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Online taxes h&rblock Publication 531 - Introductory Material Table of Contents Future Developments What's New Reminder IntroductionOrdering forms and publications. Online taxes h&rblock Tax questions. Online taxes h&rblock Future Developments For the latest information about developments related to Publication 531, such as legislation enacted after this publication was published, go to www. Online taxes h&rblock irs. Online taxes h&rblock gov/pub531. Online taxes h&rblock What's New Additional Medicare Tax. Online taxes h&rblock  Beginning in 2013, a 0. Online taxes h&rblock 9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Online taxes h&rblock An employer is required to withhold Additional Medicare Tax on any Medicare wages or RRTA compensation it pays to an employee in excess of $200,000 in a calendar year without regard to the employee's filing status. Online taxes h&rblock An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages or compensation in excess of $200,000 to an employee and continue to withhold it until the end of the calendar year. Online taxes h&rblock Additional Medicare Tax is only imposed on the employee. Online taxes h&rblock There is no employer share of Additional Medicare Tax. Online taxes h&rblock All wages and compensation that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Online taxes h&rblock Tips are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold. Online taxes h&rblock Similarly, tips are subject to Additional Medicare Tax withholding, if, in combination with other RRTA compensation paid by the employer, they exceed the $200,000 withholding threshold. Online taxes h&rblock For more information on Additional Medicare Tax, go to www. Online taxes h&rblock irs. Online taxes h&rblock gov and enter “Additional Medicare Tax” in the search box. Online taxes h&rblock Reminder Photographs of missing children. Online taxes h&rblock  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Online taxes h&rblock Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Online taxes h&rblock You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Online taxes h&rblock Introduction This publication is for employees who receive tips. Online taxes h&rblock All tips you receive are income and are subject to federal income tax. Online taxes h&rblock You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement. Online taxes h&rblock The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax. Online taxes h&rblock Reporting your tip income correctly is not difficult. Online taxes h&rblock You must do three things. Online taxes h&rblock Keep a daily tip record. Online taxes h&rblock Report tips to your employer. Online taxes h&rblock Report all your tips on your income tax return. Online taxes h&rblock  This publication will explain these three things and show you what to do on your tax return if you have not done the first two. Online taxes h&rblock This publication will also show you how to treat allocated tips. Online taxes h&rblock Comments and suggestions. Online taxes h&rblock   We welcome your comments about this publication and your suggestions for future editions. Online taxes h&rblock   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Online taxes h&rblock NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Online taxes h&rblock Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Online taxes h&rblock   You can send your comments from www. Online taxes h&rblock irs. Online taxes h&rblock gov/formspubs/. Online taxes h&rblock Click on “More Information” and then on “Comment on Tax Forms and Publications”. Online taxes h&rblock   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Online taxes h&rblock Ordering forms and publications. Online taxes h&rblock   Visit www. Online taxes h&rblock irs. Online taxes h&rblock gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Online taxes h&rblock Internal Revenue Service 1201 N. Online taxes h&rblock Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Online taxes h&rblock   If you have a tax question, check the information available on IRS. Online taxes h&rblock gov or call 1-800-829-1040. Online taxes h&rblock We cannot answer tax questions sent to either of the above addresses. 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Online taxes h&rblock 5. Online taxes h&rblock   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. Online taxes h&rblock Short-term lease. Online taxes h&rblock Retail space. Online taxes h&rblock Qualified long-term real property. Online taxes h&rblock 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. Online taxes h&rblock If there is a connection between any income you receive and your business, the income is business income. Online taxes h&rblock A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Online taxes h&rblock You can have business income even if you are not involved in the activity on a regular full-time basis. Online taxes h&rblock Income from work you do on the side in addition to your regular job can be business income. Online taxes h&rblock You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Online taxes h&rblock 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. Online taxes h&rblock For information on selling business assets, see chapter 3. Online taxes h&rblock Nonemployee compensation. Online taxes h&rblock Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Online taxes h&rblock This includes amounts reported as nonemployee compensation in box 7 of the form. Online taxes h&rblock You can find more information in the instructions on the back of the Form 1099-MISC you received. Online taxes h&rblock Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Online taxes h&rblock In most cases, your business income will be in the form of cash, checks, and credit card charges. Online taxes h&rblock But business income can be in other forms, such as property or services. Online taxes h&rblock These and other types of income are explained next. Online taxes h&rblock If you are a U. Online taxes h&rblock S. Online taxes h&rblock 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. Online taxes h&rblock S. Online taxes h&rblock law. Online taxes h&rblock If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Online taxes h&rblock For details, see Publication 54, Tax Guide for U. Online taxes h&rblock S. Online taxes h&rblock Citizens and Resident Aliens Abroad. Online taxes h&rblock Bartering for Property or Services Bartering is an exchange of property or services. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock Example 1. Online taxes h&rblock You are a self-employed lawyer. Online taxes h&rblock You perform legal services for a client, a small corporation. Online taxes h&rblock In payment for your services, you receive shares of stock in the corporation. Online taxes h&rblock You must include the fair market value of the shares in income. Online taxes h&rblock Example 2. Online taxes h&rblock You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Online taxes h&rblock You must include the fair rental value of the apartment in your gross receipts. Online taxes h&rblock Your landlord must include the fair market value of the work of art in his or her rental income. Online taxes h&rblock Example 3. Online taxes h&rblock You are a self-employed accountant. Online taxes h&rblock 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. Online taxes h&rblock Members get in touch with other members directly and bargain for the value of the services to be performed. Online taxes h&rblock In return for accounting services you provided for the house painter's business, the house painter painted your home. Online taxes h&rblock You must include in gross receipts the fair market value of the services you received from the house painter. Online taxes h&rblock The house painter must include the fair market value of your accounting services in his or her gross receipts. Online taxes h&rblock Example 4. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Online taxes h&rblock See Publication 15 (Circular E), Employer's Tax Guide. Online taxes h&rblock Example 5. Online taxes h&rblock You operate a plumbing business and use the cash method of accounting. Online taxes h&rblock You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Online taxes h&rblock Each member has access to a directory that lists the members of the club and the services available. Online taxes h&rblock Members contact each other directly and request services to be performed. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock Information returns. Online taxes h&rblock   If you are involved in a bartering transaction, you may have to file either of the following forms. Online taxes h&rblock Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Online taxes h&rblock Form 1099-MISC, Miscellaneous Income. Online taxes h&rblock For information about these forms, see the General Instructions for Certain Information Returns. Online taxes h&rblock 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. Online taxes h&rblock , who provides services (maid services, etc. Online taxes h&rblock ) for guests, report the rental income and expenses on Schedule C or C-EZ. Online taxes h&rblock 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. Online taxes h&rblock For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Online taxes h&rblock Real estate dealer. Online taxes h&rblock   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. Online taxes h&rblock Rent you receive from real estate held for sale to customers is subject to SE tax. Online taxes h&rblock However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Online taxes h&rblock Trailer park owner. Online taxes h&rblock   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. Online taxes h&rblock    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. Online taxes h&rblock Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Online taxes h&rblock   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. Online taxes h&rblock   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Online taxes h&rblock Hotels, boarding houses, and apartments. Online taxes h&rblock   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. Online taxes h&rblock   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. Online taxes h&rblock An example of a service that is not normally provided for the convenience of the occupants is maid service. Online taxes h&rblock However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Online taxes h&rblock Prepaid rent. Online taxes h&rblock   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. Online taxes h&rblock This is true no matter what accounting method or period you use. Online taxes h&rblock Lease bonus. Online taxes h&rblock   A bonus you receive from a lessee for granting a lease is an addition to the rent. Online taxes h&rblock Include it in your gross receipts in the year received. Online taxes h&rblock Lease cancellation payments. Online taxes h&rblock   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Online taxes h&rblock Payments to third parties. Online taxes h&rblock   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. Online taxes h&rblock A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Online taxes h&rblock Settlement payments. Online taxes h&rblock   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. Online taxes h&rblock Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Online taxes h&rblock ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Online taxes h&rblock Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Online taxes h&rblock If you receive any of those payments, include them in your gross receipts as explained in that discussion. Online taxes h&rblock Interest and Dividend Income Interest and dividends may be considered business income. Online taxes h&rblock Interest. Online taxes h&rblock   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Online taxes h&rblock Interest received on loans is business income if you are in the business of lending money. Online taxes h&rblock Uncollectible loans. Online taxes h&rblock   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. Online taxes h&rblock If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Online taxes h&rblock See Bad Debts in chapter 8. Online taxes h&rblock Unstated interest. Online taxes h&rblock   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Online taxes h&rblock See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Online taxes h&rblock Dividends. Online taxes h&rblock   Generally, dividends are business income to dealers in securities. Online taxes h&rblock For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Online taxes h&rblock If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Online taxes h&rblock   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. Online taxes h&rblock To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Online taxes h&rblock Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Online taxes h&rblock 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. Online taxes h&rblock Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Online taxes h&rblock If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Online taxes h&rblock Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Online taxes h&rblock Price reduced after purchase. Online taxes h&rblock   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. Online taxes h&rblock Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Online taxes h&rblock Deductible debt. Online taxes h&rblock   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Online taxes h&rblock Example. Online taxes h&rblock You get accounting services for your business on credit. Online taxes h&rblock Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Online taxes h&rblock Your accountant forgives part of the amount you owe for the accounting services. Online taxes h&rblock How you treat the canceled debt depends on your method of accounting. Online taxes h&rblock Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Online taxes h&rblock Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Online taxes h&rblock   For information on the cash and accrual methods of accounting, see chapter 2. Online taxes h&rblock Exclusions Do not include canceled debt in income in the following situations. Online taxes h&rblock However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Online taxes h&rblock For more information, see Form 982. Online taxes h&rblock The cancellation takes place in a bankruptcy case under title 11 of the U. Online taxes h&rblock S. Online taxes h&rblock Code (relating to bankruptcy). Online taxes h&rblock See Publication 908, Bankruptcy Tax Guide. Online taxes h&rblock The cancellation takes place when you are insolvent. Online taxes h&rblock You can exclude the canceled debt to the extent you are insolvent. Online taxes h&rblock See Publication 908. Online taxes h&rblock The canceled debt is a qualified farm debt owed to a qualified person. Online taxes h&rblock See chapter 3 in Publication 225, Farmer's Tax Guide. Online taxes h&rblock The canceled debt is a qualified real property business debt. Online taxes h&rblock This situation is explained later. Online taxes h&rblock The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Online taxes h&rblock See Form 982. Online taxes h&rblock 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. Online taxes h&rblock If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Online taxes h&rblock Debt. Online taxes h&rblock   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Online taxes h&rblock Qualified real property business debt. Online taxes h&rblock   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Online taxes h&rblock If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Online taxes h&rblock Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Online taxes h&rblock However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Online taxes h&rblock Cancellation of qualified real property business debt. Online taxes h&rblock   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Online taxes h&rblock It was incurred or assumed in connection with real property used in a trade or business. Online taxes h&rblock It was secured by such real property. Online taxes h&rblock It was incurred or assumed at either of the following times. Online taxes h&rblock Before January 1, 1993. Online taxes h&rblock After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Online taxes h&rblock It is debt to which you choose to apply these rules. Online taxes h&rblock   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. Online taxes h&rblock   You cannot exclude more than either of the following amounts. Online taxes h&rblock 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. Online taxes h&rblock The total adjusted bases of depreciable real property held by you immediately before the cancellation. Online taxes h&rblock These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Online taxes h&rblock Do not take into account depreciable real property acquired in contemplation of the cancellation. Online taxes h&rblock Election. Online taxes h&rblock   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Online taxes h&rblock You must file your return by the due date (including extensions). Online taxes h&rblock 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). Online taxes h&rblock For more information, see When To File in the form instructions. Online taxes h&rblock Other Income The following discussion explains how to treat other types of business income you may receive. Online taxes h&rblock Restricted property. Online taxes h&rblock   Restricted property is property that has certain restrictions that affect its value. Online taxes h&rblock 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. Online taxes h&rblock However, you can choose to be taxed in the year you receive the property. Online taxes h&rblock For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Online taxes h&rblock Gains and losses. Online taxes h&rblock   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. Online taxes h&rblock Instead, you must report these gains and losses on other forms. Online taxes h&rblock For more information, see chapter 3. Online taxes h&rblock Promissory notes. Online taxes h&rblock   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. Online taxes h&rblock In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Online taxes h&rblock Lost income payments. Online taxes h&rblock   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. Online taxes h&rblock Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Online taxes h&rblock Damages. Online taxes h&rblock   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. Online taxes h&rblock Patent infringement. Online taxes h&rblock Breach of contract or fiduciary duty. Online taxes h&rblock Antitrust injury. Online taxes h&rblock Economic injury. Online taxes h&rblock   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Online taxes h&rblock Your deduction is the smaller of the following amounts. Online taxes h&rblock 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. Online taxes h&rblock Your loss from the injury that you have not yet deducted. Online taxes h&rblock Punitive damages. Online taxes h&rblock   You must also include punitive damages in income. Online taxes h&rblock Kickbacks. Online taxes h&rblock   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Online taxes h&rblock 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. Online taxes h&rblock Recovery of items previously deducted. Online taxes h&rblock   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. Online taxes h&rblock 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. Online taxes h&rblock If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Online taxes h&rblock Example. Online taxes h&rblock Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Online taxes h&rblock He also had 2 personal exemptions for a total of $7,800. Online taxes h&rblock He would not pay income tax even if he did not deduct the bad debt. Online taxes h&rblock Therefore, he will not report as income any part of the $300 he may recover in any future year. Online taxes h&rblock Exception for depreciation. Online taxes h&rblock   This rule does not apply to depreciation. Online taxes h&rblock You recover depreciation using the rules explained next. Online taxes h&rblock Recapture of depreciation. Online taxes h&rblock   In the following situations, you have to recapture the depreciation deduction. Online taxes h&rblock This means you include in income part or all of the depreciation you deducted in previous years. Online taxes h&rblock Listed property. Online taxes h&rblock   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. Online taxes h&rblock You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Online taxes h&rblock Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Online taxes h&rblock For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Online taxes h&rblock That chapter explains how to determine whether property is used more than 50% in your business. Online taxes h&rblock Section 179 property. Online taxes h&rblock   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. Online taxes h&rblock You do this by including in income on Schedule C part of the deduction you took. Online taxes h&rblock Use Part IV of Form 4797 to figure the amount to include on Schedule C. Online taxes h&rblock See chapter 2 in Publication 946 to find out when you recapture the deduction. Online taxes h&rblock Sale or exchange of depreciable property. Online taxes h&rblock   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. Online taxes h&rblock You figure the income due to depreciation recapture in Part III of Form 4797. Online taxes h&rblock For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Online taxes h&rblock Items That Are Not Income In some cases the property or money you receive is not income. Online taxes h&rblock Appreciation. Online taxes h&rblock   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Online taxes h&rblock Consignments. Online taxes h&rblock   Consignments of merchandise to others to sell for you are not sales. Online taxes h&rblock The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Online taxes h&rblock Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Online taxes h&rblock Merchandise you have shipped out on consignment is included in your inventory until it is sold. Online taxes h&rblock   Do not include merchandise you receive on consignment in your inventory. Online taxes h&rblock 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. Online taxes h&rblock Construction allowances. Online taxes h&rblock   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. Online taxes h&rblock Under a short-term lease of retail space. Online taxes h&rblock For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Online taxes h&rblock Amount you can exclude. Online taxes h&rblock   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Online taxes h&rblock Short-term lease. Online taxes h&rblock   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Online taxes h&rblock The following rules apply in determining whether the lease is for 15 years or less. Online taxes h&rblock Take into account options to renew when figuring whether the lease is for 15 years or less. Online taxes h&rblock But do not take into account any option to renew at fair market value determined at the time of renewal. Online taxes h&rblock 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. Online taxes h&rblock Retail space. Online taxes h&rblock   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. Online taxes h&rblock Qualified long-term real property. Online taxes h&rblock   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. Online taxes h&rblock Exchange of like-kind property. Online taxes h&rblock   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. Online taxes h&rblock This means that the gain is not taxable and the loss is not deductible. Online taxes h&rblock A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Online taxes h&rblock For more information, see Form 8824. Online taxes h&rblock Leasehold improvements. Online taxes h&rblock   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. Online taxes h&rblock However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Online taxes h&rblock Loans. Online taxes h&rblock   Money borrowed through a bona fide loan is not income. Online taxes h&rblock Sales tax. Online taxes h&rblock   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. Online taxes h&rblock 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). Online taxes h&rblock Direct seller. Online taxes h&rblock   You must report all income you receive as a direct seller on Schedule C or C-EZ. Online taxes h&rblock This includes any of the following. Online taxes h&rblock Income from sales—payments you receive from customers for products they buy from you. Online taxes h&rblock Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Online taxes h&rblock Prizes, awards, and gifts you receive from your selling business. Online taxes h&rblock You must report this income regardless of whether it is reported to you on an information return. Online taxes h&rblock   You are a direct seller if you meet all the following conditions. Online taxes h&rblock You are engaged in one of the following trades or businesses. Online taxes h&rblock 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. Online taxes h&rblock Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock Executor or administrator. Online taxes h&rblock   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. Online taxes h&rblock A nonprofessional fiduciary (personal representative) and both of the following apply. Online taxes h&rblock The estate includes an active trade or business in which you actively participate. Online taxes h&rblock Your fees are related to the operation of that trade or business. Online taxes h&rblock 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. Online taxes h&rblock    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Online taxes h&rblock Fishing crew member. Online taxes h&rblock    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 . Online taxes h&rblock Insurance agent, former. Online taxes h&rblock   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. Online taxes h&rblock You received payments after your agreement to perform services for the company ended. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock 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). Online taxes h&rblock Insurance agent, retired. Online taxes h&rblock   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. Online taxes h&rblock Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Online taxes h&rblock   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Online taxes h&rblock Newspaper carrier or distributor. Online taxes h&rblock   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Online taxes h&rblock You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Online taxes h&rblock Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Online taxes h&rblock You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Online taxes h&rblock   This rule applies whether or not you hire others to help you make deliveries. Online taxes h&rblock It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Online taxes h&rblock Newspaper or magazine vendor. Online taxes h&rblock   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. Online taxes h&rblock You sell newspapers or magazines to ultimate consumers. Online taxes h&rblock You sell them at a fixed price. Online taxes h&rblock Your earnings are based on the difference between the sales price and your cost of goods sold. Online taxes h&rblock   This rule applies whether or not you are guaranteed a minimum amount of earnings. Online taxes h&rblock It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Online taxes h&rblock Notary public. Online taxes h&rblock   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Online taxes h&rblock These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Online taxes h&rblock Public official. Online taxes h&rblock   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Online taxes h&rblock 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. Online taxes h&rblock 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. Online taxes h&rblock   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. Online taxes h&rblock Real estate agent or direct seller. Online taxes h&rblock   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. Online taxes h&rblock 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. Online taxes h&rblock You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Online taxes h&rblock Securities dealer. Online taxes h&rblock   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. Online taxes h&rblock For more information, see sections 1256 and 1402(i). Online taxes h&rblock Securities trader. Online taxes h&rblock   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Online taxes h&rblock As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Online taxes h&rblock However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Online taxes h&rblock For more information about securities traders, see Publication 550, Investment Income and Expenses. Online taxes h&rblock Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Online taxes h&rblock This section discusses some of the more common differences that may affect business transactions. Online taxes h&rblock Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Online taxes h&rblock 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. Online taxes h&rblock Dealers in real estate are not allowed to use inventories. Online taxes h&rblock For more information on inventories, see chapter 2. Online taxes h&rblock Income paid to a third party. Online taxes h&rblock   All income you earn is taxable to you. Online taxes h&rblock You cannot avoid tax by having the income paid to a third party. Online taxes h&rblock Example. Online taxes h&rblock You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Online taxes h&rblock The amount paid to your son is gross income to you. Online taxes h&rblock Cash discounts. Online taxes h&rblock   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Online taxes h&rblock For income tax purposes, you can use either of the following two methods to account for cash discounts. Online taxes h&rblock Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Online taxes h&rblock Credit the cash discount to a discount income account. Online taxes h&rblock You must use the chosen method every year for all your purchase discounts. Online taxes h&rblock   If you use the second method, the credit balance in the account at the end of your tax year is business income. Online taxes h&rblock Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Online taxes h&rblock 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. Online taxes h&rblock Trade discounts. Online taxes h&rblock   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Online taxes h&rblock Do not enter these discounts on your books of account. Online taxes h&rblock Instead, use only the net amount as the cost of the merchandise purchased. Online taxes h&rblock For more information, see Trade discounts in chapter 6. Online taxes h&rblock Payment placed in escrow. Online taxes h&rblock   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. Online taxes h&rblock 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. Online taxes h&rblock Sales returns and allowances. Online taxes h&rblock   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Online taxes h&rblock Advance payments. Online taxes h&rblock   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Online taxes h&rblock Insurance proceeds. Online taxes h&rblock   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. Online taxes h&rblock You cannot deduct the reimbursed part of a casualty or theft loss. Online taxes h&rblock   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Online taxes h&rblock Prev  Up  Next   Home   More Online Publications