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Free Online Tax 2010

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Free Online Tax 2010

Free online tax 2010 2. Free online tax 2010   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Free online tax 2010 You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Free online tax 2010 This chapter discusses accounting methods. Free online tax 2010 For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free online tax 2010 Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Free online tax 2010 Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Free online tax 2010 Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Free online tax 2010 A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Free online tax 2010 An item considered material for financial statement purposes is generally also considered material for income tax purposes. Free online tax 2010 See Publication 538 for more information. Free online tax 2010 You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Free online tax 2010 If you later want to change your accounting method, you generally must get IRS approval. Free online tax 2010 How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Free online tax 2010 Types of accounting methods. Free online tax 2010   Generally, you can use any of the following accounting methods. Free online tax 2010 Each method is discussed in detail below. Free online tax 2010 Cash method. Free online tax 2010 Accrual method. Free online tax 2010 Special methods of accounting for certain items of income and expenses. Free online tax 2010 Combination (hybrid) method using elements of two or more of the above. Free online tax 2010 Business and other items. Free online tax 2010   You can account for business and personal items using different accounting methods. Free online tax 2010 For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Free online tax 2010 Two or more businesses. Free online tax 2010   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Free online tax 2010 Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Free online tax 2010 Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Free online tax 2010 However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Free online tax 2010 See Accrual Method Required , later. Free online tax 2010 Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Free online tax 2010 Items of income include money received as well as property or services received. Free online tax 2010 If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Free online tax 2010 See chapter 3 for information on how to report farm income on your income tax return. Free online tax 2010 Constructive receipt. Free online tax 2010   Income is constructively received when an amount is credited to your account or made available to you without restriction. Free online tax 2010 You do not need to have possession of the income for it to be treated as income for the tax year. Free online tax 2010 If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Free online tax 2010 Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Free online tax 2010 Direct payments and counter-cyclical payments. Free online tax 2010   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Free online tax 2010 Delaying receipt of income. Free online tax 2010   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Free online tax 2010 You must report the income in the year the money or property is received or made available to you without restriction. Free online tax 2010 Example. Free online tax 2010 Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Free online tax 2010 She was told in December that her payment was available. Free online tax 2010 She requested not to be paid until January 2014. Free online tax 2010 However, she must still include this payment in her 2013 income because it was made available to her in 2013. Free online tax 2010 Debts paid by another person or canceled. Free online tax 2010   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Free online tax 2010 If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Free online tax 2010 See Cancellation of Debt in chapter 3. Free online tax 2010 Deferred payment contract. Free online tax 2010   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Free online tax 2010 However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Free online tax 2010 Example. Free online tax 2010 You are a farmer who uses the cash method and a calendar tax year. Free online tax 2010 You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Free online tax 2010 You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Free online tax 2010 However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Free online tax 2010 Repayment of income. Free online tax 2010   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Free online tax 2010 If the repayment is more than $3,000, a special rule applies. Free online tax 2010 For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Free online tax 2010 Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Free online tax 2010 This includes business expenses for which you contest liability. Free online tax 2010 However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Free online tax 2010 See chapter 4 for information on how to deduct farm business expenses on your income tax return. Free online tax 2010 Prepayment. Free online tax 2010   Generally, you cannot deduct expenses paid in advance. Free online tax 2010 This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free online tax 2010 Example. Free online tax 2010 On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Free online tax 2010 In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Free online tax 2010 In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Free online tax 2010 An exception applies if the expense qualifies for the 12-month rule. Free online tax 2010 See Publication 538 for more information and examples. Free online tax 2010 See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Free online tax 2010 Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Free online tax 2010 The purpose of an accrual method of accounting is to correctly match income and expenses. Free online tax 2010 Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Free online tax 2010 See Accrual Method Required and Farm Inventory , later. Free online tax 2010 Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Free online tax 2010 Under this rule, include an amount in income on the earliest of the following dates. Free online tax 2010 When you receive payment. Free online tax 2010 When the income amount is due to you. Free online tax 2010 When you earn the income. Free online tax 2010 When title passes. Free online tax 2010 If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Free online tax 2010 Inventory. Free online tax 2010   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Free online tax 2010 An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Free online tax 2010 See Publication 538 for more information. Free online tax 2010 Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Free online tax 2010 Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Free online tax 2010 The all-events test has been met. Free online tax 2010 This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Free online tax 2010 Economic performance has occurred. Free online tax 2010 Economic performance. Free online tax 2010   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Free online tax 2010 If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Free online tax 2010 If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free online tax 2010 Example. Free online tax 2010 Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Free online tax 2010 She entered into a contract with ABC Farm Consulting in 2012. Free online tax 2010 The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Free online tax 2010 It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Free online tax 2010 Jane paid ABC Farm Consulting $2,000 in December 2012. Free online tax 2010 Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Free online tax 2010 Economic performance for Jane's liability in the contract occurs as the services are provided. Free online tax 2010 Jane incurs the $2,000 cost in 2013. Free online tax 2010 An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Free online tax 2010 For more information, see Economic Performance in Publication 538. Free online tax 2010 Special rule for related persons. Free online tax 2010   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. Free online tax 2010 Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Free online tax 2010 For more information, see Internal Revenue Code section 267. Free online tax 2010 Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Free online tax 2010 A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Free online tax 2010 A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Free online tax 2010 A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Free online tax 2010 A tax shelter. Free online tax 2010 Note. Free online tax 2010 Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Free online tax 2010 Family corporation. Free online tax 2010   A family corporation is generally a corporation that meets one of the following ownership requirements. Free online tax 2010 Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Free online tax 2010 Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Free online tax 2010 Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Free online tax 2010 For more information on family corporations, see Internal Revenue Code section 447. Free online tax 2010 Tax shelter. Free online tax 2010   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Free online tax 2010 Its principal purpose is the avoidance or evasion of federal income tax. Free online tax 2010 It is a farming syndicate. Free online tax 2010 A farming syndicate is an entity that meets either of the following tests. Free online tax 2010 Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Free online tax 2010 More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Free online tax 2010   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Free online tax 2010   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Free online tax 2010 Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Free online tax 2010 This record should show the actual count or measurement of the inventory. Free online tax 2010 It should also show all factors that enter into its valuation, including quality and weight, if applicable. Free online tax 2010 Hatchery business. Free online tax 2010   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Free online tax 2010 Products held for sale. Free online tax 2010   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Free online tax 2010 , must be included in inventory. Free online tax 2010 Supplies. Free online tax 2010   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Free online tax 2010 Deduct the cost of supplies in the year used or consumed in operations. Free online tax 2010 Do not include incidental supplies in inventory as these are deductible in the year of purchase. Free online tax 2010 Livestock. Free online tax 2010   Livestock held primarily for sale must be included in inventory. Free online tax 2010 Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Free online tax 2010 See also Unit-livestock-price method , later. Free online tax 2010 If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Free online tax 2010 Growing crops. Free online tax 2010   Generally, growing crops are not required to be included in inventory. Free online tax 2010 However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Free online tax 2010 See Uniform capitalization rules below. Free online tax 2010 Also see Uniform Capitalization Rules in  chapter 6. Free online tax 2010 Items to include in inventory. Free online tax 2010   Your inventory should include all items held for sale, or for use as feed, seed, etc. Free online tax 2010 , whether raised or purchased, that are unsold at the end of the year. Free online tax 2010 Uniform capitalization rules. Free online tax 2010   The following applies if you are required to use an accrual method of accounting. Free online tax 2010 The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Free online tax 2010 The costs of animals are subject to the uniform capitalization rules. Free online tax 2010 Inventory valuation methods. Free online tax 2010   The following methods, described below, are those generally available for valuing inventory. Free online tax 2010 The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Free online tax 2010 Cost. Free online tax 2010 Lower of cost or market. Free online tax 2010 Farm-price method. Free online tax 2010 Unit-livestock-price method. Free online tax 2010 Cost and lower of cost or market methods. Free online tax 2010   See Publication 538 for information on these valuation methods. Free online tax 2010 If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Free online tax 2010 However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Free online tax 2010 Farm-price method. Free online tax 2010   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Free online tax 2010 Market price is the current price at the nearest market in the quantities you usually sell. Free online tax 2010 Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Free online tax 2010 If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Free online tax 2010 Unit-livestock-price method. Free online tax 2010   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Free online tax 2010 You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Free online tax 2010 The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Free online tax 2010 Unit prices and classifications are subject to approval by the IRS on examination of your return. Free online tax 2010 You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Free online tax 2010 IRS approval is not required for these adjustments. Free online tax 2010 Any other changes in unit prices or classifications do require IRS approval. Free online tax 2010   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Free online tax 2010 This method accounts only for the increase in cost of raising an animal to maturity. Free online tax 2010 It does not provide for any decrease in the animal's market value after it reaches maturity. Free online tax 2010 Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Free online tax 2010   Do not include sold or lost animals in the year-end inventory. Free online tax 2010 If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Free online tax 2010 The animals on hand at the end of the year are considered those most recently acquired. Free online tax 2010   You must include in inventory all livestock purchased primarily for sale. Free online tax 2010 You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Free online tax 2010 However, you must be consistent from year to year, regardless of the method you have chosen. Free online tax 2010 You cannot change your method without obtaining approval from the IRS. Free online tax 2010   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Free online tax 2010 If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Free online tax 2010 However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Free online tax 2010 This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Free online tax 2010 It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Free online tax 2010 Uniform capitalization rules. Free online tax 2010   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Free online tax 2010 This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Free online tax 2010 Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Free online tax 2010 Example 1. Free online tax 2010 You are a farmer who uses an accrual method of accounting. Free online tax 2010 You keep your books on the calendar year basis. Free online tax 2010 You sell grain in December 2013 but you are not paid until January 2014. Free online tax 2010 Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Free online tax 2010 Example 2. Free online tax 2010 Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Free online tax 2010 Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Free online tax 2010 Deduct the costs of producing the grain in the year you pay for them. Free online tax 2010 Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Free online tax 2010 Crop method. Free online tax 2010   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Free online tax 2010 You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Free online tax 2010 Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Free online tax 2010    See chapter 4 for details on deducting the costs of operating a farm. Free online tax 2010 Also see Regulations section 1. Free online tax 2010 162-12. Free online tax 2010 Other special methods. Free online tax 2010   Other special methods of accounting apply to the following items. Free online tax 2010 Amortization, see chapter 7. Free online tax 2010 Casualties, see chapter 11. Free online tax 2010 Condemnations, see chapter 11. Free online tax 2010 Depletion, see chapter 7. Free online tax 2010 Depreciation, see chapter 7. Free online tax 2010 Farm business expenses, see chapter 4. Free online tax 2010 Farm income, see chapter 3. Free online tax 2010 Installment sales, see chapter 10. Free online tax 2010 Soil and water conservation expenses, see chapter 5. Free online tax 2010 Thefts, see chapter 11. Free online tax 2010 Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Free online tax 2010 However, the following restrictions apply. Free online tax 2010 If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Free online tax 2010 If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Free online tax 2010 Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Free online tax 2010 Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Free online tax 2010 You may also have to pay a fee. Free online tax 2010 To obtain approval, you must generally file Form 3115. Free online tax 2010 There are instances when you can obtain automatic consent to change certain methods of accounting. Free online tax 2010 See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Free online tax 2010 For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Free online tax 2010 Also see Publication 538. Free online tax 2010 Prev  Up  Next   Home   More Online Publications
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The Free Online Tax 2010

Free online tax 2010 Car Expenses Table of Contents Introduction Depreciation of CarSpecial Depreciation Allowance Depreciation Limit Amended Return Election Not To Claim Special Allowance If you purchased a car after September 10, 2001, for use in your business (or as an employee) and figure your deductible expenses using the actual car expense method, new law contains provisions that may affect your depreciation deduction for that car. Free online tax 2010 Publication 463, Travel, Entertainment, Gift, and Car Expenses, contains information on figuring depreciation on your car. Free online tax 2010 However, Publication 463 does not contain the new provisions because it was printed before the law was enacted. Free online tax 2010 The new provisions are in the Supplement to Publication 463, which is reprinted below. Free online tax 2010 Supplement to Publication 463 Travel, Entertainment, Gift, and Car Expenses   Introduction This supplemental publication is for taxpayers who purchased a car for business purposes after September 10, 2001, and figure their deductible expenses, including a deduction for depreciation, using the actual car expense method. Free online tax 2010 After Publication 463 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Free online tax 2010 Certain provisions of this new law may reduce your taxes for 2001. Free online tax 2010 The new law contains the following provisions. Free online tax 2010 A new depreciation deduction, the special depreciation allowance. Free online tax 2010 An increase in the limit on depreciation for any car for which you claim the new special depreciation allowance. Free online tax 2010 If you have already filed your 2001 return, you may wish to file an amended return to claim any of these benefits. Free online tax 2010 See Amended Return, later. Free online tax 2010 Depreciation of Car If you used the actual car expense method to figure your deduction for a car you own and use in your business (or as an employee), you generally can claim a depreciation deduction. Free online tax 2010 However, there is a limit on the depreciation deduction you can take for your car each year. Free online tax 2010 See Depreciation Limit later. Free online tax 2010 Special Depreciation Allowance The new law allows you to claim a special depreciation allowance. Free online tax 2010 This special allowance is a deduction equal to 30% of the depreciable basis of qualified property. Free online tax 2010 You figure the amount of the special depreciation allowance after any section 179 deduction you choose to claim, but before figuring your regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS). Free online tax 2010 See Depreciation Deduction under Actual Car Expenses in chapter 4 of Publication 463 for information about MACRS. Free online tax 2010 You can claim the special depreciation allowance only for the year the qualified property is placed in service. Free online tax 2010 Qualified property. Free online tax 2010   Qualified property includes a car (any four-wheeled vehicle, including a truck or van not more than 6,000 pounds, that is made primarily for use on public streets, roads, and highways) that meets all of the following requirements. Free online tax 2010 You bought it new. Free online tax 2010 You bought it after September 10, 2001. Free online tax 2010 (But a car is not qualified property if a binding written contract for you to buy the car was in effect before September 11, 2001. Free online tax 2010 ) You began using it for business after September 10, 2001, and used it more than 50% in a qualified business use. Free online tax 2010 Example. Free online tax 2010 Bob bought a new car on October 15, 2001, for $20,000 and placed it in service immediately, using it 75% for business. Free online tax 2010 Bob's car is qualified property. Free online tax 2010 Bob chooses not to take a section 179 deduction for the car. Free online tax 2010 He does claim the new special depreciation allowance. Free online tax 2010 Bob first must figure the car's depreciable basis, which is $15,000 ($20,000 × . Free online tax 2010 75). Free online tax 2010 He then figures the special depreciation allowance of $4,500 ($15,000 × . Free online tax 2010 30). Free online tax 2010 The remaining depreciable basis of $10,500 ($15,000 - $4,500) is depreciated using MACRS (200% declining balance method, half-year convention) and results in a deduction of $2,100 ($10,500 × . Free online tax 2010 20), for a total depreciation deduction for 2001 of $6,600 ($4,500 + $2,100). Free online tax 2010 However, Bob's depreciation deduction is limited to $5,745 ($7,660 × . Free online tax 2010 75), as discussed next. Free online tax 2010 Depreciation Limit The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (defined above) and for which you claim the special depreciation allowance. Free online tax 2010 The limit is increased to $23,080 if the car is an electric car. Free online tax 2010 The section 179 deduction is treated as depreciation for purposes of this limit. Free online tax 2010 If you use a car less than 100% in your business or work, the limit is $7,660 (or $23,080 for an electric car) multiplied by the percentage of business and investment use during the year. Free online tax 2010 For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060 ($9,280 for electric cars). Free online tax 2010 Amended Return If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you can claim it by filing an amended return on Form 1040X, Amended U. Free online tax 2010 S. Free online tax 2010 Individual Income Tax Return, by April 15, 2003. Free online tax 2010 At the top of the Form 1040X, print “Filed pursuant to Revenue Procedure 2002–33. Free online tax 2010 ” If you are an employee, attach Form 2106, Employee Business Expenses (revised March 2002). Free online tax 2010 If you are self-employed, attach Form 4562, Depreciation and Amortization (revised March 2002). Free online tax 2010 Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002 return. Free online tax 2010 For details, see Revenue Procedure 2002–33. Free online tax 2010 (But, filing Form 1040X for 2001 enables you to claim the special allowance earlier than attaching Form 3115 to your 2002 return. Free online tax 2010 ) You cannot claim the special depreciation allowance on an amended return (or by using Form 3115) if you made, or are treated as having made, the election not to claim it described later. Free online tax 2010 Example. Free online tax 2010 The facts are the same as in the previous example except that Bob filed his original 2001 income tax return on April 15, 2002, and claimed a $3,000 ($20,000 x . Free online tax 2010 75 x . Free online tax 2010 20) depreciation deduction for his new car using MACRS. Free online tax 2010 Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. Free online tax 2010 Bob, who is an employee, files Form 1040X, by April 15, 2003, with an updated Form 2106 (revised March 2002) attached, increasing his total depreciation deduction to $5,745, as figured in the earlier example. Free online tax 2010 Bob's new filled-in Form 2106 is shown later. Free online tax 2010 Election Not To Claim Special Allowance You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written on, your return indicating that you are electing not to claim the special depreciation allowance for 5-year property. Free online tax 2010 As a general rule, you must make this election by the due date (including extensions) of your return. Free online tax 2010 You can have an automatic extension of 6 months from the due date of your return (excluding extensions) to make the election with an amended return. Free online tax 2010 To get this extension, you must have filed your original return by the due date (including extensions). Free online tax 2010 At the top of the statement, print “Filed pursuant to section 301. Free online tax 2010 9100–2. Free online tax 2010 ” If you elect not to claim the special depreciation allowance for a car, you cannot claim it for any other 5-year property placed in service during the same year. Free online tax 2010 Unless you elect (or are treated as electing) not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. Free online tax 2010 Deemed election for return filed before June 1, 2002. Free online tax 2010   If you did not make the election not to claim the special depreciation allowance in the time and manner described above, you will still be treated as electing not to claim it if all of the following apply. Free online tax 2010 You filed your 2001 return before June 1, 2002. Free online tax 2010 You claimed depreciation on your return but did not claim the special depreciation allowance. Free online tax 2010 You did not file an amended 2001 return by April 15, 2003, or a Form 3115 with your 2002 return, to claim the special depreciation allowance. Free online tax 2010 Form 2106, Page 1, for Bob Smith Form 2106, Page 2, for Bob Smith Prev  Up  Next   Home   More Online Publications