For use in preparing Returns
For the latest information about developments related to Pub. 334, such as legislation enacted after it was published, go to IRS.gov/Pub334.
This publication provides general information about the federal tax laws that apply to you if you are a self-employed 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.
You are a self-employed person if you carry on a trade or business as a sole proprietor or an independent contractor. .  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 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, he or she may use Schedule C. Sole proprietor. A sole proprietor is someone who owns an unincorporated business by himself or herself. You are also a sole proprietor for income tax purposes if you are an individual 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, dentists, 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. Also, people who provide a service generally associated with the gig (or on-demand, sharing, or access) economy, such as ride-sharing, may be treated as independent contractors. However, whether they are independent contractors or employees depends on the facts in each case. The general rule is that an individual 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.
A statutory employee has a checkmark in box 13 of his or her Form W-2, Wage and Tax Statement. Statutory employees use Schedule C to report their wages and expenses.
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 community property under the community property laws of a state, foreign country, or U.S. possession, you can treat the business either as a sole proprietorship or a partnership. States with community property laws include Arizona, California, 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. If you and your spouse each materially participate as the only members 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 qualified joint venture 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 benefits are based. For an explanation of "material participation," see the instructions for Schedule C, line G. . 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.
What you need to know. Table A provides a list of questions you need to answer to help you meet your federal tax obligations. After each question is the location in this publication where you will find the related discussion. The IRS mission. Provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. Comments and suggestions. We welcome your comments 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 comment 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 address. 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. Visit IRS.gov/Forms to download current and prior-year forms, instructions, and publications. Ordering tax forms, instructions, and publications. Go to IRS.gov/OrderForms to order current forms, instructions, 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.
The following are some of the tax changes for 2021. Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax is $142,800 for 2021. There is no maximum limit on earnings subject to the Medicare part. Standard mileage rate. For 2021, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56 cents a mile.For more information, see Car and Truck Expenses in chapter 8. The COVID-19 related credit for qualified sick and family leave wages. The Families First Coronavirus Response Act (FFCRA) was amended by recent legislation. The FFCRA requirement that employers provide paid sick and family leave for reasons related to COVID-19 (the employer mandate) expired on December 31, 2020; however, the COVID-related Tax Relief Act of 2020 extends the periods for which employers providing leave that otherwise meets the requirements of the FFCRA may continue to claim tax credits for qualified sick and family leave wages paid for leave taken before April 1, 2021.The American Rescue Plan Act of 2021 (the ARP) adds new sections 3131, 3132, and 3133 to the Internal Revenue Code to provide credits for qualified sick and family leave wages similar to the credits that were previously enacted under the FFCRA and amended and extended by the COVID-related Tax Relief Act of 2020. These credits under sections 3131 through 3133 are available for qualified leave wages paid for leave taken after March 31, 2021, and before October 1, 2021. Report these amounts as “other income” on line 6 of your Schedule C (Form 1040). For more information about these credits, see Tax Credits for Paid Leave Under the Families First Coronavirus Response Act for Leave Prior to April 1, 2021 and Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 for Leave After March 31, 2021 for more information. Employee retention credit. The deduction claimed for qualified wages, including qualified health plan expenses, will be reduced by the amount of COVID-19 related employee retention credit under section 2301 of the CARES Act, or section 3134 (added by the ARP) in the year the qualified wages expense was paid or incurred. See Notice 2021-49 for additional information. Credits for self-employed persons. Refundable credits are available to certain self-employed persons impacted by the coronavirus. See the Instructions for Form 7202, Credit for Sick Leave and Family Leave for Certain Self-Employed Individuals, for more information. 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 excess business loss will be included as income on line 8o of Schedule 1 (Form 1040) and treated as a net operating loss 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. Business meal expense. For a limited time, business meals are 100% deductible under certain conditions. See Meals and lodging, later, for more information. Paycheck Protection Program (PPP) safe harbor. Revenue Procedure 2021-20 has allowed for a safe harbor for certain taxpayers who did not deduct certain otherwise deductible expenses paid or incurred during the tax year ending after March 26, 2020, and on or before December 31, 2020, that resulted in, or were expected to result in, forgiveness of the loan. To find more information, including requirements, of this safe harbor, see Revenue Procedure 2021-20.
The following are some of the tax changes for 2022. For information on other changes, go to IRS.gov. Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax is $147,000 for 2022. Standard mileage rate. For 2022, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 58.5 cents a mile.
Self-employed tax payments deferred in 2020. Legislation allowed for self-employed individuals to defer that payment of certain social security taxes for 2020 over the next 2 years. See How self-employed individuals and household employers repay deferred Social Security tax. Form 1099-NEC. Form 1099-NEC, Nonemployee Compensation, is used to report nonemployee compensation. Reportable transactions. You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain 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 transaction understatements. Reportable transactions include:
For more information, see the Instructions for Form 8886. Small Business and Self-Employed (SB/SE) Tax Center. Do you need help with a tax issue or preparing your return, or do you need a free publication or form? SB/SE serves taxpayers who file Form 1040; Form 1040-SR; Schedules C, E, or F; or Form 2106, as well as small business taxpayers with assets under $10 million. For additional information, visit the Small Business and Self-Employed Tax Center at IRS.gov/Businesses/Small. Gig Economy Tax Center. The gig (or on-demand, sharing, or access) economy refers to an area of activity where people earn income providing on-demand work, services, or goods. Visit IRS.gov/Gig to get more information about the tax consequences of participating in the gig economy.
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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. 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. .
Publication
Form (and Instructions)
See chapter 12 for information about getting publications and forms.
This section explains three types of taxpayer identification numbers (TINs), who needs them, when to use them, and how to get them.
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.
You have to file an income tax return for 2021 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.
File your income tax return on Form 1040 or Form 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.
Please click here for the text description of the image. 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 result, the processing of 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 return contains accurate information and is filed on time.Using 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, visit IRS.gov.
Electronic signatures. Paperless filing is easier than you think and it's available to most taxpayers who file electronically—including those first-time filers who were 16 or older at the end of 2021. If you file electronically using tax preparation software or a tax professional, you will sign your return using the Self-Select PIN (personal identification number) Method for 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 income (AGI) from your originally filed 2020 income tax return (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 annual Social Security Statement. With a Self-Select PIN, there is nothing to sign and nothing to mail—not even your Forms W-2. For more details on the Self-Select PIN Method, visit IRS.gov.
Many tax professionals can electronically file paperless returns for their clients. You have two options.
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 requested, a fee may be charged. To find an authorized IRS e-file provider near you, go to IRS.gov/Efile/Providers.
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 using a self-selected PIN to complete the process. There is no signature form to submit or Forms W-2 to send in.
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 in preparing your return is available nationwide from IRS-trained volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-income 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 electronic filing.
For calendar year 2021, Forms 1040 and 1040-SR are due by April 18, 2022. If you use a fiscal year (explained in chapter 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.
Federal income tax is a pay-as-you-go tax. You must pay it as you earn or receive income during the year. An employee usually has income tax withheld from his or her 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.
If you have employees, you will need to file forms to report employment taxes. Employment taxes include the following items.
To help you determine whether the people working for you are your employees, see Pub. 15-A, Employer's Supplemental Tax Guide. That publication has information to help you determine whether an individual is an independent contractor or an employee. . An independent contractor is someone who is self-employed. You generally do not have to withhold or pay any taxes on payments made to an independent contractor.
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.
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 information 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 information returns and when you have to file them, see the General Instructions for Certain Information Returns. .
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. You may want to see:
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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.
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. 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.
Most individuals and many sole proprietors with no inventory 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 purchases, unless you are a small business taxpayer (defined later in this chapter). For more information, see Inventories, later.
Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. If you receive property or services, you must include their fair market value in income.
Example. On December 30, 2020, Mrs. Sycamore sent you a check for interior decorating services you provided to her. You received the check on January 4, 2021. You must include the amount of the check in income for 2021.
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. However, 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.
Under an accrual method of accounting, you generally report 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.
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 occurred and you can determine the amount with reasonable accuracy. For a taxpayer with an applicable financial statement 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 taxpayer. You sold a computer on December 28, 2021. You billed the customer in the first week of January 2022, but you did not receive payment until February 2022. You must include the amount received for the computer in your 2021 income.
The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services.
Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply.
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 relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Related persons include members of your immediate family, including brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. For a list of other related persons, see section 267 of the Internal Revenue Code.
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.
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production 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 property.
There are special methods of accounting for certain items of income or expense. These include the following.
Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. A change in your accounting method includes a change in:
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. You may want to see:
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A disposition of property includes the following transactions.
Table 3-1. How To Figure a Gain or Loss
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.
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 capital asset. A gain or loss from a disposition of this property is an ordinary gain or loss. However, if you held the property 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.
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.
Table 3-2. Do I Have a Short-Term or Long-Term Gain or Loss?
For more information about short-term and long-term capital gains and losses, see chapter 4 of Pub. 544.
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 increased later by the carryback of business credits from later years. You subtract this credit directly from your tax. You may want to see:
Form (and Instructions)
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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.
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 receive and your business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if you did not have the business. You can have business income even if you are not involved 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 business 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.
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. .
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 exchange 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 perform legal services for a client, a small corporation. In payment 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 include the fair market value of the work of art in his or her 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 his or her 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. 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 employee'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 (Circular E), Employer's Tax Guide.
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 services available. Members contact each other directly and request services to be performed. You are not required to provide services 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.
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, report the rental income and expenses on Schedule C. If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. For more information, see Pub. 527, Residential Rental Property.
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 substantial 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 substantial 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 maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, 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 include city sewerage, electrical connections, and roadways.
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 in the preceding Real Estate Rents discussion can also be received for renting personal property. If you receive any of those payments, include them in your gross receipts as explained in that discussion.
Interest and dividends may be considered business income.
The following explains the general rule for including canceled debt in income and the exceptions to the 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).
The following discussion covers some exceptions to the general rule for canceled debt.
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 Indebtedness. For more information, see Form 982.
Accounting for your income for income tax purposes differs 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 inventories to clearly show your income. Dealers in real estate are not allowed to use inventories. For more information on inventories, see chapter 2.
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 business that makes, buys, or sells goods to produce income. This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. .
Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. These lines are reproduced below and are explained in the discussion that follows.
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 producer, 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 closing inventory of the year before. You must explain any difference in a schedule attached to your return.
Donation of inventory. If you contribute inventory (property 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 contribution 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. A special rule may apply to certain donations of food inventory. See Pub. 526, Charitable Contributions.
Example 1. You are a calendar year taxpayer who uses an accrual method of accounting. In 2021, you contributed property from inventory to a church. It had a fair market value of $600. The closing inventory at the end of 2020 properly included $400 of costs due to the acquisition of the property, and in 2020, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. The charitable contribution allowed for 2021 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 determining gross income for 2021 must not include the $400. You remove that amount from opening inventory for 2021.
Example 2. If, in Example 1, you acquired the contributed property in 2021 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2021 and deduct the $50 of administrative and other expenses attributable to the property for that year. You would not be allowed any charitable contribution deduction for the contributed property.
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.
Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Small merchandisers (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.
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 process are treated as deferred charges. You deduct them as a business expense when you use them. Business expenses are discussed in chapter 8.
Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows.
The total of lines 35 through 39 equals the cost of the goods available for sale during the year.
Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials 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.
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.
After you have figured the gross receipts from your business (chapter 5) and the cost of goods sold (chapter 6), you are ready to figure your gross profit. You must determine gross profit before you can deduct any business expenses. These expenses are discussed in chapter 8.
Consider the following items before figuring your gross profit.
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 difference 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.
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.
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 ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. For more information about the general rules for deducting business expenses, see chapter 1 of Pub. 535. .
Publication
See chapter 12 for information about getting publications and forms.
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 deduct business bad debts as an expense on your business tax return.
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 local transportation and traveling away from home overnight on business.
You can generally deduct the amount you reimburse your employees for car and truck expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see chapter 11 of Pub. 535. That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2.
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 depreciation. The following is a brief overview. You will find more information about depreciation in Pub. 946.
Section 179 deduction. You can elect to deduct a limited 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 2021 is generally $1,050,000 (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 $2,620,000. The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2021 is $10,200 ($18,200 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2021). Special rules apply 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. .
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 ordinary and necessary expense and you must pay or incur it in the tax year. In addition, the pay must meet both the following tests.
You cannot deduct your own salary or any personal withdrawals you make from your business. As a sole proprietor, you are not an employee of the business.
You can generally deduct premiums you pay for the following kinds of insurance related to your business.
Example. In 2021, you signed a 3-year insurance contract. Even though you paid the premiums for 2021, 2022, and 2023 when you signed the contract, you can only deduct the premium for 2021 on your 2021 tax return. You can deduct in 2022 and 2023 the premiums allocable to those years.
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 expense. 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.
Certain taxpayers are required to limit their business interest 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 personal, you must divide the interest between the personal part and the business part.
Example. In 2021, you paid $600 interest on a car loan. During 2021, you used the car 60% for business and 40% for personal purposes. You are claiming actual expenses on the car. You can only deduct $360 (60% (0.60) × $600) for 2021 on Schedule C. The remaining interest of $240 is a nondeductible personal expense.
Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly 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 nature (such as making a will), you can take a business deduction only for the part of the fee related to your business.
You can set up and maintain the following small business retirement plans for yourself and your employees.
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 proprietor, 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 generally tax free until you or your employees receive distributions from the plan. You may also be able to claim a tax credit if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or SEP plan. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. Under certain plans, employees can have you contribute 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 business, see Pub. 560. .
Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as a business expense only if the rent is for property you use in your business. If you have or will receive equity in or title to the property, you cannot deduct the rent.
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.
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 circumstances. Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
Alternatively, if you use your home exclusively and regularly 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 business based on the following factors.
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 depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following.
Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction.
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. However, if you elect to use the de minimis safe harbor for tangible 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 purposes 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 tangible 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 Schedule C.
You may also be able to deduct the following expenses. See Pub. 535 to find out whether you can deduct them.
You usually cannot deduct the following as business expenses. For more information, see Pub. 535.
After figuring your business income and expenses, you are ready to figure the net profit or net loss from your business. You do this by subtracting business expenses from business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on line 3 of Schedule 1 (Form 1040). If your expenses 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 explained in the instructions for Schedule C, line G and line 32. .
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. Examples of typical losses that may produce an NOL include, but are not limited to, losses incurred from the following.
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 deduction, and how to figure an NOL carryover.
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 under this limit. For details about not-for-profit activities, see chapter 1 of Pub. 535. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.
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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 earnings from self-employment.
Maximum earnings subject to SE tax. Only the first $142,800 of your combined wages, tips, and net earnings in 2021 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 of your combined wages, tips, and net earnings in 2021 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 security tax or the Tier 1 part of railroad retirement tax, or both, and total at least $142,800, 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.
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.
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.
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, exchange, or an involuntary conversion.
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.
There are three ways to figure net earnings from self-employment.
You must use the regular method to the extent you do not use one or both of the optional methods.
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 credits, 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 figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular 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.
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.
If you meet the three tests explained earlier, use the following table to figure your nonfarm net earnings from self-employment under the nonfarm optional method.
Table 10-1. Figuring Nonfarm Net Earnings
Gross nonfarm income of $8,820 or less. The following examples illustrate how to figure net earnings when gross nonfarm income is $8,820 or less.
Example 1. Net nonfarm profit less than $6,367 and less than 72.189% of gross nonfarm income. Ann Green runs a craft business. Her actual net earnings from self-employment were $800 in 2019 and $900 in 2020. She meets the test for being self-employed on a regular basis. She has used the nonfarm optional method less than 5 years. Her gross income and net profit in 2021 are as follows. Ann's actual net earnings for 2021 are $1,108 ($1,200 × 0.9235). Because her net profit is less than $6,367 and less than 72.189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2021.
Example 2. Net nonfarm profit less than $6,367 but not less than 72.189% of gross nonfarm income. Assume that in Example 1 Ann's gross income is $1,200 and her net profit is $900. She must use the regular method to figure her net earnings. She cannot use the nonfarm optional method because her net profit is not less than 72.189% of her gross income.
Example 3. Net loss from a nonfarm business. Assume that in Example 1 Ann has a net loss of $700. She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings.
Example 4. Nonfarm net earnings less than $400. Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400.
Gross nonfarm income of more than $8,820. The following examples illustrate how to figure net earnings when gross nonfarm income is more than $8,820.
Example 1. Net nonfarm profit less than $6,367 and less than 72.189% of gross nonfarm income. John White runs an appliance repair shop. His actual net earnings from self-employment were $10,500 in 2019 and $9,500 in 2020. He meets the test for being self-employed on a regular basis. He has used the nonfarm optional method less than 5 years. His gross income and net profit in 2021 are as follows. John's actual net earnings for 2021 are $1,108 ($1,200 × 0.9235). Because his net profit is less than $6,367 and less than 72.189% of his gross income, he can use the nonfarm optional method to figure net earnings of $5,880. Because these net earnings are higher than his actual net earnings, he can report net earnings of $5,880 for 2021.
Example 2. Net nonfarm profit not less than $6,367. Assume that in Example 1 John's net profit is $6,900. He must use the regular method. He cannot use the nonfarm optional method because his net nonfarm profit is not less than $6,367.
Example 3. Net loss from a nonfarm business. Assume that in Example 1 John has a net loss of $700. He can use the nonfarm optional method and report $5,880 as his net earnings from self-employment.
Use the farm optional method only for earnings from a farming business. See Pub. 225 for information about this method.
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 methods, you must do the following.
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.
Table 10-2. Example—Farm and Nonfarm Earnings
Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2.
Table 10-3. Example—Net Earnings
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.
Use Schedule SE (Form 1040) to figure and report your SE tax. Then enter the SE tax on line 4 of Schedule 2 (Form 1040) and attach Schedule SE to Form 1040 or 1040-SR. .
This chapter explains the examination, appeal, collection, and refund processes.
Examinations (audits). We accept most taxpayers' returns 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 usually begins in one of two ways. One way is to use computer 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 special projects. Another way is to use information from compliance projects that indicates that a return may have incorrect amounts. These sources may include newspapers, public records, and individuals. If we determine 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.
Appeals. If you do not agree with the examiner's proposed changes, you can appeal them to the Appeals Office of the IRS. Most differences can be settled 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 Don't Agree, 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, cooperated 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 litigation costs. You will not be eligible to recover these costs unless you tried to resolve your case administratively, including going through the appeals system, and you gave us the information necessary to resolve the case.
Potential third party contacts. Generally, the IRS will deal directly with you or your duly authorized representative. 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 employees, we will generally need to tell them limited information, such as your name. The law prohibits us from disclosing any more information than is necessary to obtain or verify the information we are seeking. Our need to contact other persons may continue as long as there is activity 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 interview.
This section describes the help the IRS and other federal agencies offer to taxpayers who operate their own businesses.
Accounting method Accrual, Accrual Method, Accrual method. Automatic procedures, Automatic change procedures. Cash, Cash Method, Cash method. Change in, Change in Accounting Method Combination, Combination Method Special, Special Methods Accounting periods, Accounting Periods Accrual method Income - general rule, Income—General Rule Income - special rules, Income—Special Rules Of accounting, Accrual Method Adjusted basis, Adjusted basis. Administrator, Executor or administrator. Alternative fuel vehicle refueling property credit, Alternative fuel vehicle refueling property credit (Form 8911). Alternative motor vehicle credit, Alternative motor vehicle credit (Form 8910). Appeal rights, Appeals. Appreciation, Appreciation. Assistance (see Tax help) Audits, Examinations (audits). Automobile (see Car expenses) Canceled debt, Canceled Debt Cancellation of qualified real property business debt, Cancellation of qualified real property business debt. Capital gain or loss, Is My Gain or Loss Ordinary or Capital? Car expenses, Car and Truck Expenses, Methods for Deducting Car and Truck Expenses Carbon dioxide sequestration credit, Carbon oxide sequestration credit (Form 8933). Cash discount, Cash discounts., Cash discounts. Cash method Expenses, Expenses Income, Income Charitable contributions, Expenses You Cannot Deduct Child employed by parent, Child employed by parent. Claim for refund, Refunds. Collection of tax, Collections. Combination method of accounting, Combination Method Condemned property, Condemned property. Consignments, Consignments. Construction allowances, Construction allowances. Cost of goods sold, How To Figure Cost of Goods Sold Credit Alternative fuel vehicle refueling property, Alternative fuel vehicle refueling property credit (Form 8911). Alternative motor vehicle, Alternative motor vehicle credit (Form 8910). Biodiesel and renewable diesel fuels credit, Biodiesel and renewable diesel fuels credit (Form 8864). Biofuel producer credit, Biofuel producer credit (Form 6478). Carbon dioxide sequestration, Carbon oxide sequestration credit (Form 8933). Credit for employer differential wage payments, Credit for employer differential wage payments (Form 8932). Credit for increasing research activities, Credit for increasing research activities (Form 6765). Disabled access, Disabled access credit (Form 8826). Distilled spirits, Distilled spirits credit (Form 8906). Employer credit for family and medical leave, Employer credit for paid family and medical leave (Form 8994). Employer-provided childcare, Credit for employer-provided childcare facilities and services (Form 8882). Empowerment zone employment credit, Empowerment zone employment credit (Form 8844). Energy efficient home credit, Energy efficient home credit (Form 8908). How to claim, How To Claim the Credit Indian coal, Renewable electricity, refined coal, and Indian coal production credit (Form 8835). Indian employment credit, Indian employment credit (Form 8845). Investment, Investment credit (Form 3468). Low sulfur diesel fuel production, Low sulfur diesel fuel production credit (Form 8896). Low-income housing, Low-income housing credit (Form 8586). Mine rescue team training credit, Mine rescue team training credit (Form 8923). New markets, New markets credit (Form 8874). Orphan drug, Orphan drug credit (Form 8820). Qualified plug-in electric drive motor vehicle, Qualified plug-in electric drive motor vehicle credit (Form 8936). Qualified railroad track maintenance credit, Qualified railroad track maintenance credit (Form 8900). Refined coal, Renewable electricity, refined coal, and Indian coal production credit (Form 8835). Renewable electricity, Renewable electricity, refined coal, and Indian coal production credit (Form 8835). Small employer health insurance premiums, Credit for small employer health insurance premiums (Form 8941). Small employer pension plan startup costs, Credit for small employer pension plan startup costs (Form 8881). Taxes paid on certain employee tips, Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846). Work opportunity credit, Work opportunity credit (Form 5884). Credit for employer differential wage payments, Credit for employer differential wage payments (Form 8932). Credit for increasing research activities, Credit for increasing research activities (Form 6765). Damages, Damages. De Minimis Safe Harbor for Tangible Property, De Minimis Safe Harbor for Tangible Property Debt Bad, Bad Debts Canceled, Canceled Debt Qualified real property business, Qualified real property business debt. Refund offset against, Offset against debts. Definitions, Are You Self-Employed? Accounting methods, Accounting Methods Accounting periods, Accounting Periods Barter, Bartering for Property or Services Basis, Basis. Business bad debt, Business bad debt. Calendar tax year, Calendar tax year. Cash discount, Cash discounts., Cash discounts. Disposition of property, What Is a Disposition of Property? Drawing account, Merchandise withdrawn from sale. Fair market value, Fair market value. Fiscal tax year, Fiscal tax year. Fringe benefit, Fringe benefits. Local transportation expenses, Local transportation expenses. Necessary expense, Net operating loss, Net Operating Losses (NOLs) Nonbusiness bad debt, Nonbusiness bad debts. Ordinary expense, Principal place of business, Principal place of business. Qualified long-term real property, Qualified long-term real property. Qualified real property business debt, Cancellation of qualified real property business debt. Rent, Rent Expense Restricted property, Other Income Retail space, Retail space. Self-employment (SE) tax, Self-Employment (SE) Tax Tax home, Local transportation expenses. Trade discount, Trade discounts., Cash discounts. Travel expenses, Travel and Meals Depreciation Deduction, Depreciation Listed property, Listed property. Depreciation, recapture, Recapture of depreciation. Direct seller, Direct seller., Real estate agent or direct seller. Disabled access credit, Disabled access credit (Form 8826). Disposition of property Business property, Installment sale, Installment sales., Installment sales. Like-kind exchange, Like-kind exchanges., Like-kind exchanges., Exchange of like-kind property. Nontaxable exchange, Nontaxable exchanges. Sale of a business, Sale of a business. Distilled spirits credit, Distilled spirits credit (Form 8906). Dividend income, Interest and Dividend Income Donation of inventory, Donation of inventory. Drawing account, Merchandise withdrawn from sale. Due date of return, When Is My Tax Return Due? e-file, IRS e-file (Electronic Filing) Economic injury, Economic injury. EFTPS, EFTPS. Electronic filing, IRS e-file (Electronic Filing) Employee, Employee. Employee benefit programs, Fringe benefits. Employees' pay, Employees' Pay Employer identification number (EIN), Employer identification number (EIN). Employment taxes About, Employment Taxes Deduction for, Employment taxes. Empowerment zone employment credit, Empowerment zone employment credit (Form 8844). Energy efficient home credit, Energy efficient home credit (Form 8908). Entertainment expenses (see Travel expenses) Escrow, payments placed in, Payment placed in escrow. Estimated tax, How Do I Pay Income Tax? Examinations (audits), Examinations (audits). Excise taxes About, Excise Taxes Deduction for, Excise taxes. Executor, Executor or administrator. Expenses, Business Expenses Bad debts, Bad Debts Car, Car and Truck Expenses Depreciation, Depreciation Employees' pay, Employees' Pay Entertainment, Travel and Meals Home, business use, Business Use of Your Home Insurance, Insurance Interest, Interest Legal and professional fees, Legal and Professional Fees Meals, Travel and Meals Nondeductible, Expenses You Cannot Deduct Other, Other Expenses You Can Deduct Pension plans, Pension Plans Rent, Rent Expense Taxes, Taxes Travel, Travel and Meals Truck, Car and Truck Expenses Fair market value, Fair market value. Filing business taxes, Filing and Paying Business Taxes Fishing crew member, Fishing crew member., Fishing crew member. Form 1040 (tax return), How Do I File? 1040-ES (estimated tax), How Do I Pay Income Tax? 1040-SR (tax return), How Do I File? 1040-V (voucher), Balance due. 1099-B (barter), Information returns. 1099-MISC (miscellaneous), Form 1099-MISC. 1099-NEC (nonemployee compensation), Form 1099-NEC. 1128 (change tax year), Change in tax year. 2210 (underpayment of estimated tax), Penalty for underpayment of tax. 2290 (excise tax for heavy trucks), Form 2290. 3115 (change accounting method), Change in Accounting Method 3468 (investment credit), Investment credit (Form 3468). 3800 (general business credit), 4562 (depreciation), Form 4562. 4684 (casualty and theft), Casualties and thefts. 4797 (sale of business property), Dispositions of business property and depreciable property., Condemned property., Listed property. 4868 (extension), When Is My Tax Return Due? 6251 (alternative minimum tax), 6252 (installment sale), Installment sales. 720 (excise tax return), Form 720. 8300 (cash payments over $10,000), Form 8300. 8586 (low-income housing), Low-income housing credit (Form 8586). 8594 (asset acquisition), Sale of a business. 8820 (orphan drug credit), Orphan drug credit (Form 8820). 8824 (like-kind exchange), Like-kind exchanges., Like-kind exchanges. 8826 (disabled access credit), Disabled access credit (Form 8826). 8829 (business in home), Deduction limit. 8835 (renewable electricity, coal credit), Renewable electricity, refined coal, and Indian coal production credit (Form 8835). 8846 (credit for social security on tip income), Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846). 8857 (innocent spouse), Innocent spouse relief. 8874 (new markets credit), New markets credit (Form 8874). 8879 (self-selected PIN), Using an Authorized IRS e-file Provider 8881 (pension plan startup costs credit), Credit for small employer pension plan startup costs (Form 8881). 8882 (employer-provided childcare credit), Credit for employer-provided childcare facilities and services (Form 8882). 8886 (transaction statement), Reminders 8896 (low sulfur diesel fuel production credit), Low sulfur diesel fuel production credit (Form 8896). 8906 (distilled spirits credit), Distilled spirits credit (Form 8906). 8910 (alternative vehicle credit), Alternative motor vehicle credit (Form 8910). 8911 (alternative fuel refueling property credit), Alternative fuel vehicle refueling property credit (Form 8911). 8933 (carbon dioxide sequestration credit), Carbon oxide sequestration credit (Form 8933). 8936 (qualified plug-in electric drive motor vehicle), Qualified plug-in electric drive motor vehicle credit (Form 8936). 8941 (small employer health insurance premiums), Credit for small employer health insurance premiums (Form 8941). 8994 (Employer credit for paid family and medical leave), Employer credit for paid family and medical leave (Form 8994). 982 (discharge of indebtedness), Exclusions Schedule SE (self-employment tax), Who must pay SE tax. SS-4 (application for EIN), Employer identification number (EIN). SS-5 (application for SSN), Social security number (SSN). W-2 (report wages), Form W-2. W-4 (employee withholding), Employee. W-7 (application for ITIN), Individual taxpayer identification number (ITIN). W-9 (request for TIN), Other payee. Fringe benefits, Fringe benefits. Fuel taxes, Fuel taxes. Identification numbers, Identification Numbers Income, Items That Are Not Income (see also Not income) Accounting for your, Accounting for Your Income Barter, Bartering for Property or Services Business, Business Income Damages, Damages. Gains and losses, Gains and losses. Kickbacks, Kickbacks. Kinds of income, Kinds of Income Lost income payments, Lost income payments. Other, Other Income Paid to a third party, Income paid to a third party. Personal property rent, Personal Property Rents Promissory notes, Promissory notes. Recapture of depreciation, Recapture of depreciation. Recovery of items previously deducted, Recovery of items previously deducted. Rental, Real Estate Rents, Personal Property Rents Restricted property, Restricted property. Income tax About, Income Tax Deduction for, Income taxes. How to pay, How Do I Pay Income Tax? Underpayment penalty, Penalty for underpayment of tax. Income tax return, who must file, Do I Have To File an Income Tax Return? Independent contractor, Are You Self-Employed?, Business Owned and Operated by Spouses, Employment Taxes, Sole proprietor or independent contractor. Indian employment credit, Indian employment credit (Form 8845). Individual taxpayer identification number (ITIN), Individual taxpayer identification number (ITIN). Information returns, Information Returns Information, How to get more, How To Get More Information Innocent spouse relief, Innocent spouse relief. Installment sales, Installment sales. Insurance Expense, Insurance Nondeductible premiums, Nondeductible premiums. Prepayment, Prepayment. Proceeds, Insurance proceeds. Insurance agent Former, Insurance agent, former. Retired, Insurance agent, retired. Interest Expenses, Interest Income, Interest and Dividend Income Inventories, Inventories Investment credit, Investment credit (Form 3468). Kickbacks, Kickbacks., Expenses You Cannot Deduct Lease bonus, Lease bonus. Lease cancellation payments, Lease cancellation payments. Legal fees, Legal and Professional Fees Like-kind exchanges, Like-kind exchanges., Exchange of like-kind property. Limited liability company, Are You Self-Employed? Listed property, Listed property. Lobbying expense, Expenses You Cannot Deduct Local transportation expenses, Local transportation expenses. Lodging, Meals and lodging. Long-term capital gain or loss, Is My Capital Gain or Loss Short Term or Long Term? Lost income payments, Lost income payments. Low sulfur diesel fuel production credit, Low sulfur diesel fuel production credit (Form 8896). Low-income housing credit, Low-income housing credit (Form 8586). Net operating losses, Net Operating Losses (NOLs) Net profit or loss, New markets credit, New markets credit (Form 8874). Newspaper carrier or distributor, Newspaper carrier or distributor. Newspaper or magazine vendor, Newspaper or magazine vendor. Nonbusiness bad debt, Nonbusiness bad debts. Nondeductible insurance premiums, Nondeductible premiums. Nonemployee compensation, Nonemployee compensation. Nontaxable exchanges, Nontaxable exchanges. Not income Appreciation, Appreciation. Consignments, Consignments. Constructions allowances, Construction allowances. Exchange of like-kind property, Exchange of like-kind property. Leasehold improvements, Leasehold improvements. Loans, Loans. Sales tax, Sales tax. Not-for-profit activities, Not-for-Profit Activities Notary public, Notary public., Notary public. Occupations, selected Administrator, Executor or administrator. Direct seller, Direct seller., Real estate agent or direct seller. Executor, Executor or administrator. Fishing crew member, Fishing crew member. Insurance agent, former, Insurance agent, former. Insurance agent, retired, Insurance agent, retired. Newspaper carrier or distributor, Newspaper carrier or distributor. Newspaper or magazine vendor, Newspaper or magazine vendor. Notary public, Notary public. Public official, Public official. Real estate agent, Real estate agent or direct seller. Securities dealer, Dealer in section 1256 contracts. Securities trader, Securities or commodities trader. Office in the home, Office in the home. (see also Business use of your home) Optional methods, using both, Using Both Optional Methods Ordinary gain or loss, Is My Gain or Loss Ordinary or Capital? Orphan drug credit, Orphan drug credit (Form 8820). Parking fees, Parking fees and tolls. Partners, husband and wife, Business Owned and Operated by Spouses Pay, kinds of, Kinds of pay. Paying Business taxes, Filing and Paying Business Taxes Income tax, How Do I Pay Income Tax? Payments to third parties, Payments to third parties. Penalties and fines, Expenses You Cannot Deduct Penalty Failure to file Form 8300, Penalties. Failure to file information returns, Penalties. Failure to furnish correct payee statements, Penalties. Underpayment of tax, Penalty for underpayment of tax. Waiver of, Waiver of penalties. Pension plans, Pension Plans Personal property tax, Personal property tax. Prepaid expense Extends useful life, Prepayment. Rent, Rent paid in advance. Professional fees, Legal and Professional Fees Promissory notes, Promissory notes. Public official, Public official. Publications (see Tax help) Punitive damages, Punitive damages. Real estate Agent, Real estate agent or direct seller. Dealer, Real estate dealer. Rent, Real Estate Rents Taxes, Real estate taxes. Recovery of items previously deducted, Recovery of items previously deducted. Refund Inquiries, Refund inquiries. Offsets against debts, Offset against debts. Related persons Unreasonable rent, Unreasonable rent. Renewable electricity, refined coal, and Indian coal production credit, Renewable electricity, refined coal, and Indian coal production credit (Form 8835). Rent expense, Rent Expense Rental income, Real Estate Rents Repayment of income, Repayment of income. Reportable transaction disclosure statement, Reminders Reporting self-employment tax, Reporting Self-Employment Tax Restricted property, Restricted property. Retirement plans (see Pension plans) Salaries, Employees' Pay Sale of a business, Sale of a business. Sale of property, What Is a Disposition of Property? (see also Disposition of property) Sales of assets, Sales tax, Sales tax. Schedule C, How Do I File? Schedule SE (Form 1040 or 1040-SR), Who must pay SE tax. Schedule SE, filing requirement, Reporting Self-Employment Tax SE tax About, Self-Employment (SE) Tax Aliens, Aliens. Child employed by parent, Child employed by parent. Church employee, Church employee. Community property income, Community Property Income Deduction for, SE tax. Earning credits, Earning credits in 2021 and 2022. Effects of using an optional method, Effects of using an optional method. Farm optional method, Farm Optional Method Fiscal year filer, Fiscal Year Filer Fishing crew member, Fishing crew member. Gain or loss, Gain or Loss Government employee, State or local government employee., Foreign government or international organization employee. Joint return, Joint return. Lost income payments, Lost Income Payments Maximum earnings For 2020, Maximum earnings subject to SE tax. Subject to, Maximum earnings subject to SE tax. Methods for figuring net earnings, Methods for Figuring Net Earnings More than one business, More Than One Business, More than one business. Nonfarm optional method, Nonfarm Optional Method Notary public, Notary public. Optional methods Farm, Farm Optional Method Nonfarm, Nonfarm Optional Method Rate, SE tax rate. Regular method, Regular Method Residing abroad, U.S. citizen or resident alien residing abroad. Special rules and exceptions, Special Rules and Exceptions Tax rate, SE tax rate. Time limit for posting income, The SSA time limit for posting self-employment income. Who must pay?, Who Must Pay SE Tax? Why use an optional method, Why use an optional method? Section 179 Deduction, Section 179 deduction. Property, Section 179 property. Securities Dealer, Dealer in section 1256 contracts. Trader, Securities or commodities trader. Self-employment tax (see SE tax) Settlement payments, Settlement payments. Short-term capital gain or loss, Is My Capital Gain or Loss Short Term or Long Term? Signature, electronic, Electronic signatures. Small Business Administration, Small Business Administration Small employer health insurance premiums credit, Credit for small employer health insurance premiums (Form 8941). Social security coverage, Social security coverage. Social security number (SSN), Social security number (SSN). Sole proprietor, Are You Self-Employed?, Sole proprietor or independent contractor. Sport utility vehicle, Section 179 deduction. Standard mileage rate, Standard mileage rate. Statutory employee, Are You a Statutory Employee? SUV, Section 179 deduction. Tax help, How To Get Tax Help Tax home, Local transportation expenses., Travel expenses. Tax preparation fees, Tax preparation fees. Tax refund Claim for, Refunds. Offset against debts, Offset against debts. Tax return How to file, How Do I File? Who must file, Do I Have To File an Income Tax Return? Tax year, Accounting Periods Calendar, Calendar tax year. Change in, Change in tax year. Fiscal, Fiscal tax year. Taxes Deduction for, Taxes Employment, Employment Taxes, Employment taxes. Excise, Excise Taxes, Excise taxes. Fuel, Fuel taxes. Income, Income Tax, Income taxes. Paid on certain employee tips, Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846). Personal property, Personal property tax. Real estate, Real estate taxes. Sales, Sales tax. Self-employment, Self-Employment (SE) Tax, SE tax. Third parties, Payments to, Payments to third parties. Tolls, Parking fees and tolls. Trade discount, Trade discounts., Trade discounts. Trade or business, Are You Self-Employed? Trailer park owner, Trailer park owner. Transportation expenses, Local transportation expenses. Travel expenses, Travel expenses. |
Which of the following is not an alternative method of treating inventory for small business
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