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