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Department
of the
Treasury
Internal
Revenue
Service
Get forms and other information faster and easier at:
• IRS.gov (English)
• IRS.gov/Spanish (Español)
•
IRS.gov/Chinese (中文)
•
IRS.gov/Korean (한국어)
• IRS.gov/Russian (Pусский)
• IRS.gov/Vietnamese (Tiếng Việt)
Tax Guide for
Small Business
(For Individuals Who Use
Schedule C)
Publication 334
Catalog Number 11063P
For use in preparing
2023 Returns
Feb 2, 2024
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Contents
What's New for 2023 ........................... 4
What's New for 2024 ........................... 4
Reminders ................................. 4
Photographs of Missing Children ................... 5
Chapter 1. Filing and Paying Business Taxes ........... 5
Identification Numbers ...................... 6
Income Tax .............................. 6
Self-Employment (SE) Tax .................... 9
Employment Taxes ........................ 10
Excise Taxes ............................ 10
Information Returns ....................... 11
Chapter 2. Accounting Periods and Methods .......... 12
Accounting Periods ....................... 12
Accounting Methods ....................... 13
Chapter 3. Dispositions of Business Property ......... 16
What Is a Disposition of Property? .............. 17
How Do I Figure a Gain or Loss? ............... 17
Where Do I Report Gains and Losses? ............ 18
Chapter 4. General Business Credits ............... 18
Business Credits ......................... 18
How To Claim the Credit ..................... 20
Chapter 5. Business Income .................... 20
Kinds of Income ......................... 20
Items That Are Not Income ................... 24
Guidelines for Selected Occupations ............ 25
Accounting for Your Income .................. 26
Chapter 6. How To Figure Cost of Goods Sold ......... 27
Figuring Cost of Goods Sold on Schedule C, Lines
35 Through 42 ......................... 27
Chapter 7. Figuring Gross Profit .................. 29
Items To Check .......................... 29
Testing Gross Profit Accuracy ................. 30
Additions to Gross Profit .................... 30
Chapter 8. Business Expenses ................... 30
Bad Debts ............................. 30
Car and Truck Expenses .................... 31
Depreciation ............................ 32
Employees' Pay .......................... 33
Insurance ............................. 33
Interest ............................... 34
Legal and Professional Fees .................. 35
Pension Plans ........................... 35
Rent Expense ........................... 35
Taxes ................................ 36
Travel and Meals ......................... 36
Business Use of Your Home .................. 37
Other Expenses You Can Deduct ............... 38
Expenses You Cannot Deduct ................. 38
Chapter 9. Figuring Net Profit or Loss .............. 39
Net Operating Losses (NOLs) ................. 39
Not-for-Profit Activities ..................... 39
Chapter 10. Self-Employment (SE) Tax .............. 39
Who Must Pay SE Tax? ..................... 39
Reporting SE Tax ......................... 43
Chapter 11. Your Rights as a Taxpayer .............. 43
Examinations, Appeals, Collections, and Refunds .... 44
Chapter 12. How To Get More Information ............ 45
Small Business Administration ................ 48
Other Federal Agencies ..................... 49
How To Get Tax Help .......................... 45
Index ................................... 50
Future Developments
For the latest information about developments related to
Pub. 334, such as legislation enacted after it was
published, go to IRS.gov/Pub334.
Introduction
This publication provides general information about the
federal tax laws that apply to you if you are a self-em-
ployed person or a statutory employee. This publication
has information on business income, expenses, and tax
credits that may help you, as a small business owner, file
your income tax return.
This publication does not cover the topics listed in
the following table.
IF you need information about: THEN you should see:
Corporations ................... Pub. 542
Farming ....................... Pub. 225
Fishermen (Capital Construction Fund) ... Pub. 595
International business .............. IRS.gov/International
Partnerships .................... Pub. 541
Passive activities ................. Pub. 925
Recordkeeping and starting a business ... Pub. 583
Rental ........................ Pub. 527
S corporations ...................Instructions for Form
1120-S
Are You Self-Employed?
You are a self-employed person if you carry on a trade or
business as a sole proprietor or an independent
contractor.
You do not have to carry on regular full-time busi-
ness activities to be self-employed. Having a
part-time business in addition to your regular job
or business may be self-employment.
Trade or business. A trade or business is generally an
activity carried on to make a profit. The facts and
circumstances of each case determine whether or not an
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activity is a trade or business. You do not need to actually
make a profit to be in a trade or business as long as you
have a profit motive. You do need to make ongoing efforts
to further the interests of your business.
Limited liability company (LLC). An LLC is an entity
formed under state law by filing articles of organization.
Generally, for income tax purposes, a single-member LLC
is disregarded as an entity separate from its owner and
reports its income and deductions on its owner's federal
income tax return. For example, if the single-member LLC
is not engaged in farming and the owner is an individual,
they may use Schedule C.
Sole proprietor. A sole proprietor is someone who owns
an unincorporated business by themselves. You are also a
sole proprietor for income tax purposes if you are an indi-
vidual and the sole member of a domestic LLC unless you
elect to have the LLC treated as a corporation.
Independent contractor. People such as doctors, den-
tists, veterinarians, lawyers, accountants, contractors,
subcontractors, public stenographers, or auctioneers who
are in an independent trade, business, or profession in
which they offer their services to the general public are
generally independent contractors. However, whether they
are independent contractors or employees depends on
the facts in each case. The general rule is that an individ-
ual is an independent contractor if the person paying for
the work has the right to control or to direct only the result
of the work and not how it will be done. The earnings of a
person who is working as an independent contractor are
subject to self-employment tax. For more information on
determining whether you are an employee or independent
contractor, see Pub. 15-A, Employer's Supplemental Tax
Guide.
Are You a Statutory Employee?
A statutory employee has a checkmark in box 13 of their
Form W-2, Wage and Tax Statement. Statutory employees
use Schedule C to report their wages and expenses.
Business Owned and Operated
by Spouses
If you and your spouse jointly own and operate an
unincorporated business and share in the profits and
losses, you are partners in a partnership, whether or not
you have a formal partnership agreement. Do not use
Schedule C. Instead, file Form 1065, U.S. Return of
Partnership Income. For more information, see Pub. 541,
Partnerships.
Exception—Community income. If you and your
spouse wholly own an unincorporated business as com-
munity property under the community property laws of a
state, foreign country, or U.S. territory, you can treat the
business either as a sole proprietorship or a partnership.
States with community property laws include Arizona, Cal-
ifornia, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington, and Wisconsin. A change in your reporting
position will be treated as a conversion of the entity. See
Pub. 555 for more information about community property
laws.
Exception—Qualified joint venture (QJV). If you and
your spouse each materially participate as the only mem-
bers of a jointly owned and operated business, and you
file a joint return for the tax year, you can make a joint
election to be treated as a QJV instead of a partnership for
the tax year. Making this election will allow you to avoid
the complexity of Form 1065 but still give each spouse
credit for social security earnings on which retirement ben-
efits are based. For an explanation of "material participa-
tion," see the instructions for Schedule C (Form 1040),
line G.
Only businesses that are owned and operated by
spouses as co-owners (and not in the name of a
state law entity) qualify for the election. Thus, a
business owned and operated by spouses through an LLC
does not qualify for the election of a QJV.
To make this election, you must divide all items of
income, gain, loss, deduction, and credit attributable to
the business between you and your spouse in accordance
with your respective interests in the venture. Each of you
must file a separate Schedule C and a separate
Schedule SE. For more information, see Qualified Joint
Ventures in the Instructions for Schedule SE.
Additional Information
What you need to know. Table A provides a list of ques-
tions you need to answer to help you meet your federal tax
obligations. After each question is the location in this pub-
lication where you will find the related discussion.
The IRS mission. Provide America's taxpayers top-qual-
ity service by helping them understand and meet their tax
responsibilities and enforce the law with integrity and fair-
ness to all.
Comments and suggestions. We welcome your com-
ments about this publication and suggestions for future
editions.
You can send us comments through IRS.gov/
FormComments. Or, you can write to the Internal Revenue
Service, Tax Forms and Publications, 1111 Constitution
Ave. NW, IR-6526, Washington, DC 20224.
Although we can’t respond individually to each com-
ment received, we do appreciate your feedback and will
consider your comments and suggestions as we revise
our tax forms, instructions, and publications. Don’t send
tax questions, tax returns, or payments to the above ad-
dress.
Getting answers to your tax questions. If you have a
tax question not answered by this publication or the How
To Get Tax Help section at the end of this publication, go
to the IRS Interactive Tax Assistant page at IRS.gov/
Help/ITA where you can find topics by using the search
feature or viewing the categories listed.
Getting tax forms, instructions, and publications. Go
to IRS.gov/Forms to download current and prior-year
forms, instructions, and publications.
CAUTION
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Ordering tax forms, instructions, and publications.
Go to IRS.gov/OrderForms to order current forms, instruc-
tions, and publications; call 800-829-3676 to order
prior-year forms and instructions. The IRS will process
your order for forms and publications as soon as possible.
Don’t resubmit requests you’ve already sent us. You can
get forms and publications faster online.
What's New for 2023
The following are some of the tax changes for 2023.
Maximum net earnings. The maximum net self-employ-
ment earnings subject to the social security part of the
self-employment tax is $160,200 for 2023. There is no
maximum limit on earnings subject to the Medicare part.
Standard mileage rate. For 2023, the standard mileage
rate for the cost of operating your car, van, pickup, or
panel truck for each mile of business use during 2023 in-
creased to 65.5 cents a mile.
For more information, see Car and Truck Expenses in
chapter 8.
Redesigned Form 1040-SS. For 2023, Schedule(s) C
and SE (Form 1040) are available to be filed with Form
1040-SS, if applicable. For additional information, see the
Instructions for Form 1040-SS.
Bonus depreciation. The bonus depreciation deduction
under section 168(k) begins its phaseout in 2023 with a
reduction of the applicable limit from 100% to 80%.
Form 7205, Energy efficient commercial buildings
deduction. This form and its separate instructions are
used to claim the section 179D deduction for qualifying
energy efficient commercial building expenses that are
now reported on new line 27b of Schedule C (Form 1040).
See Form 7205 and its instructions for more information.
Commercial clean vehicle credit. Businesses that buy
a qualified commercial clean vehicle may qualify for a
clean vehicle tax credit. See Form 8936 and its instruc-
tions for more information.
Business meal expense. The temporary 100% deduc-
tion for business meal expense has expired. The business
meal deduction reverts back to the previous 50% allowa-
ble deduction beginning January 1, 2023. See Meals and
lodging, later, for more information.
What's New for 2024
The following are some of the tax changes for 2024. For
information on other changes, go to IRS.gov.
Maximum net earnings. The maximum net self-employ-
ment earnings subject to the social security part of the
self-employment tax is $168,600 for 2024.
Standard mileage rate. For 2024, the standard mileage
rate for the cost of operating your car, van, pickup, or
panel truck for each mile of business use is 67 cents a
mile.
Reminders
Excess business loss limitation. Your loss from a trade
or business may be limited. Use Form 461 to determine
the amount of your excess business loss, if any. Your ex-
cess business loss will be included as income on line 8p
of Schedule 1 (Form 1040) and treated as a net operating
loss (NOL) that you must carry forward and deduct in a
subsequent tax year.
For more information about the excess business loss
limitation, see Form 461 and its instructions.
Qualified paid sick leave and qualified paid family
leave payroll tax credit. Generally, the credit for quali-
fied sick and family leave wages, as enacted under the
Families First Coronavirus Response Act (FFCRA) and
amended and extended by the COVID-related Tax Relief
What You Need To Know About Federal Taxes
(Note. The following is a list of questions you may need to answer so you can fill out your federal income tax return.
Chapters are given to help you find the related discussion in this publication.)
What must I know? Where to find the answer
What kinds of federal taxes do I have to pay? How do I pay them? See chapter 1.
What forms must I file? See chapter 1.
What must I do if I have employees? See Employment Taxes in chapter 1.
Do I have to start my tax year in January, or can I start it in any other month? See Accounting Periods in chapter 2.
What method can I use to account for my income and expenses? See Accounting Methods in chapter 2.
What must I do if I disposed of business property during the year? See chapter 3.
What kinds of business income do I have to report on my tax return? See chapter 5.
What kinds of business expenses can I deduct on my tax return? See Business Expenses in chapter 8.
What kinds of expenses are not deductible as business expenses? See Expenses You Cannot Deduct in chapter 8.
What happens if I have a business loss? Can I deduct it? See chapter 9.
What are my rights as a taxpayer? See chapter 11.
Where do I go if I need help with federal tax matters? See chapter 12.
Table A.
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Act of 2020, for leave taken after March 31, 2020, and be-
fore April 1, 2021, and the credit for qualified sick and fam-
ily leave wages under sections 3131, 3132, and 3133 of
the Internal Revenue Code, as enacted under the Ameri-
can Rescue Plan Act of 2021 (the ARP), for leave taken
after March 31, 2021, and before October 1, 2021, have
expired. However, employers that pay qualified sick and
family leave wages in 2023 for leave taken after March 31,
2020, and before October 1, 2021, are eligible to claim a
credit for qualified sick and family leave wages in the quar-
ter of 2023 in which the qualified wages were paid. For
more information, see Form 941, lines 11b, 11d, 13c, and
13e; and Form 944, lines 8b, 8d, 10d, and 10f. You must
include the full amount (both the refundable and nonre-
fundable portions) of the credit for qualified sick and family
leave wages in gross income on line 3 or 4, as applicable,
for the tax year that includes the last day of any calendar
quarter with respect to which a credit is allowed.
Note. A credit is available only if the leave was taken
after March 31, 2020, and before October 1, 2021, and
only after the qualified leave wages were paid, which
might, under certain circumstances, not occur until a quar-
ter after September 30, 2021, including qualifying quar-
terly payments made during 2023. Accordingly, all lines re-
lated to qualified sick and family leave wages remain on
the employment tax returns for 2023.
Reportable transactions. You must file Form 8886, Re-
portable Transaction Disclosure Statement, to report cer-
tain transactions. You may have to pay a penalty if you are
required to file Form 8886 but do not do so. You may also
have to pay interest and penalties on any reportable trans-
action understatements. Reportable transactions include:
1. Transactions the same as or substantially similar to
tax avoidance transactions identified by the IRS;
2. Transactions offered to you under conditions of confi-
dentiality for which you paid an advisor a minimum
fee;
3. Transactions for which you have, or a related party
has, contractual protection against disallowance of
the tax benefits;
4. Transactions that result in losses of at least $2 million
in any single tax year ($50,000 if from certain foreign
currency transactions) or $4 million in any combina-
tion of tax years; and
5. Transactions the same as or substantially similar to
one of the types of transactions the IRS has identified
as a transaction of interest.
For more information, see the Instructions for Form
8886 or Abusive Tax Shelters and Transactions.
Small Business and Self-Employed (SB/SE) Tax Cen-
ter. Do you need help with a tax issue or preparing your
return, or do you need a free publication or form? The
SB/SE Tax Center serves taxpayers who file Form 1040;
Form 1040-SR; Schedule C, E, or F; or Form 2106, as well
as small business taxpayers with assets under $10 mil-
lion. For additional information, go to the SB/SE Tax Cen-
ter at IRS.gov/Businesses/Small.
Gig Economy Tax Center. The gig (or on-demand, shar-
ing, or access) economy refers to an area of activity where
people earn income providing on-demand work, services,
or goods. Go to IRS.gov/Gig to get more information about
the tax consequences of participating in the gig economy.
Photographs of Missing
Children
The Internal Revenue Service is a proud partner with the
National Center for Missing & Exploited Children®
(NCMEC). Photographs of missing children selected by
the Center may appear in this publication on pages that
would otherwise be blank. You can help bring these
children home by looking at the photographs and calling
1-800-THE-LOST (1-800-843-5678) if you recognize a
child.
1.
Filing and Paying
Business Taxes
Introduction
This chapter explains the business taxes you may have to
pay and the forms you may have to file. It also discusses
taxpayer identification numbers (TINs).
Table 1-1 lists the benefits of filing electronically.
Table 1-2 lists the federal taxes you may have to pay,
their due dates, and the forms you use to report them.
Table 1-3 provides checklists that highlight the typical
forms and schedules you may need to file if you ever go
out of business.
You may want to get Pub. 509, Tax Calendars. It
has tax calendars that tell you when to file returns
and make tax payments.
Useful Items
You may want to see:
Publication
505 Tax Withholding and Estimated Tax
583 Starting a Business and Keeping Records
Form (and Instructions)
461 Limitation on Business Losses
1040 U.S. Individual Income Tax Return
1040-SR U.S. Tax Return for Seniors
1040-ES Estimated Tax for Individuals
TIP
505
583
461
1040
1040-SR
1040-ES
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7205 Energy Efficient Commercial Buildings
Deduction
Sch C (Form 1040) Profit or Loss From Business
Sch SE (Form 1040) Self-Employment Tax
See chapter 12 for information about getting publications
and forms.
Identification Numbers
This section explains three types of TINs, who needs
them, when to use them, and how to get them.
Social security number (SSN). Generally, use your
SSN as your TIN. You must put this number on each of
your individual income tax forms, such as Form 1040 and
its schedules.
To apply for an SSN, use Form SS-5, Application for a
Social Security Card. This form is available at Social Se-
curity Administration (SSA) offices or by calling
800-772-1213. It is also available from the SSA website at
SSA.gov/forms/ss-5.
Individual taxpayer identification number (ITIN). The
IRS will issue an ITIN if you are a nonresident or resident
alien and you do not have and are not eligible to get an
SSN. The ITIN will expire for any taxpayer who does not
file a federal income tax return (or who is not included as a
dependent on the return of another taxpayer) for 3 con-
secutive years. In general, if you need to obtain an ITIN,
you must attach Form W-7, Application for IRS Individual
Taxpayer Identification Number, with your signed, original,
completed tax return and any other required documenta-
tion and mail them to the address in the Instructions for
Form W-7. Exceptions are covered in the instructions. If
you must include another person's SSN on your return
and that person does not have and cannot get an SSN,
enter that person's ITIN. The application is also available
in Spanish. The form is available at IRS.gov/FormW7.
An ITIN is for tax use only. It does not entitle the
holder to social security benefits or change the
holder's employment or immigration status.
Employer identification number (EIN). You must also
have an EIN to use as a TIN if you do either of the follow-
ing.
•
Pay wages to one or more employees.
•
File pension or excise tax returns.
If you must have an EIN, include it along with your SSN
on your Schedule C as instructed.
You can apply for an EIN:
•
Online by clicking on the Employer ID Numbers (EINs)
link at IRS.gov/EIN as long as the principal business
location is in the United States or U.S. territories—the
EIN is issued immediately once the application infor-
mation is validated;
7205
Sch C (Form 1040)
Sch SE (Form 1040)
CAUTION
!
•
By telephone at 267-941-1099 (not a toll-free number)
only if the principal business is located outside the
United States or U.S. territories; or
•
By mailing or faxing Form SS-4, Application for Em-
ployer Identification Number.
New EIN. You may need to get a new EIN if either the
form or the ownership of your business changes. For more
information, see Pub. 1635, Understanding Your EIN.
When you need identification numbers of other per-
sons. In operating your business, you will probably make
certain payments you must report on information returns.
These payments are discussed under Information Re-
turns, later in this chapter. You must give the recipient of
these payments (the payee) a statement showing the total
amount paid during the year. You must include the payee's
identification number and your identification number on
the returns and statements.
Employee. If you have employees, you must get an
SSN from each of them. Record the name and SSN of
each employee exactly as they are shown on the employ-
ee's social security card. If the employee's name is not
correct as shown on the card, the employee should re-
quest a new card from the SSA. This may occur if the em-
ployee's name was changed due to marriage or divorce.
Form W-4, Employee's Withholding Allowance Certifi-
cate, is completed by each employee so the correct fed-
eral income tax can be withheld from their pay.
If your employee does not have an SSN, they should
file Form SS-5 with the SSA.
Other payee. If you make payments to someone who
is not your employee and you must report the payments
on an information return, get that person's SSN. If you
must report payments to an organization, such as a corpo-
ration or partnership, you must get its EIN.
To get the payee's SSN or EIN, use Form W-9, Re-
quest for Taxpayer Identification Number and Certification.
A payee who does not provide you with an identification
number may be subject to backup withholding. For infor-
mation on backup withholding, see the Instructions for the
Requester of Form W-9 and the General Instructions for
Certain Information Returns.
Income Tax
This part explains whether you have to file an income tax
return and when you file it. It also explains how you pay
the tax.
Do I Have To File an Income Tax
Return?
You have to file an income tax return for 2023 if your net
earnings from self-employment were $400 or more. If your
net earnings from self-employment were less than $400,
you still have to file an income tax return if you meet any
other filing requirement listed in the Instructions for Form
1040.
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How Do I File?
File your income tax return on Form 1040 or 1040-SR
and attach Schedule C. Enter the net profit or loss from
Schedule C on Schedule 1 (Form 1040). Use Schedule C
to figure your net profit or loss from your business. If you
operated more than one business as a sole proprietorship,
you must attach a separate Schedule C for each business.
IRS e-file (Electronic Filing)
You may be able to file your tax returns electronically using
an IRS e-file option. Table 1-1 lists the benefits of IRS
e-file. IRS e-file uses automation to replace most of the
manual steps needed to process paper returns. As a re-
sult, the processing of IRS e-file returns is faster and more
accurate than the processing of paper returns. As with a
paper return, you are responsible for making sure your re-
turn contains accurate information and is filed on time.
Using IRS e-file does not affect your chances of an IRS
examination of your return.
You can file most commonly used business forms using
IRS e-file. For more information, go to IRS.gov.
Electronic signatures. Paperless filing is easier than
you think and it's available to most taxpayers who file elec-
tronically—including those first-time filers who were 16 or
older at the end of 2023. If you file electronically using tax
preparation software or a tax professional, you will sign
your return using the Self-Select PIN (personal identifica-
tion number) Method for IRS e-file. If you are married filing
jointly, you and your spouse will each need to create a PIN
and enter these PINs as your electronic signatures.
To create a PIN, you must know your adjusted gross in-
come (AGI) from your originally filed 2022 income tax re-
turn (not from an amended return, Form 1040-X, or after
receiving any math error notice from the IRS). You will also
need to provide your date of birth (DOB). Make sure your
DOB is accurate and matches the information on record
with the SSA before you e-file. To do this, check your an-
nual Social Security Statement.
With a Self-Select PIN, there is nothing to sign and
nothing to mail—not even your Form(s) W-2. For more de-
tails on the Self-Select PIN Method, go to IRS.gov.
State returns. In most states, you can file an electronic
state return simultaneously with your federal return. For
more information, check with your state tax agency, tax
professional, or IRS.gov.
Refunds. You can have your refund check mailed to you,
or you can have your refund deposited directly to your
checking or savings account.
With IRS e-file, your refund will be issued in half the
time as when filing on paper. Most refunds are issued in
less than 21 days.
Offset against debts. As with a paper return, you may
not get all of your refund if you owe certain past-due
amounts, such as federal tax, state tax, a student loan, or
child support. You will be notified if the refund you claimed
has been offset against your debts.
Refund inquiries. You can check the status of your re-
fund if it has been at least 24 hours (4 weeks if you mailed
a paper return) from the date you filed your return. Be sure
to have a copy of your tax return available because you
will need to know the filing status, the first SSN shown on
the return, and the exact whole-dollar amount of the re-
fund. To check on your refund, do one of the following.
•
Go to IRS.gov/Refunds.
•
Download the free IRS2Go app to your smart phone
and use it to check your refund status.
•
Call 800-829-1954 for automated refund information,
and follow the recorded instructions.
The IRS can’t issue refunds before mid-February 2024
for returns that claimed the earned income credit or the
additional child tax credit. This applies to the entire refund,
not just the portion associated with these credits.
Balance due. If your return shows that you owe tax, you
must pay it by the due date of your return (without regard
to any extension to file) to avoid late-payment penalties
and interest. For calendar year 2023, pay by April 15,
2024. You have many options for making your payment,
including by scheduling an electronic funds withdrawal
from your checking or savings account or by debit or credit
card. For more information about your payment options,
go to IRS.gov/Payments.
Using an Authorized IRS e-file Provider
Many tax professionals can electronically file paperless re-
turns for their clients. You have two options.
1. You can prepare your return, take it to an authorized
IRS e-file provider, and have the provider transmit it
electronically to the IRS.
2. You can have an authorized IRS e-file provider pre-
pare your return and transmit it for you electronically.
You will be asked to complete Form 8879, IRS e-file
Signature Authorization, to authorize the provider to enter
your self-selected PIN on your return.
Depending on the provider and the specific services re-
quested, a fee may be charged. To find an authorized IRS
e-file provider near you, go to IRS.gov/Efile/Providers.
Using Your Personal Computer
A computer with Internet access is all you need to file your
tax return using IRS e-file. When you use your personal
computer, you can e-file your return from your home any
time of the day or night. Sign your return electronically us-
ing a self-selected PIN to complete the process. There is
no signature form to submit or Forms W-2 to send in.
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Free software options for doing your taxes. If your
AGI was $79,000 or less in 2023, you can use free tax
software to prepare and e-file your tax return.
Free File. This public-private partnership, between
the IRS and tax software providers, makes approximately
a dozen brand-name commercial software products and
e-file available for free. Just go to IRS.gov/FreeFile for de-
tails. You can review each software provider's criteria for
free usage or use an online tool to find which free software
products match your situation. Some software providers
offer state tax return preparation for free.
Free File Fillable Forms. The IRS also offers elec-
tronic versions of IRS paper forms that can also be e-filed
for free. Free File Fillable Forms is best for people experi-
enced in preparing their own tax returns. There is no in-
come limitation to using these forms. Free File Fillable
Forms does basic math calculations. It supports only fed-
eral tax forms.
Filing Through Employers and Financial
Institutions
Some businesses offer free e-file to their employees,
members, or customers. Others offer it for a fee. Ask your
employer or financial institution if they offer IRS e-file as
an employee, member, or customer benefit.
Free Help With Your Return
Free help in preparing your return is available nationwide
from IRS-trained volunteers. The Volunteer Income Tax
Assistance (VITA) program is designed to help low-in-
come taxpayers, and the Tax Counseling for the Elderly
(TCE) program is designed to assist taxpayers age 60 or
older with their tax returns. Some locations offer free elec-
tronic filing.
Table 1-1. Benefits of IRS e-file
Accuracy • Your chance of getting an error notice from the IRS is significantly reduced.
Security • Your privacy and security are assured.
Electronic signatures • Create your own personal identification number (PIN) and file a completely paperless return through your
tax preparation software or tax professional. There is nothing to mail.
Proof of acceptance • You receive an electronic acknowledgment within 48 hours that the IRS has accepted your return for
processing.
Fast refunds • You get your refund faster with direct deposit.
Free Internet filing options • Use IRS.gov to access commercial tax preparation and e-file services available at no cost to eligible
taxpayers.
Electronic payment options • Convenient, safe, and secure electronic payment options are available. E-file and pay your taxes in a
single step. Schedule direct payment from your checking or savings account (up to and including April 15,
2024) or pay by debit or credit card.
Federal/State filing • Prepare and file your federal and state tax returns together and double the benefits you get from e-file.
When Is My Tax Return Due?
For calendar year 2023, Form 1040 or 1040-SR is due by
April 15, 2024. If you use a fiscal year (explained in chap-
ter 2), your return is due by the 15th day of the 4th month
after the end of your fiscal year. If you file late, you may
have to pay penalties and interest.
If you cannot file your return on time, use Form 4868,
Application for Automatic Extension of Time To File U.S.
Individual Income Tax Return, to request an automatic
6-month extension. For calendar year taxpayers, this will
extend the tax filing due date until October 15. Filing an
extension does not extend the time to pay your taxes, only
the time to file the tax return.
How Do I Pay Income Tax?
Federal income tax is a pay-as-you-go tax. You must pay it
as you earn or receive income during the year. An em-
ployee usually has income tax withheld from their pay. If
you do not pay your tax through withholding, or do not pay
enough tax that way, you might have to pay estimated tax.
Estimated tax payments. You generally have to make
estimated tax payments if you expect to owe taxes, includ-
ing self-employment tax (discussed later), of $1,000 or
more when you file your return. Use Form 1040-ES to fig-
ure and pay the tax. If you do not have to make estimated
tax payments, you can pay any tax due when you file your
return. For more information on estimated tax, see Pub.
505.
What are my options for paying estimated tax?
You can pay your estimated tax electronically using vari-
ous options. If you pay electronically, there is no need to
mail in Form 1040-ES payment vouchers. These options
include:
1. Paying electronically through the Electronic Federal
Tax Payment System (EFTPS),
2. Paying with Direct Pay by authorizing an electronic
funds withdrawal when you file Form 1040 or 1040-SR
electronically, or
3. Paying by credit or debit card over the phone or by In-
ternet.
Other options include crediting an overpayment from your
2022 return to your 2023 estimated tax, or mailing a check
or money order with a Form 1040-ES payment voucher.
EFTPS.
1. To enroll in EFTPS, go to EFTPS.gov or call
800-555-4477.
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2. When you request a new EIN, you may be automati-
cally enrolled in EFTPS.
3. Benefits of EFTPS include the following.
a. The chance of an error in making your payments is
reduced.
b. You receive immediate confirmation of every trans-
action.
Penalty for underpayment of tax. If you did not pay
enough income tax and self-employment tax for 2023 by
withholding or by making estimated tax payments, you
may have to pay a penalty on the amount not paid. The
IRS will figure the penalty for you and send you a bill. Or
you can use Form 2210, Underpayment of Estimated Tax
by Individuals, Estates, and Trusts, to see if you have to
pay a penalty and to figure the penalty amount. For more
information, see Pub. 505.
Self-Employment (SE) Tax
SE tax is a social security and Medicare tax primarily for
individuals who work for themselves. It is similar to the so-
cial security and Medicare taxes withheld from the pay of
most wage earners.
If you earned income as a statutory employee,
you do not pay SE tax on that income. Social se-
curity and Medicare taxes should have already
been withheld from those earnings.
Social security coverage. Social security benefits are
available to self-employed persons just as they are to
wage earners. Your payments of SE tax contribute to your
coverage under the social security system. Social security
coverage provides you with retirement benefits, disability
benefits, survivor benefits, and hospital insurance (Medi-
care) benefits.
Be sure to report all of your self-employment in-
come. By not reporting all of it, you could cause
your social security benefits to be lower when you
retire.
How to become insured under social security. You
must be insured under the social security system before
you begin receiving social security benefits. You are in-
sured if you have the required number of credits (also
called quarters of coverage), discussed next.
Earning credits in 2023 and 2024. For 2023, you re-
ceived one credit, up to a maximum of four credits, for
each $1,640 ($1,730 for 2024) of income subject to social
security tax. Therefore, for 2023, if you had income
(self-employment and wages) of $6,560 that was subject
to social security tax, you received four credits ($6,560 ÷
$1,640).
For an explanation of the number of credits you must
have to be insured and the benefits available to you and
your family under the social security program, consult your
nearest SSA office.
CAUTION
!
CAUTION
!
Making false statements to get or to increase so-
cial security benefits may subject you to penalties.
The SSA time limit for posting self-employment in-
come. Generally, the SSA will give you credit only for
self-employment income reported on a tax return filed
within 3 years, 3 months, and 15 days after the tax year
you earned the income. If you file your tax return or report
a change in your self-employment income after this time
limit, the SSA may change its record but only to remove or
reduce the amount. The SSA will not change its records to
increase your self-employment income.
Who must pay SE tax. You must pay SE tax and file
Schedule SE (Form 1040) if either of the following applies.
1. Your net earnings from self-employment (excluding
church employee income) were $400 or more.
2. You had church employee income of $108.28 or more.
The SE tax rules apply no matter how old you are
and even if you are already receiving social secur-
ity or Medicare benefits.
SE tax rate. The SE tax rate on net earnings is 15.3%
(12.4% social security tax plus 2.9% Medicare tax).
Maximum earnings subject to SE tax. Only the first
$160,200 of your combined wages, tips, and net earnings
in 2023 is subject to any combination of the 12.4% social
security part of SE tax, social security tax, or the Tier 1
part of railroad retirement tax.
All your combined wages, tips, and net earnings in
2023 are subject to any combination of the 2.9% Medicare
part of SE tax, Medicare tax, or Medicare part of railroad
retirement tax.
If wages and tips you receive as an employee are sub-
ject to either social security tax or the Tier 1 part of rail-
road retirement tax, or both, and total at least $160,200,
do not pay the 12.4% social security part of the SE tax on
any of your net earnings. However, you must pay the 2.9%
Medicare part of the SE tax on all your net earnings.
Deduct one-half of your SE tax as an adjustment
to income on line 15 of Schedule 1 (Form 1040).
Additional Medicare Tax. A 0.9% Additional Medicare
Tax may apply to you if your net earnings from self-em-
ployment exceed one of the following threshold amounts
(based on your filing status).
•
Married filing jointly—$250,000
•
Married filing separately—$125,000
•
Single, Head of household, or Qualifying surviving
spouse—$200,000
If you have both wages and self-employment income,
the threshold amount for applying the Additional Medicare
Tax on the self-employment income is reduced (but not
below zero) by the amount of wages subject to Additional
CAUTION
!
CAUTION
!
TIP
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Medicare Tax. Use Form 8959, Additional Medicare Tax,
to figure this tax.
More information. For information on methods of calcu-
lating SE tax, see chapter 10.
Table 1-2. Which Forms Must I File?
IF you are liable for... THEN use Form... DUE by...
1
Income tax 1040, or 1040-SR, and Schedule C
2
15th day of 4th month after end of
tax year.
Self-employment tax Schedule SE File with Form 1040, Form 1040-SR, or
1040-SS.
Estimated tax 1040-ES 15th day of 4th, 6th, and 9th months of tax
year, and 15th day of 1st month after the end
of tax year.
Social security and Medicare taxes and income
tax withholding
941 or 944 April 30, July 31, October 31, and January 31.
3
See Pub. 15.
Providing information on social security and
Medicare taxes and income tax withholding
W-2 (to employee)
W-2 and W-3 (to the SSA)
January 31.
3
January 31.
3
Federal unemployment tax (FUTA) 940 January 31.
3
April 30, July 31, October 31, and January 31,
but only if the liability for unpaid tax is more
than $500.
Filing information returns for payments to
nonemployees and transactions with other
persons
See Information Returns Forms 1099—to the recipient by January 31
and to the IRS by February 28 (March 31 if
filing electronically).
4
Other forms—see the General Instructions for
Certain Information Returns.
Excise tax See Excise Taxes See the instructions for the forms.
1
If a due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday. For more information, see Pub. 509.
2
File a separate schedule for each business.
3
See the form instructions if you go out of business, change the form of your business, or stop paying wages.
4
Form 1099-NEC—to the IRS by January 31 (even if filing electronically) if you are reporting nonemployee compensation.
Employment Taxes
If you have employees, you will need to file forms to report
employment taxes. Employment taxes include the follow-
ing items.
•
Social security and Medicare taxes.
•
Federal income tax withholding.
•
Federal unemployment tax (FUTA).
For more information, see Pub. 15 (Circular E), Employ-
er's Tax Guide. That publication explains your tax respon-
sibilities as an employer.
Do not reduce your deduction for social security
and Medicare taxes by the nonrefundable and re-
fundable portions of the FFCRA and ARP of 2021
credits for qualified sick and family leave wages claimed
on an employment tax return. Instead, report the credits
as income.
To help you determine whether the people working for
you are your employees, see Pub. 15-A. That publication
has information to help you determine whether an
individual is an independent contractor or an employee.
CAUTION
!
If you incorrectly classify an employee as an inde-
pendent contractor, you may be held liable for em-
ployment taxes for that worker plus a penalty.
An independent contractor is someone who is self-em-
ployed. You generally do not have to withhold or pay any
taxes on payments made to an independent contractor.
Excise Taxes
This section identifies some of the excise taxes you may
have to pay and the forms you have to file if you do any of
the following.
•
Manufacture or sell certain products.
•
Operate certain kinds of businesses.
•
Use various kinds of equipment, facilities, or products.
•
Receive payment for certain services.
For more information on excise taxes, see Pub. 510, Ex-
cise Taxes.
CAUTION
!
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Form 720. The federal excise taxes reported on Form
720, Quarterly Federal Excise Tax Return, consist of
several broad categories of taxes, including the following.
•
Environmental taxes on the sale or use of ozone-de-
pleting chemicals and imported products containing or
manufactured with these chemicals.
•
Communications and air transportation taxes.
•
Fuel taxes.
•
Tax on the first retail sale of heavy trucks, trailers, and
tractors.
•
Manufacturer’s taxes on the sale or use of a variety of
different articles.
•
Tax on indoor tanning services.
Form 2290. There is a federal excise tax on the use of
certain trucks, truck tractors, and buses on public high-
ways. The tax applies to vehicles having a taxable gross
weight of 55,000 pounds or more. Report the tax on Form
2290, Heavy Highway Vehicle Use Tax Return. For more
information, see the Instructions for Form 2290.
Depositing excise taxes. If you have to file a quarterly
excise tax return on Form 720, you may have to deposit
your excise taxes before the return is due. For details on
depositing excise taxes, see the Instructions for Form 720.
Information Returns
If you make or receive payments in your business, you
may have to report them to the IRS on information returns.
The IRS compares the payments shown on the informa-
tion returns with each person's income tax return to see if
the payments were included in income. You must give a
copy of each information return you are required to file to
the recipient or payer. In addition to the forms described
below, you may have to use other returns to report certain
kinds of payments or transactions. For more details on in-
formation returns and when you have to file them, see the
General Instructions for Certain Information Returns.
Form 1099-MISC. Use Form 1099-MISC, Miscellaneous
Information, to report certain payments you make in your
business. These payments include the following items.
•
Rent payments of $600 or more, other than rents paid
to real estate agents.
•
Prizes and awards of $600 or more that are not for
services, such as winnings on TV or radio shows.
•
Royalty payments of $10 or more.
•
Payments to certain crew members by owners or op-
erators of fishing boats.
•
Amounts paid for the purchase of fish for resale from
any person engaged in the business of catching fish.
You also use Form 1099-MISC to report your sales of
$5,000 or more of consumer products to a person for re-
sale anywhere other than in a permanent retail establish-
ment.
Form 1099-NEC. File Form 1099-NEC, Nonemployee
Compensation, for each person in the course of your busi-
ness to whom you have paid at least $600 during the year
in:
•
Services performed by someone who is not your em-
ployee (including parts and materials) (box 1),
•
Cash payments for fish (or other aquatic life) you pur-
chase from anyone engaged in the trade or business
of catching fish (box 1), or
•
Payments to an attorney (box 1).
You must also file Form 1099-NEC for each person
from whom you have withheld any federal income tax (re-
port in box 4) under the backup withholding rules regard-
less of the amount of the payment.
If you use Form 1099-NEC to report sales totaling
$5,000 or more of consumer products, then you
are required to file Form 1099-NEC with the IRS
by January 31.
Form W-2. You must file Form W-2 to report payments to
your employees, such as wages, tips, and other compen-
sation; and withheld income, social security, and Medicare
taxes. You can file Form W-2 online. For more information
about Form W-2, see the General Instructions for Forms
W-2 and W-3.
Penalties. The law provides for the following penalties if
you do not file Form(s) 1099-MISC, Form(s) 1099-NEC, or
Form(s) W-2 or do not correctly report the information. For
more information, see the General Instructions for Certain
Information Returns.
•
Failure to file information returns. This penalty applies
if you do not file information returns by the due date,
do not include all required information, or report incor-
rect information.
•
Failure to furnish correct payee statements. This pen-
alty applies if you do not furnish a required statement
to a payee by the required date, do not include all re-
quired information, or report incorrect information.
Waiver of penalties. These penalties will not apply if
you can show that the failure was due to reasonable cause
and not willful neglect.
In addition, there is no penalty for failure to include all
required information, or for including incorrect information,
on a de minimis (small) number of information returns if
you correct the errors by August 1 of the year the returns
are due. (A de minimis number of returns is the greater of
10 or
1
/2 of 1% of the total number of returns you are re-
quired to file for the year.)
Form 8300. You must file Form 8300, Report of Cash
Payments Over $10,000 Received in a Trade or Business,
if you receive more than $10,000 in cash in one transac-
tion, or two or more related business transactions. Cash
includes U.S. and foreign coin and currency. It also in-
cludes certain monetary instruments such as cashier's
and traveler's checks and money orders. Cash does not
include a check drawn on an individual's personal account
CAUTION
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(personal check). For more information, see Pub. 1544,
Reporting Cash Payments of Over $10,000.
Penalties. There are civil and criminal penalties, in-
cluding up to 5 years in prison, for not filing Form 8300, fil-
ing (or causing the filing of) a false or fraudulent Form
8300, or structuring a transaction to evade reporting re-
quirements.
Going Out of Business Checklists
(Note. The following checklists highlight the typical final forms and schedules you may need to file if you ever go out of
business. For more information, see the instructions for the listed forms.)
IF you are liable for... THEN you may need to...
Income tax File Schedule C with your Form 1040 or 1040-SR for the year in which you go out of business.
File Form 4797 with your Form 1040 or 1040-SR for each year in which you sell or exchange
property used in your business or in which the business use of certain section 179 or listed
property drops to 50% or less.
File Form 8594 with your Form 1040 or 1040-SR if you sold your business.
SE tax File Schedule SE with your Form 1040 or 1040-SR for the year in which you go out of business.
Employment taxes File Form 941 for the calendar quarter (or Form 944 for the year) in which you make final wage
payments. Note. Do not forget to check the box and enter the date final wages were paid on line
17 of Form 941 or line 14 of Form 944.
File Form 940 for the calendar year in which final wages were paid. Note. Do not forget to check
box d, Final: Business closed or stopped paying wages under Type of Return.
Information returns Provide Forms W-2 to your employees for the calendar year in which you make final wage
payments.
File Form W-3 to file Forms W-2.
Provide Form(s) 1099-MISC and Form(s) 1099-NEC to each person to whom you have paid at
least $600 for services (including parts and materials) during the calendar year in which you go
out of business.
File Form 1096 to file Form(s) 1099-MISC and Form(s) 1099-NEC.
Table 1-3.
2.
Accounting Periods and
Methods
Introduction
You must figure your taxable income and file an income
tax return for an annual accounting period called a tax
year. Also, you must consistently use an accounting
method that clearly shows your income and expenses for
the tax year.
Useful Items
You may want to see:
Publication
538 Accounting Periods and Methods
See chapter 12 for information about getting publications
and forms.
538
Accounting Periods
When preparing a statement of income and expenses
(generally, your income tax return), you must use your
books and records for a specific interval of time called an
accounting period. The annual accounting period for your
income tax return is called a tax year. You can use one of
the following tax years.
•
A calendar tax year.
•
A fiscal tax year.
Unless you have a required tax year, you adopt a tax year
by filing your first income tax return using that tax year. A
required tax year is a tax year required under the Internal
Revenue Code or the Income Tax Regulations.
Calendar tax year. A calendar tax year is 12 consecutive
months beginning January 1 and ending December 31.
You must adopt the calendar tax year if any of the fol-
lowing apply.
•
You do not keep books.
•
You have no annual accounting period.
•
Your present tax year does not qualify as a fiscal year.
•
Your use of the calendar tax year is required under the
Internal Revenue Code or the Income Tax Regula-
tions.
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If you filed your first income tax return using the calen-
dar tax year and you later begin business as a sole pro-
prietor, you must continue to use the calendar tax year un-
less you get IRS approval to change it or are otherwise
allowed to change it without IRS approval. For more infor-
mation, see Change in tax year, later.
If you adopt the calendar tax year, you must maintain
your books and records and report your income and ex-
penses for the period from January 1 through December
31 of each year.
Fiscal tax year. A fiscal tax year is 12 consecutive
months ending on the last day of any month except De-
cember. A 52-53-week tax year is a fiscal tax year that var-
ies from 52 to 53 weeks but does not have to end on the
last day of a month.
If you adopt a fiscal tax year, you must maintain your
books and records and report your income and expenses
using the same tax year.
For more information on a fiscal tax year, including a
52-53-week tax year, see Pub. 538.
Change in tax year. Generally, you must file Form 1128,
Application To Adopt, Change, or Retain a Tax Year, to re-
quest IRS approval to change your tax year. See the In-
structions for Form 1128 for exceptions. If you qualify for
an automatic approval request, a user fee is not required.
If you do not qualify for automatic approval, a ruling must
be requested. See the Instructions for Form 1128 for infor-
mation about user fees if you are requesting a ruling.
Accounting Methods
An accounting method is a set of rules used to determine
when and how income and expenses are reported. Your
accounting method includes not only the overall method of
accounting you use, but also the accounting treatment you
use for any material item.
You choose an accounting method for your business
when you file your first income tax return that includes a
Schedule C for the business. After that, if you want to
change your accounting method, you must generally get
IRS approval. See Change in Accounting Method, later.
Kinds of methods. Generally, you can use any of the fol-
lowing accounting methods.
•
Cash method.
•
An accrual method.
•
Special methods of accounting for certain items of in-
come and expenses.
•
Combination method using elements of two or more of
the above.
You must use the same accounting method to figure
your taxable income and to keep your books. Also, you
must use an accounting method that clearly shows your
income.
Business and personal items. You can account for
business and personal items under different accounting
methods. For example, you can figure your business in-
come under an accrual method, even if you use the cash
method to figure personal items.
Two or more businesses. If you have two or more sepa-
rate and distinct businesses, you can use a different ac-
counting method for each if the method clearly reflects the
income of each business. They are separate and distinct
only if you maintain complete and separate books and re-
cords for each business.
Cash Method
Most individuals and many sole proprietors with no inven-
tory use the cash method because they find it easier to
keep cash method records. However, if an inventory is
necessary to account for your income, you must generally
use an accrual method of accounting for sales and pur-
chases, unless you are a small business taxpayer (defined
later in this chapter). For more information, see Invento-
ries, later.
Income
Under the cash method, include in your gross income all
items of income you actually or constructively receive dur-
ing your tax year. If you receive property or services, you
must include their fair market value in income.
Example. On December 30, 2022, a client sent you a
check for interior decorating services you provided to
them. You received the check on January 4, 2023. You
must include the amount of the check in income for 2023.
Constructive receipt. You have constructive receipt of
income when an amount is credited to your account or
made available to you without restriction. You do not need
to have possession of it. If you authorize someone to be
your agent and receive income for you, you are treated as
having received it when your agent received it.
Example. Interest is credited to your bank account in
December 2023. You do not withdraw it or enter it into
your passbook until 2024. You must include it in your
gross income for 2023.
Delaying receipt of income. You cannot hold checks
or postpone taking possession of similar property from
one tax year to another to avoid paying tax on the income.
You must report the income in the year the property is re-
ceived or made available to you without restriction.
Example. A service contractor was entitled to receive
a $10,000 payment on a contract in December 2023. They
were told in December that their payment was available.
At their request, they were not paid until January 2024.
They must include this payment in their 2023 income be-
cause it was constructively received in 2023.
Checks. Receipt of a valid check by the end of the tax
year is constructive receipt of income in that year, even if
you cannot cash or deposit the check until the following
year.
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Example. You received a check for $500 on December
30, 2023, from a client. You could not deposit the check in
your business account until January 3, 2024. You must in-
clude this fee in income for 2023.
Debts paid by another person or canceled. If your
debts are paid by another person or are canceled by your
creditors, you may have to report part or all of this debt re-
lief as income. If you receive income in this way, you con-
structively receive the income when the debt is canceled
or paid. For more information, see Canceled Debt under
Kinds of Income in chapter 5.
Repayment of income. If you include an amount in in-
come and in a later year you have to repay all or part of it,
you can usually deduct the repayment in the year in which
you make it. If the amount you repay is over $3,000, a spe-
cial rule applies. For details about the special rule, see Re-
payments in chapter 8 of Pub. 17.
Expenses
Under the cash method, you generally deduct expenses in
the tax year in which you actually pay them. This includes
business expenses for which you contest liability. How-
ever, you may not be able to deduct an expense paid in
advance or you may be required to capitalize certain
costs, as explained later under Uniform Capitalization
Rules.
Expenses paid in advance. You can deduct an expense
you pay in advance only in the year to which it applies.
Example. You are a calendar year taxpayer and you
pay $1,000 in 2023 for a business insurance policy effec-
tive for 1 year, beginning July 1. You can deduct $500 in
2023 and $500 in 2024.
Accrual Method
Under an accrual method of accounting, you generally re-
port income in the year earned and deduct or capitalize
expenses in the year incurred. The purpose of an accrual
method of accounting is to match income and expenses in
the correct year.
Income—General Rule
Under an accrual method, you generally include an
amount in your gross income for the tax year in which all
events that fix your right to receive the income have occur-
red and you can determine the amount with reasonable
accuracy. For a taxpayer with an applicable financial state-
ment or other financial statement as the Secretary may
specify, the all-events test for an item of gross income is
considered met no later than when taken into account in
an applicable financial statement or such other financial
statement.
Example. You are a calendar year accrual method tax-
payer. You sold a computer on December 28, 2023. You
billed the customer in the first week of January 2024, but
you did not receive payment until February 2024. You
must include the amount received for the computer in your
2023 income.
Income—Special Rules
The following are special rules that apply to advance pay-
ments, estimating income, and changing a payment
schedule for services.
Estimated income. If you include a reasonably estima-
ted amount in gross income, and later determine the exact
amount is different, take the difference into account in the
tax year in which you make the determination.
Change in payment schedule for services. If you per-
form services for a basic rate specified in a contract, you
must accrue the income at the basic rate, even if you
agree to receive payments at a lower rate until you com-
plete the services and then receive the difference.
Advance payments. Generally, you report an advance
payment as income in the year you receive the payment.
However, if you receive an advance payment, you can
elect to postpone including the advance payment in in-
come until the next tax year. You cannot postpone includ-
ing any payment beyond that tax year.
For more information, see Pub. 538 and section 451.
Expenses
Under an accrual method of accounting, you generally de-
duct or capitalize a business expense when both the fol-
lowing apply.
1. The all-events test has been met. The test has been
met when:
a. All events have occurred that fix the fact of liability,
and
b. The liability can be determined with reasonable
accuracy.
2. Economic performance has occurred.
Economic performance. You generally cannot deduct or
capitalize a business expense until economic perform-
ance occurs. If your expense is for property or services
provided to you, or for your use of property, economic per-
formance occurs as the property or services are provided
or as the property is used. If your expense is for property
or services you provide to others, economic performance
occurs as you provide the property or services. An excep-
tion allows certain recurring items to be treated as incur-
red during a tax year even though economic performance
has not occurred. For more information on economic per-
formance, see Economic Performance under Accrual
Method in Pub. 538.
Example. You are a calendar year taxpayer and use
an accrual method of accounting. You buy office supplies
in December 2023. You receive the supplies and the bill in
December, but you pay the bill in January 2024. You can
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deduct the expense in 2023 because all events that fix the
fact of liability have occurred, the amount of the liability
could be reasonably determined, and economic perform-
ance occurred in that year.
Your office supplies may qualify as a recurring expense.
In that case, you can deduct them in 2023 even if the sup-
plies are not delivered until 2024 (when economic per-
formance occurs).
Keeping inventories. When the production, purchase, or
sale of merchandise is an income-producing factor in your
business, you must generally take inventories into account
at the beginning and the end of your tax year, unless you
are a small business taxpayer. If you must account for an
inventory, you must generally use an accrual method of
accounting for your purchases and sales. For more infor-
mation, see Inventories, later.
Special rule for related persons. You cannot deduct
business expenses and interest owed to a related person
who uses the cash method of accounting until you make
the payment and the corresponding amount is includible
in the related person's gross income. Determine the rela-
tionship, for this rule, as of the end of the tax year for
which the expense or interest would otherwise be deducti-
ble. If a deduction is not allowed under this rule, the rule
will continue to apply even if your relationship with the per-
son ends before the expense or interest is includible in the
gross income of that person.
Related persons include members of your immediate
family, including siblings (either whole or half), your
spouse, ancestors, and lineal descendants. For a list of
other related persons, see section 267 of the Internal Rev-
enue Code.
Combination Method
You can generally use any combination of cash, accrual,
and special methods of accounting if the combination
clearly shows your income and expenses and you use it
consistently. However, the following restrictions apply.
•
If an inventory is necessary to account for your in-
come, you must generally use an accrual method for
purchases and sales. (See, however, Inventories,
later.) You can use the cash method for all other items
of income and expenses.
•
If you use the cash method for figuring your income,
you must use the cash method for reporting your ex-
penses.
•
If you use an accrual method for reporting your expen-
ses, you must use an accrual method for figuring your
income.
•
If you use a combination method that includes the
cash method, treat that combination method as the
cash method.
Inventories
Generally, if you produce, purchase, or sell merchandise
in your business, you must keep an inventory and use an
accrual method for purchases and sales of merchandise.
Exception for small business taxpayers. If you are a
small business taxpayer, you can choose not to keep an
inventory, but you must still use a method of accounting
for inventory that clearly reflects income. If you choose not
to keep an inventory, you won’t be treated as failing to
clearly reflect income if your method of accounting for in-
ventory treats inventory as non-incidental material or sup-
plies, or conforms to your financial accounting treatment
of inventories. If, however, you choose to keep an inven-
tory, you must generally use an accrual method of ac-
counting and value the inventory each year to determine
your cost of goods sold in Part III of Schedule C.
Small business taxpayer. You qualify as a small busi-
ness taxpayer if you (a) have average annual gross re-
ceipts of $29 million or less for the 3 prior tax years, and
(b) are not a tax shelter (as defined in section 448(d)(3)). 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, and if your
business has a predecessor entity, include the gross re-
ceipts of the predecessor entity from the 3-tax-year period
when figuring average gross receipts. If your business (or
predecessor entity) had short tax years for any of the
3-tax-year period, annualize your business’ gross receipts
for the short tax years that are part of the 3-tax-year pe-
riod. See Pub. 538 for more information.
Treating inventory as non-incidental material or
supplies. If you account for inventories as materials and
supplies that are not incidental, you deduct the amounts
paid or incurred to acquire or produce the inventoriable
items treated as non-incidental materials and supplies in
the year in which they are first used or consumed in your
operations. Inventory treated as non-incidental materials
and supplies is used or consumed in your business in the
year you provide the inventory to your customers.
Financial accounting treatment of inventories.
Your financial accounting treatment of inventories is deter-
mined with regard to the method of accounting you use in
your applicable financial statement (as defined in section
451(b)(3)) or, if you do not have an applicable financial
statement, with regard to the method of accounting you
use in your books and records that have been prepared in
accordance with your accounting procedures.
Changing your method of accounting for inven-
tory. If you want to change your method of accounting for
inventory, you must file Form 3115, Application for Change
in Accounting Method. See Change in Accounting
Method, later.
Items included in inventory. If you are required to ac-
count for inventories, include the following items when ac-
counting for your inventory.
•
Merchandise or stock in trade.
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•
Raw materials.
•
Work in process.
•
Finished products.
•
Supplies that physically become a part of the item in-
tended for sale.
Valuing inventory. You must value your inventory at the
beginning and end of each tax year to determine your cost
of goods sold (Schedule C, line 42). To determine the
value of your inventory, you need a method for identifying
the items in your inventory and a method for valuing these
items.
Inventory valuation rules cannot be the same for all
kinds of businesses. The method you use to value your in-
ventory must conform to generally accepted accounting
principles for similar businesses and must clearly reflect
income. Your inventory practices must be consistent from
year to year.
More information. For more information about invento-
ries, see Pub. 538.
Uniform Capitalization Rules
Under the uniform capitalization rules, you must capitalize
the direct costs and part of the indirect costs for produc-
tion or resale activities. Include these costs in the basis of
property you produce or acquire for resale, rather than
claiming them as a current deduction. You recover the
costs through depreciation, amortization, or cost of goods
sold when you use, sell, or otherwise dispose of the prop-
erty.
Activities subject to the uniform capitalization rules.
You may be subject to the uniform capitalization rules if
you do any of the following, unless the property is pro-
duced for your use other than in a business or an activity
carried on for profit.
•
Produce real or tangible personal property. For this
purpose, tangible personal property includes a film,
sound recording, videotape, book, or similar property.
•
Acquire property for resale.
Exceptions. These rules do not apply to the following.
1. Small business taxpayers, defined earlier under In-
ventories.
2. Property you produce if your indirect costs of produc-
ing the property are $200,000 or less.
Special Methods
There are special methods of accounting for certain items
of income or expense. These include the following.
•
Amortization, discussed in chapter 7 of Pub. 225.
•
Bad debts, discussed under Topic No. 453, Bad Debt
Deduction.
•
Depletion, discussed in chapter 7 of Pub. 225.
•
Depreciation, discussed in Pub. 946, How To Depreci-
ate Property.
•
Installment sales, discussed in Pub. 537, Installment
Sales.
•
Long-term contract methods of accounting. See sec-
tion 460.
Change in Accounting Method
Once you have set up your accounting method, you must
generally get IRS approval before you can change to an-
other method. A change in your accounting method in-
cludes a change in:
1. Your overall method, such as from cash to an accrual
method; and
2. Your treatment of any material item.
To get approval, you must file Form 3115. You can get
IRS approval to change an accounting method under ei-
ther the automatic change procedures or the advance
consent request procedures. You may have to pay a user
fee. For more information, see the Instructions for Form
3115.
Automatic change procedures. Certain taxpayers can
presume to have IRS approval to change their method of
accounting. The approval is granted for the tax year for
which the taxpayer requests a change (year of change), if
the taxpayer complies with the provisions of the automatic
change procedures. No user fee is required for an applica-
tion filed under an automatic change procedure generally
covered in Revenue Procedure 2015-13, 2015-5 I.R.B.
419, which is available at IRS.gov/IRB/
2015-05_IRB#RP-2015-13 (or its successor).
Generally, you must use Form 3115 to request an auto-
matic change. For more information, see the Instructions
for Form 3115.
3.
Dispositions of Business
Property
Introduction
If you dispose of business property, you may have a gain
or loss that you report on your tax return. However, in
some cases, you may have a gain that is not taxable or a
loss that is not deductible. This chapter discusses
whether you have a disposition, how to figure the gain or
loss, and where to report the gain or loss.
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Useful Items
You may want to see:
Publication
544 Sales and Other Dispositions of Assets
Form (and Instructions)
4797 Sales of Business Property
Sch D (Form 1040) Capital Gains and Losses
See chapter 12 for information about getting publications
and forms.
What Is a Disposition of
Property?
A disposition of property includes the following transac-
tions.
•
You sell property for cash or other property.
•
You exchange property for other property.
•
You receive money as a tenant for the cancellation of a
lease.
•
You receive money for granting the exclusive use of a
copyright throughout its life in a particular medium.
•
You transfer property to satisfy a debt.
•
You abandon property.
•
Your bank or other financial institution forecloses on
your mortgage or repossesses your property.
•
Your property is damaged, destroyed, or stolen, and
you receive property or money in payment.
•
Your property is condemned, or disposed of under the
threat of condemnation, and you receive property or
money in payment.
•
You give property away.
For details about damaged, destroyed, or stolen property,
see Pub. 547, Casualties, Disasters, and Thefts. For de-
tails about other dispositions, see chapter 1 of Pub. 544.
Nontaxable exchanges. Certain exchanges of property
are not taxable. This means any gain from the exchange is
not recognized and you cannot deduct any loss. Your gain
or loss will not be recognized until you sell or otherwise
dispose of the property you receive.
Like-kind exchanges. A like-kind exchange is the ex-
change of property for other like-kind property. It is the
most common type of nontaxable exchange. To be a
like-kind exchange, the property traded and the property
received must be both (a) real property, and (b) business
or investment property.
Report the exchange of like-kind property on Form
8824, Like-Kind Exchanges. For more information about
like-kind exchanges, see chapter 1 of Pub. 544.
Installment sales. An installment sale is a sale of prop-
erty where you receive at least one payment after the tax
544
4797
Sch D (Form 1040)
year of the sale. If you finance the buyer's purchase of
your property, instead of having the buyer get a loan or
mortgage from a third party, you probably have an install-
ment sale.
For more information about installment sales, see Pub.
537.
Sale of a business. The sale of a business is usually not
a sale of one asset. Instead, all the assets of the business
are sold. Generally, when this occurs, each asset is trea-
ted as being sold separately for determining the treatment
of gain or loss.
Both the buyer and seller involved in the sale of a busi-
ness must report to the IRS the allocation of the sales
price among the business assets. Use Form 8594, Asset
Acquisition Statement Under Section 1060, to provide this
information. The buyer and seller should each attach Form
8594 to their federal income tax return for the year in
which the sale occurred.
For more information about the sale of a business, see
Pub. 544.
How Do I Figure a Gain or
Loss?
Table 3-1. How To Figure a Gain or Loss
IF your... THEN you have a...
adjusted basis is more than the amount
realized loss.
amount realized is more than the
adjusted basis gain.
Basis, adjusted basis, amount realized, fair market
value, and amount recognized are defined next. You need
to know these definitions to figure your gain or loss.
Basis. The cost or purchase price of property is usually
its basis for figuring the gain or loss from its sale or other
disposition. However, if you acquired the property by gift,
by inheritance, or in some way other than buying it, you
must use a basis other than its cost. For more information
about basis, see Pub. 551, Basis of Assets.
Adjusted basis. The adjusted basis of property generally
is your original cost or other basis plus certain additions,
and minus certain deductions such as depreciation and
casualty losses. In determining gain or loss, the costs of
transferring property to a new owner, such as selling ex-
penses, are added to the adjusted basis of the property.
Amount realized. Generally, the amount you realize from
a disposition is the total of all money you receive plus the
fair market value of all property or services you receive.
The amount you realize also includes any of your liabilities
that were assumed by the buyer and any liabilities to
which the property you transferred is subject, such as real
estate taxes or a mortgage.
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Fair market value. Fair market value is the price at which
the property would change hands between a buyer and a
seller, neither having to buy or sell, and both having rea-
sonable knowledge of all necessary facts.
Amount recognized. Your gain or loss realized from a
disposition of property is usually a recognized gain or loss
for tax purposes. Recognized gains must be included in
gross income. Recognized losses are deductible from
gross income. However, a gain or loss realized from cer-
tain exchanges of property is not recognized. See
Nontaxable exchanges, earlier. Also, you cannot deduct a
loss from the disposition of property held for personal use.
Is My Gain or Loss Ordinary or
Capital?
You must classify your gains and losses as either ordinary
or capital gains or losses. You must do this to figure your
net capital gain or loss. Generally, you will have a capital
gain or loss if you dispose of a capital asset. For the most
part, everything you own and use for personal purposes or
investment is a capital asset.
Certain property you use in your business is not a capi-
tal asset. A gain or loss from a disposition of this property
is an ordinary gain or loss. However, if you held the prop-
erty longer than 1 year, you may be able to treat the gain
or loss as a capital gain or loss. These gains and losses
are called section 1231 gains and losses.
For more information about ordinary and capital gains
and losses, see chapters 2 and 3 of Pub. 544.
Is My Capital Gain or Loss Short Term
or Long Term?
If you have a capital gain or loss, you must determine
whether it is long term or short term. Whether a gain or
loss is long or short term depends on how long you own
the property before you dispose of it. The time you own
property before disposing of it is called the holding period.
Do I Have a Short-Term or
Long-Term Gain or Loss?
Table 3-2.
IF you hold the property... THEN you have a...
1 year or less short-term capital gain or loss.
more than 1 year long-term capital gain or loss.
For more information about short-term and long-term
capital gains and losses, see chapter 4 of Pub. 544.
Where Do I Report Gains and
Losses?
Report gains and losses from the following dispositions on
the forms indicated. The instructions for the forms explain
how to fill them out.
Dispositions of business property and depreciable
property. Use Form 4797. If you have taxable gain, you
may also have to use Schedule D (Form 1040).
Like-kind exchanges. Use Form 8824. You may also
have to use Form 4797 and Schedule D (Form 1040).
Installment sales. Use Form 6252, Installment Sale In-
come. You may also have to use Form 4797 and Sched-
ule D (Form 1040).
Casualties and thefts. Use Form 4684, Casualties and
Thefts. You may also have to use Form 4797.
Condemned property. Use Form 4797. You may also
have to use Schedule D (Form 1040).
4.
General Business Credits
Introduction
Your general business credit for the year consists of your
carryforward of business credits from prior years plus the
total of your current year business credits. In addition, your
general business credit for the current year may be in-
creased later by the carryback of business credits from
later years. You subtract this credit directly from your tax.
Useful Items
You may want to see:
Form (and Instructions)
3800 General Business Credit
6251 Alternative Minimum Tax—Individuals
See chapter 12 for information about getting publications
and forms.
Business Credits
All of the following credits are part of the general business
credit. The form you use to figure each credit is shown in
parentheses. You will also have to complete Form 3800.
Some credits have expiration dates. Check the instruc-
tions for each credit to make sure it is available for 2023.
Alternative fuel vehicle refueling property credit
(Form 8911). This credit applies to the cost of any quali-
fied fuel vehicle refueling property. For more information,
see Form 8911.
Biodiesel, renewable diesel, or sustainable aviation
fuels credits (Form 8864). For more information, see
Form 8864.
3800
6251
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Biofuel producer credit (Form 6478). For more infor-
mation, see Form 6478.
Carbon oxide sequestration credit (Form 8933). This
credit is for carbon oxide that is captured at a qualified fa-
cility and disposed of in secure geological storage or used
in a qualified enhanced oil or natural gas recovery project.
For more information, see Form 8933.
Credit for employer social security and Medicare
taxes paid on certain employee tips (Form 8846).
This credit is generally equal to your (employer's) portion
of social security and Medicare taxes paid on tips re-
ceived by employees of your food and beverage establish-
ment where tipping is customary. The credit applies re-
gardless of whether the food is consumed on or off your
business premises. For more information, see Form 8846.
Credit for employer differential wage payments
(Form 8932). This credit provides businesses with an in-
centive to continue to pay wages to an employee perform-
ing services on active duty in the uniformed services of
the United States for a period of more than 30 days. For
more information, see Form 8932.
Credit for employer-provided childcare facilities and
services (Form 8882). This credit applies to the quali-
fied expenses you paid for employee childcare and quali-
fied expenses you paid for childcare resource and referral
services. For more information, see Form 8882.
Credit for increasing research activities (Form 6765).
This credit is designed to encourage businesses to in-
crease the amounts they spend on research and experi-
mental activities, including energy research. For more in-
formation, see Form 6765.
Credit for small employer health insurance premiums
(Form 8941). This credit applies to the cost of certain
health insurance coverage you provide to certain employ-
ees. For more information, see Form 8941.
Credit for small employer pension plan startup costs,
auto-enrollment, and military spouse participation
(Form 8881). This credit applies to pension plan startup
costs of a new qualified defined benefit or defined contri-
bution plan (including a section 401(k) plan), SIMPLE
plan, or SEP plan. For more information, see Pub. 560,
Retirement Plans for Small Business.
Disabled access credit (Form 8826). This credit is a
nonrefundable tax credit for an eligible small business that
pays or incurs expenses to provide access to persons
who have disabilities. You must pay or incur the expenses
to enable your business to comply with the Americans
with Disabilities Act of 1990. For more information, see
Form 8826.
Distilled spirits credit (Form 8906). This credit is avail-
able to distillers and importers of distilled spirits and eligi-
ble wholesalers of distilled spirits. For more information,
see Form 8906.
Employer credit for paid family and medical leave
(Form 8994). This credit applies for wages paid to quali-
fying employees while they are on family and medical
leave, subject to certain conditions. For more information,
see Form 8994.
Empowerment zone employment credit (Form 8844).
You may qualify for this credit if you have employees and
are engaged in a business in an empowerment zone for
which the credit is available. For more information, see
Form 8844.
Energy efficient home credit (Form 8908). This credit
is available for eligible contractors of certain homes sold
for use as a residence. For more information, see Form
8908.
Investment credit (Form 3468). The investment credit
is the total of the several credits. For more information,
see Form 3468.
Low sulfur diesel fuel production credit (Form 8896).
For more information, see Form 8896.
Low-income housing credit (Form 8586). This credit
generally applies to each qualified low-income building
placed in service after 1986. For more information, see
Form 8586.
New markets credit (Form 8874). This credit is for
qualified equity investments made in qualified community
development entities. For more information, see Form
8874.
Orphan drug credit (Form 8820). This credit applies to
qualified expenses incurred in testing certain drugs for
rare diseases and conditions. For more information, see
Form 8820.
Clean vehicle credits (Form 8936). These credits are
for certain clean vehicles placed in service during the tax
year. For more information, see Form 8936.
Qualified railroad track maintenance credit (Form
8900). This credit applies to qualified railroad track main-
tenance expenditures paid or incurred during the tax year.
For more information, see Form 8900.
Renewable electricity production credit (Form 8835).
This credit is for renewable energy sources produced in
the United States or U.S. territories from qualified energy
resources at a qualified facility. For more information, see
Form 8835.
Work opportunity credit (Form 5884). This credit pro-
vides businesses with an incentive to hire individuals from
targeted groups that have a particularly high unemploy-
ment rate or other special employment needs. For more
information, see Form 5884.
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How To Claim the Credit
To claim a general business credit, you will first have to get
the forms you need to claim your current year business
credits.
In addition to the credit form, you also need to file Form
3800.
5.
Business Income
Introduction
This chapter primarily explains business income and how
to account for it on your tax return and what items are not
considered income, and it gives guidelines for selected
occupations.
If there is a connection between any income you re-
ceive and your business, the income is business income.
A connection exists if it is clear that the payment of in-
come would not have been made if you did not have the
business.
You can have business income even if you are not in-
volved in the activity on a regular full-time basis. Income
from work you do on the side in addition to your regular
job can be business income. For example, you may be in
the business of providing services for a ride-sharing busi-
ness as a second job.
You report most business income, such as income from
selling your products or services, on Schedule C. But you
report the income from the sale of business assets, such
as land and office buildings, on other forms instead of
Schedule C. For information on selling business assets,
see chapter 3.
Nonemployee compensation. Business income in-
cludes amounts you received in your business that were
properly shown on Forms 1099-NEC. This includes
amounts reported as nonemployee compensation in box 1
of the form. You can find more information in the instruc-
tions on the back of the Form 1099-NEC you received.
Payment card and third-party network transactions.
If you are in a business, you may receive a Form 1099-K
representing the total dollar amount of total reportable
payment transactions. This may not be the amount you
should report as income, as it may not include all the re-
ceipts and it may include items that are not included in
your receipts (such as sales tax).
Business income deduction. Income you report on
Schedule C may be qualified business income and entitle
you to a deduction on Form 1040 or 1040-SR, line 13. See
Form 8995-A or Form 8995 to figure your deduction, if any.
Kinds of Income
You must report on your tax return all income you receive
from your business unless it is excluded by law. In most
cases, your business income will be in the form of cash,
checks, and credit card charges. But business income can
be in other forms, such as property or services. These and
other types of income are explained next.
If you are a U.S. citizen who has business income
from sources outside the United States (foreign
income), you must report that income on your tax
return unless it is exempt from tax under U.S. law. If you
live outside the United States, you may be able to exclude
part or all of your foreign-source business income. For de-
tails, see Pub. 54, Tax Guide for U.S. Citizens and Resi-
dent Aliens Abroad.
Bartering for Property or Services
Bartering is an exchange of property or services. You must
include in your gross receipts, at the time received, the fair
market value of property or services you receive in ex-
change for something else. If you exchange services with
another person and you both have agreed ahead of time
on the value of the services, that value will be accepted as
the fair market value unless the value can be shown to be
otherwise.
Example 1. You are a self-employed lawyer. You per-
form legal services for a client, a small corporation. In pay-
ment for your services, you receive shares of stock in the
corporation. You must include the fair market value of the
shares in income.
Example 2. You are an artist and create a work of art
to compensate your landlord for the rent-free use of your
apartment. You must include the fair rental value of the
apartment in your gross receipts. Your landlord must in-
clude the fair market value of the work of art in their rental
income.
Example 3. You are a self-employed accountant. Both
you and a house painter are members of a barter club, an
organization that each year gives its members a directory
of members and the services each member provides.
Members get in touch with other members directly and
bargain for the value of the services to be performed.
In return for accounting services you provided for the
house painter's business, the house painter painted your
home. You must include in gross receipts the fair market
value of the services you received from the house painter.
The house painter must include the fair market value of
your accounting services in their gross receipts.
Example 4. You are a member of a barter club that
uses credit units to credit or debit members' accounts for
goods or services provided or received. As soon as units
are credited to your account, you can use them to buy
goods or services or sell or transfer the units to other
members.
CAUTION
!
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You must include the value of credit units you received
in your gross receipts for the tax year in which the units
are credited to your account.
The dollar value of units received for services by an
employee of the club, who can use the units in the same
manner as other members, must be included in the em-
ployee's gross income for the tax year in which received. It
is wages subject to social security and Medicare taxes
(FICA), FUTA taxes, and income tax withholding. See
Pub. 15.
Example 5. You operate a plumbing business and use
the cash method of accounting. You join a barter club and
agree to provide plumbing services to any member for a
specified number of hours. Each member has access to a
directory that lists the members of the club and the serv-
ices available.
Members contact each other directly and request serv-
ices to be performed. You are not required to provide serv-
ices unless requested by another member, but you can
use as many of the offered services as you wish without
paying a fee.
You must include the fair market value of any services
you receive from club members in your gross receipts
when you receive them even if you have not provided any
services to club members.
Information returns. If you are involved in a bartering
transaction, you may have to file either of the following
forms.
•
Form 1099-B, Proceeds From Broker and Barter Ex-
change Transactions.
•
Form 1099-MISC.
For information about these forms, see the General In-
structions for Certain Information Returns.
Real Estate Rents
If you are a real estate dealer who receives income from
renting real property or an owner of a hotel, motel, etc.,
who provides services (maid services, etc.) for guests, re-
port the rental income and expenses on Schedule C. If
you are not a real estate dealer or the kind of owner de-
scribed in the preceding sentence, report the rental in-
come and expenses on Schedule E. For more information,
see Pub. 527, Residential Rental Property.
Real estate dealer. You are a real estate dealer if you
are engaged in the business of selling real estate to cus-
tomers with the purpose of making a profit from those
sales. Rent you receive from real estate held for sale to
customers is subject to SE tax. However, rent you receive
from real estate held for speculation or investment is not
subject to SE tax.
Trailer park owner. Rental income from a trailer park is
subject to SE tax if you are a self-employed trailer park
owner who provides trailer lots and facilities and substan-
tial services for the convenience of your tenants.
You are generally considered to provide substantial
services for tenants if they are primarily for the tenants'
convenience and are not normally provided to maintain
the lots in a condition for occupancy. Services are sub-
stantial if the compensation for the services makes up a
material part of the tenants' rental payments.
Examples of services that are not normally provided for
the tenants' convenience include supervising and main-
taining a recreational hall provided by the park, distributing
a monthly newsletter to tenants, operating a laundry fa-
cility, and helping tenants buy or sell their trailers.
Examples of services that are normally provided to
maintain the lots in a condition for tenant occupancy in-
clude city sewerage, electrical connections, and road-
ways.
Hotels, boarding houses, and apartments. Rental in-
come you receive for the use or occupancy of hotels,
boarding houses, or apartment houses is subject to SE
tax if you provide services for the occupants.
Generally, you are considered to provide services for
the occupants if the services are primarily for their conven-
ience and are not services normally provided with the
rental of rooms for occupancy only. An example of a serv-
ice that is not normally provided for the convenience of the
occupants is maid service. However, providing heat and
light, cleaning stairways and lobbies, and collecting trash
are services normally provided for the occupants' conven-
ience.
Prepaid rent. Advance payments received under a lease
that does not put any restriction on their use or enjoyment
are income in the year you receive them. This is generally
true no matter what accounting method or period you use.
Lease bonus. A bonus you receive from a lessee for
granting a lease is an addition to the rent. Include it in your
gross receipts in the year received.
Lease cancellation payments. Report payments you re-
ceive from your lessee for canceling a lease in your gross
receipts in the year received.
Payments to third parties. If your lessee makes pay-
ments to someone else under an agreement to pay your
debts or obligations, include the payments in your gross
receipts when the lessee makes the payments. A common
example of this kind of income is a lessee's payment of
your property taxes on leased real property.
Settlement payments. Payments you receive in settle-
ment of a lessee's obligation to restore the leased prop-
erty to its original condition are income in the amount that
the payments exceed the adjusted basis of the leasehold
improvements destroyed, damaged, removed, or discon-
nected by the lessee.
Personal Property Rents
If you are in the business of renting personal property
(equipment, vehicles, formal wear, etc.), include the rental
amount you receive in your gross receipts on Schedule C.
Prepaid rent and other payments described under Real
Estate Rents, earlier, can also be received for renting
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personal property. If you receive any of those payments,
include them in your gross receipts as explained in that
discussion.
Interest and Dividend Income
Interest and dividends may be considered business in-
come.
Interest. Interest received on notes receivable that you
have accepted in the ordinary course of business is busi-
ness income. Interest received on loans is business in-
come if you are in the business of lending money.
Uncollectible loans. If a loan payable to you be-
comes uncollectible during the tax year and you use an
accrual method of accounting, you generally must include
in gross income qualified stated interest accrued up to the
time the loan became uncollectible. If the accrued interest
that you previously included later becomes uncollectible,
you may be able to take a bad debt deduction. See Bad
Debts in chapter 8.
Unstated interest and Original Issue Discount
(OID). If little or no interest is charged on an installment
sale contract, you may have to treat a part of each pay-
ment as unstated interest. See Unstated Interest and
Original Issue Discount (OID) in Pub. 537.
Dividends. Generally, dividends are business income to
dealers in securities. For most sole proprietors and statu-
tory employees, however, dividends are nonbusiness in-
come. If you hold stock as a personal investment sepa-
rately from your business activity, the dividends from the
stock are nonbusiness income.
If you receive dividends from business insurance pre-
miums you deducted in an earlier year, you must report all
or part of the dividend as business income on your return.
To find out how much you have to report, see Recovery of
items previously deducted under Other Income, later.
Canceled Debt
The following explain the general rule for including can-
celed debt in income and the exceptions to the general
rule.
General Rule
Generally, if your debt is canceled or forgiven, other than
as a gift or bequest to you, you must include the canceled
amount in your gross income for tax purposes. Report the
canceled amount on line 6 of Schedule C if you incurred
the debt in your business. If the debt is a nonbusiness
debt, report the canceled amount on line 8c of Schedule 1
(Form 1040).
Exceptions
The following discussion covers some exceptions to the
general rule for canceled debt.
Price reduced after purchase. If you owe a debt to the
seller for property you bought and the seller reduces the
amount you owe, you generally do not have income from
the reduction. Unless you are bankrupt or insolvent, treat
the amount of the reduction as a purchase price adjust-
ment and reduce your basis in the property.
Deductible debt. You do not realize income from a can-
celed debt to the extent the payment of the debt would
have led to a deduction.
Example. You get accounting services for your busi-
ness on credit. Later, you have trouble paying your busi-
ness debts, but you are not bankrupt or insolvent. Your ac-
countant forgives part of the amount you owe for the
accounting services. How you treat the canceled debt de-
pends on your method of accounting.
•
Cash method—You do not include the canceled debt
in income because payment of the debt would have
been deductible as a business expense.
•
Accrual method—You include the canceled debt in in-
come because the expense was deductible when you
incurred the debt.
For information on the cash and accrual methods of ac-
counting, see chapter 2.
Exclusions
Do not include canceled debt in income in the following
situations. However, you may be required to file Form
982, Reduction of Tax Attributes Due to Discharge of In-
debtedness. For more information, see Form 982.
1. The cancellation takes place in a bankruptcy case un-
der title 11 of the U.S. Code (relating to bankruptcy).
See Pub. 908, Bankruptcy Tax Guide.
2. The cancellation takes place when you are insolvent.
You can exclude the canceled debt to the extent you
are insolvent. See Pub. 4681, Canceled Debts, Fore-
closures, Repossessions, and Abandonments.
3. The canceled debt is a qualified farm debt owed to a
qualified person. See chapter 3 of Pub. 225, Farmer's
Tax Guide.
4. The canceled debt is a qualified real property busi-
ness debt. This situation is explained later.
5. The canceled debt is qualified principal residence in-
debtedness which is discharged after 2006. See the
Instructions for Form 982 for more information about
this exclusion.
If a canceled debt is excluded from income because it
takes place in a bankruptcy case, the exclusions in situa-
tions 2 through 5 do not apply. If it takes place when you
are insolvent, the exclusions in situations 3 and 4 do not
apply to the extent you are insolvent.
Debt. For purposes of this discussion, debt includes any
debt for which you are liable or which attaches to property
you hold.
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Qualified real property business debt. You can elect
to exclude (up to certain limits) the cancellation of quali-
fied real property business debt. If you make the election,
you must reduce the basis of your depreciable real prop-
erty by the amount excluded. Make this reduction at the
beginning of your tax year following the tax year in which
the cancellation occurs. However, if you dispose of the
property before that time, you must reduce its basis imme-
diately before the disposition.
Cancellation of qualified real property business
debt. Qualified real property business debt is debt (other
than qualified farm debt) that meets all the following condi-
tions.
1. It was incurred or assumed in connection with real
property used in a trade or business. Real property
used in a trade or business does not include real
property developed and held primarily for sale to cus-
tomers in the ordinary course of business.
2. It was secured by such real property.
3. It was incurred or assumed at either of the following
times.
a. Before January 1, 1993.
b. After December 31, 1992, if incurred or assumed
to acquire, construct, or substantially improve the
real property.
4. It is debt to which you choose to apply these rules.
Qualified real property business debt includes refinanc-
ing of debt described in (3) above, but only to the extent it
does not exceed the debt being refinanced.
If you are the owner of a disregarded entity (for
example, a single-member LLC), see Qualified
Real Property Business Indebtedness in chap-
ter 1 of Pub. 4681 to see if you qualify for this exclusion.
You cannot exclude more than either of the following
amounts.
1. The excess (if any) of:
a. The outstanding principal of qualified real property
business debt (immediately before the cancella-
tion); over
b. The fair market value (immediately before the can-
cellation) of the business real property that is se-
curity for the debt, reduced by the outstanding
principal amount of any other qualified real prop-
erty business debt secured by this property imme-
diately before the cancellation.
2. The total adjusted bases of depreciable real property
held by you immediately before the cancellation.
These adjusted bases are determined after any basis
reduction due to a cancellation in bankruptcy or insol-
vency, or of qualified farm debt. Do not take into ac-
count depreciable real property acquired in contem-
plation of the cancellation.
Election. To make this election, complete Form 982
and attach it to your income tax return for the tax year in
TIP
which the cancellation occurs. You must file your return by
the due date (including extensions). If you timely filed your
return for the year without making the election, you can
still make the election by filing an amended return within 6
months of the due date of the return (excluding exten-
sions). For more information, see When To File in the form
instructions.
Other Income
The following discussion explains how to treat other types
of business income you may receive.
Restricted property. Restricted property is property that
has certain restrictions that affect its value. If you receive
restricted stock or other property for services performed,
the fair market value of the property in excess of your cost
is included in your income on Schedule C when the re-
striction is lifted. However, you can choose to be taxed in
the year you receive the property. For more information on
including restricted property in income, see Pub. 525, Tax-
able and Nontaxable Income.
Gains and losses. Do not report on Schedule C a gain
or loss from the disposition of property that is neither stock
in trade nor held primarily for sale to customers. Instead,
you must report these gains and losses on other forms.
For more information, see chapter 3.
Promissory notes. Report promissory notes and other
evidences of debt issued to you in a sale or exchange of
property that is stock in trade or held primarily for sale to
customers on Schedule C. In general, you report them at
their stated principal amount (minus any unstated interest)
or issue price (for debt instruments with OID) when you re-
ceive them.
Lost income payments. If you reduce or stop your busi-
ness activities, report on Schedule C any payment you re-
ceive for the lost income of your business from insurance
or other sources. Report it on Schedule C even if your
business is inactive when you receive the payment.
Damages. You must include in gross income compensa-
tion you receive during the tax year as a result of any of
the following injuries connected with your business.
•
Patent infringement.
•
Breach of contract or fiduciary duty.
•
Antitrust injury.
Economic injury. You may be entitled to a deduction
against the income if it compensates you for actual eco-
nomic injury. Your deduction is the smaller of the following
amounts.
•
The amount you receive or accrue for damages in the
tax year reduced by the amount you pay or incur in the
tax year to recover that amount.
•
Your loss from the injury that you have not yet deduc-
ted.
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Punitive damages. You must also include punitive
damages in income.
Kickbacks. If you receive any kickbacks, include them in
your income on Schedule C. However, do not include
them if you properly treat them as a reduction of a related
expense item, a capital expenditure, or cost of goods sold.
Recovery of items previously deducted. If you recover
a bad debt or any other item deducted in a previous year,
include the recovery in income on Schedule C. However, if
all or part of the deduction in earlier years did not reduce
your tax, you can exclude the part that did not reduce your
tax. If you exclude part of the recovery from income, you
must include with your return a computation showing how
you figured the exclusion.
Exception for depreciation. This rule does not apply
to depreciation. You recover depreciation using the rules
explained next.
Recapture of depreciation. In the following situations,
you have to recapture the depreciation deduction. This
means you include in income part or all of the depreciation
you deducted in previous years.
Listed property. If your business use of listed prop-
erty (explained in chapter 8 under Depreciation) falls to
50% or less in a tax year after the tax year you placed the
property in service, you may have to recapture part of the
depreciation deduction. You do this by including in income
on Schedule C part of the depreciation you deducted in
previous years. Use Part IV of Form 4797 to figure the
amount to include on Schedule C. For more information,
see What Is the Business-Use Requirement? in chapter 5
of Pub. 946. That chapter explains how to determine
whether property is used more than 50% in your business.
Section 179 property. If you take a section 179 de-
duction (explained in chapter 8 under Depreciation) for an
asset and before the end of the asset's recovery period
the percentage of business use drops to 50% or less, you
must recapture part of the section 179 deduction. You do
this by including in income on Schedule C part of the de-
duction you took. Use Part IV of Form 4797 to figure the
amount to include on Schedule C. See chapter 2 of Pub.
946 to find out when you recapture the deduction.
Sale or exchange of depreciable property. If you
sell or exchange depreciable property at a gain, you may
have to treat all or part of the gain due to depreciation as
ordinary income. You figure the income due to deprecia-
tion recapture in Part III of Form 4797. For more informa-
tion, see chapter 4 of Pub. 544.
Items That Are Not Income
In some cases, the property or money you receive is not
income.
Appreciation. Increases in value of your property are not
income until you realize the increases through a sale or
other taxable disposition.
Consignments. Consignments of merchandise to others
to sell for you are not sales. The title of merchandise re-
mains with you, the consignor, even after the consignee
possesses the merchandise. Therefore, if you ship goods
on consignment, you have no profit or loss until the con-
signee sells the merchandise. Merchandise you have
shipped out on consignment is included in your inventory
until it is sold.
Do not include merchandise you receive on consign-
ment in your inventory. Include your profit or commission
on merchandise consigned to you in your income when
you sell the merchandise or when you receive your profit
or commission, depending upon the method of accounting
you use.
Construction allowances. If you enter into a lease after
August 5, 1997, you can exclude from income the con-
struction allowance you receive (in cash or as a rent re-
duction) from your landlord if you receive it under both the
following conditions.
•
Under a short-term lease of retail space.
•
For the purpose of constructing or improving qualified
long-term real property for use in your business at that
retail space.
Amount you can exclude. You can exclude the con-
struction allowance to the extent it does not exceed the
amount you spent for construction or improvements.
Short-term lease. A short-term lease is a lease (or
other agreement for occupancy or use) of retail space for
15 years or less. The following rules apply in determining
whether the lease is for 15 years or less.
•
Take into account options to renew when figuring
whether the lease is for 15 years or less. But do not
take into account any option to renew at fair market
value determined at the time of renewal.
•
Two or more successive leases that are part of the
same transaction (or a series of related transactions)
for the same or substantially similar retail space are
treated as one lease.
Retail space. Retail space is real property leased, oc-
cupied, or otherwise used by you as a tenant in your busi-
ness of selling tangible personal property or services to
the general public.
Qualified long-term real property. Qualified
long-term real property is nonresidential real property that
is part of, or otherwise present at, your retail space and
that reverts to the landlord when the lease ends.
Exchange of like-kind property. Generally, if you ex-
change real property used for business or held as an in-
vestment solely for other business or investment real
property of a like kind, no gain or loss is recognized. This
means that the gain is not taxable and the loss is not de-
ductible. For more information, see Form 8824.
Leasehold improvements. If a tenant erects buildings or
makes improvements to your property, the increase in the
value of the property due to the improvements is not
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income to you. However, if the facts indicate that the im-
provements are a payment of rent to you, then the in-
crease in value would be income.
Loans. Money borrowed through a bona fide loan is not
income.
Sales tax. State and local sales taxes imposed on the
buyer, which you were required to collect and pay over to
state or local governments, are not income.
Guidelines for Selected
Occupations
This section provides information to determine whether
your earnings should be reported on Schedule C (Form
1040).
Direct seller. You must report all income you receive as a
direct seller on Schedule C. This includes any of the fol-
lowing.
•
Income from sales—Payments you receive from cus-
tomers for products they buy from you.
•
Commissions, bonuses, or percentages you receive
for sales and the sales of others who work under you.
•
Prizes, awards, and gifts you receive from your selling
business.
You must report this income regardless of whether it is re-
ported to you on an information return.
You are a direct seller if you meet all the following con-
ditions.
1. You are engaged in one of the following trades or
businesses.
a. Selling or soliciting the sale of consumer products
either in a home or other place that is not a perma-
nent retail establishment, or to any buyer on a
buy-sell basis or a deposit-commission basis for
resale in a home or other place of business that is
not a permanent retail establishment.
b. Delivering or distributing newspapers or shopping
news (including any services directly related to
that trade or business).
2. Substantially all your pay (whether paid in cash or not)
for services described above is directly related to
sales or other output (including performance of serv-
ices) rather than to the number of hours worked.
3. Your services are performed under a written contract
between you and the person for whom you perform
the services, and the contract provides that you will
not be treated as an employee for federal tax purpo-
ses.
Executor or administrator. If you administer a de-
ceased person's estate, your fees are reported on Sched-
ule C if you are one of the following.
1. A professional fiduciary.
2. A nonprofessional fiduciary (personal representative)
and both of the following apply.
a. The estate includes an active trade or business in
which you actively participate.
b. Your fees are related to the operation of that trade
or business.
3. A nonprofessional fiduciary of a single estate that re-
quires extensive managerial activities on your part for
a long period of time, provided these activities are
enough to be considered a trade or business.
If the fees do not meet the above requirements, report
them on line 8z of Schedule 1 (Form 1040).
Fishing crew member. If you are a member of a crew
that catches fish or other aquatic life, your earnings are re-
ported on Schedule C if you meet all the requirements
shown in chapter 10 under Fishing crew member.
Insurance agent, former. Termination payments you re-
ceive as a former self-employed insurance agent from an
insurance company because of services you performed
for that company are not reported on Schedule C if all the
following conditions are met.
•
You received payments after your agreement to per-
form services for the company ended.
•
You did not perform any services for the company af-
ter your service agreement ended and before the end
of the year in which you received the payment.
•
You entered into a covenant not to compete against
the company for at least a 1-year period beginning on
the date your service agreement ended.
•
The amount of the payments depended primarily on
policies sold by you or credited to your account during
the last year of your service agreement or the extent to
which those policies remain in force for some period
after your service agreement ended, or both.
•
The amount of the payment did not depend to any ex-
tent on length of service or overall earnings from serv-
ices performed for the company (regardless of
whether eligibility for the payments depended on
length of service).
Insurance agent, retired. Income paid by an insurance
company to a retired self-employed insurance agent
based on a percentage of commissions received before
retirement is reported on Schedule C. Also, renewal com-
missions and deferred commissions for sales made before
retirement are generally reported on Schedule C.
However, renewal commissions paid to the survivor of
an insurance agent are not reported on Schedule C.
Newspaper carrier or distributor. You are a direct
seller and your earnings are reported on Schedule C if all
the following conditions apply.
•
You are in the business of delivering or distributing
newspapers or shopping news (including directly rela-
ted services such as soliciting customers and
collecting receipts).
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•
Substantially all your pay for these services directly re-
lates to your sales or other output rather than to the
number of hours you work.
•
You perform the services under a written contract that
says you will not be treated as an employee for federal
tax purposes.
This rule applies whether or not you hire others to help
you make deliveries. It also applies whether you buy the
papers from the publisher or are paid based on the num-
ber of papers you deliver.
Newspaper or magazine vendor. If you are age 18 or
older and you sell newspapers or magazines, your earn-
ings are reported on Schedule C if all the following condi-
tions apply.
•
You sell newspapers or magazines to ultimate con-
sumers.
•
You sell them at a fixed price.
•
Your earnings are based on the difference between
the sales price and your cost of goods sold.
This rule applies whether or not you are guaranteed a
minimum amount of earnings. It also applies whether or
not you receive credit for unsold newspapers or maga-
zines you return to your supplier.
Notary public. Fees you receive for services you perform
as a notary public are reported on Schedule C. These
payments are not subject to SE tax (see the Instructions
for Schedule SE (Form 1040)).
Public official. Public officials generally do not report
what they earn for serving in public office on Schedule C.
This rule applies to payments received by an elected tax
collector from state funds on the basis of a fixed percent-
age of the taxes collected. Public office includes any elec-
tive or appointive office of the United States or its territo-
ries, the District of Columbia, a state or its political
subdivisions, or a wholly owned instrumentality of any of
these.
Public officials of state or local governments report their
fees from the public on Schedule C if they are paid solely
on a fee basis and if their services are eligible for, but not
covered by, social security under a federal-state agree-
ment.
Real estate agent or direct seller. If you are a licensed
real estate agent or a direct seller, your earnings are re-
ported on Schedule C if both the following apply.
•
Substantially all your pay for services as a real estate
agent or direct seller directly relates to your sales or
other output rather than to the number of hours you
work.
•
You perform the services under a written contract that
says you will not be treated as an employee for federal
tax purposes.
Dealer in section 1256 contracts. If you are a dealer in
options or commodities, your gains and losses from deal-
ing or trading in section 1256 contracts (regulated futures
contracts, foreign currency contracts, nonequity options,
dealer equity options, and dealer securities futures con-
tracts) or property related to those contracts (such as
stock used to hedge options) are reported on Schedule C.
For more information, see sections 1256 and 1402(i).
Securities or commodities trader. You are a trader in
securities or commodities if you are engaged in the busi-
ness of buying and selling securities or commodities for
your own account. As a trader in securities or commodi-
ties (including if you made the section 475(f) mark-to-mar-
ket election as a trader in securities or commodities), your
gain or loss from the disposition of securities or commodi-
ties is not reported on Schedule C. For more information
about traders in securities or commodities, see Pub. 550,
Investment Income and Expenses, and Topic No. 429,
Traders in Securities.
Accounting for Your Income
Accounting for your income for income tax purposes dif-
fers at times from accounting for financial purposes. This
section discusses some of the more common differences
that may affect business transactions.
Figure your business income on the basis of a tax year
and according to your regular method of accounting (see
chapter 2). If the sale of a product is an income-producing
factor in your business, you usually have to use invento-
ries to clearly show your income. Dealers in real estate are
not allowed to use inventories. For more information on in-
ventories, see chapter 2.
Income paid to a third party. All income you earn is tax-
able to you. You cannot avoid tax by having the income
paid to a third party.
Example. You rent out your property and the rental
agreement directs the lessee to pay the rent to your son.
The amount paid to your son is gross income to you.
Cash discounts. These are amounts the seller permits
you to deduct from the invoice price for prompt payment.
For income tax purposes, you can use either of the follow-
ing two methods to account for cash discounts.
1. Deduct the cash discount from purchases (see
Line 36—Purchases Less Cost of Items Withdrawn for
Personal Use in chapter 6).
2. Credit the cash discount to a discount income ac-
count.
You must use the chosen method every year for all your
purchase discounts.
If you use the second method, the credit balance in the
account at the end of your tax year is business income.
Under this method, you do not reduce the cost of goods
sold by the cash discounts you received. When valuing
your closing inventory, you cannot reduce the invoice price
of merchandise on hand at the close of the tax year by the
average or estimated discounts received on the merchan-
dise.
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Trade discounts. These are reductions from list or cata-
log prices and are usually not written into the invoice or
charged to the customer. Do not enter these discounts on
your books of account. Instead, use only the net amount
as the cost of the merchandise purchased. For more infor-
mation, see Trade discounts in chapter 6.
Payment placed in escrow. If the buyer of your property
places part or all of the purchase price in escrow, you do
not include any part of it in gross sales until you actually or
constructively receive it. However, upon completion of the
terms of the contract and the escrow agreement, you will
have taxable income, even if you do not accept the money
until the next year.
Sales returns and allowances. Credits you allow cus-
tomers for returned merchandise and any other allowan-
ces you make on sales are deductions from gross sales in
figuring net sales.
Advance payments. Special rules dealing with an ac-
crual method of accounting for payments received in ad-
vance are discussed in chapter 2 under Accrual Method.
Insurance proceeds. If you receive insurance or another
type of reimbursement for a casualty or theft loss, you
must subtract it from the loss when you figure your deduc-
tion. You cannot deduct the reimbursed part of a casualty
or theft loss.
For information on casualty or theft losses, see Pub.
547.
6.
How To Figure Cost of
Goods Sold
Introduction
If you make or buy goods to sell, you can deduct the cost
of goods sold from your gross receipts on Schedule C.
However, to determine these costs, you must value your
inventory at the beginning and end of each tax year.
This chapter applies to you if you are a manufacturer,
wholesaler, or retailer or if you are engaged in any busi-
ness that makes, buys, or sells goods to produce income.
This chapter does not apply to a personal service busi-
ness, such as the business of a doctor, lawyer, carpenter,
or painter. However, if you work in a personal service busi-
ness and also sell or charge for the materials and supplies
normally used in your business, this chapter applies to
you.
There are exceptions for small business taxpayers
that may change how you figure cost of goods
sold for your business. For more information, see
chapter 2.
Figuring Cost of Goods Sold
on Schedule C, Lines 35
Through 42
Figure your cost of goods sold by filling out lines 35
through 42 of Schedule C. These lines are reproduced be-
low and are explained in the discussion that follows.
35 Inventory at beginning of year. If different from last
year's closing inventory, attach explanation .......
36 Purchases less cost of items withdrawn for personal
use ................................
37 Cost of labor. Do not include any amounts paid to
yourself .............................
38 Materials and supplies ....................
39 Other costs ...........................
40 Add lines 35 through 39 ...................
41 Inventory at end of year ...................
42 Cost of goods sold. Subtract line 41 from line 40.
Enter the result here and on line 4 .............
Line 35—Inventory at Beginning of
Year
If you are a merchant, beginning inventory is the cost of
merchandise on hand at the beginning of the year that you
will sell to customers. If you are a manufacturer or pro-
ducer, it includes the total cost of raw materials, work in
process, finished goods, and materials and supplies used
in manufacturing the goods (see Inventories in chapter 2).
Opening inventory will usually be identical to the clos-
ing inventory of the year before. You must explain any dif-
ference in a schedule attached to your return.
Donation of inventory. If you contribute inventory (prop-
erty that you sell in the course of your business), the
amount you can claim as a contribution deduction is the
smaller of its fair market value on the day you contributed
it or its basis. The basis of donated inventory is any cost
incurred for the inventory in an earlier year that you would
otherwise include in your opening inventory for the year of
the contribution. You must remove the amount of your con-
tribution deduction from your opening inventory. It is not
part of the cost of goods sold.
If the cost of donated inventory is not included in your
opening inventory, the inventory's basis is zero and you
cannot claim a charitable contribution deduction. Treat the
inventory's cost as you would ordinarily treat it under your
method of accounting. For example, include the purchase
price of inventory bought and donated in the same year in
the cost of goods sold for that year.
CAUTION
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A special rule may apply to certain donations of food in-
ventory. See Pub. 526, Charitable Contributions.
Example 1. You are a calendar year taxpayer who
uses an accrual method of accounting. In 2023, you con-
tributed property from inventory to a church. It had a fair
market value of $600. The closing inventory at the end of
2022 properly included $400 of costs due to the acquisi-
tion of the property, and in 2022, you properly deducted
$50 of administrative and other expenses attributable to
the property as business expenses. The charitable contri-
bution allowed for 2023 is $400 ($600 − $200). The $200
is the amount that would be ordinary income if you had
sold the contributed inventory at fair market value on the
date of the gift. The cost of goods sold you use in deter-
mining gross income for 2023 must not include the $400.
You remove that amount from opening inventory for 2023.
Example 2. If, in Example 1, you acquired the contrib-
uted property in 2023 at a cost of $400, you would include
the $400 cost of the property in figuring the cost of goods
sold for 2023 and deduct the $50 of administrative and
other expenses attributable to the property for that year.
You would not be allowed any charitable contribution de-
duction for the contributed property.
Line 36—Purchases Less Cost of
Items Withdrawn for Personal Use
If you are a merchant, use the cost of all merchandise you
bought for sale. If you are a manufacturer or producer, this
includes the cost of all raw materials or parts purchased
for manufacture into a finished product.
Trade discounts. The differences between the stated
prices of articles and the actual prices you pay for them
are called trade discounts. You must use the prices you
pay (not the stated prices) in figuring your cost of purcha-
ses. Do not show the discount amount separately as an
item in gross income.
An automobile dealer must record the cost of a car in
inventory reduced by any manufacturer's rebate that rep-
resents a trade discount.
Cash discounts. Cash discounts are amounts your sup-
pliers let you deduct from your purchase invoices for
prompt payments. There are two methods of accounting
for cash discounts. You can either credit them to a sepa-
rate discount account or deduct them from total purchases
for the year. Whichever method you use, you must be con-
sistent. If you want to change your method of figuring in-
ventory cost, you must file Form 3115. For more informa-
tion, see Change in Accounting Method in chapter 2.
If you credit cash discounts to a separate account, you
must include this credit balance in your business income
at the end of the tax year. If you use this method, do not
reduce your cost of goods sold by the cash discounts.
Purchase returns and allowances. You must deduct all
returns and allowances from your total purchases during
the year.
Merchandise withdrawn from sale. If you withdraw
merchandise for your personal or family use, you must ex-
clude this cost from the total amount of merchandise you
bought for sale. Do this by crediting the purchases or
sales account with the cost of merchandise you withdraw
for personal use. You must also charge the amount to your
drawing account.
A drawing account is a separate account you should
keep to record the business income you withdraw to pay
for personal and family expenses. As stated above, you
also use it to record withdrawals of merchandise for per-
sonal or family use. This account is also known as a with-
drawals account or personal account.
Line 37—Cost of Labor
Labor costs are usually an element of cost of goods sold
only in a manufacturing or mining business. Small mer-
chandisers (wholesalers, retailers, etc.) usually do not
have labor costs that can properly be charged to cost of
goods sold. In a manufacturing business, labor costs
properly allocable to the cost of goods sold include both
the direct and indirect labor used in fabricating the raw
material into a finished, saleable product.
Direct labor. Direct labor costs are the wages you pay to
those employees who spend all their time working directly
on the product being manufactured. They also include a
part of the wages you pay to employees who work directly
on the product part time if you can determine that part of
their wages.
Indirect labor. Indirect labor costs are the wages you
pay to employees who perform a general factory function
that does not have any immediate or direct connection
with making the saleable product, but that is a necessary
part of the manufacturing process.
Other labor. Other labor costs not properly chargeable to
the cost of goods sold can be deducted as selling or ad-
ministrative expenses. Generally, the only kinds of labor
costs properly chargeable to your cost of goods sold are
the direct or indirect labor costs and certain other costs
treated as overhead expenses properly charged to the
manufacturing process, as discussed later under
Line 39—Other Costs.
Line 38—Materials and Supplies
Materials and supplies, such as hardware and chemicals,
used in manufacturing goods are charged to cost of goods
sold. Those that are not used in the manufacturing proc-
ess are treated as deferred charges. You deduct them as
a business expense when you use them. Business expen-
ses are discussed in chapter 8.
Line 39—Other Costs
Examples of other costs incurred in a manufacturing or
mining process that you charge to your cost of goods sold
are as follows.
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Containers. Containers and packages that are an inte-
gral part of the product manufactured are a part of your
cost of goods sold. If they are not an integral part of the
manufactured product, their costs are shipping or selling
expenses.
Freight-in. Freight-in, express-in, and cartage-in on raw
materials, supplies you use in production, and merchan-
dise you purchase for sale are all part of cost of goods
sold.
Overhead expenses. Overhead expenses include ex-
penses such as rent, heat, light, power, insurance, depre-
ciation, taxes, maintenance, labor, and supervision. The
overhead expenses you have as direct and necessary ex-
penses of the manufacturing operation are included in
your cost of goods sold.
Line 40—Add Lines 35 Through 39
The total of lines 35 through 39 equals the cost of the
goods available for sale during the year.
Line 41—Inventory at End of Year
Subtract the value of your closing inventory (including, as
appropriate, the allocable parts of the cost of raw materi-
als and supplies, direct labor, and overhead expenses)
from line 40. Inventory at the end of the year is also known
as closing or ending inventory. Your ending inventory will
usually become the beginning inventory of your next tax
year.
Line 42—Cost of Goods Sold
When you subtract your closing inventory (inventory at the
end of the year) from the cost of goods available for sale,
the remainder is your cost of goods sold during the tax
year.
7.
Figuring Gross Profit
Introduction
After you have figured the gross receipts from your busi-
ness (chapter 5) and the cost of goods sold (chapter 6),
you are ready to figure your gross profit. You must deter-
mine gross profit before you can deduct any business ex-
penses. These expenses are discussed in chapter 8.
Businesses that sell products. Figure your gross profit
by first figuring your net receipts. Figure net receipts
(line 3) on Schedule C by subtracting any returns and al-
lowances (line 2) from gross receipts (line 1). Returns and
allowances include cash or credit refunds you make to
customers, rebates, and other allowances off the actual
sales price.
Next, subtract the cost of goods sold (line 4) from net
receipts (line 3). The result is the gross profit from your
business.
Businesses that sell services. You do not have to fig-
ure the cost of goods sold if the sale of merchandise is not
an income-producing factor for your business. Your gross
profit is the same as your net receipts (gross receipts mi-
nus any refunds, rebates, or other allowances). Most pro-
fessions and businesses that sell services rather than
products can figure gross profit directly from net receipts
in this way.
Illustration. This illustration of the gross profit section of
the income statement of a retail business shows how
gross profit is figured.
Income Statement Year Ended December
31, 2023
Gross receipts ............................ $400,000
Minus: Returns and allowances ................. 14,940
Net receipts ............................. $385,060
Minus: Cost of goods sold .................... 288,140
Gross profit ............................. $96,920
The cost of goods sold for this business is figured as
follows.
Inventory at beginning of year .................. $37,845
Plus: Purchases ................... $285,900
Minus: Items withdrawn for personal use .... 2,650 283,250
Goods available for sale ..................... $321,095
Minus: Inventory at end of year ................. 32,955
Cost of goods sold ....................... $288,140
Items To Check
Consider the following items before figuring your gross
profit.
Gross receipts. At the end of each business day, make
sure your records balance with your actual cash and credit
receipts for the day. You may find it helpful to use cash
registers to keep track of receipts. You should also use a
proper invoicing system and keep a separate bank ac-
count for your business.
Sales tax collected. Check to make sure your records
show the correct sales tax collected.
If you collect state and local sales taxes imposed on
you as the seller of goods or services from the buyer, you
must include the amount collected in gross receipts.
If you are required to collect state and local taxes im-
posed on the buyer and turn them over to state or local
governments, you generally do not include these amounts
in income.
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Inventory at beginning of year. Compare this figure
with last year's ending inventory. The two amounts should
usually be the same.
Purchases. If you take any inventory items for your per-
sonal use (use them yourself, provide them to your family,
or give them as personal gifts, etc.), be sure to remove
them from the cost of goods sold. For details on how to
adjust cost of goods sold, see Merchandise withdrawn
from sale in chapter 6.
Inventory at end of year. Check to make sure your pro-
cedures for taking inventory are adequate. These proce-
dures should ensure all items have been included in in-
ventory and proper pricing techniques have been used.
Use inventory forms and adding machine tapes as the
only evidence for your inventory. Inventory forms are avail-
able at office supply stores. These forms have columns for
recording the description, quantity, unit price, and value of
each inventory item. Each page has space to record who
made the physical count, who priced the items, who made
the extensions, and who proofread the calculations. These
forms will help you confirm that the total inventory is accu-
rate. They will also provide you with a permanent record to
support its validity.
Inventories are discussed in chapter 2.
Testing Gross Profit Accuracy
If you are in a retail or wholesale business, you can check
the accuracy of your gross profit figure. First, divide gross
profit by net receipts. The resulting percentage measures
the average spread between the merchandise cost of
goods sold and the selling price.
Next, compare this percentage to your markup policy.
Little or no difference between these two percentages
shows that your gross profit figure is accurate. A large dif-
ference between these percentages may show that you
did not accurately figure sales, purchases, inventory, or
other items of cost. You should determine the reason for
the difference.
Example. You operate a retail business. On the aver-
age, you mark up your merchandise so that you will realize
a gross profit of 33
1
/3% on its sales. The net receipts
(gross receipts minus returns and allowances) shown on
your income statement are $300,000. Your cost of goods
sold is $200,000. This results in a gross profit of $100,000
($300,000 − $200,000). To test the accuracy of this year's
results, you divide gross profit ($100,000) by net receipts
($300,000). The resulting 33
1
/3% confirms your markup
percentage of 33
1
/3%.
Additions to Gross Profit
If your business has income from a source other than its
regular business operations, enter the income on line 6 of
Schedule C and add it to gross profit. The result is gross
business income. Some examples include income from an
interest-bearing checking account, income from scrap
sales, income from certain fuel tax credits and refunds,
and amounts recovered from bad debts.
8.
Business Expenses
Introduction
You can deduct the costs of operating your business.
These costs are known as business expenses. These are
costs you do not have to capitalize or include in the cost of
goods sold but can deduct in the current year.
To be deductible, a business expense must be both or-
dinary and necessary. An ordinary expense is one that is
common and accepted in your field of business. A neces-
sary expense is one that is helpful and appropriate for
your business. An expense does not have to be indispen-
sable to be considered necessary.
For more information about the general rules for de-
ducting business expenses, see section 162 and its regu-
lations.
If you have an expense that is partly for business
and partly personal, separate the personal part
from the business part. The personal part is not
deductible.
Useful Items
You may want to see:
Publication
463 Travel, Gift, and Car Expenses
946 How To Depreciate Property
See chapter 12 for information about getting publications
and forms.
Bad Debts
If someone owes you money you cannot collect, you have
a bad debt. There are two kinds of bad debts—business
bad debts and nonbusiness bad debts.
A business bad debt is generally one that comes from
operating your trade or business. You may be able to de-
duct business bad debts as an expense on your business
tax return.
Business bad debt. A business bad debt is a loss from
the worthlessness of a debt that was either of the follow-
ing.
1. Created or acquired in your business.
2. Closely related to your business when it became
partly or totally worthless.
CAUTION
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463
946
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A debt is closely related to your business if your primary
motive for incurring the debt is a business reason.
Business bad debts are mainly the result of credit sales
to customers. They can also be the result of loans to sup-
pliers, clients, employees, or distributors. Goods and serv-
ices that customers have not paid for are shown in your
books as either accounts receivable or notes receivable. If
you are unable to collect any part of these accounts or
notes receivable, the uncollectible part is a business bad
debt.
You can take a bad debt deduction for these ac-
counts and notes receivable only if the amount
you were owed was included in your gross income
either for the year the deduction is claimed or for a prior
year.
Accrual method. If you use an accrual method of ac-
counting, you normally report income as you earn it. You
can take a bad debt deduction for an uncollectible receiva-
ble if you have included the uncollectible amount in in-
come.
Cash method. If you use the cash method of account-
ing, you normally report income when you receive pay-
ment. You cannot take a bad debt deduction for amounts
owed to you that you have not received and cannot collect
if you never included those amounts in income.
More information. For more information about business
bad debts, see section 166 and its regulations.
Nonbusiness bad debts. All other bad debts are non-
business bad debts and are deductible as short-term cap-
ital losses on Form 8949 and Schedule D (Form 1040).
For more information on nonbusiness bad debts, see sec-
tion 166 and its regulations.
Car and Truck Expenses
If you use your car or truck in your business, you may be
able to deduct the costs of operating and maintaining your
vehicle. You may also be able to deduct other costs of lo-
cal transportation and traveling away from home overnight
on business.
Local transportation expenses. Local transportation
expenses include the ordinary and necessary costs of all
the following.
•
Getting from one workplace to another in the course of
your business or profession when you are traveling
within the city or general area that is your tax home.
Tax home is defined later.
•
Visiting clients or customers.
•
Going to a business meeting away from your regular
workplace.
•
Getting from your home to a temporary workplace
when you have one or more regular places of work.
These temporary workplaces can be either within the
area of your tax home or outside that area.
CAUTION
!
Local business transportation does not include expenses
you have while traveling away from home overnight. Those
expenses are deductible as travel expenses and are dis-
cussed later under Travel and Meals. However, if you use
your car while traveling away from home overnight, use
the rules in this section to figure your car expense deduc-
tion.
Generally, your tax home is your regular place of busi-
ness, regardless of where you maintain your family home.
It includes the entire city or general area in which your
business or work is located.
Example. You operate a printing business out of ren-
ted office space. You use your van to deliver completed
jobs to your customers. You can deduct the cost of
round-trip transportation between your customers and
your print shop.
You cannot deduct the costs of driving your car or
truck between your home and your main or regu-
lar workplace. These costs are personal commut-
ing expenses.
Office in the home. Your workplace can be your
home if you have an office in your home that qualifies as
your principal place of business. For more information,
see Business Use of Your Home, later.
Example. You are a graphic designer. You operate
your business out of your home. Your home qualifies as
your principal place of business. You occasionally have to
drive to your clients to deliver your completed work. You
can deduct the cost of the round-trip transportation be-
tween your home and your clients.
Methods for Deducting Car and Truck
Expenses
For local transportation or overnight travel by car or truck,
you can generally use one of the following methods to fig-
ure your expenses.
•
Standard mileage rate.
•
Actual expenses.
Standard mileage rate. You may be able to use the
standard mileage rate to figure the deductible costs of op-
erating your car, van, pickup, or panel truck for business
purposes. The business standard mileage rate for 2023 is
65.5 cents a mile.
If you choose to use the standard mileage rate for
a year, you cannot deduct your actual expenses
for that year except for business-related parking
fees and tolls.
Choosing the standard mileage rate. If you want to
use the standard mileage rate for a car or truck you own,
you must choose to use it in the first year the car is availa-
ble for use in your business. In later years, you can choose
to use either the standard mileage rate or actual expen-
ses.
CAUTION
!
CAUTION
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If you choose to use the standard mileage rate for a car
you lease, you must use it for the entire lease period (in-
cluding renewals).
Standard mileage rate not allowed. You cannot use
the standard mileage rate if you:
1. Operate five or more cars at the same time;
2. Claimed a depreciation deduction using any method
other than straight line, for example, ACRS or
MACRS;
3. Claimed a section 179 deduction on the car;
4. Claimed the special depreciation allowance on the
car;
5. Claimed actual car expenses for a car you leased; or
6. Are a rural mail carrier who received a qualified reim-
bursement.
Parking fees and tolls. In addition to using the stand-
ard mileage rate, you can deduct any business-related
parking fees and tolls. (Parking fees you pay to park your
car at your place of work are nondeductible commuting
expenses.)
Actual expenses. If you do not choose to use the stand-
ard mileage rate, you may be able to deduct your actual
car or truck expenses.
If you qualify to use both methods, figure your de-
duction both ways to see which gives you a larger
deduction.
Actual car expenses include the costs of the following
items.
Depreciation Lease payments Registration
Garage rent Licenses Repairs
Gas Oil Tires
Insurance Parking fees Tolls
If you use your vehicle for both business and personal
purposes, you must divide your expenses between busi-
ness and personal use. You can divide your expenses
based on the miles driven for each purpose.
Example. You are the sole proprietor of a flower shop.
You drove your van 20,000 miles during the year. 16,000
miles were for delivering flowers to customers and 4,000
miles were for personal use (including commuting miles).
You can claim only 80% (16,000 ÷ 20,000) of the cost of
operating your van as a business expense.
More information. For more information about the rules
for claiming car and truck expenses, see Pub. 463.
Reimbursing Your Employees for
Expenses
You can generally deduct the amount you reimburse your
employees for car and truck expenses. The reimburse-
ment you deduct and the manner in which you deduct it
depend in part on whether you reimburse the expenses
TIP
under an accountable plan or a nonaccountable plan. For
details, see Pub. 15. That publication explains accounta-
ble and nonaccountable plans and tells you whether to re-
port the reimbursement on your employee's Form W-2.
Depreciation
If property you acquire to use in your business is expected
to last more than 1 year, you generally cannot deduct the
entire cost as a business expense in the year you acquire
it. You must spread the cost over more than 1 tax year and
deduct part of it each year on Schedule C. This method of
deducting the cost of business property is called depreci-
ation.
The following is a brief overview. You will find more in-
formation about depreciation in Pub. 946.
What property can be depreciated? You can depreci-
ate property if it meets all the following requirements.
•
It must be property you own.
•
It must be used in business or held to produce in-
come. You can never depreciate inventory (explained
in chapter 2) because it is not held for use in your busi-
ness.
•
It must have a useful life that extends substantially be-
yond the year it is placed in service.
•
It must have a determinable useful life, which means
that it must be something that wears out, decays, gets
used up, becomes obsolete, or loses its value from
natural causes. You can never depreciate the cost of
land because land does not wear out, become obso-
lete, or get used up.
•
It must not be excepted property. This includes prop-
erty placed in service and disposed of in the same
year.
Repairs. In general, you do not depreciate the costs of
repairs or maintenance if they do not improve your prop-
erty. Instead, you deduct these amounts on line 21 of
Schedule C. Improvements are amounts paid for better-
ments to your property, restorations of your property, or
work that adapts your property to a new or different use.
Election to capitalize repair and maintenance
costs that do not improve your property. You can
make an election to treat certain repairs or replacements
in your trade or business as improvements subject to de-
preciation. This election is available if you treat these
amounts as capital expenditures on your books and re-
cords regularly used in computing your income and ex-
penses.
Depreciation method. The method for depreciating
most business and investment property placed in service
after 1986 is called the Modified Accelerated Cost Recov-
ery System (MACRS). MACRS is discussed in detail in
Pub. 946.
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Section 179 deduction. You can elect to deduct a limi-
ted amount of the cost of certain depreciable property in
the year you place the property in service. This deduction
is known as the section 179 deduction. The maximum
amount you can elect to deduct during 2023 is generally
$1,160,000 (higher limits apply to certain property).
This limit is generally reduced by the amount by which
the cost of the property placed in service during the tax
year exceeds $2,890,000. The total amount of deprecia-
tion (including the section 179 deduction) you can take for
a passenger automobile you use in your business and first
place in service in 2023 is $12,200 ($20,200 if you take
the special depreciation allowance for qualified passenger
automobiles placed in service in 2023). Special rules ap-
ply to trucks and vans. For more information, see Pub.
946. It explains what property qualifies for the deduction,
what limits apply to the deduction, and when and how to
recapture the deduction.
Your section 179 election for the cost of any sport
utility vehicle (SUV) and certain other vehicles is
limited to $28,900. For more information, see the
Instructions for Form 4562 or Pub. 946.
Listed property. You must follow special rules and re-
cordkeeping requirements when depreciating listed prop-
erty. Listed property includes any of the following.
•
Most passenger automobiles.
•
Most other property used for transportation.
•
Any property of a type generally used for entertain-
ment, recreation, or amusement.
For more information about listed property, see Pub.
946.
Form 4562. Use Form 4562, Depreciation and Amortiza-
tion, if you are claiming any of the following.
•
Depreciation on property placed in service during the
current tax year.
•
A section 179 deduction.
•
Depreciation on any listed property (regardless of
when it was placed in service).
Employees' Pay
You can generally deduct on Schedule C the pay you give
your employees for the services they perform for your
business. The pay may be in cash, property, or services.
To be deductible, your employees' pay must be an ordi-
nary and necessary expense and you must pay or incur it
in the tax year. In addition, the pay must meet both the fol-
lowing tests.
•
The pay must be reasonable.
•
The pay must be for services performed.
You cannot deduct your own salary or any personal
withdrawals you make from your business. As a sole pro-
prietor, you are not an employee of the business.
CAUTION
!
Kinds of pay. Some of the ways you may provide pay to
your employees are listed below.
•
Awards.
•
Bonuses.
•
Education expenses.
•
Fringe benefits (discussed later).
•
Loans or advances you do not expect the employee to
repay if they are for personal services actually per-
formed.
•
Property you transfer to an employee as payment for
services.
•
Reimbursements for employee business expenses.
•
Sick pay.
•
Vacation pay.
Fringe benefits. A fringe benefit is a form of pay for
the performance of services. The following are examples
of fringe benefits.
•
Benefits under qualified employee benefit programs.
•
Meals and lodging.
•
The use of a car.
•
Flights on airplanes.
•
Discounts on property or services.
Employee benefit programs include the following.
•
Accident and health plans.
•
Adoption assistance.
•
Cafeteria plans.
•
Dependent care assistance.
•
Educational assistance.
•
Group-term life insurance coverage.
•
Welfare benefit funds.
You can generally deduct the cost of fringe benefits you
provide on your Schedule C in whatever category the cost
falls. For example, if you allow an employee to use a car or
other property you lease, deduct the cost of the lease as a
rent or lease expense. If you own the property, include
your deduction for its cost or other basis as a section 179
deduction or a depreciation deduction.
You may be able to exclude all or part of the fringe
benefits you provide from your employees' wages.
For more information about fringe benefits and the
exclusion of benefits, see Pub. 15-B.
Insurance
You can generally deduct premiums you pay for the follow-
ing kinds of insurance related to your business.
1. Fire, theft, flood, or similar insurance.
2. Credit insurance that covers losses from business
bad debts.
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3. Group hospitalization and medical insurance for em-
ployees, including long-term care insurance.
4. Liability insurance.
5. Malpractice insurance that covers your personal liabil-
ity for professional negligence resulting in injury or
damage to patients or clients.
6. Workers' compensation insurance set by state law
that covers any claims for bodily injuries or job-related
diseases suffered by employees in your business, re-
gardless of fault.
7. Contributions to a state unemployment insurance
fund are deductible as taxes if they are considered
taxes under state law.
8. Overhead insurance that pays for business overhead
expenses you have during long periods of disability
caused by your injury or sickness.
9. Car and other vehicle insurance that covers vehicles
used in your business for liability, damages, and other
losses. If you operate a vehicle partly for personal
use, deduct only the part of the insurance premium
that applies to the business use of the vehicle. If you
use the standard mileage rate to figure your car ex-
penses, you cannot deduct any car insurance premi-
ums.
10.
Life insurance covering your employees if you are not
directly or indirectly the beneficiary under the con-
tract.
11.
Business interruption insurance that pays for lost prof-
its if your business is shut down due to a fire or other
cause.
Nondeductible premiums. You cannot deduct premi-
ums on the following kinds of insurance.
1. Self-insurance reserve funds. You cannot deduct
amounts credited to a reserve set up for self-insur-
ance. This applies even if you cannot get business in-
surance coverage for certain business risks. However,
your actual losses may be deductible. For more infor-
mation, see Pub. 547.
2. Loss of earnings. You cannot deduct premiums for a
policy that pays for your lost earnings due to sickness
or disability. However, see item 8 in the previous list.
3. Certain life insurance and annuities.
a. For contracts issued before June 9, 1997, you
cannot deduct the premiums on a life insurance
policy covering you, an employee, or any person
with a financial interest in your business if you are
directly or indirectly a beneficiary of the policy. You
are included among possible beneficiaries of the
policy if the policy owner is obligated to repay a
loan from you using the proceeds of the policy. A
person has a financial interest in your business if
the person is an owner or part owner of the busi-
ness or has lent money to the business.
b. For contracts issued after June 8, 1997, you gen-
erally cannot deduct the premiums on any life in-
surance policy, endowment contract, or annuity
contract if you are directly or indirectly a benefi-
ciary. The disallowance applies without regard to
whom the policy covers.
4. Insurance to secure a loan. If you take out a policy on
your life or on the life of another person with a finan-
cial interest in your business to get or protect a busi-
ness loan, you cannot deduct the premiums as a busi-
ness expense. Nor can you deduct the premiums as
interest on business loans or as an expense of financ-
ing loans. In the event of death, the proceeds of the
policy are not taxed as income even if they are used
to liquidate the debt.
Self-employed health insurance deduction. You may
be able to deduct the amount you paid for medical and
dental insurance and qualified long-term care insurance
for you and your family.
How to figure the deduction. Generally, you can use
the worksheet in the Instructions for Form 1040 to figure
your deduction. However, if any of the following apply, you
must use Form(s) 7206.
•
You have more than one source of income subject to
SE tax.
•
You file Form 2555 (relating to foreign earned income).
•
You are using amounts paid for qualified long-term
care insurance to figure the deduction.
See Form 8962 and its separate instructions and use
Pub. 974 if the insurance plan established, or considered
to be established, under your business was obtained
through the Health Insurance Marketplace and you are
claiming the premium tax credit.
Prepayment. You cannot deduct expenses in advance,
even if you pay them in advance. This rule applies to any
expense paid far enough in advance to, in effect, create an
asset with a useful life extending substantially beyond the
end of the current tax year.
Example. In 2023, you signed a 3-year insurance con-
tract. Even though you paid the premiums for 2023, 2024,
and 2025 when you signed the contract, you can only de-
duct the premium for 2023 on your 2023 tax return. You
can deduct in 2024 and 2025 the premiums allocable to
those years.
Interest
You can generally deduct as a business expense some or
all interest you pay or accrue during the tax year on debts
related to your business. Interest relates to your business
if you use the proceeds of the loan for a business ex-
pense. It does not matter what type of property secures
the loan. You can deduct interest on a debt only if you
meet all of the following requirements.
•
You are legally liable for that debt.
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•
Both you and the lender intend that the debt be re-
paid.
•
You and the lender have a true debtor-creditor rela-
tionship.
Certain taxpayers are required to limit their business in-
terest expense deduction. See the Instructions for Form
8990 to determine whether you are required to limit your
business interest expense deduction, who is required to
file Form 8990, and how certain businesses may elect out
of the business interest expense limitation.
You cannot deduct on Schedule C the interest you paid
on personal loans. If a loan is part business and part per-
sonal, you must divide the interest between the personal
part and the business part.
Example. In 2023, you paid $600 interest on a car
loan. During 2023, you used the car 60% for business and
40% for personal purposes. You are claiming actual ex-
penses on the car. You can only deduct $360 (60% (0.60)
× $600) for 2023 on Schedule C. The remaining interest of
$240 is a nondeductible personal expense.
More information. Additional items to consider are
shown below.
•
How to allocate interest between personal and busi-
ness use.
•
Limitation on business interest.
•
When to deduct interest.
•
The rules for a below-market interest rate loan. (This is
generally a loan on which no interest is charged or on
which interest is charged at a rate below the applica-
ble federal rate.)
Legal and Professional Fees
Legal and professional fees, such as fees charged by ac-
countants, that are ordinary and necessary expenses di-
rectly related to operating your business are deductible on
Schedule C. However, you usually cannot deduct legal
fees you pay to acquire business assets. Add them to the
basis of the property.
If the fees include payments for work of a personal na-
ture (such as making a will), you can take a business de-
duction only for the part of the fee related to your busi-
ness.
Tax preparation fees. You can deduct on Schedule C
the cost of preparing that part of your tax return relating to
your business as a sole proprietor or statutory employee.
You can also deduct on Schedule C the amount you
pay or incur in resolving asserted tax deficiencies for your
business as a sole proprietor or statutory employee.
Pension Plans
You can set up and maintain the following small business
retirement plans for yourself and your employees.
•
SEP (Simplified Employee Pension) plans.
•
SIMPLE (Savings Incentive Match Plan for Employ-
ees) plans.
•
Qualified plans (including Keogh or H.R. 10 plans).
SEP, SIMPLE, and qualified plans offer you and your
employees a tax-favored way to save for retirement. You
can deduct contributions you make to the plan for your
employees on line 19 of Schedule C. If you are a sole pro-
prietor, you can deduct contributions you make to the plan
for yourself on line 16 of Schedule 1 (Form 1040). You can
also deduct trustees' fees if contributions to the plan do
not cover them. Earnings on the contributions are gener-
ally tax free until you or your employees receive distribu-
tions from the plan. You may also be able to claim a tax
credit if you begin a new qualified defined benefit or de-
fined contribution plan (including a 401(k) plan), SIMPLE
plan, or SEP plan. For details on this credit and credits for
auto-enrollment and military spouse participation, see
Form 8881 and its separate instructions.
Under certain plans, employees can have you contrib-
ute limited amounts of their before-tax pay to a plan.
These amounts (and earnings on them) are generally tax
free until your employees receive distributions from the
plan.
For more information on retirement plans for small busi-
ness, see Pub. 560.
Pub. 590-A, Contributions to Individual Retire-
ment Arrangements (IRAs), discusses other
tax-favored ways to save for retirement.
Rent Expense
Rent is any amount you pay for the use of property you do
not own. In general, you can deduct rent as a business ex-
pense only if the rent is for property you use in your busi-
ness. If you have or will receive equity in or title to the
property, you cannot deduct the rent.
Unreasonable rent. You cannot take a rental deduction
for unreasonable rents. Ordinarily, the issue of reasona-
bleness arises only if you and the lessor are related. Rent
paid to a related person is reasonable if it is the same
amount you would pay to a stranger for use of the same
property. Rent is not unreasonable just because it is fig-
ured as a percentage of gross receipts.
Related persons include members of your immediate
family, including siblings (either whole or half), your
spouse, ancestors, and lineal descendants. For a list of
the other related persons, see section 267 of the Internal
Revenue Code.
Rent on your home. If you rent your home and use part
of it as your place of business, you may be able to deduct
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the rent you pay for that part. You must meet the require-
ments for business use of your home. For more informa-
tion, see Business Use of Your Home, later.
Rent paid in advance. Generally, rent paid in your busi-
ness is deductible in the year paid or accrued. If you pay
rent in advance, you can deduct only the amount that ap-
plies to your use of the rented property during the tax year.
You can deduct the rest of your payment only over the pe-
riod to which it applies.
Taxes
You can deduct on Schedule C various federal, state, lo-
cal, and foreign taxes directly attributable to your busi-
ness.
Income taxes. You can deduct on Schedule C a state tax
on gross income (as distinguished from net income) di-
rectly attributable to your business. You can deduct other
state and local income taxes on Schedule A (Form 1040)
if you itemize your deductions. Do not deduct federal in-
come tax.
Employment taxes. You can deduct the social security,
Medicare, and FUTA taxes you paid out of your own funds
as an employer. Employment taxes are discussed briefly
in chapter 1. You can also deduct payments you made as
an employer to a state unemployment compensation fund
or to a state disability benefit fund. Deduct these pay-
ments as taxes.
SE tax. You can deduct one-half of your SE tax on line 15
of Schedule 1 (Form 1040). SE tax is discussed in chap-
ter 1 and chapter 10.
Personal property tax. You can deduct on Schedule C
any tax imposed by a state or local government on per-
sonal property used in your business.
You can also deduct registration fees for the right to use
property within a state or local area.
Example. You and your spouse drove your car 7,000
business miles out of a total of 10,000 miles. You and your
spouse had to pay $25 for your annual state license tags
and $20 for your city registration sticker. You and your
spouse also paid $235 in city personal property tax on the
car, for a total of $280. You and your spouse are claiming
your actual car expenses. Because you and your spouse
used the car 70% for business, you and your spouse can
deduct 70% of the $280, or $196, as a business expense.
Real estate taxes. You can deduct on Schedule C the
real estate taxes you pay on your business property. De-
ductible real estate taxes are any state, local, or foreign
taxes on real estate levied for the general public welfare.
The taxing authority must assess these taxes uniformly at
a like rate on all real property under its jurisdiction, and the
proceeds must be for general community or governmental
purposes.
Sales tax. Treat any sales tax you pay on a service or on
the purchase or use of property as part of the cost of the
service or property. If the service or the cost or use of the
property is a deductible business expense, you can de-
duct the tax as part of that service or cost. If the property
is merchandise bought for resale, the sales tax is part of
the cost of the merchandise. If the property is depreciable,
add the sales tax to the basis for depreciation. For infor-
mation on the basis of property, see Pub. 551.
Do not deduct state and local sales taxes im-
posed on the buyer that you must collect and pay
over to the state or local government. Do not in-
clude these taxes in gross receipts or sales.
,
Excise taxes. You can deduct on Schedule C all excise
taxes that are ordinary and necessary expenses of carry-
ing on your business. Excise taxes are discussed briefly in
chapter 1.
Fuel taxes. Taxes on gasoline, diesel fuel, and other mo-
tor fuels you use in your business are usually included as
part of the cost of the fuel. Do not deduct these taxes as a
separate item.
You may be entitled to a credit or refund for federal ex-
cise tax you paid on fuels used for certain purposes. For
more information, see Pub. 510.
Travel and Meals
This section briefly explains the kinds of travel and meal
expenses you can deduct on Schedule C.
Travel expenses. These are the ordinary and necessary
expenses of traveling away from home for your business.
You are traveling away from home if both the following
conditions are met.
1. Your duties require you to be away from the general
area of your tax home (defined later) substantially lon-
ger than an ordinary day's work.
2. You need to get sleep or rest to meet the demands of
your work while away from home.
Generally, your tax home is your regular place of busi-
ness, regardless of where you maintain your family home.
It includes the entire city or general area in which your
business is located. See Pub. 463 for more information.
The following is a brief discussion of the expenses you
can deduct.
Transportation. You can deduct the cost of travel by
airplane, train, bus, or car between your home and your
business destination.
Taxi, commuter bus, and limousine. You can deduct
fares for these and other types of transportation between
the airport or station and your hotel, or between the hotel
and your work location away from home.
CAUTION
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Baggage and shipping. You can deduct the cost of
sending baggage and sample or display material between
your regular and temporary work locations.
Car or truck. You can deduct the costs of operating
and maintaining your vehicle when traveling away from
home on business. You can deduct actual expenses or the
standard mileage rate (discussed earlier under Car and
Truck Expenses), as well as business-related tolls and
parking. If you rent a car while away from home on busi-
ness, you can deduct only the business-use portion of the
expenses.
Meals and lodging. You can deduct the cost of meals
and lodging if your business trip is overnight or long
enough that you need to stop for sleep or rest to properly
perform your duties. You can use actual expenses or the
standard meal allowance to calculate your deduction. In
most cases, you can deduct only 50% of your meal expen-
ses. See Pub. 463 for additional information.
Cleaning. You can deduct the costs of dry cleaning
and laundry while on your business trip.
Telephone. You can deduct the cost of business calls
while on your business trip, including business communi-
cation by fax machine or other communication devices.
Tips. You can deduct the tips you pay for any expense
in this list.
More information. For more information about travel
expenses, see Pub. 463.
Reimbursing your employees for expenses. You can
generally deduct the amount you reimburse your employ-
ees for travel and meal expenses. The reimbursement you
deduct and the manner in which you deduct it depend in
part on whether you reimburse the expenses under an ac-
countable plan or a nonaccountable plan. For details, see
Pub. 15. That publication explains accountable and non-
accountable plans and tells you whether to report the re-
imbursement on your employee's Form W-2.
Business Use of Your Home
To deduct expenses related to the part of your home used
for business, you must meet specific requirements. Even
then, your deduction may be limited.
To qualify to claim expenses for business use of your
home, you must meet the following tests.
1. Your use of the business part of your home must be:
a. Exclusive (however, see Exceptions to exclusive
use, later),
b. Regular, and
c. For your business.
2. The business part of your home must be:
a. Your principal place of business (defined later);
b. A place where you meet or deal with patients, cli-
ents, or customers in the normal course of your
business; or
c. A separate structure (not attached to your home)
you use in connection with your business.
Exclusive use. To qualify under the exclusive use test,
you must use a specific area of your home only for your
trade or business. The area used for business can be a
room or other separately identifiable space. The space
does not need to be marked off by a permanent partition.
You do not meet the requirements of the exclusive use
test if you use the area in question both for business and
for personal purposes.
Example. You are an attorney and use a den in your
home to write legal briefs and prepare clients' tax returns.
Your family also uses the den for recreation. The den is
not used exclusively in your profession, so you cannot
claim a business deduction for its use.
Exceptions to exclusive use. You do not have to
meet the exclusive use test to the extent you use part of
your home in either of the following ways.
1. For the storage of inventory or product samples.
2. As a daycare facility.
For an explanation of these exceptions, see Pub. 587,
Business Use of Your Home.
Regular use. To qualify under the regular use test, you
must use a specific area of your home for business on a
continuing basis. You do not meet the test if your business
use of the area is only occasional or incidental, even if you
do not use that area for any other purpose.
Principal place of business. You can have more than
one business location, including your home, for a single
trade or business. To qualify to deduct the expenses for
the business use of your home under the principal place
of business test, your home must be your principal place
of business for that business. To determine your principal
place of business, you must consider all the facts and cir-
cumstances.
Your home office will qualify as your principal place of
business for deducting expenses for its use if you meet
the following requirements.
•
You use it exclusively and regularly for administrative
or management activities of your business.
•
You have no other fixed location where you conduct
substantial administrative or management activities of
your business.
Alternatively, if you use your home exclusively and reg-
ularly for your business, but your home office does not
qualify as your principal place of business based on the
previous rules, you determine your principal place of busi-
ness based on the following factors.
•
The relative importance of the activities performed at
each location.
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•
If the relative importance factor does not determine
your principal place of business, you can also con-
sider the time spent at each location.
If, after considering your business locations, your home
cannot be identified as your principal place of business,
you cannot deduct home office expenses. However, for
other ways to qualify to deduct home office expenses, see
Pub. 587.
Deduction limit. If your gross income from the business
use of your home equals or exceeds your total business
expenses (including depreciation), you can deduct all your
business expenses related to the use of your home. If your
gross income from the business use is less than your total
business expenses, your deduction for certain expenses
for the business use of your home is limited.
Your deduction of otherwise nondeductible expenses,
such as insurance, utilities, and depreciation (with depre-
ciation taken last), allocable to the business is limited to
the gross income from the business use of your home mi-
nus the sum of the following.
1. The business part of expenses you could deduct even
if you did not use your home for business (such as
mortgage interest, real estate taxes, and casualty and
theft losses that are allowable as itemized deductions
on Schedule A (Form 1040)).
2. The business expenses that relate to the business ac-
tivity in the home (for example, business phone, sup-
plies, and depreciation on equipment), but not to the
use of the home itself.
Do not include in (2) above your deduction for one-half of
your SE tax.
Use Form 8829, Expenses for Business Use of Your
Home, to figure your deduction.
Simplified method. The IRS provides a simplified
method to determine your expenses for business use of
your home. The simplified method is an alternative to cal-
culating and substantiating actual expenses. In most ca-
ses, you will figure your deduction by multiplying $5 by the
area of your home used for a qualified business use. The
area you use to figure your deduction is limited to 300
square feet. For more information, see the Instructions for
Schedule C.
More information. For more information on deducting
expenses for the business use of your home, see Pub.
587.
De Minimis Safe Harbor for
Tangible Property
Generally, you must capitalize costs to acquire or produce
real or tangible personal property used in your trade or
business, such as buildings, equipment, or furniture. How-
ever, if you elect to use the de minimis safe harbor for tan-
gible property, you may deduct de minimis amounts paid
to acquire or produce certain tangible property if these
amounts are deducted by you for financial accounting pur-
poses or in keeping your books and records.
If you have an applicable financial statement, you may
use this safe harbor to deduct amounts paid for tangible
property up to $5,000 per item or invoice. If you do not
have an applicable financial statement, you may use the
de minimis safe harbor to deduct amounts paid for tangi-
ble property up to $2,500 per item or invoice.
Amounts qualifying under this de minimis safe harbor
should be included as other expenses in Part V of Sched-
ule C.
More information. For details on making this election
and requirements for using the de minimis safe harbor for
tangible property, see Tangible Property Regulations.
Other Expenses You Can
Deduct
You may also be able to deduct the following expenses.
•
Advertising.
•
Bank fees.
•
Donations to business organizations.
•
Education expenses.
•
Impairment-related expenses.
•
Interview expense allowances.
•
Licenses and regulatory fees.
•
Moving machinery.
•
Outplacement services.
•
Penalties and fines you pay for late performance or
nonperformance of a contract.
•
Repairs and maintenance to real or tangible personal
property.
•
Repayments of income.
•
Supplies and materials.
•
Utilities.
Expenses You Cannot Deduct
You usually cannot deduct the following as business ex-
penses.
•
Bribes and kickbacks.
•
Charitable contributions.
•
Demolition expenses or losses.
•
Dues to business, social, athletic, luncheon, sporting,
airline, and hotel clubs.
•
Entertainment expenses.
•
Improvements to real or tangible personal property.
Improvements are amounts paid for betterments to
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your property, restorations of your property, or work
that adapts your property to a new or different use.
•
Lobbying expenses.
•
Penalties and fines you pay to a governmental agency
or instrumentality because you broke the law.
•
Personal, living, and family expenses.
•
Political contributions.
•
Settlements or payments related to sexual harass-
ment or sexual abuse if such settlement or payment is
subject to a nondisclosure agreement. You also can-
not deduct attorney fees related to such settlement or
payment.
9.
Figuring Net Profit or
Loss
Introduction
After figuring your business income and expenses, you
are ready to figure the net profit or net loss from your busi-
ness. You do this by subtracting business expenses from
business income. If your expenses are less than your in-
come, the difference is net profit and becomes part of your
income on line 3 of Schedule 1 (Form 1040). If your ex-
penses are more than your income, the difference is a net
loss. You can usually deduct it from gross income on line 3
of Schedule 1 (Form 1040). But in some situations your
loss is limited. This chapter briefly explains three of those
situations. Other situations that may limit your loss are ex-
plained in the instructions for Schedule C, line G and
line 32.
If you have more than one business, you must fig-
ure your net profit or loss for each business on a
separate Schedule C.
Excess business loss limitation. Your loss from a trade
or business may be limited. Use Form 461 to determine
the amount of your excess business loss, if any. Your ex-
cess business loss will be included as income on line 8p
of Schedule 1 (Form 1040) and treated as an NOL that
you must carry forward and deduct in a subsequent year.
For more information about the excess business loss
limitation, see Form 461 and its instructions.
Net Operating Losses (NOLs)
If your deductions for the year are more than your income
for the year, you may have an NOL. You can use an NOL
by deducting it from your income in another year or years.
CAUTION
!
Examples of typical losses that may produce an NOL
include, but are not limited to, losses incurred from the fol-
lowing.
•
Your trade or business.
•
A casualty or theft resulting from a federally declared
disaster.
•
Moving expenses.
•
Rental property.
A loss from operating a business is the most common
reason for an NOL.
For details about NOLs, see Pub. 536. It explains how
to figure an NOL, when to use it, how to claim an NOL de-
duction, and how to figure an NOL carryover.
Not-for-Profit Activities
If you do not carry on your business to make a profit, there
is a limit on the deductions you can take. You cannot use a
loss from the activity to offset other income. Activities you
do as a hobby, or mainly for sport or recreation, come un-
der this limit.
For details about not-for-profit activities, see Hobby or
business: here’s what to know about that side hustle.
10.
Self-Employment (SE) Tax
The SE tax rules apply no matter how old you are
and even if you are already receiving social secur-
ity and Medicare benefits.
Who Must Pay SE Tax?
Generally, you must pay SE tax and file Schedule SE
(Form 1040) if your net earnings from self-employment
were $400 or more. Use Schedule SE to figure net earn-
ings from self-employment.
Sole proprietor or independent contractor. If you are
self-employed as a sole proprietor or independent con-
tractor, you generally use Schedule C (Form 1040) to fig-
ure your earnings subject to SE tax.
SE tax rate. The 2023 SE tax rate on net earnings is
15.3% (12.4% social security tax plus 2.9% Medicare tax).
Maximum earnings subject to SE tax. Only the first
$160,200 of your combined wages, tips, and net earnings
in 2023 is subject to any combination of the 12.4% social
security part of SE tax, social security tax, or the Tier 1
part of railroad retirement tax.
CAUTION
!
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All of your combined wages, tips, and net earnings in
2023 are subject to any combination of the 2.9% Medicare
part of SE tax, Medicare tax, or Medicare part of railroad
retirement tax.
If your wages and tips are subject to either social secur-
ity tax or the Tier 1 part of railroad retirement tax, or both,
and total at least $160,200, do not pay the 12.4% social
security part of the SE tax on any of your net earnings.
However, you must pay the 2.9% Medicare part of the SE
tax on all your net earnings.
Additional Medicare Tax. A 0.9% Additional Medicare
Tax may apply to you if your net earnings from self-em-
ployment exceed a threshold amount (based on your filing
status). For more information, see Self-Employment (SE)
Tax in chapter 1, and Form 8959 and its instructions.
Special Rules and Exceptions
Aliens. Generally, resident aliens must pay SE tax under
the same rules that apply to U.S. citizens. Nonresident ali-
ens are not subject to SE tax unless an international social
security agreement (also known as a totalization agree-
ment) in effect determines that they are covered under the
U.S. social security system. However, residents of the U.S.
Virgin Islands, Puerto Rico, Guam, the Commonwealth of
the Northern Mariana Islands, or American Samoa are
subject to SE tax, as they are considered U.S. residents
for SE tax purposes. For more information on aliens, see
Pub. 519, U.S. Tax Guide for Aliens.
Child employed by parent. You are not subject to SE
tax if you are under age 18 and you are working for your
father or mother.
Church employee. If you work for a church or a qualified
church-controlled organization (other than as a minister,
member of a religious order, or Christian Science practi-
tioner) that elected an exemption from social security and
Medicare taxes, you are subject to SE tax if you receive
$108.28 or more in wages from the church or organization.
For more information, see Pub. 517, Social Security and
Other Information for Members of the Clergy and Reli-
gious Workers.
Fishing crew member. If you are a member of the crew
on a boat that catches fish or other aquatic life, your earn-
ings are subject to SE tax if all the following conditions ap-
ply.
1. You do not get any pay for the work except your share
of the catch or a share of the proceeds from the sale
of the catch, unless the pay meets all the following
conditions.
a. The pay is not more than $100 per trip.
b. The pay is received only if there is a minimum
catch.
c. The pay is solely for additional duties (such as
mate, engineer, or cook) for which additional cash
pay is traditional in the fishing industry.
2. You get a share of the catch or a share of the pro-
ceeds from the sale of the catch.
3. Your share depends on the amount of the catch.
4. The boat's operating crew normally numbers fewer
than 10 individuals. (An operating crew is considered
as normally made up of fewer than 10 if the average
size of the crew on trips made during the last 4 calen-
dar quarters is fewer than 10.)
Notary public. Fees you receive for services you perform
as a notary public are reported on Schedule C but are not
subject to SE tax (see the Instructions for Schedule SE
(Form 1040)).
State or local government employee. You are subject
to SE tax if you are an employee of a state or local govern-
ment, are paid solely on a fee basis, and your services are
not covered under a federal-state social security agree-
ment.
Foreign government or international organization
employee. You are subject to SE tax if both the following
conditions are true.
1. You are a U.S. citizen employed in the United States,
Puerto Rico, Guam, American Samoa, the Common-
wealth of the Northern Mariana Islands, or the U.S.
Virgin Islands by:
a. A foreign government,
b. A wholly owned agency of a foreign government,
or
c. An international organization.
2. Your employer is not required to withhold social secur-
ity and Medicare taxes from your wages.
U.S. citizen or resident alien residing abroad. If you
are a self-employed U.S. citizen or resident alien living
outside the United States, in most cases you must pay SE
tax. Foreign earnings from self-employment can’t be re-
duced by your foreign earned income exclusion when
computing self-employment tax.
Exception. The United States has social security
agreements with many countries to eliminate double taxa-
tion under two social security systems. Under these
agreements, you must generally only pay social security
and Medicare taxes to the country in which you live. The
country to which you must pay the tax will issue a certifi-
cate that serves as proof of exemption from social security
tax in the other country.
For more information, see the Instructions for Sched-
ule SE (Form 1040).
More Than One Business
If you have earnings subject to SE tax from more than one
trade, business, or profession, you must combine the net
profit (or loss) from each to determine your total earnings
subject to SE tax. A loss from one business reduces your
profit from another business.
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Community Property Income
If any of the income from a trade or business, other than a
partnership, is community property income under state
law, it is included in the earnings subject to SE tax of the
spouse carrying on the trade or business.
Gain or Loss
Do not include in earnings subject to SE tax a gain or loss
from the disposition of property that is neither stock in
trade nor held primarily for sale to customers. It does not
matter whether the disposition is a sale, an exchange, or
an involuntary conversion.
Lost Income Payments
If you are self-employed and reduce or stop your business
activities, any payment you receive from insurance or
other sources for the lost business income is included in
earnings subject to SE tax. If you are not working when
you receive the payment, it still relates to your business
and is included in earnings subject to SE tax, even though
your business is temporarily inactive.
Figuring Earnings Subject to SE Tax
Methods for Figuring Net Earnings
There are three ways to figure net earnings from self-em-
ployment.
1. The regular method.
2. The nonfarm optional method.
3. The farm optional method.
You must use the regular method to the extent you do
not use one or both of the optional methods.
Why use an optional method? You may want to use the
optional methods (discussed later) when you have a loss
or a small net profit and any one of the following applies.
•
You want to receive credit for social security benefit
coverage.
•
You incurred child or dependent care expenses for
which you could claim a credit. (An optional method
may increase your earned income, which could in-
crease your credit.)
•
You are entitled to the earned income credit. (An op-
tional method may increase your earned income,
which could increase your credit.)
•
You are entitled to the additional child tax credit. (An
optional method may increase your earned income,
which could increase your credit.)
Effects of using an optional method. Using an optional
method could increase your SE tax. Paying more SE tax
could result in your getting higher benefits when you retire.
Using the optional methods may also decrease your
AGI due to the deduction for one-half of SE tax on Form
1040 or 1040-SR, which may affect your eligibility for cred-
its, deductions, or other items that are subject to an AGI
limit. Figure your AGI with and without using the optional
methods to see if the optional methods will benefit you.
If you use either or both optional methods, you must fig-
ure and pay the SE tax due under these methods even if
you would have had a smaller tax or no tax using the regu-
lar method.
The optional methods may be used only to figure your
SE tax. To figure your income tax, include your actual
earnings in gross income, regardless of which method you
use to determine SE tax.
Regular Method
To figure net earnings using the regular method, multiply
your self-employment earnings by 92.35% (0.9235). For
your net earnings figured using the regular method, see
line 4a of your Schedule SE (Form 1040).
Net earnings figured using the regular method are also
called actual net earnings.
Nonfarm Optional Method
Use the nonfarm optional method only for earnings that do
not come from farming. You may use this method if you
meet all the following tests.
1. You are self-employed on a regular basis. This means
that your actual net earnings from self-employment
were $400 or more in at least 2 of the 3 tax years be-
fore the one for which you use this method. For this
purpose, the prior-year net earnings can be from ei-
ther farm or nonfarm earnings or both.
2. You have used this method less than 5 years. (There
is a 5-year lifetime limit.) The years do not have to be
one after another.
3. Your net nonfarm profits were:
a. Less than $7,103, and
b. Less than 72.189% of your gross nonfarm income.
Net nonfarm profit. Net nonfarm profit is generally the
total of the amounts from:
•
Line 31 of Schedule C (Form 1040); and
•
Box 14, code A, of Schedule K-1 (Form 1065) (from
nonfarm partnerships).
However, you may need to adjust the amount reported
on Schedule K-1 if you are a general partner or if it is a
loss.
Gross nonfarm income. Your gross nonfarm income is
generally the total of the amounts from:
•
Line 7 of Schedule C (Form 1040); and
•
Box 14, code C, of Schedule K-1 (Form 1065) (from
nonfarm partnerships).
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Figuring Nonfarm Net Earnings
If you meet the three tests explained earlier, use the fol-
lowing table to figure your nonfarm net earnings from
self-employment under the nonfarm optional method.
Table 10-1. Figuring Nonfarm Net Earnings
IF your gross nonfarm
income is...
THEN your net
earnings are equal to...
$9,840 or less two-thirds of your gross
nonfarm income.
more than $9,840 $7,103.
Optional net earnings less than actual net earnings.
You cannot use this method to report an amount less than
your actual nonfarm net earnings from self-employment.
Your actual nonfarm net earnings are your nonfarm net
earnings figured using the regular method, explained ear-
lier.
Gross nonfarm income of $9,840 or less. The follow-
ing examples illustrate how to figure net earnings when
gross nonfarm income is $9,840 or less.
Example 1. Net nonfarm profit less than $7,103
and less than 72.189% of gross nonfarm income. You
run a craft business. Your actual net earnings from
self-employment were $800 in 2021 and $900 in 2022.
You meet the test for being self-employed on a regular ba-
sis. You have used the nonfarm optional method less than
5 years. Your gross income and net profit in 2023 are as
follows.
Gross nonfarm income ...................... $5,400
Net nonfarm profit ......................... $1,200
Your actual net earnings for 2023 are $1,108 ($1,200 ×
0.9235). Because your net profit is less than $7,103 and
less than 72.189% of your gross income, you can use the
nonfarm optional method to figure net earnings of $3,600
(
2
/3 × $5,400). Because these net earnings are higher than
your actual net earnings, you can report net earnings of
$3,600 for 2023.
Example 2. Net nonfarm profit less than $7,103 but
not less than 72.189% of gross nonfarm income. As-
sume that in Example 1 your gross income is $1,200 and
your net profit is $900. You must use the regular method to
figure your net earnings. You cannot use the nonfarm op-
tional method because your net profit is not less than
72.189% of your gross income.
Example 3. Net loss from a nonfarm business. As-
sume that in Example 1 you have a net loss of $700. You
can use the nonfarm optional method and report $3,600
(
2
/3 × $5,400) as your net earnings.
Example 4. Nonfarm net earnings less than $400.
Assume that in Example 1 you have gross income of $525
and a net profit of $175. In this situation, you would not
pay any SE tax under either the regular method or the
nonfarm optional method because your net earnings un-
der both methods are less than $400.
Gross nonfarm income of more than $9,840. The fol-
lowing examples illustrate how to figure net earnings when
gross nonfarm income is more than $9,840.
Example 1. Net nonfarm profit less than $7,103
and less than 72.189% of gross nonfarm income. You
run an appliance repair shop. Your actual net earnings
from self-employment were $10,500 in 2021 and $9,500 in
2022. You meet the test for being self-employed on a reg-
ular basis. You have used the nonfarm optional method
less than 5 years. Your gross income and net profit in 2023
are as follows.
Gross nonfarm income ...................... $12,000
Net nonfarm profit ......................... $1,200
Your actual net earnings for 2023 are $1,108 ($1,200 ×
0.9235). Because your net profit is less than $7,103 and
less than 72.189% of your gross income, you can use the
nonfarm optional method to figure net earnings of $6,560.
Because these net earnings are higher than your actual
net earnings, you can report net earnings of $6,560 for
2023.
Example 2. Net nonfarm profit not less than
$7,103. Assume that in Example 1 your net profit is
$8,900. You must use the regular method. You cannot use
the nonfarm optional method because your net nonfarm
profit is not less than $7,103.
Example 3. Net loss from a nonfarm business. As-
sume that in Example 1 you have a net loss of $700. You
can use the nonfarm optional method and report $6,560
as your net earnings from self-employment.
Farm Optional Method
Use the farm optional method only for earnings from a
farming business. See Pub. 225 for information about this
method.
Using Both Optional Methods
If you have both farm and nonfarm earnings, you may be
able to use both optional methods to determine your net
earnings from self-employment.
To figure your net earnings using both optional meth-
ods, you must do the following.
•
Figure your farm and nonfarm net earnings separately
under each method. Do not combine farm earnings
with nonfarm earnings to figure your net earnings un-
der either method.
•
Add the net earnings figured under each method to ar-
rive at your total net earnings from self-employment.
You can report less than your total actual farm and non-
farm net earnings but not less than actual nonfarm net
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earnings. If you use both optional methods, you can report
no more than $6,560 as your combined net earnings from
self-employment.
Example. You are a self-employed farmer. You also
operate a retail grocery store. Your gross income, actual
net earnings from self-employment, and optional farm and
optional nonfarm net earnings from self-employment are
shown in Table 10-2.
Example—Farm and Nonfarm
Earnings
Table 10-2.
Income and
Earnings Farm Nonfarm
Gross income $4,500 $6,000
Actual net earnings $900 $500
Optional net
earnings (
2
/3 of
gross income) $3,000 $4,000
Table 10-3 shows four methods or combinations of
methods you can use to figure net earnings from self-em-
ployment using the farm and nonfarm gross income and
actual net earnings shown in Table 10-2.
•
Method 1. Using the regular method for both farm and
nonfarm income.
•
Method 2. Using the optional method for farm income
and the regular method for nonfarm income.
•
Method 3. Using the regular method for farm income
and the optional method for nonfarm income.
•
Method 4. Using the optional method for both farm
and nonfarm income.
Note. Actual net earnings are the same as net earnings
figured using the regular method.
Example—Net EarningsTable 10-3.
Net
Earnings 1 2 3 4
Actual
farm $ 900 $ 900
Optional
farm $ 3,000 $ 3,000
Actual
nonfarm $ 500 $ 500
Optional
nonfarm $4,000 $4,000
Amount
you can
report: $1,400 $3,500 $4,900 $6,560*
* Limited to $6,560 because you used both optional methods.
Fiscal Year Filer
If you use a tax year other than the calendar year, you
must use the tax rate and maximum earnings limit in effect
at the beginning of your tax year. Even if the tax rate or
maximum earnings limit changes during your tax year,
continue to use the same rate and limit throughout your
tax year.
Reporting SE Tax
Use Schedule SE (Form 1040) to figure and report your
SE tax. If you file Form 1040 or 1040-SR, enter the SE tax
on line 4 of Schedule 2 and attach Schedule SE to your
form. If you file Form 1040-SS, enter the SE tax on line 3,
and attach Schedule SE to your form.
If you need to pay SE tax, you must file Form
1040, 1040-SR, or 1040-SS, as applicable (with
Schedule SE attached) even if you do not other-
wise have to file a federal income tax return.
Joint return. Even if you file a joint return, you cannot file
a joint Schedule SE. This is true whether one spouse or
both spouses have earnings subject to SE tax. If both of
you have earnings subject to SE tax, each of you must
complete a separate Schedule SE. Attach both schedules
to the joint return.
More than one business. If you have more than one
trade or business, you must combine the net profit (or
loss) from each business to figure your SE tax. A loss from
one business will reduce your profit from another busi-
ness. File one Schedule SE showing the earnings from
self-employment, but file a separate Schedule C or F for
each business.
Example. You are the sole proprietor of two separate
businesses. You operate a restaurant that made a net
profit of $25,000. You also have a cabinetmaking business
that had a net loss of $500. You must file a Schedule C for
the restaurant showing your net profit of $25,000 and an-
other Schedule C for the cabinetmaking business showing
your net loss of $500. You file one Schedule SE showing
total earnings subject to SE tax of $24,500.
11.
Your Rights as a
Taxpayer
This chapter explains the examination, appeal, collection,
and refund processes.
CAUTION
!
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Examinations, Appeals,
Collections, and Refunds
Examinations (audits). We accept most taxpayers' re-
turns as filed. If we inquire about your return or select it for
examination, it does not suggest that you are dishonest.
The inquiry or examination may or may not result in more
tax. We may close your case without change or you may
receive a refund.
The process of selecting a return for examination usu-
ally begins in one of two ways. One way is to use com-
puter programs to identify returns that may have incorrect
amounts. These programs may be based on information
returns, such as Forms 1099 and W-2; on studies of past
examinations; or on certain issues identified by other spe-
cial projects. Another way is to use information from com-
pliance projects that indicates that a return may have in-
correct amounts. These sources may include
newspapers, public records, and individuals. If we deter-
mine that the information is accurate and reliable, we may
use it to select a return for examination.
Pub. 556, Examination of Returns, Appeal Rights, and
Claims for Refund, explains the rules and procedures that
we follow in examinations. The following sections give an
overview of how we conduct examinations.
By mail. We handle many examinations and inquiries
by mail. We will send you a letter with either a request for
more information or a reason why we believe a change to
your return may be needed. You can respond by mail or
you can request a personal interview with an examiner. If
you mail us the requested information or provide an ex-
planation, we may or may not agree with you, and we will
explain the reasons for any changes. Do not hesitate to
write to us about anything you do not understand.
By interview. If we notify you that we will conduct your
examination through a personal interview, or you request
such an interview, you have the right to ask that the exami-
nation take place at a reasonable time and place that is
convenient for both you and the IRS. If our examiner pro-
poses any changes to your return, they will explain the
reasons for the changes. If you do not agree with these
changes, you can meet with the examiner's supervisor.
Repeat examinations. If we examined your return for
the same items in either of the 2 previous years and pro-
posed no change to your tax liability, contact us as soon
as possible so we can see if we should discontinue the ex-
amination.
Appeals. If you do not agree with the examiner's pro-
posed changes, you can appeal them to the IRS Inde-
pendent Office of Appeals. Most differences can be set-
tled without expensive and time-consuming court trials.
Your appeal rights are explained in detail in both Pub. 5,
Your Appeal Rights and How to Prepare a Protest if You
Disagree, and Pub. 556.
If you do not wish to use the Appeals Office or disagree
with its findings, you may be able to take your case to the
U.S. Tax Court, U.S. Court of Federal Claims, or the U.S.
District Court where you live. If you take your case to
court, the IRS will have the burden of proving certain facts
if you kept adequate records to show your tax liability, co-
operated with the IRS, and meet certain other conditions.
If the court agrees with you on most issues in your case
and finds that our position was largely unjustified, you may
be able to recover some of your administrative and litiga-
tion costs. You will not be eligible to recover these costs
unless you tried to resolve your case administratively, in-
cluding going through the appeals system, and you gave
us the information necessary to resolve the case.
Collections. Pub. 594, The IRS Collection Process, ex-
plains your rights and responsibilities regarding payment
of federal taxes. It describes the following.
•
What to do when you owe taxes. It describes what to
do if you get a tax bill and what to do if you think your
bill is wrong. It also covers making installment pay-
ments, delaying collection action, and submitting an
offer in compromise.
•
IRS collection actions. It covers liens, releasing a lien,
levies, releasing a levy, seizures and sales, and re-
lease of property.
•
IRS certification to the State Department of a seriously
delinquent tax debt, which will generally result in de-
nial of a passport application and may lead to revoca-
tion of a passport.
Your collection appeal rights are explained in detail in
Pub. 1660, Collection Appeal Rights.
Innocent spouse relief. Generally, both you and your
spouse are responsible, jointly and individually, for paying
the full amount of any tax, interest, or penalties due on
your joint return. To seek relief from any liability related to
your spouse (or former spouse), you must file a claim on
Form 8857, Request for Innocent Spouse Relief. In some
cases, Form 8857 may need to be filed within 2 years of
the date on which the IRS first attempted to collect the tax
from you. Do not file Form 8857 with your Form 1040 or
1040-SR. For more information, see Pub. 971, Innocent
Spouse Relief, and Form 8857, or you can call the Inno-
cent Spouse office toll free at 855-851-2009.
Potential third-party contacts. Generally, the IRS will
deal directly with you or your duly authorized representa-
tive. However, we sometimes talk with other persons if we
need information that you have been unable to provide, or
to verify information we have received. If we do contact
other persons, such as a neighbor, bank, employer, or em-
ployees, we will generally need to tell them limited infor-
mation, such as your name. The law prohibits us from dis-
closing any more information than is necessary to obtain
or verify the information we are seeking. Our need to con-
tact other persons may continue as long as there is activ-
ity in your case. If we do contact other persons, you have a
right to request a list of those contacted. Your request can
be made by telephone, in writing, or during a personal in-
terview.
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Refunds. You can file a claim for refund if you think you
paid too much tax. You must generally file the claim within
3 years from the date you filed your original return or 2
years from the date you paid the tax, whichever is later.
Pub. 556 has more information on refunds.
If you were due a refund but you did not file a return,
you must file a refund claim within 2 years from the time
the tax was paid to get that refund. The law generally pro-
vides for interest on your refund if it is not paid within 45
days of the date you filed your return or claim for refund.
12.
How To Get More
Information
This section describes the help the IRS and other federal
agencies offer to taxpayers who operate their own busi-
nesses.
How To Get Tax Help
If you have questions about a tax issue; need help prepar-
ing your tax return; or want to download free publications,
forms, or instructions, go to IRS.gov to find resources that
can help you right away.
Preparing and filing your tax return. After receiving all
your wage and earnings statements (Forms W-2, W-2G,
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
compensation statements (by mail or in a digital format) or
other government payment statements (Form 1099-G);
and interest, dividend, and retirement statements from
banks and investment firms (Forms 1099), you have sev-
eral options to choose from to prepare and file your tax re-
turn. You can prepare the tax return yourself, see if you
qualify for free tax preparation, or hire a tax professional to
prepare your return.
Free options for tax preparation. Your options for pre-
paring and filing your return online or in your local com-
munity, if you qualify, include the following.
•
Free File. This program lets you prepare and file your
federal individual income tax return for free using soft-
ware or Free File Fillable Forms. However, state tax
preparation may not be available through Free File. Go
to IRS.gov/FreeFile to see if you qualify for free online
federal tax preparation, e-filing, and direct deposit or
payment options.
•
VITA. The Volunteer Income Tax Assistance (VITA)
program offers free tax help to people with
low-to-moderate incomes, persons with disabilities,
and limited-English-speaking taxpayers who need
help preparing their own tax returns. Go to IRS.gov/
VITA, download the free IRS2Go app, or call
800-906-9887 for information on free tax return prepa-
ration.
•
TCE. The Tax Counseling for the Elderly (TCE) pro-
gram offers free tax help for all taxpayers, particularly
those who are 60 years of age and older. TCE volun-
teers specialize in answering questions about pen-
sions and retirement-related issues unique to seniors.
Go to IRS.gov/TCE or download the free IRS2Go app
for information on free tax return preparation.
•
MilTax. Members of the U.S. Armed Forces and quali-
fied veterans may use MilTax, a free tax service of-
fered by the Department of Defense through Military
OneSource. For more information, go to
MilitaryOneSource (MilitaryOneSource.mil/MilTax).
Also, the IRS offers Free Fillable Forms, which can
be completed online and then e-filed regardless of in-
come.
Using online tools to help prepare your return. Go to
IRS.gov/Tools for the following.
•
The Earned Income Tax Credit Assistant (IRS.gov/
EITCAssistant) determines if you’re eligible for the
earned income credit (EIC).
•
The Online EIN Application (IRS.gov/EIN) helps you
get an employer identification number (EIN) at no
cost.
•
The Tax Withholding Estimator (IRS.gov/W4App)
makes it easier for you to estimate the federal income
tax you want your employer to withhold from your pay-
check. This is tax withholding. See how your withhold-
ing affects your refund, take-home pay, or tax due.
•
The First-Time Homebuyer Credit Account Look-up
(IRS.gov/HomeBuyer) tool provides information on
your repayments and account balance.
•
The Sales Tax Deduction Calculator (IRS.gov/
SalesTax) figures the amount you can claim if you
itemize deductions on Schedule A (Form 1040).
Getting answers to your tax questions. On
IRS.gov, you can get up-to-date information on
current events and changes in tax law.
•
IRS.gov/Help: A variety of tools to help you get an-
swers to some of the most common tax questions.
•
IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro-
vide answers on a number of tax topics.
•
IRS.gov/Forms: Find forms, instructions, and publica-
tions. You will find details on the most recent tax
changes and interactive links to help you find answers
to your questions.
•
You may also be able to access tax information in your
e-filing software.
Need someone to prepare your tax return? There are
various types of tax return preparers, including enrolled
agents, certified public accountants (CPAs), accountants,
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and many others who don’t have professional credentials.
If you choose to have someone prepare your tax return,
choose that preparer wisely. A paid tax preparer is:
•
Primarily responsible for the overall substantive accu-
racy of your return,
•
Required to sign the return, and
•
Required to include their preparer tax identification
number (PTIN).
Although the tax preparer always signs the return,
you're ultimately responsible for providing all the
information required for the preparer to accurately
prepare your return and for the accuracy of every item re-
ported on the return. Anyone paid to prepare tax returns
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax pre-
parer, go to Tips for Choosing a Tax Preparer on IRS.gov.
Employers can register to use Business Services On-
line. The Social Security Administration (SSA) offers on-
line service at SSA.gov/employer for fast, free, and secure
W-2 filing options to CPAs, accountants, enrolled agents,
and individuals who process Form W-2, Wage and Tax
Statement, and Form W-2c, Corrected Wage and Tax
Statement.
IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest
information on tax changes, scam alerts, initiatives, prod-
ucts, and services. At the IRS, privacy and security are our
highest priority. We use these tools to share public infor-
mation with you. Don’t post your social security number
(SSN) or other confidential information on social media
sites. Always protect your identity when using any social
networking site.
The following IRS YouTube channels provide short, in-
formative videos on various tax-related topics in English,
Spanish, and ASL.
•
Youtube.com/irsvideos.
•
Youtube.com/irsvideosmultilingua.
•
Youtube.com/irsvideosASL.
Watching IRS videos. The IRS Video portal
(IRSVideos.gov) contains video and audio presentations
for individuals, small businesses, and tax professionals.
Online tax information in other languages. You can
find information on IRS.gov/MyLanguage if English isn’t
your native language.
Free Over-the-Phone Interpreter (OPI) Service. The
IRS is committed to serving taxpayers with limited-English
proficiency (LEP) by offering OPI services. The OPI Serv-
ice is a federally funded program and is available at Tax-
payer Assistance Centers (TACs), most IRS offices, and
every VITA/TCE tax return site. The OPI Service is acces-
sible in more than 350 languages.
Accessibility Helpline available for taxpayers with
disabilities. Taxpayers who need information about ac-
CAUTION
!
cessibility services can call 833-690-0598. The Accessi-
bility Helpline can answer questions related to current and
future accessibility products and services available in al-
ternative media formats (for example, braille, large print,
audio, etc.). The Accessibility Helpline does not have ac-
cess to your IRS account. For help with tax law, refunds, or
account-related issues, go to IRS.gov/LetUsHelp.
Note. Form 9000, Alternative Media Preference, or
Form 9000(SP) allows you to elect to receive certain types
of written correspondence in the following formats.
•
Standard Print.
•
Large Print.
•
Braille.
•
Audio (MP3).
•
Plain Text File (TXT).
•
Braille Ready File (BRF).
Disasters. Go to IRS.gov/DisasterRelief to review the
available disaster tax relief.
Getting tax forms and publications. Go to IRS.gov/
Forms to view, download, or print all the forms, instruc-
tions, and publications you may need. Or, you can go to
IRS.gov/OrderForms to place an order.
Getting tax publications and instructions in eBook
format. Download and view most tax publications and in-
structions (including the Instructions for Form 1040) on
mobile devices as eBooks at IRS.gov/eBooks.
IRS eBooks have been tested using Apple's iBooks for
iPad. Our eBooks haven’t been tested on other dedicated
eBook readers, and eBook functionality may not operate
as intended.
Access your online account (individual taxpayers
only). Go to IRS.gov/Account to securely access infor-
mation about your federal tax account.
•
View the amount you owe and a breakdown by tax
year.
•
See payment plan details or apply for a new payment
plan.
•
Make a payment or view 5 years of payment history
and any pending or scheduled payments.
•
Access your tax records, including key data from your
most recent tax return, and transcripts.
•
View digital copies of select notices from the IRS.
•
Approve or reject authorization requests from tax pro-
fessionals.
•
View your address on file or manage your communica-
tion preferences.
Get a transcript of your return. With an online account,
you can access a variety of information to help you during
the filing season. You can get a transcript, review your
most recently filed tax return, and get your adjusted gross
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income. Create or access your online account at IRS.gov/
Account.
Tax Pro Account. This tool lets your tax professional
submit an authorization request to access your individual
taxpayer IRS online account. For more information, go to
IRS.gov/TaxProAccount.
Using direct deposit. The safest and easiest way to re-
ceive a tax refund is to e-file and choose direct deposit,
which securely and electronically transfers your refund di-
rectly into your financial account. Direct deposit also
avoids the possibility that your check could be lost, stolen,
destroyed, or returned undeliverable to the IRS. Eight in
10 taxpayers use direct deposit to receive their refunds. If
you don’t have a bank account, go to IRS.gov/
DirectDeposit for more information on where to find a bank
or credit union that can open an account online.
Reporting and resolving your tax-related identity
theft issues.
•
Tax-related identity theft happens when someone
steals your personal information to commit tax fraud.
Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit.
•
The IRS doesn’t initiate contact with taxpayers by
email, text messages (including shortened links), tele-
phone calls, or social media channels to request or
verify personal or financial information. This includes
requests for personal identification numbers (PINs),
passwords, or similar information for credit cards,
banks, or other financial accounts.
•
Go to IRS.gov/IdentityTheft, the IRS Identity Theft
Central webpage, for information on identity theft and
data security protection for taxpayers, tax professio-
nals, and businesses. If your SSN has been lost or
stolen or you suspect you’re a victim of tax-related
identity theft, you can learn what steps you should
take.
•
Get an Identity Protection PIN (IP PIN). IP PINs are
six-digit numbers assigned to taxpayers to help pre-
vent the misuse of their SSNs on fraudulent federal in-
come tax returns. When you have an IP PIN, it pre-
vents someone else from filing a tax return with your
SSN. To learn more, go to IRS.gov/IPPIN.
Ways to check on the status of your refund.
•
Go to IRS.gov/Refunds.
•
Download the official IRS2Go app to your mobile de-
vice to check your refund status.
•
Call the automated refund hotline at 800-829-1954.
The IRS can’t issue refunds before mid-February
for returns that claimed the EIC or the additional
child tax credit (ACTC). This applies to the entire
refund, not just the portion associated with these credits.
Making a tax payment. Payments of U.S. tax must be
remitted to the IRS in U.S. dollars. Digital assets are not
CAUTION
!
accepted. Go to IRS.gov/Payments for information on how
to make a payment using any of the following options.
•
IRS Direct Pay: Pay your individual tax bill or estimated
tax payment directly from your checking or savings ac-
count at no cost to you.
•
Debit Card, Credit Card, or Digital Wallet: Choose an
approved payment processor to pay online or by
phone.
•
Electronic Funds Withdrawal: Schedule a payment
when filing your federal taxes using tax return prepara-
tion software or through a tax professional.
•
Electronic Federal Tax Payment System: Best option
for businesses. Enrollment is required.
•
Check or Money Order: Mail your payment to the ad-
dress listed on the notice or instructions.
•
Cash: You may be able to pay your taxes with cash at
a participating retail store.
•
Same-Day Wire: You may be able to do same-day
wire from your financial institution. Contact your finan-
cial institution for availability, cost, and time frames.
Note. The IRS uses the latest encryption technology to
ensure that the electronic payments you make online, by
phone, or from a mobile device using the IRS2Go app are
safe and secure. Paying electronically is quick, easy, and
faster than mailing in a check or money order.
What if I can’t pay now? Go to IRS.gov/Payments for
more information about your options.
•
Apply for an online payment agreement (IRS.gov/
OPA) to meet your tax obligation in monthly install-
ments if you can’t pay your taxes in full today. Once
you complete the online process, you will receive im-
mediate notification of whether your agreement has
been approved.
•
Use the Offer in Compromise Pre-Qualifier to see if
you can settle your tax debt for less than the full
amount you owe. For more information on the Offer in
Compromise program, go to IRS.gov/OIC.
Filing an amended return. Go to IRS.gov/Form1040X
for information and updates.
Checking the status of your amended return. Go to
IRS.gov/WMAR to track the status of Form 1040-X amen-
ded returns.
It can take up to 3 weeks from the date you filed
your amended return for it to show up in our sys-
tem, and processing it can take up to 16 weeks.
Understanding an IRS notice or letter you’ve re-
ceived. Go to IRS.gov/Notices to find additional informa-
tion about responding to an IRS notice or letter.
Responding to an IRS notice or letter. You can now
upload responses to all notices and letters using the
Document Upload Tool. For notices that require additional
action, taxpayers will be redirected appropriately on
CAUTION
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IRS.gov to take further action. To learn more about the
tool, go to IRS.gov/Upload.
Note. You can use Schedule LEP (Form 1040), Re-
quest for Change in Language Preference, to state a pref-
erence to receive notices, letters, or other written commu-
nications from the IRS in an alternative language. You may
not immediately receive written communications in the re-
quested language. The IRS’s commitment to LEP taxpay-
ers is part of a multi-year timeline that began providing
translations in 2023. You will continue to receive communi-
cations, including notices and letters, in English until they
are translated to your preferred language.
Contacting your local TAC. Keep in mind, many ques-
tions can be answered on IRS.gov without visiting a TAC.
Go to IRS.gov/LetUsHelp for the topics people ask about
most. If you still need help, TACs provide tax help when a
tax issue can’t be handled online or by phone. All TACs
now provide service by appointment, so you’ll know in ad-
vance that you can get the service you need without long
wait times. Before you visit, go to IRS.gov/TACLocator to
find the nearest TAC and to check hours, available serv-
ices, and appointment options. Or, on the IRS2Go app,
under the Stay Connected tab, choose the Contact Us op-
tion and click on “Local Offices.”
The Taxpayer Advocate Service (TAS)
Is Here To Help You
What Is TAS?
TAS is an independent organization within the IRS that
helps taxpayers and protects taxpayer rights. TAS strives
to ensure that every taxpayer is treated fairly and that you
know and understand your rights under the Taxpayer Bill
of Rights.
How Can You Learn About Your Taxpayer
Rights?
The Taxpayer Bill of Rights describes 10 basic rights that
all taxpayers have when dealing with the IRS. Go to
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.
What Can TAS Do for You?
TAS can help you resolve problems that you can’t resolve
with the IRS. And their service is free. If you qualify for
their assistance, you will be assigned to one advocate
who will work with you throughout the process and will do
everything possible to resolve your issue. TAS can help
you if:
•
Your problem is causing financial difficulty for you,
your family, or your business;
•
You face (or your business is facing) an immediate
threat of adverse action; or
•
You’ve tried repeatedly to contact the IRS but no one
has responded, or the IRS hasn’t responded by the
date promised.
How Can You Reach TAS?
TAS has offices in every state, the District of Columbia,
and Puerto Rico. To find your advocate’s number:
•
Go to TaxpayerAdvocate.IRS.gov/Contact-Us;
•
Download Pub. 1546, The Taxpayer Advocate Service
Is Your Voice at the IRS, available at IRS.gov/pub/irs-
pdf/p1546.pdf;
•
Call the IRS toll free at 800-TAX-FORM
(800-829-3676) to order a copy of Pub. 1546;
•
Check your local directory; or
•
Call TAS toll free at 877-777-4778.
How Else Does TAS Help Taxpayers?
TAS works to resolve large-scale problems that affect
many taxpayers. If you know of one of these broad issues,
report it to TAS at
IRS.gov/SAMS. Be sure to not include
any personal taxpayer information.
Low Income Taxpayer Clinics (LITCs)
LITCs are independent from the IRS and TAS. LITCs rep-
resent individuals whose income is below a certain level
and who need to resolve tax problems with the IRS. LITCs
can represent taxpayers in audits, appeals, and tax collec-
tion disputes before the IRS and in court. In addition,
LITCs can provide information about taxpayer rights and
responsibilities in different languages for individuals who
speak English as a second language. Services are offered
for free or a small fee. For more information or to find an
LITC near you, go to the LITC page at
TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134,
Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/
p4134.pdf.
Small Business Administration
The Small Business Administration (SBA) offers training
and educational programs, counseling services, financial
programs, and contract assistance for small business
owners. The SBA also has publications and videos on a
variety of business topics. The following briefly describes
assistance provided by the SBA.
Small Business Development Centers (SBDCs).
SBDCs provide counseling, training, and technical serv-
ices to current and prospective small business owners
who cannot afford the services of a private consultant.
Help is available when beginning, improving, or expanding
a small business.
Service Corps of Retired Executives (SCORE).
SCORE provides small business counseling and training
to current and prospective small business owners.
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SCORE is made up of current and former business people
who offer their expertise and knowledge to help people
start, manage, and expand a small business. SCORE also
offers a variety of small business workshops.
Internet. You can visit the SBA website at SBA.gov.
While visiting the SBA website, you can find a variety of in-
formation of interest to small business owners.
Phone. Call the SBA Answer Desk at 800-U-ASK-SBA
(800-827-5722) for general information about programs
available to assist small business owners.
Walk-in. You can walk in to an SBDC to request assis-
tance with your small business. To find the location near-
est you, visit the SBA website or call the SBA Answer
Desk.
Other Federal Agencies
Other federal agencies also publish publications and pam-
phlets to assist small businesses. Most of these are avail-
able from the Superintendent of Documents at the U.S.
Government Publishing Office. You can get information
and order these publications and pamphlets in several
ways.
Internet. You can visit the GPO website at
Catalog.GPO.gov.
Mail. Write to the GPO at the following address.
Superintendent of Documents
U.S. Government Publishing Office
P.O. Box 979050
St. Louis, MO 63197-9000
Phone. Call the GPO toll free at 866-512-1800 or at
202-512-1800 from the Washington, DC, area.
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To help us develop a more useful index, please let us know if you have ideas for index entries.
See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
Index
A
Accounting method:
Accrual 14, 31
Automatic procedures 16
Cash 13, 31
Change in 16
Combination 15
Special 16
Accounting periods 12
Accrual method:
Income - general rule 14
Income - special rules 14
Of accounting 14
Adjusted basis 17
Administrator 25
Alternative fuel vehicle refueling
property credit 18
Appeal rights 44
Appreciation 24
Assistance (See Tax help)
Audits 44
Automobile (See Car expenses)
B
Bad debts 30
Barter income 20
Basis of property 17
Biodiesel and renewable diesel
fuels credit 18
Biofuel producer credit 19
Bribes 38
Business expenses 30
Business income 20
Business use of your home 37
C
Canceled debt 22
Cancellation of qualified real
property business debt 23
Capital gain or loss 18
Car expenses 31
Carbon oxide sequestration
credit 19
Cash discount 26, 28
Cash method:
Expenses 14
Income 13
Charitable contributions 38
Child employed by parent 40
Claim for refund 45
Clean vehicle credit 19
Collection of tax 44
Combination method of
accounting 15
Condemned property 18
Consignments 24
Construction allowances 24
Cost of goods sold 27
Credit:
Alternative fuel vehicle refueling
property 18
Biodiesel and renewable diesel
fuels credit 18
Biofuel producer credit 19
Carbon oxide sequestration 19
Clean vehicle credit 19
Credit for employer differential
wage payments 19
Credit for increasing research
activities 19
Disabled access 19
Distilled spirits 19
Employer credit for family and
medical leave 19
Employer-provided childcare 19
Empowerment zone employment
credit 19
Energy efficient home credit 19
How to claim 20
Indian coal 19
Investment 19
Low sulfur diesel fuel production 19
Low-income housing 19
New markets 19
Orphan drug 19
Qualified railroad track
maintenance credit 19
Refined coal 19
Renewable electricity 19
Small employer health insurance
premiums 19
Small employer pension plan
startup costs 19
Taxes paid on certain employee
tips 19
Work opportunity credit 19
Credit for employer differential
wage payments 19
Credit for increasing research
activities 19
D
Damages 23
De Minimis Safe Harbor for
Tangible Property 38
Debt:
Bad 30
Canceled 22
Qualified real property business 23
Refund offset against 7
Definitions 3
Accounting methods 13
Accounting periods 12
Barter 20
Basis 17
Business bad debt 30
Calendar tax year 12
Cash discount 26, 28
Disposition of property 17
Drawing account 28
Fair market value 18
Fiscal tax year 13
Fringe benefit 33
Local transportation expenses 31
Necessary expense 30
Net operating loss 39
Nonbusiness bad debt 31
Ordinary expense 30
Principal place of business 37
Qualified long-term real
property 24
Qualified real property business
debt 23
Rent 35
Restricted property 23
Retail space 24
Self-employment (SE) tax 9
Tax home 31
Trade discount 27, 28
Travel expenses 36
Depreciation:
Deduction 32
Listed property 33
Depreciation, recapture 24
Direct seller 25, 26
Disabled access credit 19
Disposition of property:
Business property 16
Installment sale 17, 18
Like-kind exchange 17, 18, 24
Nontaxable exchange 17
Sale of a business 17
Distilled spirits credit 19
Dividend income 22
Donation of inventory 27
Drawing account 28
Due date of return 8
E
e-file 7
Economic injury 23
EFTPS 8
Electronic filing 7
Employee 6
Employee benefit programs 33
Employees' pay 33
Employer identification number
(EIN) 6
Employment taxes:
About 10
Deduction for 36
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Empowerment zone employment
credit 19
Energy efficient home credit 19
Entertainment expenses
(See Travel expenses)
Escrow, payments placed in 27
Estimated tax 8
Examinations (audits) 44
Excise taxes:
About 10
Deduction for 36
Executor 25
Expenses 30
Bad debts 30
Car 31
Depreciation 32
Employees' pay 33
Entertainment 36
Home, business use 37
Insurance 33
Interest 34
Legal and professional fees 35
Meals 36
Nondeductible 38
Other 38
Pension plans 35
Rent 35
Taxes 36
Travel 36
Truck 31
F
Fair market value 18
Filing business taxes 5
Fishing crew member 25, 40
Form:
1040 (tax return) 7, 10
1040-ES (estimated tax) 8, 10
1040-SR (tax return) 7, 10
1040-V (voucher) 7
1099-B (barter) 21
1099-MISC (miscellaneous) 11
1099-NEC (nonemployee
compensation) 11
1128 (change tax year) 13
2210 (underpayment of estimated
tax) 9
2290 (excise tax for heavy
trucks) 11
3115 (change accounting
method) 16
3468 (investment credit) 19
3800 (general business credit) 18
4562 (depreciation) 33
4684 (casualty and theft) 18
4797 (sale of business
property) 18, 24
4868 (extension) 8
6251 (alternative minimum tax) 18
6252 (installment sale) 18
720 (excise tax return) 11
8300 (cash payments over
$10,000) 11
8586 (low-income housing) 19
8594 (asset acquisition) 17
8820 (orphan drug credit) 19
8824 (like-kind exchange) 17, 18
8826 (disabled access credit) 19
8829 (business in home) 38
8835 (renewable electricity, coal
credit) 19
8846 (credit for social security on
tip income) 19
8857 (innocent spouse) 44
8874 (new markets credit) 19
8879 (self-selected PIN) 7
8881 (pension plan startup costs
credit) 19
8882 (employer-provided childcare
credit) 19
8886 (transaction statement) 5
8896 (low sulfur diesel fuel
production credit) 19
8906 (distilled spirits credit) 19
8911 (alternative fuel vehicle
refueling property credit) 18
8933 (carbon oxide sequestration
credit) 19
8936 (clean vehicle credit) 19
8941 (small employer health
insurance premiums) 19
8994 (employer credit for paid
family and medical leave) 19
940 (unemployment tax) 10
941 (quarterly employment tax) 10
944 (annual employment tax) 10
982 (discharge of
indebtedness) 22
Final 12
Information returns 10
Schedule C (sole proprietor) 10
Schedule SE (self-employment
tax) 9, 10
SS-4 (application for EIN) 6
SS-5 (application for SSN) 6
W-2 (report wages) 10, 11
W-3 (transmittal of W-2) 10
W-4 (employee withholding) 6
W-7 (application for ITIN) 6
W-9 (request for TIN) 6
When to file 10
Which to file 10
Fringe benefits 33
Fuel taxes 36
G
Gains and losses 23
General business credits 18
Gross profit:
Accuracy 30
Additions to 30
Guidelines for selected
occupations 25
(See also Occupations, selected)
H
Home, business use of 37
Hotels, boarding houses, and
apartments 21
Husband and wife business 3
I
Identification numbers 6
Income 24
(See also Not income)
Accounting for your 26
Barter 20
Business 20
Damages 23
Gains and losses 23
Kickbacks 24
Kinds of income 20
Lost income payments 23
Other 23
Paid to a third party 26
Personal property rent 21
Promissory notes 23
Recapture of depreciation 24
Recovery of items previously
deducted 24
Rental 21
Restricted property 23
Income tax:
About 6
Deduction for 36
How to pay 8
Underpayment penalty 9
Income tax return, who must file 6
Independent contractor 3, 10, 39
Individual taxpayer identification
number (ITIN) 6
Information returns 11
Information, How to get more 45
Innocent spouse relief 44
Installment sales 17
Insurance:
Expense 33
Nondeductible premiums 34
Prepayment 34
Proceeds 27
Insurance agent:
Former 25
Retired 25
Interest:
Expenses 34
Income 22
Inventories 15
Investment credit 19
K
Kickbacks 24, 38
L
Lease bonus 21
Lease cancellation payments 21
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Legal fees 35
Like-kind exchanges 17, 24
Limited liability company 3
Listed property 24
Lobbying expense 39
Local transportation expenses 31
Lodging 37
Long-term capital gain or loss 18
Lost income payments 23
Low sulfur diesel fuel production
credit 19
Low-income housing credit 19
M
Meals 37
Methods for figuring net
earnings 41
Mileage rate for vehicles 31
N
Net operating losses 39
Net profit or loss 39
New markets credit 19
Newspaper carrier or
distributor 25
Newspaper or magazine vendor 26
Nonbusiness bad debt 31
Nondeductible insurance
premiums 34
Nonemployee compensation 20
Nontaxable exchanges 17
Not income:
Appreciation 24
Consignments 24
Constructions allowances 24
Exchange of like-kind property 24
Leasehold improvements 24
Loans 25
Sales tax 25
Not-for-profit activities 39
Notary public 26, 40
O
Occupations, selected:
Administrator 25
Direct seller 25, 26
Executor 25
Fishing crew member 25
Insurance agent, former 25
Insurance agent, retired 25
Newspaper carrier or distributor 25
Newspaper or magazine vendor 26
Notary public 26
Public official 26
Real estate agent 26
Securities dealer 26
Securities trader 26
Office in the home 31
(See also Business use of your
home)
Optional methods, using both 42
Ordinary gain or loss 18
Orphan drug credit 19
P
Parking fees 32
Partners, husband and wife 3
Pay, kinds of 33
Paying:
Business taxes 5
Income tax 8
Payments to third parties 21
Penalties and fines 39
Penalty:
Failure to file Form 8300 12
Failure to file information returns 11
Failure to furnish correct payee
statements 11
Underpayment of tax 9
Waiver of 11
Pension plans 35
Personal property tax 36
Prepaid expense:
Extends useful life 34
Rent 36
Professional fees 35
Promissory notes 23
Public official 26
Publications (See Tax help)
Punitive damages 24
Q
Qualified railroad track
maintenance credit 19
Qualified real property business
debt 23
R
Real estate:
Agent 26
Dealer 21
Rent 21
Taxes 36
Recovery of items previously
deducted 24
Refund:
Inquiries 7
Offsets against debts 7
Related persons:
Unreasonable rent 35
Renewable electricity, refined coal,
and Indian coal production
credit 19
Rent expense 35
Rental income 21
Repayment of income 14
Reportable transaction disclosure
statement 5
Reporting self-employment tax 43
Restricted property 23
Retirement plans (See Pension
plans)
S
Salaries 33
Sale of a business 17
Sale of property 17
(See also Disposition of property)
Sales of assets 16
Sales tax 36
Schedule C 7
Schedule SE (Form 1040 or
1040-SR) 9
Schedule SE, filing requirement 43
SE tax:
About 9
Aliens 40
Child employed by parent 40
Church employee 40
Community property income 41
Deduction for 36
Earning credits 9
Effects of using an optional
method 41
Farm optional method 42
Fiscal year filer 43
Fishing crew member 40
Gain or loss 41
Government employee 40
Joint return 43
Lost income payments 41
Maximum earnings:
For 2020 9
Subject to 39
Methods for figuring net
earnings 41
More than one business 40, 43
Nonfarm optional method 41
Notary public 40
Optional methods:
Farm 42
Nonfarm 41
Rate 39
Regular method 41
Residing abroad 40
Special rules and exceptions 40
Tax rate 9
Time limit for posting income 9
Who must pay? 39
Why use an optional method 41
Section 179:
Deduction 33
Property 24
Securities:
Dealer 26
Trader 26
Self-employment tax (See SE tax)
Settlement payments 21
Short-term capital gain or loss 18
Signature, electronic 7
Small Business Administration 48
Small employer health insurance
premiums credit 19
Social security coverage 9
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Social security number (SSN) 6
Sole proprietor 3, 39
Sport utility vehicle 33
Standard mileage rate 31
Statutory employee 3
SUV 33
T
Tax help 45
Tax home 31, 36
Tax preparation fees 35
Tax refund:
Claim for 45
Offset against debts 7
Tax return:
How to file 7
Who must file 6
Tax year 12
Calendar 12
Change in 13
Fiscal 13
Taxes:
Deduction for 36
Employment 10, 36
Excise 10, 36
Fuel 36
Income 6, 36
Paid on certain employee tips 19
Personal property 36
Real estate 36
Sales 36
Self-employment 9, 36
Third parties, Payments to 21
Tolls 32
Trade discount 27, 28
Trade or business 2
Trailer park owner 21
Transportation expenses 31
Travel expenses 36
U
Underpayment of tax penalty 9
Uniform capitalization rules 16
W
Wages 33
Work opportunity credit 19
Publication 334 (2023) 53
