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Turbotax 2011 Free Edition

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Turbotax 2011 Free Edition

Turbotax 2011 free edition 6. Turbotax 2011 free edition   How To Get Tax Help Table of Contents Low Income Taxpayer Clinics Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Turbotax 2011 free edition Free help with your tax return. Turbotax 2011 free edition   You can get free help preparing your return nationwide from IRS-certified volunteers. Turbotax 2011 free edition The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Turbotax 2011 free edition The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Turbotax 2011 free edition Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Turbotax 2011 free edition In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Turbotax 2011 free edition To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Turbotax 2011 free edition gov, download the IRS2Go app, or call 1-800-906-9887. Turbotax 2011 free edition   As part of the TCE program, AARP offers the Tax-Aide counseling program. Turbotax 2011 free edition To find the nearest AARP Tax-Aide site, visit AARP's website at www. Turbotax 2011 free edition aarp. Turbotax 2011 free edition org/money/taxaide or call 1-888-227-7669. Turbotax 2011 free edition For more information on these programs, go to IRS. Turbotax 2011 free edition gov and enter “VITA” in the search box. Turbotax 2011 free edition Internet. Turbotax 2011 free edition    IRS. Turbotax 2011 free edition gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Turbotax 2011 free edition Download the free IRS2Go app from the iTunes app store or from Google Play. Turbotax 2011 free edition Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Turbotax 2011 free edition Check the status of your 2013 refund with the Where's My Refund? application on IRS. Turbotax 2011 free edition gov or download the IRS2Go app and select the Refund Status option. Turbotax 2011 free edition The IRS issues more than 9 out of 10 refunds in less than 21 days. Turbotax 2011 free edition Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Turbotax 2011 free edition You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Turbotax 2011 free edition The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Turbotax 2011 free edition Use the Interactive Tax Assistant (ITA) to research your tax questions. Turbotax 2011 free edition No need to wait on the phone or stand in line. Turbotax 2011 free edition The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Turbotax 2011 free edition When you reach the response screen, you can print the entire interview and the final response for your records. Turbotax 2011 free edition New subject areas are added on a regular basis. Turbotax 2011 free edition  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Turbotax 2011 free edition gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Turbotax 2011 free edition You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Turbotax 2011 free edition The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Turbotax 2011 free edition When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Turbotax 2011 free edition Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Turbotax 2011 free edition You can also ask the IRS to mail a return or an account transcript to you. Turbotax 2011 free edition Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Turbotax 2011 free edition gov or by calling 1-800-908-9946. Turbotax 2011 free edition Tax return and tax account transcripts are generally available for the current year and the past three years. Turbotax 2011 free edition Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Turbotax 2011 free edition Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Turbotax 2011 free edition If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Turbotax 2011 free edition Check the status of your amended return using Where's My Amended Return? Go to IRS. Turbotax 2011 free edition gov and enter Where's My Amended Return? in the search box. Turbotax 2011 free edition You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Turbotax 2011 free edition It can take up to 3 weeks from the date you mailed it to show up in our system. Turbotax 2011 free edition Make a payment using one of several safe and convenient electronic payment options available on IRS. Turbotax 2011 free edition gov. Turbotax 2011 free edition Select the Payment tab on the front page of IRS. Turbotax 2011 free edition gov for more information. Turbotax 2011 free edition Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Turbotax 2011 free edition Figure your income tax withholding with the IRS Withholding Calculator on IRS. Turbotax 2011 free edition gov. Turbotax 2011 free edition Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Turbotax 2011 free edition Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Turbotax 2011 free edition gov. Turbotax 2011 free edition Request an Electronic Filing PIN by going to IRS. Turbotax 2011 free edition gov and entering Electronic Filing PIN in the search box. Turbotax 2011 free edition Download forms, instructions and publications, including accessible versions for people with disabilities. Turbotax 2011 free edition Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Turbotax 2011 free edition gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Turbotax 2011 free edition An employee can answer questions about your tax account or help you set up a payment plan. Turbotax 2011 free edition Before you visit, check the Office Locator on IRS. Turbotax 2011 free edition gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Turbotax 2011 free edition If you have a special need, such as a disability, you can request an appointment. Turbotax 2011 free edition Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Turbotax 2011 free edition Apply for an Employer Identification Number (EIN). Turbotax 2011 free edition Go to IRS. Turbotax 2011 free edition gov and enter Apply for an EIN in the search box. Turbotax 2011 free edition Read the Internal Revenue Code, regulations, or other official guidance. Turbotax 2011 free edition Read Internal Revenue Bulletins. Turbotax 2011 free edition Sign up to receive local and national tax news and more by email. Turbotax 2011 free edition Just click on “subscriptions” above the search box on IRS. Turbotax 2011 free edition gov and choose from a variety of options. Turbotax 2011 free edition Phone. Turbotax 2011 free edition    You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Turbotax 2011 free edition Download the free IRS2Go app from the iTunes app store or from Google Play. Turbotax 2011 free edition Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Turbotax 2011 free edition gov, or download the IRS2Go app. Turbotax 2011 free edition Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Turbotax 2011 free edition The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Turbotax 2011 free edition Most VITA and TCE sites offer free electronic filing. Turbotax 2011 free edition Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. Turbotax 2011 free edition Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location. Turbotax 2011 free edition Call the automated Where's My Refund? information hotline to check the status of your 2013 refund 24 hours a day, 7 days a week at 1-800-829-1954. Turbotax 2011 free edition If you e-file, you can start checking on the status of your return within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. Turbotax 2011 free edition The IRS issues more than 9 out of 10 refunds in less than 21 days. Turbotax 2011 free edition Where's My Refund? will give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. Turbotax 2011 free edition Before you call this automated hotline, have your 2013 tax return handy so you can enter your social security number, your filing status, and the exact whole dollar amount of your refund. Turbotax 2011 free edition The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Turbotax 2011 free edition Note, the above information is for our automated hotline. Turbotax 2011 free edition Our live phone and walk-in assistors can research the status of your refund only if it's been 21 days or more since you filed electronically or more than 6 weeks since you mailed your paper return. Turbotax 2011 free edition Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. Turbotax 2011 free edition You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Turbotax 2011 free edition It can take up to 3 weeks from the date you mailed it to show up in our system. Turbotax 2011 free edition Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, publications, and prior-year forms and instructions (limited to 5 years). Turbotax 2011 free edition You should receive your order within 10 business days. Turbotax 2011 free edition Call TeleTax, 1-800-829-4477, to listen to pre-recorded messages covering general and business tax information. Turbotax 2011 free edition If, between January and April 15, you still have questions about the Form 1040, 1040A, or 1040EZ (like filing requirements, dependents, credits, Schedule D, pensions and IRAs or self-employment taxes), call 1-800-829-1040. Turbotax 2011 free edition Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. Turbotax 2011 free edition The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. Turbotax 2011 free edition These individuals can also contact the IRS through relay services such as the Federal Relay Service. Turbotax 2011 free edition Walk-in. Turbotax 2011 free edition   You can find a selection of forms, publications and services — in-person. Turbotax 2011 free edition Products. Turbotax 2011 free edition You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Turbotax 2011 free edition Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. Turbotax 2011 free edition Services. Turbotax 2011 free edition You can walk in to your local TAC for face-to-face tax help. Turbotax 2011 free edition An employee can answer questions about your tax account or help you set up a payment plan. Turbotax 2011 free edition Before visiting, use the Office Locator tool on IRS. Turbotax 2011 free edition gov, or choose the Contact Us option on the IRS2Go app and search Local Offices for days and hours of operation, and services provided. Turbotax 2011 free edition Mail. Turbotax 2011 free edition   You can send your order for forms, instructions, and publications to the address below. Turbotax 2011 free edition You should receive a response within 10 business days after your request is received. Turbotax 2011 free edition Internal Revenue Service 1201 N. Turbotax 2011 free edition Mitsubishi Motorway Bloomington, IL 61705-6613    The Taxpayer Advocate Service Is Here to Help You. Turbotax 2011 free edition The Taxpayer Advocate Service (TAS) is your voice at the IRS. Turbotax 2011 free edition Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. Turbotax 2011 free edition   What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. Turbotax 2011 free edition We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and: Your problem is causing financial difficulties for you, your family, or your business. Turbotax 2011 free edition You face (or your business is facing) an immediate threat of adverse action. Turbotax 2011 free edition You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. Turbotax 2011 free edition   If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. Turbotax 2011 free edition Here's why we can help: TAS is an independent organization within the IRS. Turbotax 2011 free edition Our advocates know how to work with the IRS. Turbotax 2011 free edition Our services are free and tailored to meet your needs. Turbotax 2011 free edition We have offices in every state, the District of Columbia, and Puerto Rico. Turbotax 2011 free edition   How can you reach us? If you think TAS can help you, call your local advocate, whose number is in your local directory and at Taxpayer Advocate, or call us toll-free at 1-877-777-4778. Turbotax 2011 free edition   How else does TAS help taxpayers?  TAS also works to resolve large-scale, systemic problems that affect many taxpayers. Turbotax 2011 free edition If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System. Turbotax 2011 free edition Low Income Taxpayer Clinics Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals and tax collection disputes. Turbotax 2011 free edition Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Turbotax 2011 free edition Visit Taxpayer Advocate or see IRS Publication 4134, Low Income Taxpayer Clinic List. 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The Turbotax 2011 Free Edition

Turbotax 2011 free edition Publication 538 - Main Content Table of Contents Accounting PeriodsCalendar Year Fiscal Year Short Tax Year Improper Tax Year Change in Tax Year Individuals Partnerships, S Corporations, and Personal Service Corporations (PSCs) Corporations (Other Than S Corporations and PSCs) Accounting MethodsSpecial methods. Turbotax 2011 free edition Hybrid method. Turbotax 2011 free edition Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Turbotax 2011 free edition Accounting Periods You must use a tax year to figure your taxable income. Turbotax 2011 free edition A tax year is an annual accounting period for keeping records and reporting income and expenses. Turbotax 2011 free edition An annual accounting period does not include a short tax year (discussed later). Turbotax 2011 free edition You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Turbotax 2011 free edition Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Turbotax 2011 free edition A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Turbotax 2011 free edition You cannot adopt a tax year by merely: Filing an application for an extension of time to file an income tax return; Filing an application for an employer identification number (Form SS-4); or Paying estimated taxes. Turbotax 2011 free edition This section discusses: A calendar year. Turbotax 2011 free edition A fiscal year (including a period of 52 or 53 weeks). Turbotax 2011 free edition A short tax year. Turbotax 2011 free edition An improper tax year. Turbotax 2011 free edition A change in tax year. Turbotax 2011 free edition Special situations that apply to individuals. Turbotax 2011 free edition Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Turbotax 2011 free edition Special situations that apply to corporations. Turbotax 2011 free edition Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Turbotax 2011 free edition If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year. Turbotax 2011 free edition If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you obtain approval from the IRS to change it, or are otherwise allowed to change it without IRS approval. Turbotax 2011 free edition See Change in Tax Year, later. Turbotax 2011 free edition Generally, anyone can adopt the calendar year. Turbotax 2011 free edition However, you must adopt the calendar year if: You keep no books or records; You have no annual accounting period; Your present tax year does not qualify as a fiscal year; or You are required to use a calendar year by a provision in the Internal Revenue Code or the Income Tax Regulations. Turbotax 2011 free edition Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Turbotax 2011 free edition If you are allowed to adopt a fiscal year, you must consistently maintain your books and records and report your income and expenses using the time period adopted. Turbotax 2011 free edition 52-53-Week Tax Year You can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. Turbotax 2011 free edition If you make this election, your 52-53-week tax year must always end on the same day of the week. Turbotax 2011 free edition Your 52-53-week tax year must always end on: Whatever date this same day of the week last occurs in a calendar month, or Whatever date this same day of the week falls that is nearest to the last day of the calendar month. Turbotax 2011 free edition For example, if you elect a tax year that always ends on the last Monday in March, your 2012 tax year will end on March 25, 2013. Turbotax 2011 free edition Election. Turbotax 2011 free edition   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Turbotax 2011 free edition The month in which the new 52-53-week tax year ends. Turbotax 2011 free edition The day of the week on which the tax year always ends. Turbotax 2011 free edition The date the tax year ends. Turbotax 2011 free edition It can be either of the following dates on which the chosen day: Last occurs in the month in (1), above, or Occurs nearest to the last day of the month in (1), above. Turbotax 2011 free edition   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Turbotax 2011 free edition   To determine an effective date (or apply provisions of any law) expressed in terms of tax years beginning, including, or ending on the first or last day of a specified calendar month, a 52-53-week tax year is considered to: Begin on the first day of the calendar month beginning nearest to the first day of the 52-53-week tax year, and End on the last day of the calendar month ending nearest to the last day of the 52-53-week tax year. Turbotax 2011 free edition Example. Turbotax 2011 free edition Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Turbotax 2011 free edition For this purpose, a 52-53-week tax year that begins on the last Tuesday of June, which falls on June 26, 2012, is treated as beginning on July 1, 2012. Turbotax 2011 free edition Short Tax Year A short tax year is a tax year of less than 12 months. Turbotax 2011 free edition A short period tax return may be required when you (as a taxable entity): Are not in existence for an entire tax year, or Change your accounting period. Turbotax 2011 free edition Tax on a short period tax return is figured differently for each situation. Turbotax 2011 free edition Not in Existence Entire Year Even if a taxable entity was not in existence for the entire year, a tax return is required for the time it was in existence. Turbotax 2011 free edition Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition XYZ Corporation was organized on July 1, 2012. Turbotax 2011 free edition It elected the calendar year as its tax year. Turbotax 2011 free edition Therefore, its first tax return was due March 15, 2013. Turbotax 2011 free edition This short period return will cover the period from July 1, 2012, through December 31, 2012. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition A calendar year corporation dissolved on July 23, 2012. Turbotax 2011 free edition Its final return is due by October 15, 2012. Turbotax 2011 free edition It will cover the short period from January 1, 2012, through July 23, 2012. Turbotax 2011 free edition Death of individual. Turbotax 2011 free edition   When an individual dies, a tax return must be filed for the decedent by the 15th day of the 4th month after the close of the individual's regular tax year. Turbotax 2011 free edition The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Turbotax 2011 free edition In the case of a decedent who dies on December 31st, the last day of the regular tax year, a full calendar-year tax return is required. Turbotax 2011 free edition Example. Turbotax 2011 free edition   Agnes Green was a single, calendar year taxpayer. Turbotax 2011 free edition She died on March 6, 2012. Turbotax 2011 free edition Her final income tax return must be filed by April 15, 2013. Turbotax 2011 free edition It will cover the short period from January 1, 2012, to March 6, 2012. Turbotax 2011 free edition Figuring Tax for Short Year If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period. Turbotax 2011 free edition The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year. Turbotax 2011 free edition Figure tax for a short year under the general rule, explained below. Turbotax 2011 free edition You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Turbotax 2011 free edition General rule. Turbotax 2011 free edition   Income tax for a short tax year must be annualized. Turbotax 2011 free edition However, self-employment tax is figured on the actual self-employment income for the short period. Turbotax 2011 free edition Individuals. Turbotax 2011 free edition   An individual must figure income tax for the short tax year as follows. Turbotax 2011 free edition Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Turbotax 2011 free edition You must itemize deductions when you file a short period tax return. Turbotax 2011 free edition Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Turbotax 2011 free edition Subtract the amount in (2) from the amount in (1). Turbotax 2011 free edition The result is your modified taxable income. Turbotax 2011 free edition Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Turbotax 2011 free edition The result is your annualized income. Turbotax 2011 free edition Figure the total tax on your annualized income using the appropriate tax rate schedule. Turbotax 2011 free edition Multiply the total tax by the number of months in the short tax year and divide the result by 12. Turbotax 2011 free edition The result is your tax for the short tax year. Turbotax 2011 free edition Relief procedure. Turbotax 2011 free edition   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Turbotax 2011 free edition It may result in less tax. Turbotax 2011 free edition Under this procedure, the tax is figured by two separate methods. Turbotax 2011 free edition If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid. Turbotax 2011 free edition For more information, see section 443(b)(2) of the Internal Revenue Code. Turbotax 2011 free edition Alternative minimum tax. Turbotax 2011 free edition   To figure the alternative minimum tax (AMT) due for a short tax year: Figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps. Turbotax 2011 free edition Multiply the AMTI by 12. Turbotax 2011 free edition Divide the result by the number of months in the short tax year. Turbotax 2011 free edition Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Turbotax 2011 free edition The result is the annualized AMT. Turbotax 2011 free edition Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Turbotax 2011 free edition   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Turbotax 2011 free edition For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Turbotax 2011 free edition Tax withheld from wages. Turbotax 2011 free edition   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Turbotax 2011 free edition Federal income tax is withheld on a calendar year basis. Turbotax 2011 free edition The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Turbotax 2011 free edition Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Turbotax 2011 free edition For example, if a taxpayer began business on March 15 and adopted a tax year ending on March 14 (a period of exactly 12 months), this would be an improper tax year. Turbotax 2011 free edition See Accounting Periods, earlier, for a description of permissible tax years. Turbotax 2011 free edition To change to a proper tax year, you must do one of the following. Turbotax 2011 free edition If you are requesting a change to a calendar tax year, file an amended income tax return based on a calendar tax year that corrects the most recently filed tax return that was filed on the basis of an improper tax year. Turbotax 2011 free edition Attach a completed Form 1128 to the amended tax return. Turbotax 2011 free edition Write “FILED UNDER REV. Turbotax 2011 free edition PROC. Turbotax 2011 free edition 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Turbotax 2011 free edition If you are requesting a change to a fiscal tax year, file Form 1128 in accordance with the form instructions to request IRS approval for the change. Turbotax 2011 free edition Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Turbotax 2011 free edition See the Instructions for Form 1128 for exceptions. Turbotax 2011 free edition If you qualify for an automatic approval request, a user fee is not required. Turbotax 2011 free edition Individuals Generally, individuals must adopt the calendar year as their tax year. Turbotax 2011 free edition An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year. Turbotax 2011 free edition Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Turbotax 2011 free edition A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Turbotax 2011 free edition The entity does not have to use the required tax year if it receives IRS approval to use another permitted tax year or makes an election under section 444 of the Internal Revenue Code (discussed later). Turbotax 2011 free edition The following discussions provide the rules for partnerships, S corporations, and PSCs. Turbotax 2011 free edition Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Turbotax 2011 free edition The partnership makes an election under section 444 of the Internal Revenue Code to have a tax year other than a required tax year by filing Form 8716. Turbotax 2011 free edition The partnership elects to use a 52-53-week tax year that ends with reference to either its required tax year or a tax year elected under section 444. Turbotax 2011 free edition The partnership can establish a business purpose for a different tax year. Turbotax 2011 free edition The rules for the required tax year for partnerships are as follows. Turbotax 2011 free edition If one or more partners having the same tax year own a majority interest (more than 50%) in partnership profits and capital, the partnership must use the tax year of those partners. Turbotax 2011 free edition If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Turbotax 2011 free edition A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Turbotax 2011 free edition If there is no majority interest tax year and the principal partners do not have the same tax year, the partnership generally must use a tax year that results in the least aggregate deferral of income to the partners. Turbotax 2011 free edition If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Turbotax 2011 free edition Least aggregate deferral of income. Turbotax 2011 free edition   The tax year that results in the least aggregate deferral of income is determined as follows. Turbotax 2011 free edition Figure the number of months of deferral for each partner using one partner's tax year. Turbotax 2011 free edition Find the months of deferral by counting the months from the end of that tax year forward to the end of each other partner's tax year. Turbotax 2011 free edition Multiply each partner's months of deferral figured in step (1) by that partner's share of interest in the partnership profits for the year used in step (1). Turbotax 2011 free edition Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Turbotax 2011 free edition Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Turbotax 2011 free edition   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Turbotax 2011 free edition If the calculation results in more than one tax year qualifying as the tax year with the least aggregate deferral, the partnership can choose any one of those tax years as its tax year. Turbotax 2011 free edition However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Turbotax 2011 free edition Example. Turbotax 2011 free edition A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Turbotax 2011 free edition A uses the calendar year and B uses a fiscal year ending November 30. Turbotax 2011 free edition P must change its tax year to a fiscal year ending November 30 because this results in the least aggregate deferral of income to the partners, as shown in the following table. Turbotax 2011 free edition Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Turbotax 2011 free edition 5 -0- -0- B 11/30 0. Turbotax 2011 free edition 5 11 5. Turbotax 2011 free edition 5 Total Deferral 5. Turbotax 2011 free edition 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Turbotax 2011 free edition 5 1 0. Turbotax 2011 free edition 5 B 11/30 0. Turbotax 2011 free edition 5 -0- -0- Total Deferral 0. Turbotax 2011 free edition 5 When determination is made. Turbotax 2011 free edition   The determination of the tax year under the least aggregate deferral rules must generally be made at the beginning of the partnership's current tax year. Turbotax 2011 free edition However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Turbotax 2011 free edition This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Turbotax 2011 free edition Short period return. Turbotax 2011 free edition   When a partnership changes its tax year, a short period return must be filed. Turbotax 2011 free edition The short period return covers the months between the end of the partnership's prior tax year and the beginning of its new tax year. Turbotax 2011 free edition   If a partnership changes to the tax year resulting in the least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to determine that tax year. Turbotax 2011 free edition The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Turbotax 2011 free edition 706-1. Turbotax 2011 free edition ” More information. Turbotax 2011 free edition   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Turbotax 2011 free edition S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Turbotax 2011 free edition A permitted tax year is any of the following. Turbotax 2011 free edition The calendar year. Turbotax 2011 free edition A tax year elected under section 444 of the Internal Revenue Code. Turbotax 2011 free edition See Section 444 Election, below for details. Turbotax 2011 free edition A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Turbotax 2011 free edition Any other tax year for which the corporation establishes a business purpose. Turbotax 2011 free edition If an electing S corporation wishes to adopt a tax year other than a calendar year, it must request IRS approval using Form 2553, instead of filing Form 1128. Turbotax 2011 free edition For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Turbotax 2011 free edition Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Turbotax 2011 free edition The corporation makes an election under section 444 of the Internal Revenue Code. Turbotax 2011 free edition See Section 444 Election, below for details. Turbotax 2011 free edition The corporation elects to use a 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Turbotax 2011 free edition The corporation establishes a business purpose for a fiscal year. Turbotax 2011 free edition See the Instructions for Form 1120 for general information about PSCs. Turbotax 2011 free edition For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Turbotax 2011 free edition Section 444 Election A partnership, S corporation, electing S corporation, or PSC can elect under section 444 of the Internal Revenue Code to use a tax year other than its required tax year. Turbotax 2011 free edition Certain restrictions apply to the election. Turbotax 2011 free edition A partnership or an S corporation that makes a section 444 election must make certain required payments and a PSC must make certain distributions (discussed later). Turbotax 2011 free edition The section 444 election does not apply to any partnership, S corporation, or PSC that establishes a business purpose for a different period, explained later. Turbotax 2011 free edition A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Turbotax 2011 free edition It is not a member of a tiered structure (defined in section 1. Turbotax 2011 free edition 444-2T of the regulations). Turbotax 2011 free edition It has not previously had a section 444 election in effect. Turbotax 2011 free edition It elects a year that meets the deferral period requirement. Turbotax 2011 free edition Deferral period. Turbotax 2011 free edition   The determination of the deferral period depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax year with a section 444 election. Turbotax 2011 free edition Retaining tax year. Turbotax 2011 free edition   Generally, a partnership, S corporation, or PSC can make a section 444 election to retain its tax year only if the deferral period of the new tax year is 3 months or less. Turbotax 2011 free edition This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Turbotax 2011 free edition Adopting or changing tax year. Turbotax 2011 free edition   If the partnership, S corporation, or PSC is adopting or changing to a tax year other than its required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year. Turbotax 2011 free edition The IRS will allow a section 444 election only if the deferral period of the new tax year is less than the shorter of: Three months, or The deferral period of the tax year being changed. Turbotax 2011 free edition This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Turbotax 2011 free edition If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition BD Partnership uses a calendar year, which is also its required tax year. Turbotax 2011 free edition BD cannot make a section 444 election because the deferral period is zero. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition E, a newly formed partnership, began operations on December 1. Turbotax 2011 free edition E is owned by calendar year partners. Turbotax 2011 free edition E wants to make a section 444 election to adopt a September 30 tax year. Turbotax 2011 free edition E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Turbotax 2011 free edition Making the election. Turbotax 2011 free edition   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Turbotax 2011 free edition Form 8716 must be filed by the earlier of: The due date (not including extensions) of the income tax return for the tax year resulting from the section 444 election, or The 15th day of the 6th month of the tax year for which the election will be effective. Turbotax 2011 free edition For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Turbotax 2011 free edition Note. Turbotax 2011 free edition If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Turbotax 2011 free edition   Attach a copy of Form 8716 to Form 1065, Form 1120S, or Form 1120 for the first tax year for which the election is made. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition AB, a partnership, begins operations on September 13, 2012, and is qualified to make a section 444 election to use a September 30 tax year for its tax year beginning September 13, 2012. Turbotax 2011 free edition AB must file Form 8716 by January 15, 2013, which is the due date of the partnership's tax return for the period from September 13, 2012, to September 30, 2012. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Turbotax 2011 free edition AB must file Form 8716 by March 17, 2013. Turbotax 2011 free edition Example 3. Turbotax 2011 free edition B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Turbotax 2011 free edition B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Turbotax 2011 free edition B must file Form 8716 by December 17, 2012, the due date of the income tax return for the short period from September 1, 2012, to September 30, 2012. Turbotax 2011 free edition Note. Turbotax 2011 free edition The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Turbotax 2011 free edition Extension of time for filing. Turbotax 2011 free edition   There is an automatic extension of 12 months to make this election. Turbotax 2011 free edition See the Form 8716 instructions for more information. Turbotax 2011 free edition Terminating the election. Turbotax 2011 free edition   The section 444 election remains in effect until it is terminated. Turbotax 2011 free edition If the election is terminated, another section 444 election cannot be made for any tax year. Turbotax 2011 free edition   The election ends when any of the following applies to the partnership, S corporation, or PSC. Turbotax 2011 free edition The entity changes to its required tax year. Turbotax 2011 free edition The entity liquidates. Turbotax 2011 free edition The entity becomes a member of a tiered structure. Turbotax 2011 free edition The IRS determines that the entity willfully failed to comply with the required payments or distributions. Turbotax 2011 free edition   The election will also end if either of the following events occur. Turbotax 2011 free edition An S corporation's S election is terminated. Turbotax 2011 free edition However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Turbotax 2011 free edition A PSC ceases to be a PSC. Turbotax 2011 free edition If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Turbotax 2011 free edition Required payment for partnership or S corporation. Turbotax 2011 free edition   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Turbotax 2011 free edition The required payment for that year (or any preceding tax year) is more than $500. Turbotax 2011 free edition    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Turbotax 2011 free edition   Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. Turbotax 2011 free edition If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. Turbotax 2011 free edition If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount. Turbotax 2011 free edition Applicable election year. Turbotax 2011 free edition   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Turbotax 2011 free edition Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins. Turbotax 2011 free edition Required distribution for PSC. Turbotax 2011 free edition   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Turbotax 2011 free edition If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Turbotax 2011 free edition The amount deferred is treated as paid or incurred in the following tax year. Turbotax 2011 free edition   For information on the minimum distribution, see the instructions for Part I of Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC). Turbotax 2011 free edition Back-up election. Turbotax 2011 free edition   A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. Turbotax 2011 free edition If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Turbotax 2011 free edition Making back-up election. Turbotax 2011 free edition   The general rules for making a section 444 election, as discussed earlier, apply. Turbotax 2011 free edition When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Turbotax 2011 free edition However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print “FORM 1128 (or FORM 2553) BACK-UP ELECTION” at the top of Form 8716. Turbotax 2011 free edition Activating election. Turbotax 2011 free edition   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Turbotax 2011 free edition The due date for filing Form 8752 and making the payment is the later of the following dates. Turbotax 2011 free edition May 15 of the calendar year following the calendar year in which the applicable election year begins. Turbotax 2011 free edition 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Turbotax 2011 free edition   A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, “ACTIVATING BACK-UP ELECTION. Turbotax 2011 free edition ” 52-53-Week Tax Year A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year (discussed earlier) that ends with reference to either its required tax year or a tax year elected under section 444 (discussed earlier). Turbotax 2011 free edition A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. Turbotax 2011 free edition However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128. Turbotax 2011 free edition Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Turbotax 2011 free edition See the Instructions for Form 1128 for details. Turbotax 2011 free edition Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Turbotax 2011 free edition A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. Turbotax 2011 free edition An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Turbotax 2011 free edition Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures. Turbotax 2011 free edition See the Instructions for Form 1128 for details. Turbotax 2011 free edition Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Turbotax 2011 free edition Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Turbotax 2011 free edition You choose an accounting method when you file your first tax return. Turbotax 2011 free edition If you later want to change your accounting method, you must get IRS approval. Turbotax 2011 free edition See Change in Accounting Method, later. Turbotax 2011 free edition No single accounting method is required of all taxpayers. Turbotax 2011 free edition You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. Turbotax 2011 free edition In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Turbotax 2011 free edition You must use the same accounting method from year to year. Turbotax 2011 free edition An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Turbotax 2011 free edition If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income. Turbotax 2011 free edition Methods you can use. Turbotax 2011 free edition   In general, you can compute your taxable income under any of the following accounting methods. Turbotax 2011 free edition Cash method. Turbotax 2011 free edition Accrual method. Turbotax 2011 free edition Special methods of accounting for certain items of income and expenses. Turbotax 2011 free edition A hybrid method which combines elements of two or more of the above accounting methods. Turbotax 2011 free edition The cash and accrual methods of accounting are explained later. Turbotax 2011 free edition Special methods. Turbotax 2011 free edition   This publication does not discuss special methods of accounting for certain items of income or expenses. Turbotax 2011 free edition For information on reporting income using one of the long-term contract methods, see section 460 of the Internal Revenue Code and the related regulations. Turbotax 2011 free edition The following publications also discuss special methods of reporting income or expenses. Turbotax 2011 free edition Publication 225, Farmer's Tax Guide. Turbotax 2011 free edition Publication 535, Business Expenses. Turbotax 2011 free edition Publication 537, Installment Sales. Turbotax 2011 free edition Publication 946, How To Depreciate Property. Turbotax 2011 free edition Hybrid method. Turbotax 2011 free edition   Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. Turbotax 2011 free edition However, the following restrictions apply. Turbotax 2011 free edition If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Turbotax 2011 free edition See Exceptions under Inventories, later. Turbotax 2011 free edition Generally, you can use the cash method for all other items of income and expenses. Turbotax 2011 free edition See Inventories, later. Turbotax 2011 free edition If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Turbotax 2011 free edition If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Turbotax 2011 free edition Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Turbotax 2011 free edition Business and personal items. Turbotax 2011 free edition   You can account for business and personal items using different accounting methods. Turbotax 2011 free edition For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items. Turbotax 2011 free edition Two or more businesses. Turbotax 2011 free edition   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Turbotax 2011 free edition No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Turbotax 2011 free edition Note. Turbotax 2011 free edition If you use different accounting methods to create or shift profits or losses between businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct. Turbotax 2011 free edition Cash Method Most individuals and many small businesses use the cash method of accounting. Turbotax 2011 free edition Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Turbotax 2011 free edition See Inventories, later, for exceptions to this rule. Turbotax 2011 free edition Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Turbotax 2011 free edition If you receive property and services, you must include their fair market value (FMV) in income. Turbotax 2011 free edition Constructive receipt. Turbotax 2011 free edition   Income is constructively received when an amount is credited to your account or made available to you without restriction. Turbotax 2011 free edition You need not have possession of it. Turbotax 2011 free edition If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Turbotax 2011 free edition Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Turbotax 2011 free edition Example. Turbotax 2011 free edition You are a calendar year taxpayer. Turbotax 2011 free edition Your bank credited, and made available, interest to your bank account in December 2012. Turbotax 2011 free edition You did not withdraw it or enter it into your books until 2013. Turbotax 2011 free edition You must include the amount in gross income for 2012, the year you constructively received it. Turbotax 2011 free edition You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Turbotax 2011 free edition You must report the income in the year the property is received or made available to you without restriction. Turbotax 2011 free edition Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Turbotax 2011 free edition This includes business expenses for which you contest liability. Turbotax 2011 free edition However, you may not be able to deduct an expense paid in advance. Turbotax 2011 free edition Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Turbotax 2011 free edition Expense paid in advance. Turbotax 2011 free edition   An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Turbotax 2011 free edition   Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. Turbotax 2011 free edition 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Turbotax 2011 free edition   If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule. Turbotax 2011 free edition See Change in Accounting Method, later. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition You are a calendar year taxpayer and pay $3,000 in 2012 for a business insurance policy that is effective for three years (36 months), beginning on July 1, 2012. Turbotax 2011 free edition The general rule that an expense paid in advance is deductible only in the year to which it applies is applicable to this payment because the payment does not qualify for the 12-month rule. Turbotax 2011 free edition Therefore, only $500 (6/36 x $3,000) is deductible in 2012, $1,000 (12/36 x $3,000) is deductible in 2013, $1,000 (12/36 x $3,000) is deductible in 2014, and the remaining $500 is deductible in 2015. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition You are a calendar year taxpayer and pay $10,000 on July 1, 2012, for a business insurance policy that is effective for only one year beginning on July 1, 2012. Turbotax 2011 free edition The 12-month rule applies. Turbotax 2011 free edition Therefore, the full $10,000 is deductible in 2012. Turbotax 2011 free edition Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Turbotax 2011 free edition (See Special rules for farming businesses, later. Turbotax 2011 free edition ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Turbotax 2011 free edition See Gross receipts test, below. Turbotax 2011 free edition A partnership with a corporation (other than an S corporation) as a partner, and with the partnership having average annual gross receipts exceeding $5 million. Turbotax 2011 free edition See Gross receipts test, below. Turbotax 2011 free edition A tax shelter. Turbotax 2011 free edition Exceptions The following entities are not prohibited from using the cash method of accounting. Turbotax 2011 free edition Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Turbotax 2011 free edition A qualified personal service corporation (PSC). Turbotax 2011 free edition Gross receipts test. Turbotax 2011 free edition   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Turbotax 2011 free edition A corporation or a partnership meets the test if, for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or less. Turbotax 2011 free edition    An entity's average annual gross receipts for a prior tax year is determined by: Adding the gross receipts for that tax year and the 2 preceding tax years; and Dividing the total by 3. Turbotax 2011 free edition See Gross receipts test for qualifying taxpayers, for more information. Turbotax 2011 free edition Generally, a partnership applies the test at the partnership level. Turbotax 2011 free edition Gross receipts for a short tax year are annualized. Turbotax 2011 free edition Aggregation rules. Turbotax 2011 free edition   Organizations that are members of an affiliated service group or a controlled group of corporations treated as a single employer for tax purposes are required to aggregate their gross receipts to determine whether the gross receipts test is met. Turbotax 2011 free edition Change to accrual method. Turbotax 2011 free edition   A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test. Turbotax 2011 free edition Special rules for farming businesses. Turbotax 2011 free edition   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Turbotax 2011 free edition However, certain corporations (other than S corporations) and partnerships that have a partner that is a corporation must use an accrual method for their farming business. Turbotax 2011 free edition For this purpose, farming does not include the operation of a nursery or sod farm or the raising or harvesting of trees (other than fruit and nut trees). Turbotax 2011 free edition   There is an exception to the requirement to use an accrual method for corporations with gross receipts of $1 million or less for each prior tax year after 1975. Turbotax 2011 free edition For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Turbotax 2011 free edition See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Turbotax 2011 free edition Qualified PSC. Turbotax 2011 free edition   A PSC that meets the following function and ownership tests can use the cash method. Turbotax 2011 free edition Function test. Turbotax 2011 free edition   A corporation meets the function test if at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting. Turbotax 2011 free edition Ownership test. Turbotax 2011 free edition   A corporation meets the ownership test if at least 95% of its stock is owned, directly or indirectly, at all times during the year by one or more of the following. Turbotax 2011 free edition Employees performing services for the corporation in a field qualifying under the function test. Turbotax 2011 free edition Retired employees who had performed services in those fields. Turbotax 2011 free edition The estate of an employee described in (1) or (2). Turbotax 2011 free edition Any other person who acquired the stock by reason of the death of an employee referred to in (1) or (2), but only for the 2-year period beginning on the date of death. Turbotax 2011 free edition   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Turbotax 2011 free edition Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Turbotax 2011 free edition Other forms of indirect stock ownership, such as stock owned by family members, are generally not considered when determining if the ownership test is met. Turbotax 2011 free edition   For purposes of the ownership test, a person is not considered an employee of a corporation unless that person performs more than minimal services for the corporation. Turbotax 2011 free edition Change to accrual method. Turbotax 2011 free edition   A corporation that fails to meet the function test for any tax year; or fails to meet the ownership test at any time during any tax year must change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. Turbotax 2011 free edition A corporation that fails to meet the function test or the ownership test is not treated as a qualified PSC for any part of that tax year. Turbotax 2011 free edition Accrual Method Under the accrual method of accounting, generally you report income in the year it is earned and deduct or capitalize expenses in the year incurred. Turbotax 2011 free edition The purpose of an accrual method of accounting is to match income and expenses in the correct year. Turbotax 2011 free edition Income Generally, you include an amount in gross 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. Turbotax 2011 free edition Under this rule, you report an amount in your gross income on the earliest of the following dates. Turbotax 2011 free edition When you receive payment. Turbotax 2011 free edition When the income amount is due to you. Turbotax 2011 free edition When you earn the income. Turbotax 2011 free edition When title has passed. Turbotax 2011 free edition Estimated income. Turbotax 2011 free edition   If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination. Turbotax 2011 free edition Change in payment schedule. Turbotax 2011 free edition   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a reduced rate. Turbotax 2011 free edition Continue this procedure until you complete the services, then account for the difference. Turbotax 2011 free edition Advance Payment for Services Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Turbotax 2011 free edition However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Turbotax 2011 free edition However, you cannot postpone including any payment beyond that tax year. Turbotax 2011 free edition Service agreement. Turbotax 2011 free edition   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Turbotax 2011 free edition This includes an agreement providing for incidental replacement of parts or materials. Turbotax 2011 free edition However, this applies only if you offer the property without a service agreement in the normal course of business. Turbotax 2011 free edition Postponement not allowed. Turbotax 2011 free edition   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Turbotax 2011 free edition You are to perform any part of the service after the end of the tax year immediately following the year you receive the advance payment. Turbotax 2011 free edition You are to perform any part of the service at any unspecified future date that may be after the end of the tax year immediately following the year you receive the advance payment. Turbotax 2011 free edition Examples. Turbotax 2011 free edition   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition You manufacture, sell, and service computers. Turbotax 2011 free edition You received payment in 2012 for a one-year contingent service contract on a computer you sold. Turbotax 2011 free edition You can postpone including in income the part of the payment you did not earn in 2012 if, in the normal course of your business, you offer computers for sale without a contingent service contract. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition You are in the television repair business. Turbotax 2011 free edition You received payments in 2012 for one-year contracts under which you agree to repair or replace certain parts that fail to function properly in television sets manufactured and sold by unrelated parties. Turbotax 2011 free edition You include the payments in gross income as you earn them. Turbotax 2011 free edition Example 3. Turbotax 2011 free edition You own a dance studio. Turbotax 2011 free edition On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Turbotax 2011 free edition You give eight lessons in 2012. Turbotax 2011 free edition Under this method of including advance payments, you must include one-sixth (8/48) of the payment in income for 2012, and five-sixths (40/48) of the payment in 2013, even if you do not give all the lessons by the end of 2013. Turbotax 2011 free edition Example 4. Turbotax 2011 free edition Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Turbotax 2011 free edition You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Turbotax 2011 free edition Guarantee or warranty. Turbotax 2011 free edition   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Turbotax 2011 free edition Prepaid rent. Turbotax 2011 free edition   You cannot postpone reporting income from prepaid rent. Turbotax 2011 free edition Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Turbotax 2011 free edition You provide significant service when you supply space in a hotel, boarding house, tourist home, motor court, motel, or apartment house that furnishes hotel services. Turbotax 2011 free edition Books and records. Turbotax 2011 free edition   Any advance payment you include in gross receipts on your tax return for the year you receive payment must not be less than the payment you include in income for financial reports under the method of accounting used for those reports. Turbotax 2011 free edition Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Turbotax 2011 free edition IRS approval. Turbotax 2011 free edition   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Turbotax 2011 free edition Advance Payment for Sales Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. Turbotax 2011 free edition However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. Turbotax 2011 free edition An agreement includes a gift certificate that can be redeemed for goods. Turbotax 2011 free edition Amounts due and payable are considered received. Turbotax 2011 free edition How to report payments. Turbotax 2011 free edition   Generally, include an advance payment in income in the year in which you receive it. Turbotax 2011 free edition However, you can use the alternative method, discussed next. Turbotax 2011 free edition Alternative method of reporting. Turbotax 2011 free edition   Under the alternative method, generally include an advance payment in income in the earlier tax year in which you: Include advance payments in gross receipts under the method of accounting you use for tax purposes, or Include any part of advance payments in income for financial reports under the method of accounting used for those reports. Turbotax 2011 free edition Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition You are a retailer. Turbotax 2011 free edition You use an accrual method of accounting and account for the sale of goods when you ship the goods. Turbotax 2011 free edition You use this method for both tax and financial reporting purposes. Turbotax 2011 free edition You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. Turbotax 2011 free edition However, see Exception for inventory goods, later. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition You are a calendar year taxpayer. Turbotax 2011 free edition You manufacture household furniture and use an accrual method of accounting. Turbotax 2011 free edition Under this method, you accrue income for your financial reports when you ship the furniture. Turbotax 2011 free edition For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Turbotax 2011 free edition In 2012, you received an advance payment of $8,000 for an order of furniture to be manufactured for a total price of $20,000. Turbotax 2011 free edition You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Turbotax 2011 free edition For tax purposes, you include the $8,000 advance payment in gross income for 2012; and include the remaining $12,000 of the contract price in gross income for 2013. Turbotax 2011 free edition Information schedule. Turbotax 2011 free edition   If you use the alternative method of reporting advance payments, you must attach a statement with the following information to your tax return each year. Turbotax 2011 free edition Total advance payments received in the current tax year. Turbotax 2011 free edition Total advance payments received in earlier tax years and not included in income before the current tax year. Turbotax 2011 free edition Total payments received in earlier tax years included in income for the current tax year. Turbotax 2011 free edition Exception for inventory goods. Turbotax 2011 free edition   If you have an agreement to sell goods properly included in inventory, you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet the following requirements. Turbotax 2011 free edition You account for the advance payment under the alternative method (discussed earlier). Turbotax 2011 free edition You have received a substantial advance payment on the agreement (discussed next). Turbotax 2011 free edition You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Turbotax 2011 free edition These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. Turbotax 2011 free edition   If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments. Turbotax 2011 free edition You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Turbotax 2011 free edition If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Turbotax 2011 free edition Note. Turbotax 2011 free edition You must report any advance payments you receive after the second year in the year received. Turbotax 2011 free edition No further deferral is allowed. Turbotax 2011 free edition Substantial advance payments. Turbotax 2011 free edition   Under an agreement for a future sale, you have substantial advance payments if, by the end of the tax year, the total advance payments received during that year and preceding tax years are equal to or more than the total costs reasonably estimated to be includible in inventory because of the agreement. Turbotax 2011 free edition Example. Turbotax 2011 free edition You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Turbotax 2011 free edition In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Turbotax 2011 free edition The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Turbotax 2011 free edition You receive the following advance payments under the contract. Turbotax 2011 free edition 2009 $17,500 2010 10,000 2011 7,500 2012 5,000 2013 5,000 2014 5,000 Total contract price $50,000   Your customer asked you to deliver the goods in 2015. Turbotax 2011 free edition In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Turbotax 2011 free edition Since the advance payments you had received by the end of 2010 were more than the costs you estimated, the payments are substantial advance payments. Turbotax 2011 free edition   For 2012, include in income all payments you received by the end of 2012, the second tax year following the tax year in which you received substantial advance payments. Turbotax 2011 free edition You must include $40,000 in sales for 2012 (the total amounts received from 2009 through 2012) and include in inventory the cost of the goods (or similar goods) on hand. Turbotax 2011 free edition If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Turbotax 2011 free edition   No further deferral is allowed. Turbotax 2011 free edition You must include in gross income the advance payment you receive each remaining year of the contract. Turbotax 2011 free edition Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Turbotax 2011 free edition IRS approval. Turbotax 2011 free edition   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Turbotax 2011 free edition Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Turbotax 2011 free edition The all-events test has been met. Turbotax 2011 free edition The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Turbotax 2011 free edition Economic performance has occurred. Turbotax 2011 free edition Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Turbotax 2011 free edition If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or the property is used. Turbotax 2011 free edition If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Turbotax 2011 free edition Example. Turbotax 2011 free edition You are a calendar year taxpayer. Turbotax 2011 free edition You buy office supplies in December 2012. Turbotax 2011 free edition You receive the supplies and the bill in December, but you pay the bill in January 2013. Turbotax 2011 free edition You can deduct the expense in 2012 because all events have occurred to fix the liability, the amount of the liability can be determined, and economic performance occurred in 2012. Turbotax 2011 free edition Your office supplies may qualify as a recurring item, discussed later. Turbotax 2011 free edition If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Turbotax 2011 free edition Workers' compensation and tort liability. Turbotax 2011 free edition   If you are required to make payments under workers' compensation laws or in satisfaction of any tort liability, economic performance occurs as you make the payments. Turbotax 2011 free edition If you are required to make payments to a special designated settlement fund established by court order for a tort liability, economic performance occurs as you make the payments. Turbotax 2011 free edition Taxes. Turbotax 2011 free edition   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Turbotax 2011 free edition are paid. Turbotax 2011 free edition However, you can elect to treat taxes as a recurring item, discussed later. Turbotax 2011 free edition You can also elect to ratably accrue real estate taxes. Turbotax 2011 free edition See chapter 5 of Publication 535 for information about real estate taxes. Turbotax 2011 free edition Other liabilities. Turbotax 2011 free edition   Other liabilities for which economic performance occurs as you make payments include liabilities for breach of contract (to the extent of incidental, consequential, and liquidated damages), violation of law, rebates and refunds, awards, prizes, jackpots, insurance, and warranty and service contracts. Turbotax 2011 free edition Interest. Turbotax 2011 free edition   Economic performance occurs with the passage of time (as the borrower uses, and the lender forgoes use of, the lender's money) rather than as payments are made. Turbotax 2011 free edition Compensation for services. Turbotax 2011 free edition   Generally, economic performance occurs as an employee renders service to the employer. Turbotax 2011 free edition However, deductions for compensation or other benefits paid to an employee in a year subsequent to economic performance are subject to the rules governing deferred compensation, deferred benefits, and funded welfare benefit plans. Turbotax 2011 free edition For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Turbotax 2011 free edition Vacation pay. Turbotax 2011 free edition   You can take a current deduction for vacation pay earned by your employees if you pay it during the year or, if the amount is vested, within 2½ months after the end of the year. Turbotax 2011 free edition If you pay it later than this, you must deduct it in the year actually paid. Turbotax 2011 free edition An amount is vested if your right to it cannot be nullified or cancelled. Turbotax 2011 free edition Exception for recurring items. Turbotax 2011 free edition   An exception to the economic performance rule allows certain recurring items to be treated as incurred during the tax year even though economic performance has not occurred. Turbotax 2011 free edition The exception applies if all the following requirements are met. Turbotax 2011 free edition The all-events test, discussed earlier, is met. Turbotax 2011 free edition Economic performance occurs by the earlier of the following dates. Turbotax 2011 free edition 8½ months after the close of the year. Turbotax 2011 free edition The date you file a timely return (including extensions) for the year. Turbotax 2011 free edition The item is recurring in nature and you consistently treat similar items as incurred in the tax year in which the all-events test is met. Turbotax 2011 free edition Either: The item is not material, or Accruing the item in the year in which the all-events test is met results in a better match against income than accruing the item in the year of economic performance. Turbotax 2011 free edition This exception does not apply to workers' compensation or tort liabilities. Turbotax 2011 free edition Amended return. Turbotax 2011 free edition   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Turbotax 2011 free edition You can do so if economic performance for the liability occurs after you file your tax return for the year, but within 8½ months after the close of the tax year. Turbotax 2011 free edition Recurrence and consistency. Turbotax 2011 free edition   To determine whether an item is recurring and consistently reported, consider the frequency with which the item and similar items are incurred (or expected to be incurred) and how you report these items for tax purposes. Turbotax 2011 free edition A new expense or an expense not incurred every year can be treated as recurring if it is reasonable to expect that it will be incurred regularly in the future. Turbotax 2011 free edition Materiality. Turbotax 2011 free edition   Factors to consider in determining the materiality of a recurring item include the size of the item (both in absolute terms and in relation to your income and other expenses) and the treatment of the item on your financial statements. Turbotax 2011 free edition   An item considered material for financial statement purposes is also considered material for tax purposes. Turbotax 2011 free edition However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Turbotax 2011 free edition Matching expenses with income. Turbotax 2011 free edition   Costs directly associated with the revenue of a period are properly allocable to that period. Turbotax 2011 free edition To determine whether the accrual of an expense in a particular year results in a better match with the income to which it relates, generally accepted accounting principles (GAAP; visit www. Turbotax 2011 free edition fasab. Turbotax 2011 free edition gov/accepted. Turbotax 2011 free edition html) are an important factor. Turbotax 2011 free edition   For example, if you report sales income in the year of sale, but you do not ship the goods until the following year, the shipping costs are more properly matched to income in the year of sale than the year the goods are shipped. Turbotax 2011 free edition Expenses that cannot be practically associated with income of a particular period, such as advertising costs, should be assigned to the period the costs are incurred. Turbotax 2011 free edition However, the matching requirement is considered met for certain types of expenses. Turbotax 2011 free edition These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Turbotax 2011 free edition Expenses Paid in Advance An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Turbotax 2011 free edition Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. Turbotax 2011 free edition 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Turbotax 2011 free edition If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must get IRS approval before using the general rule and/or the 12-month rule. Turbotax 2011 free edition See Change in Accounting Method, later, for information on how to get IRS approval. Turbotax 2011 free edition See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Turbotax 2011 free edition Related Persons 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. Turbotax 2011 free edition Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Turbotax 2011 free edition See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Turbotax 2011 free edition Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Turbotax 2011 free edition If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Turbotax 2011 free edition However, see Exceptions, next. Turbotax 2011 free edition See also Accrual Method, earlier. Turbotax 2011 free edition To figure taxable income, you must value your inventory at the beginning and end of each tax year. Turbotax 2011 free edition To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Turbotax 2011 free edition See Identifying Cost and Valuing Inventory, later. Turbotax 2011 free edition The rules for valuing inventory are not the same for all businesses. Turbotax 2011 free edition The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Turbotax 2011 free edition Your inventory practices must be consistent from year to year. Turbotax 2011 free edition The rules discussed here apply only if they do not conflict with the uniform capitalization rules of section 263A and the mark-to-market rules of section 475. Turbotax 2011 free edition Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Turbotax 2011 free edition These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Turbotax 2011 free edition A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Turbotax 2011 free edition irs. Turbotax 2011 free edition gov/pub/irs-irbs/irb01–02. Turbotax 2011 free edition pdf. Turbotax 2011 free edition A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Turbotax 2011 free edition irs. Turbotax 2011 free edition gov/pub/irs-irbs/irb02–18. Turbotax 2011 free edition pdf. Turbotax 2011 free edition In addition to the information provided in this publication, you should see the revenue procedures referenced in the list, above, and the instructions for Form 3115 for information you will need to adopt or change to these accounting methods (see Changing methods, later). Turbotax 2011 free edition Qualifying taxpayer. Turbotax 2011 free edition   You are a qualifying taxpayer under Revenue Procedure 2001-10 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 17, 1998 (see Gross receipts test for qualifying taxpayers, next). Turbotax 2011 free edition Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Turbotax 2011 free edition You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Turbotax 2011 free edition Gross receipts test for qualifying taxpayers. Turbotax 2011 free edition   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Turbotax 2011 free edition List each of the test years. Turbotax 2011 free edition For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Turbotax 2011 free edition Step 2. Turbotax 2011 free edition Determine your average annual gross receipts for each test year listed in Step 1. Turbotax 2011 free edition Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Turbotax 2011 free edition Step 3. Turbotax 2011 free edition You meet the gross receipts test for qualifying taxpayers if your average annual gross receipts for each test year listed in Step 1 is $1 million or less. Turbotax 2011 free edition Qualifying small business taxpayer. Turbotax 2011 free edition   You are a qualifying small business taxpayer under Revenue Procedure 2002-28 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 31, 2000 (see Gross receipts test for qualifying small business taxpayers, next). Turbotax 2011 free edition Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Turbotax 2011 free edition You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Turbotax 2011 free edition Your principle business activity is an eligible business. Turbotax 2011 free edition See Eligible business, later. Turbotax 2011 free edition You have not changed (or have not been required to change) from the cash method because you became ineligible to use the cash method under Revenue Procedure 2002-28. Turbotax 2011 free edition Note. Turbotax 2011 free edition Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Turbotax 2011 free edition A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Turbotax 2011 free edition See Special rules for farming businesses under Cash Method, earlier. Turbotax 2011 free edition Gross receipts test for qualifying small business taxpayers. Turbotax 2011 free edition   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Turbotax 2011 free edition List each of the test years. Turbotax 2011 free edition For qualifying small business taxpayers under Revenue Procedure 2002-28, the test years are each prior tax year ending on or after December 31, 2000. Turbotax 2011 free edition Step 2. Turbotax 2011 free edition Determine your average annual gross receipts for each test year listed in Step 1. Turbotax 2011 free edition Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Turbotax 2011 free edition Step 3. Turbotax 2011 free edition You meet the gross receipts test for qualifying small business taxpayers if your average annual gross receipts for each test year listed in Step 1 is $10 million or less. Turbotax 2011 free edition Eligible business. Turbotax 2011 free edition   An eligible business is any business for which a qualified small business taxpayer can use the cash method and choose to not keep an inventory. Turbotax 2011 free edition You have an eligible business if you meet any of the following requirements. Turbotax 2011 free edition Your principal business activity is described in a North American Industry Classification System (NAICS) code other than any of the following NAICS subsector codes: NAICS codes 211 and 212 (mining activities). Turbotax 2011 free edition NAICS codes 31-33 (manufacturing). Turbotax 2011 free edition NAICS code 42 (wholesale trade). Turbotax 2011 free edition NAICS codes 44-45 (retail trade). Turbotax 2011 free edition NAICS codes 5111 and 5122 (information industries). Turbotax 2011 free edition Your principal business activity is the provision of services, including the provision of property incident to those services. Turbotax 2011 free edition Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Turbotax 2011 free edition   Information about the NAICS codes can be found at http://www. Turbotax 2011 free edition census. Turbotax 2011 free edition gov/naics or in the instructions for your federal income tax return. Turbotax 2011 free edition Gross receipts. Turbotax 2011 free edition   In general, gross receipts must include all receipts from all your trades or businesses that must be recognized under the method of accounting you used for that tax year for federal income tax purposes. Turbotax 2011 free edition See the definit