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Irs amendment form This includes business expenses for which you contest liability. Irs amendment form 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. Irs amendment form See chapter 4 for information on how to deduct farm business expenses on your income tax return. Irs amendment form Prepayment. Irs amendment form   Generally, you cannot deduct expenses paid in advance. Irs amendment form 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. Irs amendment form Example. Irs amendment form On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Irs amendment form 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. Irs amendment form 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. Irs amendment form An exception applies if the expense qualifies for the 12-month rule. Irs amendment form See Publication 538 for more information and examples. Irs amendment form See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Irs amendment form 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. Irs amendment form The purpose of an accrual method of accounting is to correctly match income and expenses. Irs amendment form Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Irs amendment form See Accrual Method Required and Farm Inventory , later. Irs amendment form 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. Irs amendment form Under this rule, include an amount in income on the earliest of the following dates. Irs amendment form When you receive payment. Irs amendment form When the income amount is due to you. Irs amendment form When you earn the income. Irs amendment form When title passes. Irs amendment form If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Irs amendment form Inventory. Irs amendment form   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Irs amendment form An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Irs amendment form See Publication 538 for more information. Irs amendment form Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Irs amendment form Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Irs amendment form The all-events test has been met. Irs amendment form 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. Irs amendment form Economic performance has occurred. Irs amendment form Economic performance. Irs amendment form   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Irs amendment form 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. Irs amendment form If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Irs amendment form Example. Irs amendment form Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Irs amendment form She entered into a contract with ABC Farm Consulting in 2012. Irs amendment form The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Irs amendment form 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. Irs amendment form Jane paid ABC Farm Consulting $2,000 in December 2012. Irs amendment form Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Irs amendment form Economic performance for Jane's liability in the contract occurs as the services are provided. Irs amendment form Jane incurs the $2,000 cost in 2013. Irs amendment form 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. Irs amendment form For more information, see Economic Performance in Publication 538. Irs amendment form Special rule for related persons. Irs amendment form   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. Irs amendment form Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Irs amendment form For more information, see Internal Revenue Code section 267. Irs amendment form Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Irs amendment form A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Irs amendment form A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Irs amendment form A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Irs amendment form A tax shelter. Irs amendment form Note. Irs amendment form 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). Irs amendment form Family corporation. Irs amendment form   A family corporation is generally a corporation that meets one of the following ownership requirements. Irs amendment form 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. Irs amendment form 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. Irs amendment form 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. Irs amendment form For more information on family corporations, see Internal Revenue Code section 447. Irs amendment form Tax shelter. Irs amendment form   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Irs amendment form Its principal purpose is the avoidance or evasion of federal income tax. Irs amendment form It is a farming syndicate. Irs amendment form A farming syndicate is an entity that meets either of the following tests. Irs amendment form 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. Irs amendment form More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Irs amendment form   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. Irs amendment form   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. Irs amendment form 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. Irs amendment form This record should show the actual count or measurement of the inventory. Irs amendment form It should also show all factors that enter into its valuation, including quality and weight, if applicable. Irs amendment form Hatchery business. Irs amendment form   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. Irs amendment form Products held for sale. Irs amendment form   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Irs amendment form , must be included in inventory. Irs amendment form Supplies. Irs amendment form   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Irs amendment form Deduct the cost of supplies in the year used or consumed in operations. Irs amendment form Do not include incidental supplies in inventory as these are deductible in the year of purchase. Irs amendment form Livestock. Irs amendment form   Livestock held primarily for sale must be included in inventory. Irs amendment form Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Irs amendment form See also Unit-livestock-price method , later. Irs amendment form 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. Irs amendment form Growing crops. Irs amendment form   Generally, growing crops are not required to be included in inventory. Irs amendment form 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. Irs amendment form See Uniform capitalization rules below. Irs amendment form Also see Uniform Capitalization Rules in  chapter 6. Irs amendment form Items to include in inventory. Irs amendment form   Your inventory should include all items held for sale, or for use as feed, seed, etc. Irs amendment form , whether raised or purchased, that are unsold at the end of the year. Irs amendment form Uniform capitalization rules. Irs amendment form   The following applies if you are required to use an accrual method of accounting. Irs amendment form 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. Irs amendment form The costs of animals are subject to the uniform capitalization rules. Irs amendment form Inventory valuation methods. Irs amendment form   The following methods, described below, are those generally available for valuing inventory. Irs amendment form The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Irs amendment form Cost. Irs amendment form Lower of cost or market. Irs amendment form Farm-price method. Irs amendment form Unit-livestock-price method. Irs amendment form Cost and lower of cost or market methods. Irs amendment form   See Publication 538 for information on these valuation methods. Irs amendment form 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. Irs amendment form 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. Irs amendment form Farm-price method. Irs amendment form   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Irs amendment form Market price is the current price at the nearest market in the quantities you usually sell. Irs amendment form Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Irs amendment form 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. Irs amendment form Unit-livestock-price method. Irs amendment form   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Irs amendment form You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Irs amendment form The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Irs amendment form Unit prices and classifications are subject to approval by the IRS on examination of your return. Irs amendment form 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. Irs amendment form IRS approval is not required for these adjustments. Irs amendment form Any other changes in unit prices or classifications do require IRS approval. Irs amendment form   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. Irs amendment form This method accounts only for the increase in cost of raising an animal to maturity. Irs amendment form It does not provide for any decrease in the animal's market value after it reaches maturity. Irs amendment form Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Irs amendment form   Do not include sold or lost animals in the year-end inventory. Irs amendment form If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Irs amendment form The animals on hand at the end of the year are considered those most recently acquired. Irs amendment form   You must include in inventory all livestock purchased primarily for sale. Irs amendment form You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Irs amendment form However, you must be consistent from year to year, regardless of the method you have chosen. Irs amendment form You cannot change your method without obtaining approval from the IRS. Irs amendment form   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Irs amendment form If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Irs amendment form However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Irs amendment form This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Irs amendment form 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. Irs amendment form Uniform capitalization rules. Irs amendment form   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. Irs amendment form This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Irs amendment form Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Irs amendment form Example 1. Irs amendment form You are a farmer who uses an accrual method of accounting. Irs amendment form You keep your books on the calendar year basis. Irs amendment form You sell grain in December 2013 but you are not paid until January 2014. Irs amendment form 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. Irs amendment form Example 2. Irs amendment form 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. Irs amendment form Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Irs amendment form Deduct the costs of producing the grain in the year you pay for them. Irs amendment form Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Irs amendment form Crop method. Irs amendment form   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. Irs amendment form You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Irs amendment form 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. Irs amendment form    See chapter 4 for details on deducting the costs of operating a farm. Irs amendment form Also see Regulations section 1. Irs amendment form 162-12. Irs amendment form Other special methods. Irs amendment form   Other special methods of accounting apply to the following items. Irs amendment form Amortization, see chapter 7. Irs amendment form Casualties, see chapter 11. Irs amendment form Condemnations, see chapter 11. Irs amendment form Depletion, see chapter 7. Irs amendment form Depreciation, see chapter 7. Irs amendment form Farm business expenses, see chapter 4. Irs amendment form Farm income, see chapter 3. Irs amendment form Installment sales, see chapter 10. Irs amendment form Soil and water conservation expenses, see chapter 5. Irs amendment form Thefts, see chapter 11. Irs amendment form 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. Irs amendment form However, the following restrictions apply. Irs amendment form If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Irs amendment form If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Irs amendment form 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). Irs amendment form 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. Irs amendment form You may also have to pay a fee. Irs amendment form To obtain approval, you must generally file Form 3115. Irs amendment form There are instances when you can obtain automatic consent to change certain methods of accounting. Irs amendment form See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Irs amendment form For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Irs amendment form Also see Publication 538. Irs amendment form Prev  Up  Next   Home   More Online Publications