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Department of the Treasury Contents Internal Service Future Developments ...... 1 Publication 538 Introduction ...... 1 (Rev. January 2019) Photographs of Missing Children ...... 2 Cat. No. 15068G Periods ...... 2 ...... 2 ...... 3 Accounting Short Year ...... 3 Improper Tax Year ...... 4 Periods and Change in Tax Year ...... 4 Individuals ...... 4 , S Corporations, and Personal Methods Service Corporations (PSCs) ...... 5 Corporations (Other Than S Corporations and PSCs) ...... 7

Accounting Methods ...... 8 Method ...... 8 Method ...... 10 ...... 13 Change in Accounting Method ...... 18

How To Get Tax Help ...... 19

Future Developments For the latest information about developments related to Pub. 538, such as legislation enacted after it was published, go to IRS.gov/Pub538.

What’s New Small taxpayers. Effective for tax beginning after 2017, the Tax Cuts and Jobs Act (P.L. 115-97) expanded the eligibility of taxpayers to use the cash method of accounting. Qualifying small business taxpayers are also exempt from the following accounting rules. • The requirement to keep inventories. • The uniform capitalization rules. • The requirement to use the percentage of completion method.

Introduction Every taxpayer (individuals, business entities, etc.) must figure taxable for an annual called a tax year. The is the most common Get forms and other information faster and easier at: tax year. Other tax years include a fiscal year and a short • IRS.gov (English) • IRS.gov/Korean (한국어) tax year. • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) Each taxpayer must use a consistent accounting • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (TiếngViệt) method, which is a set of rules for determining when to

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report income and . The most commonly used 541 541 Partnerships accounting methods are the cash method and the accrual method. 542 542 Corporations Under the cash method, you generally report income in Form (and Instructions) the tax year you receive it, and deduct expenses in the tax

year in which you pay the expenses. 1128 1128 Application To Adopt, Change, or Retain a Tax Under the accrual method, you generally report income Year in the tax year you earn it, regardless of when payment is received. You deduct expenses in the tax year you incur 2553 2553 Election by a Small Business Corporation them, regardless of when payment is made.

3115 3115 Application for Change in Accounting Method This publication explains some of the rules for ac-

TIP counting periods and accounting methods. In 8716 8716 Election To Have a Tax Year Other Than a some cases, you have to refer to other sour- Required Tax Year ces for a more in-depth explanation of the topic. See Ordering forms and publications, earlier for informa- tion about getting these publications and forms. Comments and suggestions. We welcome your com- ments about this publication and your suggestions for fu- ture editions. You can send us comments through IRS.gov/ Accounting Periods FormComments. Or you can write to: You must use a tax year to figure your . A tax year is an annual accounting period for keeping re- Tax Forms and Publications cords and reporting income and expenses. An annual ac- 1111 Constitution Ave. NW, IR-6526 counting period does not include a short tax year (dis- Washington, DC 20224 cussed later). You can use the following tax years: • A calendar year; or Although we can’t respond individually to each com- ment received, we do appreciate your feedback and will • A fiscal year (including a 52-53-week tax year). consider your comments as we revise our tax forms, in- structions, and publications. Unless you have a required tax year, you adopt a tax year by filing your first return using that tax Ordering forms and publications. Visit IRS.gov/ year. A required tax year is a tax year required under the FormsPubs to download forms and publications. Other- or the Income Tax Regulations. wise, you can go to IRS.gov/OrderForms to order current You cannot adopt a tax year by merely: and prior-year forms and instructions. Your order should Filing an application for an extension of to file an arrive within 10 business days. • income tax return; Tax Questions. If you have a tax question not an- • Filing an application for an employer identification swered by this publication, check IRS.gov and How To number (Form SS-4); or Get Tax Help at the end of this publication. • Paying estimated . This section discusses: Photographs of Missing • A calendar year. Children • A fiscal year (including a period of 52 or 53 weeks). The Internal Revenue Service is a proud partner with the • A short tax year. National Center for Missing & Exploited Children® • An improper tax year. (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that • A change in tax year. would otherwise be blank. You can help bring these • Special situations that apply to individuals. children home by looking at the photographs and calling Restrictions that apply to the accounting period of a 1-800-THE-LOST (1-800-843-5678) if you recognize a • , S corporation, or personal service corpo- child. ration. Useful Items • Special situations that apply to corporations. You may want to see: Calendar Year Publication A calendar year is 12 consecutive months beginning on 537 537 Installment January 1st and ending on December 31st.

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If you adopt the calendar year, you must maintain your To determine an effective date (or apply provisions of books and records and report your income and expenses any law) expressed in terms of tax years beginning, in- from January 1st through December 31st of each year. cluding, or ending on the first or last day of a specified cal- endar month, a 52-53-week tax year is considered to: If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, be- • Begin on the first day of the calendar month beginning come a partner in a partnership, or become a shareholder nearest to the first day of the 52-53-week tax year, in an S corporation, you must continue to use the calendar and year unless you obtain approval from the IRS to change it, • End on the last day of the calendar month ending or are otherwise allowed to change it without IRS appro- nearest to the last day of the 52-53-week tax year. val. See Change in Tax Year, later. Generally, anyone can adopt the calendar year. How- Example. Assume a tax applies to tax years ever, you must adopt the calendar year if: beginning on or after July 1, which (for purposes of this example) happens to be a Sunday. For this purpose, a • You keep no books or records; 52-53-week tax year that begins on the last Tuesday of • You have no annual accounting period; June, which (for purposes of this example) falls on June 25, is treated as beginning on July 1. • Your present tax year does not qualify as a fiscal year; or Short Tax Year • You are required to use a calendar year by a provision in the Internal Revenue Code or Income Tax Regula- A short tax year is a tax year of less than 12 months. A tions. short period tax return may be required when you (as a taxable entity): Fiscal Year • Are not in existence for an entire tax year, or A fiscal year is 12 consecutive months ending on the last • Change your accounting period. day of any month except December 31st. If you are al- Tax on a short period tax return is figured differently for lowed to adopt a fiscal year, you must consistently main- each situation. tain your books and records and report your income and expenses using the time period adopted. Not in Existence Entire Year 52-53-Week Tax 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 exis- You can elect to use a 52-53-week tax year if you keep tence. Requirements for filing the return and figuring the your books and records and report your income and ex- tax are generally the same as the requirements for a re- penses on that basis. If you make this election, your turn for a full tax year (12 months) ending on the last day 52-53-week tax year must always end on the same day of of the short tax year. the week. Your 52-53-week tax year must always end on: Example 1. XYZ Corporation was organized on July 1. Whatever date this same day of the week last occurs • It elected the calendar year as its tax year. The corpora- in a calendar month, or tion’s first tax return will cover the short period from July 1 • Whatever date this same day of the week falls that is through December 31. nearest to the last day of the calendar month. Example 2. A calendar year corporation dissolved on Election. To make the election for the 52-53-week tax July 23. The corporation’s final return will cover the short year, attach a statement with the following information to period from January 1 through July 23. your tax return. Death of individual. Although the return of the decedent 1. The month in which the new 52-53-week tax year is a return for the short period beginning with the first day ends. of his last taxable year and ending with the date of his 2. The day of the week on which the tax year always death, the filing of a return and the payment of tax for the ends. decedent may be made as though the decedent had lived throughout his last taxable year. The decedent’s tax return 3. The date the tax year ends. It can be either of the fol- must be filed for the decedent by the 15th day of the 4th lowing dates on which the chosen day: month after the close of the individual's regular tax year. If a. Last occurs in the month in (1), above, or the due date falls on a Saturday, Sunday, or legal holiday, file by the next business day. The decedent's final return b. Occurs nearest to the last day of the month in (1), will be a short period tax return that begins on January above. 1st, and ends on the date of death. In the case of a dece- When you figure or , a dent who dies on December 31st, the last day of the regu- 52-53-week tax year is generally considered a year of 12 lar tax year, a full calendar-year tax return is required. calendar months.

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Figuring Tax for Short Year 2. Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue If the IRS approves a change in your tax year or if you are Code. The result is the annualized AMT. required to change your tax year, you must figure the tax and file your return for the short tax period. The short tax 3. Multiply the annualized AMT by the number of months period begins on the first day after the close of your old in the short tax year and divide the result by 12. tax year and ends on the day before the first day of your For information on the AMT for individuals, see the In- new tax year. structions for Form 6251, –Indi- viduals. Figure tax for a short year under the general rule, ex- plained below. You may then be able to use a relief proce- Tax withheld from wages. You can claim a dure, explained later, and claim a refund of part of the tax against your income tax liability for federal income tax you paid. withheld from your wages. Federal income tax is withheld on a calendar year basis. The amount withheld in any cal- General rule. Income tax for a short tax year must be an- endar year is allowed as a credit for the tax year beginning nualized. However, self-employment tax is figured on the in the calendar year. actual self-employment income for the short period. Individuals. An individual must figure income tax for Improper Tax Year the short tax year as follows. Taxpayers that have adopted an improper tax year must 1. Determine your adjusted (AGI) for the change to a proper tax year. For example, if a taxpayer short tax year and then subtract your actual itemized began business on March 15 and adopted a tax year end- deductions for the short tax year. You must itemize ing on March 14 (a period of exactly 12 months), this deductions when you file a short period tax return. would be an improper tax year. See Accounting Periods, 2. Multiply the dollar amount of your exemptions by the earlier, for a description of permissible tax years. number of months in the short tax year and divide the To change to a proper tax year, you must do one of the result by 12. Note. For tax years beginning after 2017 following. and before 2026, the dollar amount of your exemption is zero (-0-). • If you are requesting a change to a calendar tax year, file an amended income tax return based on a calen- 3. Subtract the amount in (2) from the amount in (1). The dar tax year that corrects the most recently filed tax re- result is your modified taxable income. turn that was filed on the basis of an improper tax 4. Multiply the modified taxable income in (3) by 12, then year. Attach a completed Form 1128 to the amended divide the result by the number of months in the short tax return. Write “FILED UNDER REV. PROC. 85-15” tax year. The result is your annualized income. at the top of Form 1128 and file the forms with the In- ternal Revenue Service Center where you filed your 5. Figure the total tax on your annualized income using original return. the appropriate tax rate schedule. • If you are requesting a change to a fiscal tax year, file 6. Multiply the total tax by the number of months in the Form 1128 in accordance with the form instructions to short tax year and divide the result by 12. The result is request IRS approval for the change. your tax for the short tax year.

Relief procedure. You can use a relief procedure to fig- Change in Tax Year ure the tax for the short tax year. It may result in less tax. Under this procedure, the tax is figured by two separate Generally, you must file Form 1128 to request IRS appro- methods. If the tax figured under both methods is less val to change your tax year. See the Instructions for Form than the tax figured under the general rule, you can file a 1128 for exceptions. If you qualify for an automatic appro- claim for a refund of part of the tax you paid. For more in- val request, a user fee is not required. formation, see section 443(b)(2) of the Internal Revenue Code and the related Regulations. Individuals

Alternative minimum tax. Individuals, to figure the alter- Generally, individuals must adopt the calendar year as native minimum tax (AMT) due for a short tax year: their tax year. An individual can adopt a fiscal year if the individual maintains his or her books and records on the 1. Figure the annualized alternative minimum taxable in- basis of the adopted fiscal year. come (AMTI) for the short tax period by completing the following steps. a. Multiply the AMTI by 12. b. Divide the result by the number of months in the short tax year.

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Partnerships, 2. Multiply each partner's months of figured in step (1) by that partner's share of in the part- S Corporations, nership profits for the year used in step (1). and Personal Service Corporations 3. Add the amounts in step (2) to get the aggregate (to- (PSCs) tal) deferral for the tax year used in step (1). Generally, partnerships, S corporations (including electing 4. Repeat steps (1) through (3) for each partner's tax S corporations), and PSCs must use a required tax year. year that is different from the other partners' years. A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. The The partner's tax year that results in the lowest aggre- entity does not have to use the required tax year if it re- gate (total) number is the tax year that must be used by ceives IRS approval to use another permitted tax year or the partnership. If the calculation results in more than one makes an election under section 444 of the Internal Reve- tax year qualifying as the tax year with the least aggregate nue Code (discussed later). The following discussions deferral, the partnership can choose any one of those tax provide the rules for partnerships, S corporations, and years as its tax year. However, if one of the tax years that PSCs. qualifies is the partnership's existing tax year, the partner- ship must retain that tax year.

Partnership Example. A and B each have a 50% interest in part- nership P, which uses a fiscal year ending June 30. A A partnership must conform its tax year to its partners' tax uses the calendar year and B uses a fiscal year ending years unless any of the following apply. November 30. P must change its tax year to a fiscal year • The partnership makes an election under section 444 ending November 30 because this results in the least ag- of the Internal Revenue Code to have a tax year other gregate deferral of income to the partners, as shown in the than a required tax year by filing Form 8716. following table. • The partnership elects to use a 52-53-week tax year that ends with reference to either its required tax year Months Interest or a tax year elected under section 444. Year End Year Profits of × 12/31: End Interest Deferral Deferral • The partnership can establish a business purpose for A 12/31 0.5 -0- -0- a different tax year. B 11/30 0.5 11 5.5 Total Deferral ...... 5.5 The rules for the required tax year for partnerships are as Months Interest follows. Year End Year Profits of × • If one or more partners having the same tax year own 11/30: End Interest Deferral Deferral a majority interest (more than 50%) in partnership A 12/31 0.5 1 0.5 B 11/30 0.5 -0- -0- profits and capital, the partnership must use the tax year of those partners. Total Deferral ...... 0.5 • If there is no majority interest tax year, the partnership When determination is made. The determination of must use the tax year of all its principal partners. A the tax year under the least aggregate deferral rules must principal partner is one who has a 5% or more interest generally be made at the beginning of the partnership's in the profits or capital of the partnership. current tax year. However, the IRS can require the part- • If there is no majority interest tax year and the princi- nership to use another day or period that will more accu- pal partners do not have the same tax year, the part- rately reflect the ownership of the partnership. This could nership generally must use a tax year that results in occur, for example, if a partnership interest was transfer- the least aggregate deferral of income to the partners. red for the purpose of qualifying for a particular tax year. If a partnership changes to a required tax year be- Short period return. When a partnership changes its TIP cause of these rules, it can get automatic appro- tax year, a short period return must be filed. The short pe- val by filing Form 1128. riod return covers the months between the end of the part- nership's prior tax year and the beginning of its new tax Least aggregate deferral of income. The tax year that year. results in the least aggregate deferral of income is deter- If a partnership changes to the tax year resulting in the mined as follows. least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to de- 1. Figure the number of months of deferral for each part- termine that tax year. The short period return must indi- ner using one partner's tax year. Find the months of cate at the top of page 1, “FILED UNDER SECTION deferral by counting the months from the end of that 1.706-1.” tax year forward to the end of each other partner's tax year. More information. For more information about changing a partnership's tax year, and information about ruling re- quests, see the Instructions for Form 1128.

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S Corporation • It elects a year that meets the deferral period require- ment. All S corporations, regardless of when they became an S corporation, must use a permitted tax year. A permitted Deferral period. The determination of the deferral period tax year is any of the following. depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax • The calendar year. year with a section 444 election. • A tax year elected under section 444 of the Internal Retaining tax year. Generally, a partnership, S corpo- Revenue Code. See Section 444 Election, below for ration, or PSC can make a section 444 election to retain details. its tax year only if the deferral period of the new tax year is • A 52-53-week tax year ending with reference to the 3 months or less. This deferral period is the number of calendar year or a tax year elected under section 444. months between the beginning of the retained year and • Any other tax year for which the corporation estab- the close of the first required tax year. lishes a business purpose. Adopting or changing tax year. If the partnership, S If an electing S corporation wishes to adopt a tax year corporation, or PSC is adopting or changing to a tax year other than a calendar year, it must request IRS approval other than its required year, the deferral period is the num- using Form 2553, instead of filing Form 1128. For informa- ber of months from the end of the new tax year to the end tion about changing an S corporation's tax year and infor- of the required tax year. The IRS will allow a section 444 mation about ruling requests, see the Instructions for election only if the deferral period of the new tax year is Form 1128. less than the shorter of: • Three months, or Personal Service Corporation (PSC) • The deferral period of the tax year being changed. A PSC must use a calendar tax year unless any of the fol- This is the tax year immediately preceding the year for lowing apply. which the partnership, S corporation, or PSC wishes to make the section 444 election. • The corporation makes an election under section 444 of the Internal Revenue Code. See Section 444 Elec- If the partnership, S corporation, or PSC's tax year is the tion, below for details. same as its required tax year, the deferral period is zero. • The corporation elects to use a 52-53-week tax year Example 1. BD Partnership uses a calendar year, ending with reference to the calendar year or a tax which is also its required tax year. BD cannot make a sec- year elected under section 444. tion 444 election because the deferral period is zero.

• The corporation establishes a business purpose for a Example 2. E, a newly formed partnership, began op- fiscal year. erations on December 1. E is owned by calendar year See the Instructions for Form 1120 and Pub. 542 for gen- partners. E wants to make a section 444 election to adopt eral information about PSCs. For information on adopting a September 30 tax year. E's deferral period for the tax or changing tax years for PSCs and information about rul- year beginning December 1 is 3 months, the number of ing requests, see the Instructions for Form 1128. months between September 30 and December 31.

Section 444 Election Making the election. Make a section 444 election by fil- ing Form 8716 with the Internal Revenue Service Center A partnership, S corporation, electing S corporation, or where the entity will file its tax return. See the instructions PSC can elect under section 444 of the Internal Revenue for Form 8716 for information on when to file. Code to use a tax year other than its required tax year. Attach a copy of Form 8716 to Form 1065, Form Certain restrictions apply to the election. A partnership or 1120S, or Form 1120 for the first tax year for which the an S corporation that makes a section 444 election must election is made. make certain required payments and a PSC must make certain distributions (discussed later). The section 444 Terminating the election. The section 444 election re- election does not apply to any partnership, S corporation, mains in effect until it is terminated. If the election is termi- or PSC that establishes a business purpose for a different nated, another section 444 election cannot be made for period, explained later. any tax year. The election ends when any of the following applies to A partnership, S corporation, or PSC can make a sec- the partnership, S corporation, or PSC. tion 444 election if it meets all the following requirements. • The entity changes to its required tax year. • It is not a member of a tiered structure (defined in sec- • The entity liquidates. tion 1.444-2T of the regulations). • The entity becomes a member of a tiered structure. • It has not previously had a section 444 election in ef- fect. • The IRS determines that the entity willfully failed to comply with the required payments or distributions.

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The election will also end if either of the following filed, type or print “FORM 1128 (or FORM 2553) events occur. BACK-UP ELECTION” at the top of Form 8716. • An S corporation's S election is terminated. However, Activating election. A partnership or S corporation if the S corporation immediately becomes a PSC, the activates its back-up election by filing the return required PSC can continue the section 444 election of the S and making the required payment with Form 8752. The corporation. due date for filing Form 8752 and making the payment is • A PSC ceases to be a PSC. If the PSC elects to be an the later of the following dates. S corporation, the S corporation can continue the • May 15 of the calendar year following the calendar election of the PSC. year in which the applicable election year begins. Required payment for partnership or S corporation. • 60 days after the partnership or S corporation has A partnership or an S corporation must make a required been notified by the IRS that the business year re- payment for any tax year: quest has been denied. • The section 444 election is in effect. A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the • The required payment for that year (or any preceding tax year in which the election is first effective and printing tax year) is more than $500. on the top of the income tax return, “ACTIVATING This payment represents the value of the tax deferral BACK-UP ELECTION.” the owners receive by using a tax year different from the required tax year. 52-53-Week Tax Year Form 8752, Required Payment or Refund Under Sec- tion 7519, must be filed each year the section 444 election A partnership, S corporation, or PSC can use a tax year is in effect, even if no payment is due. If the required pay- other than its required tax year if it elects a 52-53-week ment is more than $500 (or the required payment for any tax year (discussed earlier) that ends with reference to ei- prior year was more than $500), the payment must be ther its required tax year or a tax year elected under sec- made when Form 8752 is filed. If the required payment is tion 444 (discussed earlier). $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount. See A newly formed partnership, S corporation, or PSC can Form 8752 and its instructions for more information. adopt a 52-53-week tax year ending with reference to ei- ther its required tax year or a tax year elected under sec- Applicable election year. Any tax year a section 444 tion 444 without IRS approval. However, if the entity election is in effect, including the first year, is called an ap- wishes to change to a 52-53-week tax year or change plicable election year. Form 8752 must be filed and the re- from a 52-53-week tax year that references a particular quired payment made (or zero amount reported) by May month to a non-52-53-week tax year that ends on the last 15th of the calendar year following the calendar year in day of that month, it must request IRS approval by filing which the applicable election year begins. Form 1128.

Required for PSC. A PSC with a section Business Purpose Tax Year 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable A partnership, S corporation, or PSC establishes the busi- year. If it fails to make these distributions, it may be re- ness purpose for a tax year by filing Form 1128. See the quired to defer certain deductions for amounts paid to Instructions for Form 1128 for details. owner-employees. The amount deferred is treated as paid or incurred in the following tax year. For information on the minimum distribution, see the in- Corporations (Other Than S structions for Part I of Schedule H (Form 1120), Section Corporations and PSCs) 280H Limitations for a Personal Service Corporation (PSC). A new corporation establishes its tax year when it files its first tax return. A newly reactivated corporation that has Back-up election. A partnership, S corporation, or PSC been inactive for a number of years is treated as a new can file a back-up section 444 election if it requests (or taxpayer for the purpose of adopting a tax year. An S cor- plans to request) permission to use a business purpose poration or a PSC must use the required tax year rules, tax year, discussed later. If the request is denied, the discussed earlier, to establish a tax year. Generally, a cor- back-up section 444 election must be activated (if the poration that wants to change its tax year must obtain ap- partnership, S corporation, or PSC otherwise qualifies). proval from the IRS under either the: (a) automatic appro- val procedures; or (b) ruling request procedures. See the Making back-up election. The general rules for mak- Instructions for Form 1128 for details. ing a section 444 election, as discussed earlier, apply. When filing Form 8716, type or print “BACK-UP ELEC- TION” at the top of the form. However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is

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and sales. See Exceptions under Inventories, later. Generally, you can use the cash method for all other Accounting Methods items of income and expenses. See Inventories, later. An accounting method is a set of rules used to determine • If you use the cash method for reporting your income, when and how income and expenses are reported on your you must use the cash method for reporting your ex- tax return. Your accounting method includes not only your penses. overall method of accounting, but also the accounting • If you use an accrual method for reporting your expen- treatment you use for any material item. ses, you must use an accrual method for figuring your You choose an accounting method when you file your income. first tax return. If you later want to change your accounting • Any combination that includes the cash method is method, you must get IRS approval. See Change in Ac- treated as the cash method for purposes of section counting Method, later. 448 of the Internal Revenue Code.

No single accounting method is required of all taxpay- Business and personal items. You can for ers. You must use a system that clearly reflects your in- business and personal items using different accounting come and expenses and you must maintain records that methods. For example, you can determine your business will enable you to file a correct return. In addition to your income and expenses under an accrual method, even if permanent accounting books, you must keep any other you use the cash method to figure personal items. records necessary to support the entries on your books and tax returns. Two or more . If you operate two or more You must use the same accounting method from year separate and distinct businesses, you can use a different to year. An accounting method clearly reflects income accounting method for each business. No business is only if all items of gross income and expenses are treated separate and distinct, unless a complete and separate set the same from year to year. of books and records is maintained for each business. If you do not regularly use an accounting method that Note. If you use different accounting methods to cre- clearly reflects your income, your income will be refigured ate or shift profits or losses between businesses (for ex- under the method that, in the opinion of the IRS, does ample, through adjustments, sales, purchases, clearly reflect income. or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct. Methods you can use. Generally, you can figure your taxable income under any of the following accounting Cash Method methods. • Cash method. Most individuals and many small businesses (as ex- • Accrual method. plained under Excluded Entities and Exceptions, later) use the cash method of accounting. Generally, if you pro- • Special methods of accounting for certain items of in- duce, purchase, or sell merchandise, you must keep an come and expenses. inventory and use an accrual method for sales and pur- • A hybrid method which combines elements of two or chases of merchandise. See Inventories, later, for excep- more of the above accounting methods. tions to this rule. Special methods. This publication does not discuss Income special methods of accounting for certain items of income or expenses. For information on reporting income using Under the cash method, you include in your gross income one of the long-term contract methods, see section 460 of all items of income you actually or constructively receive the Internal Revenue Code and the related regulations. during the tax year. If you receive property and services, The following publications also discuss special methods you must include their fair market value (FMV) in income. of reporting income or expenses. Constructive receipt. Income is constructively received Publication 225, Farmer's Tax Guide. • when an amount is credited to your account or made • Publication 535, Business Expenses. available to you without restriction. You do not need to • Publication 537, Installment Sales. have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to • Publication 946, How To Depreciate Property. have received it when your agent receives it. Income is Hybrid method. Generally, you can use any combina- not constructively received if your control of its receipt is tion of cash, accrual, and special methods of accounting if subject to substantial restrictions or limitations. the combination clearly reflects your income and you use Example. You are a calendar year taxpayer. Your it consistently. However, the following restrictions apply. credited, and made available, interest to your bank • If an inventory is necessary to account for your in- account in December 2018. You did not withdraw it or en- come, you must use an accrual method for purchases ter it into your books until 2019. You must include the

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amount in gross income for 2018, the year you construc- years exceeding $25 million (indexed for inflation). tively received the interest income. See Gross receipts test, below. You cannot hold checks or postpone taking pos- • A partnership with a corporation (other than an S cor- TIP session of similar property from one tax year to poration) as a partner, with average annual gross re- another to postpone paying tax on the income. ceipts for the 3 preceding tax years exceeding $25 You must report the income in the year the property is re- million (indexed for inflation). See Gross receipts test, ceived or made available to you without restriction. below. • A tax shelter, as defined in section 448(d)(3). Expenses Exceptions Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. This in- The following entities can use the cash method of ac- cludes business expenses for which you contest liability. counting. However, you may not be able to deduct an paid • Any corporation or partnership, other than a tax shel- in advance. Instead, you may be required to capitalize ter, that meets the gross receipts test explained be- certain , as explained later under Uniform Capitaliza- low. tion Rules. • A qualified personal service corporation (PSC). Expense paid in advance. An expense you pay in ad- vance is deductible only in the year to which it applies, un- Gross receipts test. A corporation or partnership, other less the expense qualifies for the 12-month rule. than a tax shelter, that meets the gross receipts test can Under the 12-month rule, a taxpayer is not required to generally use the cash method. A corporation or a part- capitalize amounts paid to create certain rights or benefits nership meets the test if its average annual gross receipts for the taxpayer that do not extend beyond the earlier of for the 3 preceding tax years were $25 million or less (in- the following. dexed for inflation). Determine an entity’s average annual gross receipts • 12 months after the right or benefit begins, or by: • The end of the tax year after the tax year in which pay- 1. Adding the gross receipts for the 3 preceding tax ment is made. years; and If you have not been applying the general rule (an ex- pense paid in advance is deductible only in the year to 2. Dividing the total by 3. which it applies) and/or the 12-month rule to the expenses See Gross receipts test for qualifying taxpayers, for more you paid in advance, you must obtain approval from the information. Generally, a partnership applies the test at IRS before using the general rule and/or the 12-month the partnership level. Gross receipts for a short tax year rule. See Change in Accounting Method, later. are annualized. Example 1. You are a calendar year taxpayer and pay Aggregation rules. Organizations that are members $3,000 in 2018 for a business policy that is ef- of an affiliated service group or a controlled group of cor- fective for three years (36 months), beginning on July 1, porations treated as a single employer for tax purposes 2018. The general rule that an expense paid in advance is must aggregate their gross receipts to determine whether deductible only in the year to which it applies is applicable the gross receipts test is met. to this payment because the payment does not qualify for Change to accrual method. A corporation or partner- the 12-month rule. Therefore, only $500 (6/36 x $3,000) is ship that fails to meet the gross receipts test for any tax deductible in 2018, $1,000 (12/36 x $3,000) is deductible year cannot use the cash method and must change to an in 2019, $1,000 (12/36 x $3,000) is deductible in 2020, accrual method of accounting, effective for the tax year in and the remaining $500 is deductible in 2021. which the entity fails to meet this test. The entity must file Example 2. You are a calendar year taxpayer and pay Form 3115 to request the change. See the instructions for $10,000 on July 1, 2018, for a business insurance policy Form 3115. that is effective for only one year beginning on July 1, Special rules for farming businesses. Generally, a 2018. The 12-month rule applies. Therefore, the full taxpayer engaged in the trade or business of farming is al- $10,000 is deductible in 2018. lowed to use the cash method for its farming business. However, certain corporations (other than S corporations) Excluded Entities and partnerships that have a partner that is a corporation must use an accrual method for their farming business, The following entities cannot use the cash method, includ- unless they meet the gross receipts test discussed above. ing any combination of methods that includes the cash See chapter 2 of Pub. 225, Farmer's Tax Guide, for method. (See Special rules for farming businesses, later.) more information. • A corporation (other than an S corporation) with aver- age annual gross receipts for the 3 preceding tax

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Qualified Personal Service Corporation (PSC). A amount in your gross income on the earliest of the follow- qualified PSC is a corporation that meets the following ing dates. function and ownership tests can use the cash method. • When you receive payment. Function test. A corporation meets the function test if • When the income amount is due to you. at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, • When you earn the income. engineering (including surveying and mapping), architec- • When title passes. ture, accounting, actuarial science, performing arts, or consulting. Estimated income. If you include a reasonably estima- ted amount in gross income and later determine the exact Ownership test. A corporation meets the ownership amount is different, take the difference into account in the test if substantially all of its is owned, directly or indi- tax year you make that determination. rectly, at all during the year by one or more of the following. Change in payment schedule. If you perform services 1. Employees performing services for the corporation in for a basic rate specified in a contract, you must accrue a field qualifying under the function test. the income at the basic rate, even if you agree to receive payments at a reduced rate. Continue this procedure until 2. Retired employees who had performed services in you complete the services, then account for the differ- those fields. ence. 3. The estate of an employee described in (1) or (2). Advance Payments 4. Any other person who acquired the stock by reason of the death of an employee referred to in (1) or (2), but Generally, you report an advance payment for goods, only for the 2-year period beginning on the date of services or other items as income in the year you receive death. the payment. However, if you use an accrual method of Indirect ownership is generally taken into account if the accounting, you can elect to postpone including the ad- stock is owned indirectly through one or more partner- vance payment in income until the next year. However, ships, S corporations, or qualified PSCs. Stock owned by you cannot postpone including any payment beyond that one of these entities is considered owned by the entity's tax year. owners in proportion to their ownership interest in that en- tity. Other forms of indirect stock ownership, such as stock For this purpose, advance payments must be: owned by family members, are generally not considered • Includible in gross receipts under the method of ac- when determining if the ownership test is met. counting you use for tax purposes, and For purposes of the ownership test, a person is not • Included in income in your applicable financial state- considered an employee of a corporation unless that per- ments (described in section 451(b)(1). son performs more than minimal services for the corpora- tion. See section 451(c) for more information. Also see Rev- Change to accrual method. A corporation that fails enue Procedure 2004-34, 2004-22, I.R.B. 991 (or any to meet the function test for any tax year; or fails to meet successor) and Notice 2018-35, 2018-18 I.R.B. 520 (or the ownership test at any time during any tax year must any successor). change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. . Any advance payment you include A corporation that fails to meet the function test or the in gross receipts on your tax return must be included no ownership test is not treated as a qualified PSC for any later than when the income is included on an applicable fi- part of that tax year. nancial statement (or other financial statement specified by the IRS. See section 451(b) for additional information Accrual Method and a list of applicable financial statements. IRS approval. You must file Form 3115 to obtain IRS ap- Under an accrual method of accounting, you generally re- proval to change your method of accounting for advance port income in the year it is earned and deduct or capital- payment for services. See Form 3115 and the Instructions ize expenses in the year incurred. The purpose of an ac- for Form 3115. crual method of accounting is to match income and expenses in the correct year. Advance Payment for Sales Income Special rules apply to including income from advance payments on agreements for future sales or other disposi- Generally, you include an amount in gross income for the tions of goods held primarily for sale to in the tax year in which all events that fix your right to receive the ordinary course of your trade or business. However, the income have occurred and you can determine the amount rules do not apply to a payment (or part of a payment) for with reasonable accuracy. Under this rule, you report an services that are not an integral part of the main activities

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covered under the agreement. An agreement includes a • You have enough substantially similar goods on hand, gift certificate that can be redeemed for goods. Amounts or available through your normal source of supply, to due and payable are considered received. satisfy the agreement.

Special rules apply to the deferral of advance pay- These rules also apply to an agreement, such as a gift ments from the sale of certain gift cards. See Revenue certificate, that can be satisfied with goods that cannot be Procedure 2011-18, 2011-5 I.R.B. 443, as modified and identified in the tax year you receive an advance payment. clarified by Revenue Procedure 2013-29, 2013-33 I.R.B. If you meet these conditions, all advance payments you 141 (or any successor). receive by the end of the second tax year, including pay- ments received in prior years but not reported, must be in- How to report payments. Generally, include an ad- cluded in income by the second tax year following the tax vance payment in income in the year in which you receive year of receipt of substantial advance payments. You it. However, you can use the alternative method, dis- must also deduct in that second year all actual or estima- cussed next. ted costs for the goods required to satisfy the agreement. If you estimated the , you must take into account any Alternative method of reporting. Under the alternative difference between the estimate and the actual cost when method, generally include an advance payment in income the goods are delivered. in the earlier tax year in which you: Note. You must report any advance payments you re- • Include advance payments in gross receipts under the ceive after the second year in the year received. No fur- method of accounting you use for tax purposes, or ther deferral is allowed. • Include any part of advance payments in income for fi- Substantial advance payments. Under an agree- nancial reports under the method of accounting used ment for a future sale, you have substantial advance pay- for those reports. Financial reports include reports to ments if, by the end of the tax year, the total advance pay- shareholders, partners, beneficiaries, and other pro- ments received during that year and preceding tax years prietors for credit purposes and consolidated financial are equal to or more than the total costs reasonably esti- statements. mated to be includible in inventory because of the agree- Example. You are a retailer. You use an accrual ment. method of accounting and account for the sale of goods Example. You are a calendar year, accrual method when you ship the goods. You use this method for both taxpayer who accounts for advance payments under the tax and financial reporting purposes. You can include ad- alternative method. In 2013, you entered into a contract vance payments in gross receipts for tax purposes in ei- for the sale of goods properly includible in your inventory. ther: (a) the tax year in which you receive the payments; The total contract price is $50,000 and you estimate that or (b) the tax year in which you ship the goods. However, your total inventoriable costs for the goods will be see Exception for inventory goods, later. $25,000. You receive the following advance payments un- Information schedule. If you use the alternative der the contract. method of reporting advance payments, you must attach a statement with the following information to your tax return 2014 ...... $17,500 each year. 2015 ...... 10,000 2016 ...... 7,500 • Total advance payments received in the current tax 2017 ...... 5,000 year. 2018 ...... 5,000 2019 ...... 5,000 • Total advance payments received in earlier tax years and not included in income before the current tax Total contract price ...... $50,000 year. Your asked you to deliver the goods in 2020. • Total payments received in earlier tax years included In your 2015 closing inventory, you had on hand enough in income for the current tax year. of the type of goods specified in the contract to satisfy the contract. Since the advance payments you had received Exception for inventory goods. If you have an agree- by the end of 2015 were more than the costs you estima- ment to sell goods properly included in inventory, you can ted, the payments are substantial advance payments. postpone including the advance payment in income until For 2017, include in income all payments you received the end of the second tax year following the year you re- by the end of 2017, the second tax year following the tax ceive an advance payment if, on the last day of the tax year in which you received substantial advance payments. year, you meet the following requirements. You must include $40,000 in sales for 2017 (the total • You account for the advance payment under the alter- amounts received from 2014 through 2017) and include in native method (discussed earlier). inventory the cost of the goods (or similar goods) on hand. If no such goods are on hand, then estimate the cost nec- • You have received a substantial advance payment on essary to satisfy the contract. the agreement (discussed next). No further deferral is allowed. You must include in gross income the advance payment you receive each

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remaining year of the contract. Take into account the dif- Other liabilities. Other liabilities for which economic per- ference between any estimated and formance occurs as you make payments include liabilities the actual cost when you deliver the goods in 2020. for breach of contract (to the extent of incidental, conse- quential, and liquidated damages), violation of law, re- IRS approval. You must file Form 3115 to obtain IRS ap- bates and refunds, awards, prizes, jackpots, insurance, proval to change your method of accounting for advance and warranty and service contracts. payments for sales. See Form 3115 and the Instructions for Form 3115. Interest. Economic performance occurs with the pas- sage of time (as the borrower uses, and the lender for- Expenses goes use of, the lender's money) rather than as payments are made. Under an accrual method of accounting, you generally de- duct or capitalize a business expense when both the fol- Compensation for services. Generally, economic per- lowing apply. formance occurs as an employee renders service to the employer. However, deductions for compensation or other 1. The all-events test has been met. The test is met benefits paid to an employee in a year subsequent to eco- when: nomic performance are subject to the rules governing de- a. All events have occurred that fix the fact of liability, ferred compensation, deferred benefits, and funded wel- and fare benefit plans. For information on employee benefit programs, see Pub. 15-B, Employer's Tax Guide to Fringe b. The liability can be determined with reasonable Benefits. accuracy. Vacation pay. You can take a current deduction for 2. Economic performance has occurred. vacation pay earned by your employees if you pay it dur- ing the year or, if the amount is vested, within 21/2 months Economic Performance after the end of the year. If you pay it later than this, you must deduct it in the year actually paid. An amount is ves- Generally, you cannot deduct or capitalize a business ex- ted if your right to it cannot be nullified or cancelled. pense until economic performance occurs. If your ex- pense is for property or services provided to you, or for Exception for recurring items. An exception to the eco- your use of property, economic performance occurs as nomic performance rule allows certain recurring items to the property or services are provided or the property is be treated as incurred during the tax year even though used. If your expense is for property or services you pro- economic performance has not occurred. The exception vide to others, economic performance occurs as you pro- applies if all the following requirements are met. vide the property or services. 1. The all-events test, discussed earlier, is met. Example. You are a calendar year taxpayer. You buy 2. Economic performance occurs by the earlier of the office supplies in December 2016. You receive the sup- following dates. plies and the bill in December, but you pay the bill in Janu- ary 2017. You can deduct the expense in 2016 because a. 81/2 months after the close of the year. all events have occurred to fix the liability, the amount of b. The date you file a timely return (including exten- the liability can be determined, and economic perform- sions) for the year. ance occurred in 2016. Your office supplies may qualify as a recurring item, 3. The item is recurring in nature and you consistently discussed later. If so, you can deduct them in 2016, even treat similar items as incurred in the tax year in which if the supplies are not delivered until 2017 (when eco- the all-events test is met. nomic performance occurs). 4. Either: Workers' compensation and tort liability. If you are re- a. The item is not material, or quired to make payments under workers' compensation laws or in satisfaction of any tort liability, economic per- b. Accruing the item in the year in which the formance occurs as you make the payments. If you are re- all-events test is met results in a better match quired to make payments to a special designated settle- against income than accruing the item in the year ment fund established by court order for a tort liability, of economic performance. economic performance occurs as you make the pay- This exception does not apply to workers' compensation ments. or tort liabilities. Taxes. Economic performance generally occurs as esti- Amended return. You may be able to file an amen- mated income tax, property taxes, employment taxes, etc. ded return and treat a liability as incurred under the recur- are paid. However, you can elect to treat taxes as a recur- ring item exception. You can do so if economic perform- ring item, discussed later. You can also elect to ratably ac- ance for the liability occurs after you file your tax return for crue real estate taxes. See chapter 5 of Pub. 535 for infor- the year, but within 81/2 months after the close of the tax mation about real estate taxes. year.

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Recurrence and consistency. To determine whether Related Persons an item is recurring and consistently reported, consider the frequency with which the item and similar items are in- Business expenses and interest owed to a related person curred (or expected to be incurred) and how you report who uses the cash method of accounting are not deducti- these items for tax purposes. A new expense or an ex- ble until you make the payment and the corresponding pense not incurred every year can be treated as recurring amount is includible in the related person's gross income. if it is reasonable to expect that it will be incurred regularly Determine the relationship for this rule as of the end of the in the future. tax year for which the expense or interest would otherwise be deductible. See section 267 of the Internal Revenue . Factors to consider in determining the ma- Code and Pub. 542, Corporations, for the definition of re- teriality of a recurring item include the size of the item lated person. (both in absolute terms and in relation to your income and other expenses) and the treatment of the item on your fi- nancial statements. Inventories An item considered material for financial statement pur- poses is also considered material for tax purposes. How- An inventory is necessary to clearly show income when ever, in certain situations an immaterial item for financial the production, purchase, or sale of merchandise is an in- accounting purposes is treated as material for purposes of come-producing factor. If you must account for an inven- economic performance. tory in your business, you must use an accrual method of accounting for your purchases and sales. However, see Matching expenses with income. Costs directly as- Exceptions, next. See also Accrual Method, earlier. sociated with the revenue of a period are properly alloca- ble to that period. To determine whether the accrual of an To figure taxable income, you must value your inven- expense in a particular year results in a better match with tory at the beginning and end of each tax year. To deter- the income to which it relates, generally accepted ac- mine the value, you need a method for identifying the counting principles (GAAP) are an important factor. items in your inventory and a method for valuing these For example, if you report sales income in the year of items. See Identifying Cost and Valuing Inventory, later. sale, but you do not ship the goods until the following year, the shipping costs are more properly matched to in- The rules for valuing inventory are not the same for all come in the year of sale than the year the goods are ship- businesses. The method you use must conform to gener- ped. Expenses that cannot be practically associated with ally accepted accounting principles for similar businesses income of a particular period, such as advertising costs, and must clearly reflect income. Your inventory practices should be assigned to the period the costs are incurred. must be consistent from year to year. However, the matching requirement is considered met for The rules discussed here apply only if they do not certain types of expenses. These expenses include taxes, ! conflict with the uniform capitalization rules of payments under insurance, warranty, and service con- CAUTION section 263A and the mark-to-market rules of sec- tracts, rebates, refunds, awards, prizes, and jackpots. tion 475. Expenses Paid in Advance Exception for Small Business Taxpayers An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for If you are a small business taxpayer (defined below), you the 12-month rule. Under the 12-month rule, a taxpayer is can choose not to keep an inventory, but you must still not required to capitalize amounts paid to create certain use a method of accounting for inventory that clearly re- flects income. If you choose not to keep an inventory, you rights or benefits for the taxpayer that do not extend be- yond the earlier of the following. will not be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as • 12 months after the right or benefit begins, or non-incidental material or supplies, or conforms to your fi- • The end of the tax year after the tax year in which pay- nancial accounting treatment for inventories. If, however, ment is made. you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory If you have not been applying the general rule (an ex- each year to determine your cost of goods sold. pense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses Small business taxpayer. You qualify as a small busi- you paid in advance, you must get IRS approval before ness taxpayer if you using the general rule and/or the 12-month rule. See • Have average annual gross receipts of $25 million or Change in Accounting Method, later, for information on less (indexed for inflation) for the 3 prior tax years, and how to get IRS approval. See Expense paid in advance under Cash Method, earlier, for examples illustrating the • Are not a tax shelter (as defined in section 448(d)(3)). application of the general and 12-month rules. If your business has not been in existence for all of the 3 tax-year period used in figuring average gross receipts, base your average on the period it has existed. If your business has a predecessor entity, include the gross

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receipts of the predecessor entity from the 3 tax-year pe- exclude the containers from inventory. Under certain cir- riod when figuring average gross receipts. If your business cumstances, some containers can be depreciated. See (or predecessor entity) had short tax years for any of the 3 Pub. 946. tax-year period, annualize your business’ gross receipts Merchandise not included. Do not include the fol- for the short tax years that are part of the 3 tax-year pe- lowing merchandise in inventory. riod. • Goods you have sold, but only if title has passed to Treating inventory as non-incidental materials and the buyer. supplies. If you account for inventories as materials and supplies that are not incidental, you deduct the amounts • Goods consigned to you. paid to acquire or produce the inventoriable items treated • Goods ordered for future delivery if you do not yet as materials and supplies in the year in which they are first have title. used or consumed in your operations. . Do not include the following in inventory. treatment of inventories. Your • Land, buildings, and equipment used in your busi- financial accounting treatment of inventories is deter- ness. mined with regard to the method of accounting you use in your applicable financial statement (as defined in section • Notes, , and similar assets. 451(b)(3)) or, if you do not have any applicable financial • Real estate held for sale by a real estate dealer in the statement, with regard to the method of accounting you ordinary course of business. use in your books and records that have been prepared in accordance with your accounting procedures. • Supplies that do not physically become part of the item intended for sale. Changing your method of accounting for inventory. Special rules apply to the cost of inventory or If you want to change your method of accounting for in- ! property imported from a related person. See the ventory, you must file Form 3115. See the Instructions for CAUTION regulations under section 1059A of the Internal Form 3115. Revenue Code. Items Included in Inventory Identifying Cost Your inventory should include all of the following. You can use any of the following methods to identify the • Merchandise or stock in trade. cost of items in inventory. • Raw materials. • Work in process. Specific Identification Method • Finished products. Use the specific identification method when you can iden- tify and match the actual cost to the items in inventory. • Supplies that physically become a part of the item in- tended for sale. Use the FIFO or LIFO method, explained next, if: Merchandise. Include the following merchandise in in- • You cannot specifically identify items with their costs. ventory. • The same type of goods are intermingled in your in- • Purchased merchandise if title has passed to you, ventory and they cannot be identified with specific in- even if the merchandise is in transit or you do not have voices. physical possession for another reason. • Goods under contract for sale that you have not yet FIFO Method segregated and applied to the contract. The FIFO (first-in first-out) method assumes the items you • Goods out on consignment. purchased or produced first are the first items you sold, • Goods held for sale in display rooms, merchandise consumed, or otherwise disposed of. The items in inven- mart rooms, or booths located away from your place tory at the end of the tax year are matched with the costs of business. of similar items that you most recently purchased or pro- duced. C.O.D. mail sales. If you sell merchandise by mail and intend payment and delivery to happen at the same time, LIFO Method title passes when payment is made. Include the merchan- dise in your closing inventory until the buyer pays for it. The LIFO (last-in first-out) method assumes the items of inventory you purchased or produced last are the first Containers. Containers such as kegs, bottles, and ca- items you sold, consumed, or otherwise disposed of. ses, regardless of whether they are on hand or returnable, Items included in closing inventory are considered to be should be included in inventory if title has not passed to from the opening inventory in the order of acquisition and the buyer of the contents. If title has passed to the buyer, from those acquired during the tax year.

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LIFO rules. The rules for using the LIFO method are very method you use to value the rest of your inventory. If complex. Two are discussed briefly here. For more infor- these goods consist of raw materials or partly finished mation on these and other LIFO rules, see sections 472 goods held for use or consumption, you must value them through 474 of the Internal Revenue Code and the related on a reasonable basis, considering their usability and con- income tax regulations. dition. Do not value them for less than scrap value. For more information, see Regulations section 1.471-2(c). Dollar-value method. Under the dollar-value method of LIFO inventories, goods and products must be grouped into one or more pools (classes of items), de- Cost Method pending on the kinds of goods or products in the invento- To properly value your inventory at cost, you must include ries. See Regulations section 1.472-8. all direct and indirect costs associated with it. The follow- Simplified dollar-value method. Under this method, ing rules apply. you establish multiple inventory pools in general catego- • For merchandise on hand at the beginning of the tax ries from appropriate government price indexes. You then year, cost means the ending inventory price of the use changes in the price index to estimate the annual goods. change in price for inventory items in the pools. An eligible small business (average annual gross re- • For merchandise purchased during the year, cost ceipts of $5 million or less for the 3 preceding tax years) means the invoice price minus appropriate discounts can elect the simplified dollar-value LIFO method. plus transportation or other charges incurred in acquir- For more information, see section 474. Taxpayers who ing the goods. It can also include other costs that have cannot use the method under section 474 should see to be capitalized under the uniform capitalization rules Regulations section 1.472-8(e)(3) for a similar simplified of section 263A of the Internal Revenue Code. dollar-value method. • For merchandise produced during the year, cost means all direct and indirect costs that have to be Adopting LIFO method. File Form 970, Application To capitalized under the uniform capitalization rules. Use LIFO Inventory Method, or a statement with all the in- formation required on Form 970 to adopt the LIFO Discounts. A trade discount is a discount allowed re- method. You must file the form (or the statement) with gardless of when the payment is made. Generally, it is for your timely filed tax return for the year in which you first volume or quantity purchases. You must reduce the cost use LIFO. of inventory by a trade (or quantity) discount. A cash discount is a reduction in the invoice or pur- Differences Between chase price for paying within a prescribed time period. FIFO and LIFO You can choose either to deduct cash discounts or in- clude them in income, but you must treat them consis- Each method produces different income results, depend- tently from year to year. ing on the trend of price levels at the time. In times of infla- tion, when prices are rising, LIFO will produce a larger Lower of Cost or Market Method cost of goods sold and a lower closing inventory. Under FIFO, the cost of goods sold will be lower and the closing Under the lower of cost or market method, compare the inventory will be higher. However, in times of falling pri- market value of each item on hand on the inventory date ces, the opposite will hold. with its cost and use the lower of the two as its inventory value. Valuing Inventory This method applies to the following. The value of your inventory is a major factor in figuring your taxable income. The method you use to value the in- • Goods purchased and on hand. ventory is very important. • The basic elements of cost (direct materials, direct la- bor, and certain indirect costs) of goods being manu- The following methods, described below, are those factured and finished goods on hand. generally available for valuing inventory. • Cost. This method does not apply to the following. They must be inventoried at cost. • Lower of cost or market. • Goods on hand or being manufactured for delivery at • . a fixed price on a firm sales contract (that is, not le- Goods that cannot be sold. These are goods you can- gally subject to cancellation by either you or the not sell at normal prices or they are unusable in the usual buyer). way because of damage, imperfections, shop wear, • Goods accounted for under the LIFO method. changes of style, odd or broken lots, or other similar cau- ses. You should value these goods at their bona fide sell- Example. Under the lower of cost or market method, ing price minus direct cost of disposition, no matter which the following items would be valued at $600 in closing in- ventory.

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Item Cost Market Lower 2. Multiply the closing inventory at retail by the average R ...... $300 $500 $300 markup percentage. The result is the markup in clos- S ...... 200 100 100 ing inventory. T ...... 450 200 200 3. Subtract the markup in (2) from the closing inventory Total ...... $950 $800 $600 at retail. The result is the approximate closing inven- You must value each item in the inventory separately. tory at cost. You cannot value the entire inventory at cost ($950) and Closing inventory. The following example shows how to at market ($800) and then use the lower of the two figures. figure your closing inventory using the retail method. Market value. Under ordinary circumstances for normal Example. Your records show the following information goods, market value means the usual bid price on the on the last day of your tax year. date of inventory. This price is based on the volume of merchandise you usually buy. For example, if you buy items in small lots at $10 an item and a competitor buys Retail Item Cost Value identical items in larger lots at $8.50 an item, your usual Opening inventory ...... $52,000 $60,000 market price will be higher than your competitor's. Purchases ...... 53,000 78,500 Lower than market. When you offer merchandise for Sales ...... 98,000 Markups ...... 2,000 sale at a price lower than market in the normal course of Markdowns ...... 500 business, you can value the inventory at the lower price, minus the direct cost of disposition. Determine these pri- ces from the actual sales for a reasonable period before Using the retail method, determine your closing inven- and after the date of your inventory. Prices that vary mate- tory as follows. rially from the actual prices will not be accepted as reflect- ing the market. Retail Item Cost Value No market exists. If no market exists, or if quotations Opening inventory ...... $52,000 $60,000 are nominal because of an inactive market, you must use Plus: Purchases ...... 53,000 78,500 the best available evidence of fair market price on the Net markups ($2,000 − $500 markdowns) ...... 1,500 date or dates nearest your inventory date. This evidence could include the following items. Total ...... $105,000 $140,000 Minus: Sales ...... 98,000 • Specific purchases or sales you or others made in Closing inventory at retail ...... $42,000 reasonable volume and in good faith. Minus: Markup* (.25 × $42,000) ...... 10,500 Closing inventory at cost ...... $31,500 • Compensation amounts paid for cancellation of con- tracts for purchase commitments. * See Markup percentage, next, for an explanation of how the markup percentage (25%) was figured for this example. Retail Method Markup percentage. The markup ($35,000) is the dif- Under the retail method, the total retail selling price of ference between cost ($105,000) and the retail value goods on hand at the end of the tax year in each depart- ($140,000). Divide the markup by the total retail value to ment or of each class of goods is reduced to approximate get the markup percentage (25%). You cannot use arbi- cost by using an average markup expressed as a percent- trary standard percentages of purchase markup to deter- age of the total retail selling price. mine markup. You must determine it as accurately as pos- sible from department records for the period covered by To figure the average markup, apply the following steps your tax return. in order. Markdowns. When determining the retail selling price 1. Add the total of the retail selling prices of the goods in of goods on hand at the end of the year, markdowns are the opening inventory and the retail selling prices of recognized only if the goods were offered to the public at the goods you bought during the year (adjusted for all the reduced price. Markdowns not based on an actual re- markups and markdowns). duction of retail sales price, such as those based on de- preciation and obsolescence, are not allowed. 2. Subtract from the total in (1) the cost of goods inclu- ded in the opening inventory plus the cost of goods Retail method with LIFO. If you use LIFO with the retail you bought during the year. method, you must adjust your retail selling prices for markdowns as well as markups. 3. Divide the balance in (2) by the total selling price in (1). The result is the average markup percentage. Price index. If you are using the retail method and LIFO, adjust the inventory value, determined using the retail Then determine the approximate cost in three steps. method, at the end of the year to reflect price changes 1. Subtract the sales at retail from the total retail selling since the close of the preceding year. Generally, to make price. The result is the closing inventory at retail. this adjustment, you must develop your own retail price

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index based on an analysis of your own data under a Loss of Inventory method acceptable to the IRS. However, a department store using LIFO that offers a full line of merchandise for You claim a casualty or theft loss of inventory, including sale can use an inventory price index provided by the Bu- items you hold for sale to customers, through the increase reau of Labor Statistics. Other sellers can use this index if in the cost of goods sold by properly reporting your open- they can demonstrate the index is accurate, reliable, and ing and closing inventories. You cannot claim the loss suitable for their use. For more information, see Revenue again as a casualty or theft loss. Any insurance or other Ruling 75-181 in Cumulative Bulletin 1975-1. reimbursement you receive for the loss is taxable.

Retail method without LIFO. If you do not use LIFO and You can choose to claim the loss separately as a casu- have been determining your inventory under the retail alty or theft loss. If you claim the loss separately, adjust method except that, to approximate the lower of cost or opening inventory or purchases to eliminate the loss items market, you have followed the consistent practice of ad- and avoid counting the loss twice. justing the retail selling prices of goods for markups (but not markdowns), you can continue that practice. The ad- If you claim the loss separately, reduce the loss by the justments must be bona fide, consistent, and uniform and reimbursement you receive or expect to receive. If you do you must also exclude markups made to cancel or correct not receive the reimbursement by the end of the year, you markdowns. The markups you include must be reduced cannot claim a loss for any amounts you reasonably ex- by markdowns made to cancel or correct the markups. pect to recover. If you do not use LIFO and you previously determined inventories without eliminating markdowns in making ad- Forgiveness of indebtedness by creditors or suppli- justments to retail selling prices, you can continue this ers. If your creditors or suppliers forgive part of what you practice only if you first get IRS approval. You can adopt owe them because of your inventory loss, this amount is and use this practice on the first tax return you file for the treated as taxable income. business, subject to IRS approval on examination of your tax return. Disaster loss. If your inventory loss is due to a disaster in an area determined by the President of the United Figuring income tax. Resellers who use the retail States to be eligible for federal assistance, you can method of pricing inventories can determine their tax on choose to deduct the loss on your return for the immedi- that basis. ately preceding year. However, you must also decrease To use this method, you must do all of the following. your opening inventory for the year of the loss so the loss • State that you are using the retail method on your tax will not show up again in inventory. return. Uniform Capitalization Rules • Keep accurate records. • Use this method each year unless the IRS allows you Under the uniform capitalization rules, you must capitalize to change to another method. the direct costs and part of the indirect costs for produc- tion or resale activities. Include these costs in the basis of You must keep records for each separate department property you produce or acquire for resale, rather than or class of goods carrying different percentages of gross claiming them as a current deduction. You recover the . Purchase records should show the firm name, date costs through depreciation, amortization, or cost of goods of invoice, invoice cost, and retail selling price. You should sold when you use, sell, or otherwise dispose of the prop- also keep records of the respective departmental or class erty. accumulation of all purchases, markdowns, sales, stock, etc. Special uniform capitalization rules apply to a ! farming business. See chapter 6 in Pub. 225. Perpetual or Book Inventory CAUTION

You can figure the cost of goods on hand by either a per- Activities subject to the rules. You are subject to the petual or book inventory if inventory is kept by following uniform capitalization rules if you do any of the following, sound accounting practices. Inventory accounts must be unless the property is produced for your use other than in charged with the actual cost of goods purchased or pro- a trade or business or an activity carried on for profit. duced and credited with the value of goods used, transfer- • Produce real or tangible personal property. red, or sold. must be determined on the basis of Acquire property for resale. However, see the excep- the actual cost of goods acquired during the year and their • tion for certain small taxpayers, discussed later. inventory value at the beginning of the tax year. Producing property. You produce property if you Physical inventory. You must take a physical inventory construct, build, install, manufacture, develop, improve, at reasonable intervals and the book amount for inventory create, raise, or grow the property. Property produced for must be adjusted to agree with the actual inventory. you under a contract is treated as produced by you to the extent you make payments or otherwise incur costs in connection with the property.

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Tangible personal property. Tangible personal prop- • A photographer is an individual who creates a photo- erty includes films, sound recordings, video tapes, books, graph or photographic negative or transparency. artwork, photographs, or similar property containing • An artist is an individual who creates a picture, paint- words, ideas, concepts, images, or sounds. However, ing, sculpture, statue, etching, drawing, cartoon, free-lance authors, photographers, and artists are exempt graphic design, or original print item. The originality from the uniform capitalization rules if they qualify. and uniqueness of the item created and the predomi- Exceptions. The uniform capitalization rules do not apply nance of aesthetic value over utilitarian value of the to the following. item created are taken into account. • A small business taxpayer that meets the gross re- Personal service corporation. The exemption for ceipts test under section 448(c) and that is not a tax writers, photographers, and artists also applies to an ex- shelter. pense of a personal service corporation that directly re- lates to the activities of the qualified employee-owner. A • Property produced to use as personal or nonbusiness qualified employee-owner is a writer, photographer, or ar- property or for uses not connected with a trade or tist who owns, with certain members of his or her family, business or an activity conducted for profit. substantially all the stock of the corporation. • Research and experimental expenditures deductible under section 174. Inventories. If you must adopt the uniform capitalization rules, revalue the items or costs included in beginning in- • Intangible drilling and development costs of oil and ventory for the year of change as if the capitalization rules gas or geothermal wells or any amortization deduction had been in effect for all prior periods. When revaluing in- allowable under section 59(e) for intangible drilling, ventory costs, the capitalization rules apply to all inventory development, or mining exploration expenditures. costs accumulated in prior periods. An adjustment is re- • Property produced under a long-term contract, except quired under section 481(a). It is the difference between for certain home construction contracts. See section the original value of the inventory and the revalued inven- 460(e). tory. If you must capitalize costs for production and resale • Timber and certain ornamental trees raised, harves- activities, you are required to make this change. If you ted, or grown, and the underlying land. make the change for the first tax year you are subject to • Qualified creative expenses paid or incurred as a the uniform capitalization rules, it is an automatic change free-lance (self-employed) writer, photographer, or ar- of accounting method that does not need IRS approval. tist that are otherwise deductible on your tax return. Otherwise, IRS approval is required to make the change. • Costs allocable to natural gas acquired for resale to More information. For information about the uniform the extent these costs would otherwise be allocable to capitalization rules, see section 263A of the Internal Reve- cushion gas stored underground. nue Code and the related income tax regulations. • Property produced if substantial construction occurred before March 1, 1986. Change in • Property provided to customers in connection with Accounting Method providing services. It must be de minimus in amount and not be included in inventory in the hands of the Generally, you can choose any permitted accounting service provider. method when you file your first tax return. You do not need to obtain IRS approval to choose the initial accounting • origination. method. You must, however, use the method consistently • The costs of certain producers who use a simplified from year to year and it must clearly reflect your income. production method and whose total indirect costs are See Accounting Methods, earlier. $200,000 or less. See Regulations section Once you have set up your accounting method and 1.263A-2(b)(3)(iv) for more information. filed your first return, generally, you must receive approval Qualified creative expenses. Qualified creative ex- from the IRS before you change the method. A change in penses are expenses paid or incurred by a free-lance your accounting method includes a change not only in (self-employed) writer, photographer, or artist whose per- your overall system of accounting but also in the treatment sonal efforts create (or can reasonably be expected to of any material item. A material item is one that affects the create) certain properties. These expenses do not include proper time for inclusion of income or allowance of a de- expenses related to printing, photographic plates, motion duction. Although an accounting method can exist without picture films, video tapes, or similar items. treating an item consistently, an accounting method is not These individuals are defined as follows. established for that item, in most cases, unless the item is treated consistently. • A writer is an individual who creates a literary manu- script, a musical composition (including any accompa- nying words), or a dance score.

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Approval required. The following are examples of The Volunteer Income Tax Assistance (VITA) program changes in accounting method that require IRS approval. offers free tax help to people who generally make $55,000 • A change from the cash method to an accrual method or less, persons with disabilities, and limited-Eng- or vice versa. lish-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) • A change in the method or basis used to value inven- program offers free tax help for all taxpayers, particularly tory. those who are 60 years of age and older. TCE volunteers • A change in the depreciation or amortization method specialize in answering questions about pensions and re- (except for certain permitted changes to the tirement-related issues unique to seniors. straight-line method). You can go to IRS.gov to see your options for preparing and filing your return which include the following. Approval not required. The following are examples of • Free File. Go to IRS.gov/FreeFile to see if you qualify types of changes that are not changes in accounting to use brand-name software to prepare and e-file your methods and do not require IRS approval. federal tax return for free. • Correction of a math or posting error. • VITA. Go to IRS.gov/VITA, download the free IRS2Go • Correction of an error in figuring tax liability (such as app, or call 800-906-9887 to find the nearest VITA lo- an error in figuring a credit). cation for free tax return preparation. • An adjustment of any item of income or deduction that • TCE. Go to IRS.gov/TCE, download the free IRS2Go does not involve the proper time for including it in in- app, or call 888-227-7669 to find the nearest TCE lo- come or deducting it. cation for free tax return preparation. • Certain adjustments in the useful life of a depreciable Getting answers to your tax questions. On or amortizable . IRS.gov, get answers to your tax questions any- time, anywhere. Form 3115. In general, you must file a current Form 3115 to request a change in either an overall accounting • Go to IRS.gov/Help for a variety of tools that will help method or the accounting treatment of any item. There are you get answers to some of the most common tax some instances when you can obtain automatic consent questions. from the IRS to change to certain accounting methods. In • Go to IRS.gov/ITA for the Interactive Tax Assistant, a other instances, you can file Form 3115 using the non-au- tool that will ask you questions on a number of tax law tomatic change request procedures. topics and provide answers. You can print the entire interview and the final response for your records. More information. For more information on making changes in accounting methods, see Form 3115 and the • Go to IRS.gov/Pub17 to get Pub. 17, Your Federal In- instructions for Form 3115. Also see Revenue Procedure come Tax for Individuals, which features details on 2018-31, 2018-22 I.R.B. 637 (or any successor). tax-saving opportunities, 2018 tax changes, and thou- sands of interactive links to help you find answers to When filing Form 3115, you must determine if the your questions. View it online in HTML, as a PDF, or ! IRS has issued any new published guidance download it to your mobile device as an eBook. CAUTION which includes revenue procedures, revenue rul- ings, notices, regulations, or other relevant guidance in • You may also be able to access tax law information in the Internal Revenue Bulletin. For the latest information, your electronic filing software. visit IRS.gov. Getting tax forms and publications. Go to IRS.gov/ Forms to view, download, or print all of the forms and pub- lications you may need. You can also download and view How To Get Tax Help popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no If you have questions about a tax issue, need help prepar- charge. Or you can go to IRS.gov/OrderForms to place an ing your tax return, or want to download free publications, order and have forms mailed to you within 10 business forms, or instructions, go to IRS.gov and find resources days. that can help you right away. Access your online account (individual taxpayers . Major tax reform legislation impacting indi- only). Go to IRS.gov/Account to securely access infor- viduals, businesses, and tax-exempt entities was enacted mation about your federal tax account. in the Tax Cuts and Jobs Act on December 22, 2017. Go to IRS.gov/TaxReform for information and updates on • View the amount you owe, pay online, or set up an on- how this legislation affects your taxes. line payment agreement. • Access your tax records online. Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local • Review the past 24 months of your payment history. community if you qualify.

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• Go to IRS.gov/SecureAccess to review the required Checking on the status of your refund. identity authentication process. • Go to IRS.gov/Refunds. Using direct deposit. The fastest way to receive a tax • The IRS can’t issue refunds before mid-February 2019 refund is to combine direct deposit and IRS e-file. Direct for returns that claimed the EIC or the ACTC. This ap- deposit securely and electronically transfers your refund plies to the entire refund, not just the portion associ- directly into your financial account. Eight in 10 taxpayers ated with these credits. use direct deposit to receive their refund. The IRS issues Download the official IRS2Go app to your mobile de- more than 90% of refunds in less than 21 days. • vice to check your refund status. Refund timing for returns claiming certain credits. • Call the automated refund hotline at 800-829-1954. The IRS can’t issue refunds before mid-February 2019 for returns that claimed the earned income credit (EIC) or the Making a tax payment. The IRS uses the latest encryp- additional child tax credit (ACTC). This applies to the en- tion technology to ensure your electronic payments are tire refund, not just the portion associated with these cred- safe and secure. You can make electronic payments on- its. line, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and Getting a transcript or copy of a return. The quickest faster than mailing in a check or money order. Go to way to get a copy of your tax transcript is to go to IRS.gov/ IRS.gov/Payments to make a payment using any of the Transcripts. Click on either "Get Transcript Online" or "Get following options. Transcript by Mail" to order a copy of your transcript. If you prefer, you can: • IRS Direct Pay: Pay your individual tax bill or estima- ted tax payment directly from your checking or sav- • Order your transcript by calling 800-908-9946, or ings account at no cost to you. • Mail Form 4506-T or Form 4506T-EZ (both available • Debit or credit card: Choose an approved payment on IRS.gov). processor to pay online, by phone, and by mobile de- vice. Using online tools to help prepare your return. Go to IRS.gov/Tools for the following. • Electronic Funds Withdrawal: Offered only when fil- ing your federal taxes using tax return preparation • The Earned Income Tax Credit Assistant (IRS.gov/ software or through a tax professional. EITCAssistant) determines if you’re eligible for the EIC. • Electronic Federal Tax Payment System: Best op- tion for businesses. Enrollment is required. • The Online EIN Application (IRS.gov/EIN) helps you get an employer identification number. • Check or money order: Mail your payment to the ad- dress listed on the notice or instructions. • The IRS Withholding Calculator (IRS.gov/W4App) es- timates the amount you should have withheld from • Cash: You may be able to pay your taxes with cash at your paycheck for federal income tax purposes and a participating retail store. can help you perform a “paycheck checkup.” What if I can’t pay now? Go to IRS.gov/Payments for • The First Time Homebuyer Credit Account Look-up more information about your options. (IRS.gov/HomeBuyer) tool provides information on your repayments and account balance. • Apply for an online payment agreement (IRS.gov/ OPA) to meet your tax obligation in monthly install- • The Sales Calculator (IRS.gov/ ments if you can’t pay your taxes in full today. Once SalesTax) figures the amount you can claim if you you complete the online process, you will receive im- itemize deductions on Schedule A (Form 1040), mediate notification of whether your agreement has choose not to claim state and local income taxes, and been approved. you didn’t save your receipts showing the sales tax you paid. • Use the Offer in Compromise Pre-Qualifier (IRS.gov/ OIC) to see if you can settle your tax for less than Resolving tax-related identity theft issues. the full amount you owe. • The IRS doesn’t initiate contact with taxpayers by Checking the status of an amended return. Go to email or telephone to request personal or financial in- IRS.gov/WMAR to track the status of Form 1040X amen- formation. This includes any type of electronic com- ded returns. Please note that it can take up to 3 weeks munication, such as text messages and social media from the date you mailed your amended return for it to channels. show up in our system and processing it can take up to 16 • Go to IRS.gov/IDProtection for information. weeks. • If your SSN has been lost or stolen or you suspect Understanding an IRS notice or letter. Go to IRS.gov/ you’re a victim of tax-related identity theft, visit Notices to find additional information about responding to IRS.gov/IdentityTheft to learn what steps you should an IRS notice or letter. take.

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Contacting your local IRS office. Keep in mind, many What Can TAS Do For You? questions can be answered on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/ TAS can help you resolve problems that you can’t resolve LetUsHelp for the topics people ask about most. If you still with the IRS. And their service is free. If you qualify for need help, IRS TACs provide tax help when a tax issue their assistance, you will be assigned to one advocate can’t be handled online or by phone. All TACs now pro- who will work with you throughout the process and will do vide service by appointment so you’ll know in advance everything possible to resolve your issue. TAS can help that you can get the service you need without long wait you if: times. Before you visit, go to IRS.gov/TACLocator to find • Your problem is causing financial difficulty for you, the nearest TAC, check hours, available services, and ap- your family, or your business; pointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on • You face (or your business is facing) an immediate “Local Offices.” threat of adverse action; or • You’ve tried repeatedly to contact the IRS but no one Watching IRS videos. The IRS Video portal has responded, or the IRS hasn’t responded by the (IRSVideos.gov) contains video and audio presentations date promised. for individuals, small businesses, and tax professionals.

Getting tax information in other languages. For tax- How Can You Reach TAS? payers whose native language isn’t English, we have the following resources available. Taxpayers can find informa- TAS has offices in every state, the District of Columbia, tion on IRS.gov in the following languages. and . Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/ • Spanish (IRS.gov/Spanish). Contact-Us. You can also call them at 877-777-4778. • Chinese (IRS.gov/Chinese). • Vietnamese (IRS.gov/Vietnamese). How Else Does TAS Help Taxpayers? • Korean (IRS.gov/Korean). TAS works to resolve large-scale problems that affect • Russian (IRS.gov/Russian). many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS. The IRS TACs provide over-the-phone interpreter serv- ice in over 170 languages, and the service is available TAS also has a website, Tax Reform Changes, which free to taxpayers. shows you how the new tax law may change your future tax filings and helps you plan for these changes. The in- The Taxpayer Advocate Service (TAS) formation is categorized by tax topic in the order of the IRS Form 1040. Go to TaxChanges.us for more informa- Is Here To Help You tion. What is TAS? Low Income Taxpayer Clinics (LITCs) TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is LITCs are independent from the IRS. LITCs represent in- to ensure that every taxpayer is treated fairly and that you dividuals whose income is below a certain level and need know and understand your rights under the Taxpayer Bill to resolve tax problems with the IRS, such as , ap- of Rights. peals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibili- How Can You Learn About Your Taxpayer ties in different languages for individuals who speak Eng- Rights? lish as a second language. Services are offered for free or a small fee. To find a clinic near you, visit The Taxpayer Bill of Rights describes 10 basic rights that TaxpayerAdvocate.IRS.gov/LITCmap or see IRS Pub. all taxpayers have when dealing with the IRS. Go to 4134, Low Income Taxpayer Clinic List. TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

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