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Tax Filing 2014

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Tax Filing 2014

Tax filing 2014 3. Tax filing 2014   SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Tax filing 2014 Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. Tax filing 2014 In addition, you will contribute matching or nonelective contributions. Tax filing 2014 SIMPLE plans can only be maintained on a calendar-year basis. Tax filing 2014 A SIMPLE plan can be set up in either of the following ways. Tax filing 2014 Using SIMPLE IRAs (SIMPLE IRA plan). Tax filing 2014 As part of a 401(k) plan (SIMPLE 401(k) plan). Tax filing 2014 Many financial institutions will help you set up a SIMPLE plan. Tax filing 2014 SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Tax filing 2014 Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. Tax filing 2014 For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. Tax filing 2014 Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. Tax filing 2014 You meet the employee limit. Tax filing 2014 You do not maintain another qualified plan unless the other plan is for collective bargaining employees. Tax filing 2014 Employee limit. Tax filing 2014   You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Tax filing 2014 Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Tax filing 2014 Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). Tax filing 2014   Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. Tax filing 2014 Grace period for employers who cease to meet the 100-employee limit. Tax filing 2014   If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. Tax filing 2014   A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Tax filing 2014 Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. Tax filing 2014 Coverage under the plan has not significantly changed during the grace period. Tax filing 2014 The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. Tax filing 2014    The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. Tax filing 2014 Other qualified plan. Tax filing 2014   The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. Tax filing 2014 Exception. Tax filing 2014   If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. Tax filing 2014 Who Can Participate in a SIMPLE IRA Plan? Eligible employee. Tax filing 2014   Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. Tax filing 2014 The term “employee” includes a self-employed individual who received earned income. Tax filing 2014   You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. Tax filing 2014 For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. Tax filing 2014 However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. Tax filing 2014 Excludable employees. Tax filing 2014   The following employees do not need to be covered under a SIMPLE IRA plan. Tax filing 2014 Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Tax filing 2014 Nonresident alien employees who have received no U. Tax filing 2014 S. Tax filing 2014 source wages, salaries, or other personal services compensation from you. Tax filing 2014 Compensation. Tax filing 2014   Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Tax filing 2014 Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. Tax filing 2014 If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. Tax filing 2014 How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Tax filing 2014 Each form is a model savings incentive match plan for employees (SIMPLE) plan document. Tax filing 2014 Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. Tax filing 2014 Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. Tax filing 2014 Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. Tax filing 2014 The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Tax filing 2014 Keep the original form. Tax filing 2014 Do not file it with the IRS. Tax filing 2014 Other uses of the forms. Tax filing 2014   If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. Tax filing 2014 Meeting employer notification requirements for the SIMPLE IRA plan. Tax filing 2014 Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. Tax filing 2014 Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. Tax filing 2014 Deadline for setting up a SIMPLE IRA plan. Tax filing 2014   You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. Tax filing 2014 This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. Tax filing 2014 If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. Tax filing 2014 A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. Tax filing 2014 Setting up a SIMPLE IRA. Tax filing 2014   SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. Tax filing 2014 A SIMPLE IRA must be set up for each eligible employee. Tax filing 2014 Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. Tax filing 2014   A SIMPLE IRA cannot be a Roth IRA. Tax filing 2014 Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Tax filing 2014 Deadline for setting up a SIMPLE IRA. Tax filing 2014   A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. Tax filing 2014 See Time limits for contributing funds , later, under Contribution Limits. Tax filing 2014 Credit for startup costs. Tax filing 2014   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. Tax filing 2014 For more information, see Credit for startup costs under Reminders, earlier. Tax filing 2014 Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. Tax filing 2014 The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. Tax filing 2014 Your decision to make either matching contributions or nonelective contributions (discussed later). Tax filing 2014 A summary description provided by the financial institution. Tax filing 2014 Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. Tax filing 2014 Election period. Tax filing 2014   The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). Tax filing 2014 However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. Tax filing 2014   A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. Tax filing 2014 For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Tax filing 2014 Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. Tax filing 2014 Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. Tax filing 2014 You, as the employer, must make either matching contributions or nonelective contributions, defined later. Tax filing 2014 No other contributions can be made to the SIMPLE IRA plan. Tax filing 2014 These contributions, which you can deduct, must be made timely. Tax filing 2014 See Time limits for contributing funds , later. Tax filing 2014 Salary reduction contributions. Tax filing 2014   The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. Tax filing 2014 These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. Tax filing 2014 You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. Tax filing 2014   If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. Tax filing 2014 Catch-up contributions. Tax filing 2014   A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Tax filing 2014 The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. Tax filing 2014 Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. Tax filing 2014 However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Tax filing 2014 The catch-up contribution limit. Tax filing 2014 The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. Tax filing 2014 Employer matching contributions. Tax filing 2014   You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. Tax filing 2014 This requirement does not apply if you make nonelective contributions as discussed later. Tax filing 2014 Example. Tax filing 2014 In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Tax filing 2014 Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Tax filing 2014 You make 3% matching contributions. Tax filing 2014 The total contribution you make for John is $2,000, figured as follows. Tax filing 2014 Salary reduction contributions ($25,000 × . Tax filing 2014 05) $1,250 Employer matching contribution ($25,000 × . Tax filing 2014 03) 750 Total contributions $2,000     The total contribution you make for yourself is $5,200, figured as follows. Tax filing 2014 Salary reduction contributions ($40,000 × . Tax filing 2014 10) $4,000 Employer matching contribution ($40,000 × . Tax filing 2014 03) 1,200 Total contributions $5,200 Lower percentage. Tax filing 2014   If you choose a matching contribution less than 3%, the percentage must be at least 1%. Tax filing 2014 You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Tax filing 2014 You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. Tax filing 2014 Nonelective contributions. Tax filing 2014   Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. Tax filing 2014 If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Tax filing 2014 Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). Tax filing 2014   If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Tax filing 2014 Example 1. Tax filing 2014 In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Tax filing 2014 Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Tax filing 2014 You make a 2% nonelective contribution. Tax filing 2014 Both of you are under age 50. Tax filing 2014 The total contribution you make for Jane is $4,320, figured as follows. Tax filing 2014 Salary reduction contributions ($36,000 × . Tax filing 2014 10) $3,600 2% nonelective contributions ($36,000 × . Tax filing 2014 02) 720 Total contributions $4,320     The total contribution you make for yourself is $6,000, figured as follows. Tax filing 2014 Salary reduction contributions ($50,000 × . Tax filing 2014 10) $5,000 2% nonelective contributions ($50,000 × . Tax filing 2014 02) 1,000 Total contributions $6,000 Example 2. Tax filing 2014 Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. Tax filing 2014 Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . Tax filing 2014 02) 1,500 Total contributions $13,500 Time limits for contributing funds. Tax filing 2014   You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. Tax filing 2014 You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Tax filing 2014 Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. Tax filing 2014 When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. Tax filing 2014 You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. Tax filing 2014 Example 1. Tax filing 2014 Your tax year is the fiscal year ending June 30. Tax filing 2014 Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. Tax filing 2014 Example 2. Tax filing 2014 You are a sole proprietor whose tax year is the calendar year. Tax filing 2014 Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. Tax filing 2014 Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Tax filing 2014 For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. Tax filing 2014 Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Tax filing 2014 (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. Tax filing 2014 ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. Tax filing 2014 SIMPLE IRA plan contributions are not subject to federal income tax withholding. Tax filing 2014 However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Tax filing 2014 Matching and nonelective contributions are not subject to these taxes. Tax filing 2014 Reporting on Form W-2. Tax filing 2014   Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. Tax filing 2014 You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Tax filing 2014 You must also include them in box 12. Tax filing 2014 Mark the “Retirement plan” checkbox in box 13. Tax filing 2014 For more information, see the Form W-2 instructions. Tax filing 2014 Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Tax filing 2014 Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. Tax filing 2014 However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. Tax filing 2014 Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Tax filing 2014 Early withdrawals generally are subject to a 10% additional tax. Tax filing 2014 However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. Tax filing 2014 More information. Tax filing 2014   See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. Tax filing 2014 More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. Tax filing 2014 SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. Tax filing 2014 A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. Tax filing 2014 However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. Tax filing 2014 Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. Tax filing 2014 If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. Tax filing 2014 See Catch-up contributions , earlier under Contribution Limits. Tax filing 2014 You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. Tax filing 2014 No other contributions can be made to the trust. Tax filing 2014 No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. Tax filing 2014 The employee's rights to any contributions are nonforfeitable. Tax filing 2014 No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). Tax filing 2014 Compensation is defined earlier in this chapter. Tax filing 2014 Employee notification. Tax filing 2014   The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. Tax filing 2014 See Notification Requirement in this chapter. Tax filing 2014 Credit for startup costs. Tax filing 2014   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. Tax filing 2014 For more information, see Credit for startup costs under Reminders, earlier. Tax filing 2014 Note on Forms. Tax filing 2014   Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. Tax filing 2014 To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. Tax filing 2014 Prev  Up  Next   Home   More Online Publications
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The Tax Filing 2014

Tax filing 2014 6. Tax filing 2014   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Tax filing 2014 However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Tax filing 2014 This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Tax filing 2014 This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Tax filing 2014 However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Tax filing 2014 If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Tax filing 2014 For more information, see chapter 2. Tax filing 2014 Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Tax filing 2014 These lines are reproduced below and are explained in the discussion that follows. Tax filing 2014 35 Inventory at beginning of year. Tax filing 2014 If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Tax filing 2014 Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Tax filing 2014 Subtract line 41 from line 40. Tax filing 2014  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Tax filing 2014 If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Tax filing 2014 Opening inventory usually will be identical to the closing inventory of the year before. Tax filing 2014 You must explain any difference in a schedule attached to your return. Tax filing 2014 Donation of inventory. Tax filing 2014   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Tax filing 2014 The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Tax filing 2014 You must remove the amount of your contribution deduction from your opening inventory. Tax filing 2014 It is not part of the cost of goods sold. Tax filing 2014   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Tax filing 2014 Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Tax filing 2014 For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Tax filing 2014   A special rule may apply to certain donations of food inventory. Tax filing 2014 See Publication 526, Charitable Contributions. Tax filing 2014 Example 1. Tax filing 2014 You are a calendar year taxpayer who uses an accrual method of accounting. Tax filing 2014 In 2013, you contributed property from inventory to a church. Tax filing 2014 It had a fair market value of $600. Tax filing 2014 The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Tax filing 2014 The charitable contribution allowed for 2013 is $400 ($600 − $200). Tax filing 2014 The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Tax filing 2014 The cost of goods sold you use in determining gross income for 2013 must not include the $400. Tax filing 2014 You remove that amount from opening inventory for 2013. Tax filing 2014 Example 2. Tax filing 2014 If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Tax filing 2014 You would not be allowed any charitable contribution deduction for the contributed property. Tax filing 2014 Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Tax filing 2014 If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Tax filing 2014 Trade discounts. Tax filing 2014   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Tax filing 2014 You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Tax filing 2014 Do not show the discount amount separately as an item in gross income. Tax filing 2014   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Tax filing 2014 Cash discounts. Tax filing 2014   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Tax filing 2014 There are two methods of accounting for cash discounts. Tax filing 2014 You can either credit them to a separate discount account or deduct them from total purchases for the year. Tax filing 2014 Whichever method you use, you must be consistent. Tax filing 2014 If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Tax filing 2014 For more information, see Change in Accounting Method in chapter 2. Tax filing 2014   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Tax filing 2014 If you use this method, do not reduce your cost of goods sold by the cash discounts. Tax filing 2014 Purchase returns and allowances. Tax filing 2014   You must deduct all returns and allowances from your total purchases during the year. Tax filing 2014 Merchandise withdrawn from sale. Tax filing 2014   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Tax filing 2014 Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Tax filing 2014 You must also charge the amount to your drawing account. Tax filing 2014   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Tax filing 2014 As stated above, you also use it to record withdrawals of merchandise for personal or family use. Tax filing 2014 This account is also known as a “withdrawals account” or “personal account. Tax filing 2014 ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Tax filing 2014 Small merchandisers (wholesalers, retailers, etc. Tax filing 2014 ) usually do not have labor costs that can properly be charged to cost of goods sold. Tax filing 2014 In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Tax filing 2014 Direct labor. Tax filing 2014   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Tax filing 2014 They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Tax filing 2014 Indirect labor. Tax filing 2014   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Tax filing 2014 Other labor. Tax filing 2014   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Tax filing 2014 Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Tax filing 2014 Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Tax filing 2014 Those that are not used in the manufacturing process are treated as deferred charges. Tax filing 2014 You deduct them as a business expense when you use them. Tax filing 2014 Business expenses are discussed in chapter 8. Tax filing 2014 Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Tax filing 2014 Containers. Tax filing 2014   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Tax filing 2014 If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Tax filing 2014 Freight-in. Tax filing 2014   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Tax filing 2014 Overhead expenses. Tax filing 2014   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Tax filing 2014 The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Tax filing 2014 Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Tax filing 2014 Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Tax filing 2014 Inventory at the end of the year is also known as closing or ending inventory. Tax filing 2014 Your ending inventory will usually become the beginning inventory of your next tax year. Tax filing 2014 Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. 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