Publication 334

Tax Guide for Catalog Number 11063P

Small Business For use in preparing

Department
of the (For Individuals Who Use 2023 Returns
Treasury Schedule C)
Internal
Revenue
Service

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Feb 2, 2024
 Chapter 9. Figuring Net Profit or Loss .............. 39
Contents Net Operating Losses (NOLs) . . . . . . . . . . . . . . . . . 39
Not-for-Profit Activities ..................... 39
What's New for 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Chapter 10. Self-Employment (SE) Tax . . . . . . . . . . . . . . 39
What's New for 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Who Must Pay SE Tax? ..................... 39
Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Reporting SE Tax . . . . . . . . . . . . . . . . . . . . . . . . . 43

Photographs of Missing Children . . . . . . . . . . . . . . . . . . . 5 Chapter 11. Your Rights as a Taxpayer . . . . . . . . . . . . . . 43

Examinations, Appeals, Collections, and Refunds .... 44
Chapter 1. Filing and Paying Business Taxes . . . . . . . . . . . 5
Identification Numbers ... . . . . . . . . . . . . . . . . . .. 6 Chapter 12. How To Get More Information . . . . . . . . . . . . 45
Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6 Small Business Administration ................ 48
Self-Employment (SE) Tax . . . . . . . . . . . . . . . . . . .. 9 Other Federal Agencies . . . . . . . . . . . . . . . . . . . . . 49
Employment Taxes . . . . . . . . . . . . . . . . . . . . . . . . 10 How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Excise Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Information Returns . . . . . . . . . . . . . . . . . . . . . . . 11 Index ................................... 50

Chapter 2. Accounting Periods and Methods . . . . . . . . . . 12

Accounting Periods .......................
Accounting Methods . . . . . . . . . . . . . . . . . . . . . . .
12
13
Future Developments
For the latest information about developments related to
Chapter 3. Dispositions of Business Property . . . . . . . . . 16 Pub. 334, such as legislation enacted after it was
What Is a Disposition of Property? . . . . . . . . . . . . . . 17 published, go to IRS.gov/Pub334.
How Do I Figure a Gain or Loss? . . . . . . . . . . . . . . . 17
Where Do I Report Gains and Losses? . . . . . . . . . . . . 18 Introduction
Chapter 4. General Business Credits . . . . . . . . . . . . . . . 18 This publication provides general information about the
Business Credits . . . . . . . . . . . . . . . . . . . . . . . . . 18 federal tax laws that apply to you if you are a self-em-
How To Claim the Credit . . . . . . . . . . . . . . . . . . . . . 20 ployed person or a statutory employee. This publication
has information on business income, expenses, and tax
Chapter 5. Business Income ......... . . . . . . . . . . . 20 credits that may help you, as a small business owner, file
Kinds of Income .............. . . . . . . . . . . . 20 your income tax return.
Items That Are Not Income . . . . . . . . . . . . . . . . . . . 24
Guidelines for Selected Occupations . . . . . . . . . . . . 25 This publication does not cover the topics listed in
Accounting for Your Income . . . . . . . . . . . . . . . . . . 26
the following table.

Chapter 6. How To Figure Cost of Goods Sold . . . . . . . . . 27 IF you need information about: THEN you should see:
Figuring Cost of Goods Sold on Schedule C, Lines
Corporations . . . . . . . . . . . . . . . . . . . Pub. 542
35 Through 42 . . . . . . . . . . . . . . . . . . . . . . . . . 27
Farming . . . . . . . . . . . . . . . . . . . . . . . Pub. 225
Fishermen (Capital Construction Fund) . . . Pub. 595
Chapter 7. Figuring Gross Profit . . . . . . . . . . . . . . . . . . 29
International business . . . . . . . . . . . . . . IRS.gov/International
Items To Check . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Partnerships . . . . . . . . . . . . . . . . . . . . Pub. 541
Testing Gross Profit Accuracy . . . . . . . . . . . . . . . . . 30 Passive activities . . . . . . . . . . . . . . . . . Pub. 925
Additions to Gross Profit . . . . . . . . . . . . . . . . . . . . 30 Recordkeeping and starting a business . . . Pub. 583
Rental . . . . . . . . . . . . . . . . . . . . . . . . Pub. 527
Chapter 8. Business Expenses . . . . . . . . . . . . . . . . . . . 30 S corporations . . . . . . . . . . . . . . . . . . . Instructions for Form
Bad Debts .......... .. . . . . . . . . . . . . . . . . . 30 1120-S
Car and Truck Expenses . .. . . . . . . . . . . . . . . . . . 31
Depreciation . . . . . . . . . .. . . . . . . . . . . . . . . . . . 32
Employees' Pay . . . . . . .
Insurance . . . . . . . . . .
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33
33
Are You Self-Employed?
Interest . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . 34 You are a self-employed person if you carry on a trade or
Legal and Professional Fees . . . . . . . . . . . . . . . . . . 35 business as a sole proprietor or an independent
Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 contractor.
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 You do not have to carry on regular full-time busi-
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ! ness activities to be self-employed. Having a
Travel and Meals . . . . . . . . . . . . . . . . . . . . . . . . . 36 CAUTION part-time business in addition to your regular job

Business Use of Your Home . . . . . . . . . . . . . . . . . . 37 or business may be self-employment.

Other Expenses You Can Deduct . . . . . . . . . . . . . . . 38 Trade or business. A trade or business is generally an
Expenses You Cannot Deduct . . . . . . . . . . . . . . . . . 38 activity carried on to make a profit. The facts and
circumstances of each case determine whether or not an

2 Publication 334 (2023)

activity is a trade or business. You do not need to actually Pub. 555 for more information about community property
make a profit to be in a trade or business as long as you laws.
have a profit motive. You do need to make ongoing efforts Exception—Qualified joint venture (QJV). If you and
to further the interests of your business. your spouse each materially participate as the only mem-
Limited liability company (LLC). An LLC is an entity bers of a jointly owned and operated business, and you
formed under state law by filing articles of organization. file a joint return for the tax year, you can make a joint
Generally, for income tax purposes, a single-member LLC election to be treated as a QJV instead of a partnership for
is disregarded as an entity separate from its owner and the tax year. Making this election will allow you to avoid
reports its income and deductions on its owner's federal the complexity of Form 1065 but still give each spouse
income tax return. For example, if the single-member LLC credit for social security earnings on which retirement ben-
is not engaged in farming and the owner is an individual, efits are based. For an explanation of "material participa-
they may use Schedule C. tion," see the instructions for Schedule C (Form 1040),
Sole proprietor. A sole proprietor is someone who owns line G.
an unincorporated business by themselves. You are also a
Only businesses that are owned and operated by
sole proprietor for income tax purposes if you are an indi-
! spouses as co-owners (and not in the name of a
vidual and the sole member of a domestic LLC unless you
CAUTION state law entity) qualify for the election. Thus, a
elect to have the LLC treated as a corporation.
business owned and operated by spouses through an LLC
Independent contractor. People such as doctors, den- does not qualify for the election of a QJV.
tists, veterinarians, lawyers, accountants, contractors,
subcontractors, public stenographers, or auctioneers who To make this election, you must divide all items of
are in an independent trade, business, or profession in income, gain, loss, deduction, and credit attributable to
which they offer their services to the general public are the business between you and your spouse in accordance
generally independent contractors. However, whether they with your respective interests in the venture. Each of you
are independent contractors or employees depends on must file a separate Schedule C and a separate
the facts in each case. The general rule is that an individ- Schedule SE. For more information, see Qualified Joint
ual is an independent contractor if the person paying for Ventures in the Instructions for Schedule SE.
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 Additional Information
subject to self-employment tax. For more information on
What you need to know. Table A provides a list of ques-
determining whether you are an employee or independent
tions you need to answer to help you meet your federal tax
contractor, see Pub. 15-A, Employer's Supplemental Tax
obligations. After each question is the location in this pub-
Guide.
lication where you will find the related discussion.
The IRS mission. Provide America's taxpayers top-qual-
Are You a Statutory Employee? ity service by helping them understand and meet their tax
responsibilities and enforce the law with integrity and fair-
A statutory employee has a checkmark in box 13 of their ness to all.
Form W-2, Wage and Tax Statement. Statutory employees Comments and suggestions. We welcome your com-
use Schedule C to report their wages and expenses. ments about this publication and suggestions for future
editions.
You can send us comments through IRS.gov/
Business Owned and Operated FormComments. Or, you can write to the Internal Revenue
by Spouses Service, Tax Forms and Publications, 1111 Constitution
Ave. NW, IR-6526, Washington, DC 20224.
If you and your spouse jointly own and operate an
unincorporated business and share in the profits and Although we can’t respond individually to each com-
losses, you are partners in a partnership, whether or not ment received, we do appreciate your feedback and will
you have a formal partnership agreement. Do not use consider your comments and suggestions as we revise
Schedule C. Instead, file Form 1065, U.S. Return of our tax forms, instructions, and publications. Don’t send
Partnership Income. For more information, see Pub. 541, tax questions, tax returns, or payments to the above ad-
Partnerships. dress.
Exception—Community income. If you and your Getting answers to your tax questions. If you have a
spouse wholly own an unincorporated business as com- tax question not answered by this publication or the How
munity property under the community property laws of a To Get Tax Help section at the end of this publication, go
state, foreign country, or U.S. territory, you can treat the to the IRS Interactive Tax Assistant page at IRS.gov/
business either as a sole proprietorship or a partnership. Help/ITA where you can find topics by using the search
States with community property laws include Arizona, Cal- feature or viewing the categories listed.
ifornia, Idaho, Louisiana, Nevada, New Mexico, Texas, Getting tax forms, instructions, and publications. Go
Washington, and Wisconsin. A change in your reporting to IRS.gov/Forms to download current and prior-year
position will be treated as a conversion of the entity. See forms, instructions, and publications.

Publication 334 (2023) 3

Table A. 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.

Ordering tax forms, instructions, and publications. clean vehicle tax credit. See Form 8936 and its instruc-
Go to IRS.gov/OrderForms to order current forms, instruc- tions for more information.
tions, and publications; call 800-829-3676 to order
Business meal expense. The temporary 100% deduc-
prior-year forms and instructions. The IRS will process
tion for business meal expense has expired. The business
your order for forms and publications as soon as possible.
meal deduction reverts back to the previous 50% allowa-
Don’t resubmit requests you’ve already sent us. You can
ble deduction beginning January 1, 2023. See Meals and
get forms and publications faster online.
lodging, later, for more information.

What's New for 2023 What's New for 2024

The following are some of the tax changes for 2023.
The following are some of the tax changes for 2024. For
Maximum net earnings. The maximum net self-employ- information on other changes, go to IRS.gov.
ment earnings subject to the social security part of the
Maximum net earnings. The maximum net self-employ-
self-employment tax is $160,200 for 2023. There is no
ment earnings subject to the social security part of the
maximum limit on earnings subject to the Medicare part.
self-employment tax is $168,600 for 2024.
Standard mileage rate. For 2023, the standard mileage
Standard mileage rate. For 2024, the standard mileage
rate for the cost of operating your car, van, pickup, or
rate for the cost of operating your car, van, pickup, or
panel truck for each mile of business use during 2023 in-
panel truck for each mile of business use is 67 cents a
creased to 65.5 cents a mile.
mile.
For more information, see Car and Truck Expenses in
chapter 8.
Redesigned Form 1040-SS. For 2023, Schedule(s) C Reminders
and SE (Form 1040) are available to be filed with Form
1040-SS, if applicable. For additional information, see the Excess business loss limitation. Your loss from a trade
Instructions for Form 1040-SS. or business may be limited. Use Form 461 to determine
the amount of your excess business loss, if any. Your ex-
Bonus depreciation. The bonus depreciation deduction cess business loss will be included as income on line 8p
under section 168(k) begins its phaseout in 2023 with a of Schedule 1 (Form 1040) and treated as a net operating
reduction of the applicable limit from 100% to 80%. loss (NOL) that you must carry forward and deduct in a
Form 7205, Energy efficient commercial buildings subsequent tax year.
deduction. This form and its separate instructions are For more information about the excess business loss
used to claim the section 179D deduction for qualifying limitation, see Form 461 and its instructions.
energy efficient commercial building expenses that are Qualified paid sick leave and qualified paid family
now reported on new line 27b of Schedule C (Form 1040). leave payroll tax credit. Generally, the credit for quali-
See Form 7205 and its instructions for more information. fied sick and family leave wages, as enacted under the
Commercial clean vehicle credit. Businesses that buy Families First Coronavirus Response Act (FFCRA) and
a qualified commercial clean vehicle may qualify for a amended and extended by the COVID-related Tax Relief

4 Publication 334 (2023)

Act of 2020, for leave taken after March 31, 2020, and be- Gig Economy Tax Center. The gig (or on-demand, shar-
fore April 1, 2021, and the credit for qualified sick and fam- ing, or access) economy refers to an area of activity where
ily leave wages under sections 3131, 3132, and 3133 of people earn income providing on-demand work, services,
the Internal Revenue Code, as enacted under the Ameri- or goods. Go to IRS.gov/Gig to get more information about
can Rescue Plan Act of 2021 (the ARP), for leave taken the tax consequences of participating in the gig economy.
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
Photographs of Missing
credit for qualified sick and family leave wages in the quar- Children
ter of 2023 in which the qualified wages were paid. For The Internal Revenue Service is a proud partner with the
more information, see Form 941, lines 11b, 11d, 13c, and National Center for Missing & Exploited Children®
13e; and Form 944, lines 8b, 8d, 10d, and 10f. You must (NCMEC). Photographs of missing children selected by
include the full amount (both the refundable and nonre- the Center may appear in this publication on pages that
fundable portions) of the credit for qualified sick and family would otherwise be blank. You can help bring these
leave wages in gross income on line 3 or 4, as applicable, children home by looking at the photographs and calling
for the tax year that includes the last day of any calendar 1-800-THE-LOST (1-800-843-5678) if you recognize a
quarter with respect to which a credit is allowed. child.
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- 1.
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. Filing and Paying
Reportable transactions. You must file Form 8886, Re-
portable Transaction Disclosure Statement, to report cer- Business Taxes
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- Introduction
action understatements. Reportable transactions include:
This chapter explains the business taxes you may have to
1. Transactions the same as or substantially similar to pay and the forms you may have to file. It also discusses
tax avoidance transactions identified by the IRS; taxpayer identification numbers (TINs).
Table 1-1 lists the benefits of filing electronically.
2. Transactions offered to you under conditions of confi-
Table 1-2 lists the federal taxes you may have to pay,
dentiality for which you paid an advisor a minimum
their due dates, and the forms you use to report them.
fee;
Table 1-3 provides checklists that highlight the typical
3. Transactions for which you have, or a related party forms and schedules you may need to file if you ever go
has, contractual protection against disallowance of out of business.
the tax benefits;
You may want to get Pub. 509, Tax Calendars. It
4. Transactions that result in losses of at least $2 million TIP has tax calendars that tell you when to file returns
in any single tax year ($50,000 if from certain foreign and make tax payments.
currency transactions) or $4 million in any combina-
tion of tax years; and
Useful Items
5. Transactions the same as or substantially similar to You may want to see:
one of the types of transactions the IRS has identified
as a transaction of interest. Publication
For more information, see the Instructions for Form 505 Tax Withholding and Estimated Tax
8886 or Abusive Tax Shelters and Transactions.
505

583 Starting a Business and Keeping Records

Small Business and Self-Employed (SB/SE) Tax Cen-
583

ter. Do you need help with a tax issue or preparing your Form (and Instructions)
return, or do you need a free publication or form? The
461 Limitation on Business Losses
SB/SE Tax Center serves taxpayers who file Form 1040;
461

Form 1040-SR; Schedule C, E, or F; or Form 2106, as well 1040 U.S. Individual Income Tax Return
as small business taxpayers with assets under $10 mil-
1040

1040-SR U.S. Tax Return for Seniors

lion. For additional information, go to the SB/SE Tax Cen-
1040-SR

ter at IRS.gov/Businesses/Small. 1040-ES Estimated Tax for Individuals

1040-ES

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 5

 7205 Energy Efficient Commercial Buildings • By telephone at 267-941-1099 (not a toll-free number)
Deduction only if the principal business is located outside the
7205

United States or U.S. territories; or

Sch C (Form 1040) Profit or Loss From Business
• By mailing or faxing Form SS-4, Application for Em-
Sch C (Form 1040)

Sch SE (Form 1040) Self-Employment Tax

ployer Identification Number.
Sch SE (Form 1040)

See chapter 12 for information about getting publications

New EIN. You may need to get a new EIN if either the
and forms.
form or the ownership of your business changes. For more
information, see Pub. 1635, Understanding Your EIN.
Identification Numbers When you need identification numbers of other per-
sons. In operating your business, you will probably make
This section explains three types of TINs, who needs certain payments you must report on information returns.
them, when to use them, and how to get them. These payments are discussed under Information Re-
Social security number (SSN). Generally, use your turns, later in this chapter. You must give the recipient of
SSN as your TIN. You must put this number on each of these payments (the payee) a statement showing the total
your individual income tax forms, such as Form 1040 and amount paid during the year. You must include the payee's
its schedules. identification number and your identification number on
To apply for an SSN, use Form SS-5, Application for a the returns and statements.
Social Security Card. This form is available at Social Se- Employee. If you have employees, you must get an
curity Administration (SSA) offices or by calling SSN from each of them. Record the name and SSN of
800-772-1213. It is also available from the SSA website at each employee exactly as they are shown on the employ-
SSA.gov/forms/ss-5. ee's social security card. If the employee's name is not
correct as shown on the card, the employee should re-
Individual taxpayer identification number (ITIN). The quest a new card from the SSA. This may occur if the em-
IRS will issue an ITIN if you are a nonresident or resident ployee's name was changed due to marriage or divorce.
alien and you do not have and are not eligible to get an Form W-4, Employee's Withholding Allowance Certifi-
SSN. The ITIN will expire for any taxpayer who does not cate, is completed by each employee so the correct fed-
file a federal income tax return (or who is not included as a eral income tax can be withheld from their pay.
dependent on the return of another taxpayer) for 3 con- If your employee does not have an SSN, they should
secutive years. In general, if you need to obtain an ITIN, file Form SS-5 with the SSA.
you must attach Form W-7, Application for IRS Individual
Taxpayer Identification Number, with your signed, original, Other payee. If you make payments to someone who
completed tax return and any other required documenta- is not your employee and you must report the payments
tion and mail them to the address in the Instructions for on an information return, get that person's SSN. If you
Form W-7. Exceptions are covered in the instructions. If must report payments to an organization, such as a corpo-
you must include another person's SSN on your return ration or partnership, you must get its EIN.
and that person does not have and cannot get an SSN, To get the payee's SSN or EIN, use Form W-9, Re-
enter that person's ITIN. The application is also available quest for Taxpayer Identification Number and Certification.
in Spanish. The form is available at IRS.gov/FormW7. A payee who does not provide you with an identification
number may be subject to backup withholding. For infor-
An ITIN is for tax use only. It does not entitle the mation on backup withholding, see the Instructions for the
! holder to social security benefits or change the Requester of Form W-9 and the General Instructions for
holder's employment or immigration status. Certain Information Returns.
CAUTION

Employer identification number (EIN). You must also

have an EIN to use as a TIN if you do either of the follow-
ing.
Income Tax
• Pay wages to one or more employees. This part explains whether you have to file an income tax
return and when you file it. It also explains how you pay
• File pension or excise tax returns. the tax.
If you must have an EIN, include it along with your SSN
on your Schedule C as instructed. Do I Have To File an Income Tax
You can apply for an EIN:
Return?
• Online by clicking on the Employer ID Numbers (EINs)
link at IRS.gov/EIN as long as the principal business You have to file an income tax return for 2023 if your net
location is in the United States or U.S. territories—the earnings from self-employment were $400 or more. If your
EIN is issued immediately once the application infor- net earnings from self-employment were less than $400,
mation is validated; you still have to file an income tax return if you meet any
other filing requirement listed in the Instructions for Form
1040.

6 Chapter 1 Filing and Paying Business Taxes Publication 334 (2023)

How Do I File? Offset against debts. As with a paper return, you may
not get all of your refund if you owe certain past-due
File your income tax return on Form 1040 or 1040-SR amounts, such as federal tax, state tax, a student loan, or
and attach Schedule C. Enter the net profit or loss from child support. You will be notified if the refund you claimed
Schedule C on Schedule 1 (Form 1040). Use Schedule C has been offset against your debts.
to figure your net profit or loss from your business. If you Refund inquiries. You can check the status of your re-
operated more than one business as a sole proprietorship, fund if it has been at least 24 hours (4 weeks if you mailed
you must attach a separate Schedule C for each business. a paper return) from the date you filed your return. Be sure
to have a copy of your tax return available because you
IRS e-file (Electronic Filing) 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
You may be able to file your tax returns electronically using and use it to check your refund status.
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 • Call 800-829-1954 for automated refund information,
manual steps needed to process paper returns. As a re- and follow the recorded instructions.
sult, the processing of IRS e-file returns is faster and more The IRS can’t issue refunds before mid-February 2024
accurate than the processing of paper returns. As with a for returns that claimed the earned income credit or the
paper return, you are responsible for making sure your re- additional child tax credit. This applies to the entire refund,
turn contains accurate information and is filed on time. not just the portion associated with these credits.
Using IRS e-file does not affect your chances of an IRS Balance due. If your return shows that you owe tax, you
examination of your return. must pay it by the due date of your return (without regard
to any extension to file) to avoid late-payment penalties
You can file most commonly used business forms using and interest. For calendar year 2023, pay by April 15,
IRS e-file. For more information, go to IRS.gov. 2024. You have many options for making your payment,
Electronic signatures. Paperless filing is easier than including by scheduling an electronic funds withdrawal
you think and it's available to most taxpayers who file elec- from your checking or savings account or by debit or credit
tronically—including those first-time filers who were 16 or card. For more information about your payment options,
older at the end of 2023. If you file electronically using tax go to IRS.gov/Payments.
preparation software or a tax professional, you will sign
your return using the Self-Select PIN (personal identifica- Using an Authorized IRS e-file Provider
tion number) Method for IRS e-file. If you are married filing
jointly, you and your spouse will each need to create a PIN Many tax professionals can electronically file paperless re-
and enter these PINs as your electronic signatures. turns for their clients. You have two options.
To create a PIN, you must know your adjusted gross in- 1. You can prepare your return, take it to an authorized
come (AGI) from your originally filed 2022 income tax re- IRS e-file provider, and have the provider transmit it
turn (not from an amended return, Form 1040-X, or after electronically to the IRS.
receiving any math error notice from the IRS). You will also
need to provide your date of birth (DOB). Make sure your 2. You can have an authorized IRS e-file provider pre-
DOB is accurate and matches the information on record pare your return and transmit it for you electronically.
with the SSA before you e-file. To do this, check your an-
nual Social Security Statement. You will be asked to complete Form 8879, IRS e-file
With a Self-Select PIN, there is nothing to sign and Signature Authorization, to authorize the provider to enter
nothing to mail—not even your Form(s) W-2. For more de- your self-selected PIN on your return.
tails on the Self-Select PIN Method, go to IRS.gov.
Depending on the provider and the specific services re-
State returns. In most states, you can file an electronic quested, a fee may be charged. To find an authorized IRS
state return simultaneously with your federal return. For e-file provider near you, go to IRS.gov/Efile/Providers.
more information, check with your state tax agency, tax
professional, or IRS.gov. Using Your Personal Computer
Refunds. You can have your refund check mailed to you, A computer with Internet access is all you need to file your
or you can have your refund deposited directly to your tax return using IRS e-file. When you use your personal
checking or savings account. computer, you can e-file your return from your home any
With IRS e-file, your refund will be issued in half the time of the day or night. Sign your return electronically us-
time as when filing on paper. Most refunds are issued in ing a self-selected PIN to complete the process. There is
less than 21 days. no signature form to submit or Forms W-2 to send in.

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 7

Free software options for doing your taxes. If your Filing Through Employers and Financial
AGI was $79,000 or less in 2023, you can use free tax Institutions
software to prepare and e-file your tax return.
Free File. This public-private partnership, between Some businesses offer free e-file to their employees,
the IRS and tax software providers, makes approximately members, or customers. Others offer it for a fee. Ask your
a dozen brand-name commercial software products and employer or financial institution if they offer IRS e-file as
e-file available for free. Just go to IRS.gov/FreeFile for de- an employee, member, or customer benefit.
tails. You can review each software provider's criteria for
free usage or use an online tool to find which free software Free Help With Your Return
products match your situation. Some software providers
offer state tax return preparation for free. Free help in preparing your return is available nationwide
from IRS-trained volunteers. The Volunteer Income Tax
Free File Fillable Forms. The IRS also offers elec-
Assistance (VITA) program is designed to help low-in-
tronic versions of IRS paper forms that can also be e-filed
come taxpayers, and the Tax Counseling for the Elderly
for free. Free File Fillable Forms is best for people experi-
(TCE) program is designed to assist taxpayers age 60 or
enced in preparing their own tax returns. There is no in-
older with their tax returns. Some locations offer free elec-
come limitation to using these forms. Free File Fillable
tronic filing.
Forms does basic math calculations. It supports only fed-
eral tax forms.
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? 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
For calendar year 2023, Form 1040 or 1040-SR is due by tax payments, you can pay any tax due when you file your
April 15, 2024. If you use a fiscal year (explained in chap- return. For more information on estimated tax, see Pub.
ter 2), your return is due by the 15th day of the 4th month 505.
after the end of your fiscal year. If you file late, you may What are my options for paying estimated tax?
have to pay penalties and interest. You can pay your estimated tax electronically using vari-
ous options. If you pay electronically, there is no need to
If you cannot file your return on time, use Form 4868, mail in Form 1040-ES payment vouchers. These options
Application for Automatic Extension of Time To File U.S. include:
Individual Income Tax Return, to request an automatic
6-month extension. For calendar year taxpayers, this will 1. Paying electronically through the Electronic Federal
extend the tax filing due date until October 15. Filing an Tax Payment System (EFTPS),
extension does not extend the time to pay your taxes, only
2. Paying with Direct Pay by authorizing an electronic
the time to file the tax return.
funds withdrawal when you file Form 1040 or 1040-SR
electronically, or
How Do I Pay Income Tax?
3. Paying by credit or debit card over the phone or by In-
Federal income tax is a pay-as-you-go tax. You must pay it ternet.
as you earn or receive income during the year. An em- Other options include crediting an overpayment from your
ployee usually has income tax withheld from their pay. If 2022 return to your 2023 estimated tax, or mailing a check
you do not pay your tax through withholding, or do not pay or money order with a Form 1040-ES payment voucher.
enough tax that way, you might have to pay estimated tax.
EFTPS.
Estimated tax payments. You generally have to make 1. To enroll in EFTPS, go to EFTPS.gov or call
estimated tax payments if you expect to owe taxes, includ- 800-555-4477.
ing self-employment tax (discussed later), of $1,000 or

8 Chapter 1 Filing and Paying Business Taxes Publication 334 (2023)

 2. When you request a new EIN, you may be automati- Making false statements to get or to increase so-
cally enrolled in EFTPS. ! cial security benefits may subject you to penalties.
3. Benefits of EFTPS include the following.
CAUTION

a. The chance of an error in making your payments is The SSA time limit for posting self-employment in-
reduced. come. Generally, the SSA will give you credit only for
self-employment income reported on a tax return filed
b. You receive immediate confirmation of every trans- within 3 years, 3 months, and 15 days after the tax year
action. you earned the income. If you file your tax return or report
a change in your self-employment income after this time
Penalty for underpayment of tax. If you did not pay
limit, the SSA may change its record but only to remove or
enough income tax and self-employment tax for 2023 by
reduce the amount. The SSA will not change its records to
withholding or by making estimated tax payments, you
increase your self-employment income.
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 Who must pay SE tax. You must pay SE tax and file
you can use Form 2210, Underpayment of Estimated Tax Schedule SE (Form 1040) if either of the following applies.
by Individuals, Estates, and Trusts, to see if you have to
pay a penalty and to figure the penalty amount. For more 1. Your net earnings from self-employment (excluding
information, see Pub. 505. church employee income) were $400 or more.
2. You had church employee income of $108.28 or more.

Self-Employment (SE) Tax The SE tax rules apply no matter how old you are
and even if you are already receiving social secur-
SE tax is a social security and Medicare tax primarily for
!
CAUTION ity or Medicare benefits.
individuals who work for themselves. It is similar to the so-
cial security and Medicare taxes withheld from the pay of SE tax rate. The SE tax rate on net earnings is 15.3%
most wage earners. (12.4% social security tax plus 2.9% Medicare tax).
If you earned income as a statutory employee,
Maximum earnings subject to SE tax. Only the first
! you do not pay SE tax on that income. Social se-
$160,200 of your combined wages, tips, and net earnings
CAUTION curity and Medicare taxes should have already
in 2023 is subject to any combination of the 12.4% social
been withheld from those earnings.
security part of SE tax, social security tax, or the Tier 1
part of railroad retirement tax.
Social security coverage. Social security benefits are All your combined wages, tips, and net earnings in
available to self-employed persons just as they are to 2023 are subject to any combination of the 2.9% Medicare
wage earners. Your payments of SE tax contribute to your part of SE tax, Medicare tax, or Medicare part of railroad
coverage under the social security system. Social security retirement tax.
coverage provides you with retirement benefits, disability If wages and tips you receive as an employee are sub-
benefits, survivor benefits, and hospital insurance (Medi- ject to either social security tax or the Tier 1 part of rail-
care) benefits. road retirement tax, or both, and total at least $160,200,
Be sure to report all of your self-employment in- do not pay the 12.4% social security part of the SE tax on
come. By not reporting all of it, you could cause any of your net earnings. However, you must pay the 2.9%
!
CAUTION your social security benefits to be lower when you Medicare part of the SE tax on all your net earnings.
retire. Deduct one-half of your SE tax as an adjustment
TIP to income on line 15 of Schedule 1 (Form 1040).
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-
Additional Medicare Tax. A 0.9% Additional Medicare
sured if you have the required number of credits (also
Tax may apply to you if your net earnings from self-em-
called quarters of coverage), discussed next.
ployment exceed one of the following threshold amounts
Earning credits in 2023 and 2024. For 2023, you re- (based on your filing status).
ceived one credit, up to a maximum of four credits, for
• Married filing jointly—$250,000
each $1,640 ($1,730 for 2024) of income subject to social
security tax. Therefore, for 2023, if you had income • Married filing separately—$125,000
(self-employment and wages) of $6,560 that was subject • Single, Head of household, or Qualifying surviving
to social security tax, you received four credits ($6,560 ÷ spouse—$200,000
$1,640).
For an explanation of the number of credits you must If you have both wages and self-employment income,
have to be insured and the benefits available to you and the threshold amount for applying the Additional Medicare
your family under the social security program, consult your Tax on the self-employment income is reduced (but not
nearest SSA office. below zero) by the amount of wages subject to Additional

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 9

Medicare Tax. Use Form 8959, Additional Medicare Tax, More information. For information on methods of calcu-
to figure this tax. 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 C2 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 941 or 944 April 30, July 31, October 31, and January 31.3
tax withholding
See Pub. 15.
Providing information on social security and W-2 (to employee) January 31.3
Medicare taxes and income tax withholding
W-2 and W-3 (to the SSA) 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 See Information Returns Forms 1099—to the recipient by January 31
nonemployees and transactions with other and to the IRS by February 28 (March 31 if
persons 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.

If you incorrectly classify an employee as an inde-

Employment Taxes !
CAUTION
pendent contractor, you may be held liable for em-
ployment taxes for that worker plus a penalty.
If you have employees, you will need to file forms to report
employment taxes. Employment taxes include the follow- An independent contractor is someone who is self-em-
ing items. ployed. You generally do not have to withhold or pay any
taxes on payments made to an independent contractor.
• Social security and Medicare taxes.
• Federal income tax withholding.
• Federal unemployment tax (FUTA). Excise Taxes
For more information, see Pub. 15 (Circular E), Employ- This section identifies some of the excise taxes you may
er's Tax Guide. That publication explains your tax respon- have to pay and the forms you have to file if you do any of
sibilities as an employer. the following.
Do not reduce your deduction for social security • Manufacture or sell certain products.
! and Medicare taxes by the nonrefundable and re-
CAUTION fundable portions of the FFCRA and ARP of 2021
• Operate certain kinds of businesses.
credits for qualified sick and family leave wages claimed • Use various kinds of equipment, facilities, or products.
on an employment tax return. Instead, report the credits • Receive payment for certain services.
as income.
For more information on excise taxes, see Pub. 510, Ex-
To help you determine whether the people working for cise Taxes.
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.

10 Chapter 1 Filing and Paying Business Taxes Publication 334 (2023)

Form 720. The federal excise taxes reported on Form Form 1099-NEC. File Form 1099-NEC, Nonemployee
720, Quarterly Federal Excise Tax Return, consist of Compensation, for each person in the course of your busi-
several broad categories of taxes, including the following. ness to whom you have paid at least $600 during the year
in:
• Environmental taxes on the sale or use of ozone-de-
pleting chemicals and imported products containing or • Services performed by someone who is not your em-
manufactured with these chemicals. ployee (including parts and materials) (box 1),
• Communications and air transportation taxes. • Cash payments for fish (or other aquatic life) you pur-
chase from anyone engaged in the trade or business
• Fuel taxes.
of catching fish (box 1), or
• Tax on the first retail sale of heavy trucks, trailers, and
tractors. • Payments to an attorney (box 1).
You must also file Form 1099-NEC for each person
• Manufacturer’s taxes on the sale or use of a variety of from whom you have withheld any federal income tax (re-
different articles.
port in box 4) under the backup withholding rules regard-
• Tax on indoor tanning services. less of the amount of the payment.

Form 2290. There is a federal excise tax on the use of If you use Form 1099-NEC to report sales totaling
certain trucks, truck tractors, and buses on public high- ! $5,000 or more of consumer products, then you
CAUTION are required to file Form 1099-NEC with the IRS
ways. The tax applies to vehicles having a taxable gross
weight of 55,000 pounds or more. Report the tax on Form by January 31.
2290, Heavy Highway Vehicle Use Tax Return. For more
information, see the Instructions for Form 2290. Form W-2. You must file Form W-2 to report payments to
your employees, such as wages, tips, and other compen-
Depositing excise taxes. If you have to file a quarterly sation; and withheld income, social security, and Medicare
excise tax return on Form 720, you may have to deposit taxes. You can file Form W-2 online. For more information
your excise taxes before the return is due. For details on about Form W-2, see the General Instructions for Forms
depositing excise taxes, see the Instructions for Form 720. W-2 and W-3.

Penalties. The law provides for the following penalties if

Information Returns 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
If you make or receive payments in your business, you more information, see the General Instructions for Certain
may have to report them to the IRS on information returns. Information Returns.
The IRS compares the payments shown on the informa- • Failure to file information returns. This penalty applies
tion returns with each person's income tax return to see if if you do not file information returns by the due date,
the payments were included in income. You must give a do not include all required information, or report incor-
copy of each information return you are required to file to rect information.
the recipient or payer. In addition to the forms described
below, you may have to use other returns to report certain • Failure to furnish correct payee statements. This pen-
kinds of payments or transactions. For more details on in- alty applies if you do not furnish a required statement
formation returns and when you have to file them, see the to a payee by the required date, do not include all re-
General Instructions for Certain Information Returns. quired information, or report incorrect information.
Waiver of penalties. These penalties will not apply if
Form 1099-MISC. Use Form 1099-MISC, Miscellaneous
you can show that the failure was due to reasonable cause
Information, to report certain payments you make in your
and not willful neglect.
business. These payments include the following items.
In addition, there is no penalty for failure to include all
• Rent payments of $600 or more, other than rents paid required information, or for including incorrect information,
to real estate agents. on a de minimis (small) number of information returns if
• Prizes and awards of $600 or more that are not for you correct the errors by August 1 of the year the returns
services, such as winnings on TV or radio shows. 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-
• Royalty payments of $10 or more. quired to file for the year.)
• Payments to certain crew members by owners or op-
erators of fishing boats. Form 8300. You must file Form 8300, Report of Cash
Payments Over $10,000 Received in a Trade or Business,
• Amounts paid for the purchase of fish for resale from if you receive more than $10,000 in cash in one transac-
any person engaged in the business of catching fish. tion, or two or more related business transactions. Cash
You also use Form 1099-MISC to report your sales of includes U.S. and foreign coin and currency. It also in-
$5,000 or more of consumer products to a person for re- cludes certain monetary instruments such as cashier's
sale anywhere other than in a permanent retail establish- and traveler's checks and money orders. Cash does not
ment. include a check drawn on an individual's personal account

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 11

(personal check). For more information, see Pub. 1544, 8300, or structuring a transaction to evade reporting re-
Reporting Cash Payments of Over $10,000. quirements.
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
Table 1-3. 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.

Accounting Periods
When preparing a statement of income and expenses
2. (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
Accounting Periods and the following tax years.

Methods • A calendar tax year.

• A fiscal tax year.
Unless you have a required tax year, you adopt a tax year
Introduction by filing your first income tax return using that tax year. A
You must figure your taxable income and file an income required tax year is a tax year required under the Internal
tax return for an annual accounting period called a tax Revenue Code or the Income Tax Regulations.
year. Also, you must consistently use an accounting
method that clearly shows your income and expenses for Calendar tax year. A calendar tax year is 12 consecutive
the tax year. months beginning January 1 and ending December 31.
You must adopt the calendar tax year if any of the fol-
lowing apply.
Useful Items
You may want to see: • You do not keep books.
• You have no annual accounting period.
Publication
• Your present tax year does not qualify as a fiscal year.
538 Accounting Periods and Methods
• Your use of the calendar tax year is required under the
538

See chapter 12 for information about getting publications Internal Revenue Code or the Income Tax Regula-
and forms. tions.

12 Chapter 2 Accounting Periods and Methods Publication 334 (2023)

 If you filed your first income tax return using the calen- methods. For example, you can figure your business in-
dar tax year and you later begin business as a sole pro- come under an accrual method, even if you use the cash
prietor, you must continue to use the calendar tax year un- method to figure personal items.
less you get IRS approval to change it or are otherwise
allowed to change it without IRS approval. For more infor- Two or more businesses. If you have two or more sepa-
mation, see Change in tax year, later. rate and distinct businesses, you can use a different ac-
If you adopt the calendar tax year, you must maintain counting method for each if the method clearly reflects the
your books and records and report your income and ex- income of each business. They are separate and distinct
penses for the period from January 1 through December only if you maintain complete and separate books and re-
31 of each year. cords for each business.

Fiscal tax year. A fiscal tax year is 12 consecutive Cash Method

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- Most individuals and many sole proprietors with no inven-
ies from 52 to 53 weeks but does not have to end on the tory use the cash method because they find it easier to
last day of a month. keep cash method records. However, if an inventory is
If you adopt a fiscal tax year, you must maintain your necessary to account for your income, you must generally
books and records and report your income and expenses use an accrual method of accounting for sales and pur-
using the same tax year. chases, unless you are a small business taxpayer (defined
For more information on a fiscal tax year, including a later in this chapter). For more information, see Invento-
52-53-week tax year, see Pub. 538. ries, later.
Change in tax year. Generally, you must file Form 1128,
Application To Adopt, Change, or Retain a Tax Year, to re- Income
quest IRS approval to change your tax year. See the In-
structions for Form 1128 for exceptions. If you qualify for Under the cash method, include in your gross income all
an automatic approval request, a user fee is not required. items of income you actually or constructively receive dur-
If you do not qualify for automatic approval, a ruling must ing your tax year. If you receive property or services, you
be requested. See the Instructions for Form 1128 for infor- must include their fair market value in income.
mation about user fees if you are requesting a ruling.
Example. On December 30, 2022, a client sent you a
check for interior decorating services you provided to
Accounting Methods them. You received the check on January 4, 2023. You
must include the amount of the check in income for 2023.
An accounting method is a set of rules used to determine Constructive receipt. You have constructive receipt of
when and how income and expenses are reported. Your income when an amount is credited to your account or
accounting method includes not only the overall method of made available to you without restriction. You do not need
accounting you use, but also the accounting treatment you to have possession of it. If you authorize someone to be
use for any material item. your agent and receive income for you, you are treated as
You choose an accounting method for your business having received it when your agent received it.
when you file your first income tax return that includes a
Schedule C for the business. After that, if you want to Example. Interest is credited to your bank account in
change your accounting method, you must generally get December 2023. You do not withdraw it or enter it into
IRS approval. See Change in Accounting Method, later. your passbook until 2024. You must include it in your
gross income for 2023.
Kinds of methods. Generally, you can use any of the fol-
Delaying receipt of income. You cannot hold checks
lowing accounting methods.
or postpone taking possession of similar property from
• Cash method. one tax year to another to avoid paying tax on the income.
• An accrual method. You must report the income in the year the property is re-
ceived or made available to you without restriction.
• Special methods of accounting for certain items of in-
come and expenses. Example. A service contractor was entitled to receive
• Combination method using elements of two or more of a $10,000 payment on a contract in December 2023. They
the above. were told in December that their payment was available.
At their request, they were not paid until January 2024.
You must use the same accounting method to figure They must include this payment in their 2023 income be-
your taxable income and to keep your books. Also, you cause it was constructively received in 2023.
must use an accounting method that clearly shows your
income. Checks. Receipt of a valid check by the end of the tax
year is constructive receipt of income in that year, even if
Business and personal items. You can account for you cannot cash or deposit the check until the following
business and personal items under different accounting year.

Publication 334 (2023) Chapter 2 Accounting Periods and Methods 13

 Example. You received a check for $500 on December you did not receive payment until February 2024. You
30, 2023, from a client. You could not deposit the check in must include the amount received for the computer in your
your business account until January 3, 2024. You must in- 2023 income.
clude this fee in income for 2023.
Debts paid by another person or canceled. If your Income—Special Rules
debts are paid by another person or are canceled by your
creditors, you may have to report part or all of this debt re- The following are special rules that apply to advance pay-
lief as income. If you receive income in this way, you con- ments, estimating income, and changing a payment
structively receive the income when the debt is canceled schedule for services.
or paid. For more information, see Canceled Debt under
Estimated income. If you include a reasonably estima-
Kinds of Income in chapter 5.
ted amount in gross income, and later determine the exact
Repayment of income. If you include an amount in in- amount is different, take the difference into account in the
come and in a later year you have to repay all or part of it, tax year in which you make the determination.
you can usually deduct the repayment in the year in which
Change in payment schedule for services. If you per-
you make it. If the amount you repay is over $3,000, a spe-
form services for a basic rate specified in a contract, you
cial rule applies. For details about the special rule, see Re-
must accrue the income at the basic rate, even if you
payments in chapter 8 of Pub. 17.
agree to receive payments at a lower rate until you com-
plete the services and then receive the difference.
Expenses
Advance payments. Generally, you report an advance
Under the cash method, you generally deduct expenses in payment as income in the year you receive the payment.
the tax year in which you actually pay them. This includes However, if you receive an advance payment, you can
business expenses for which you contest liability. How- elect to postpone including the advance payment in in-
ever, you may not be able to deduct an expense paid in come until the next tax year. You cannot postpone includ-
advance or you may be required to capitalize certain ing any payment beyond that tax year.
costs, as explained later under Uniform Capitalization For more information, see Pub. 538 and section 451.
Rules.
Expenses
Expenses paid in advance. You can deduct an expense
you pay in advance only in the year to which it applies.
Under an accrual method of accounting, you generally de-
Example. You are a calendar year taxpayer and you duct or capitalize a business expense when both the fol-
pay $1,000 in 2023 for a business insurance policy effec- lowing apply.
tive for 1 year, beginning July 1. You can deduct $500 in 1. The all-events test has been met. The test has been
2023 and $500 in 2024. met when:
a. All events have occurred that fix the fact of liability,
Accrual Method and
Under an accrual method of accounting, you generally re- b. The liability can be determined with reasonable
port income in the year earned and deduct or capitalize accuracy.
expenses in the year incurred. The purpose of an accrual 2. Economic performance has occurred.
method of accounting is to match income and expenses in
the correct year. Economic performance. You generally cannot deduct or
capitalize a business expense until economic perform-
Income—General Rule ance occurs. If your expense is for property or services
provided to you, or for your use of property, economic per-
Under an accrual method, you generally include an formance occurs as the property or services are provided
amount in your gross income for the tax year in which all or as the property is used. If your expense is for property
events that fix your right to receive the income have occur- or services you provide to others, economic performance
red and you can determine the amount with reasonable occurs as you provide the property or services. An excep-
accuracy. For a taxpayer with an applicable financial state- tion allows certain recurring items to be treated as incur-
ment or other financial statement as the Secretary may red during a tax year even though economic performance
specify, the all-events test for an item of gross income is has not occurred. For more information on economic per-
considered met no later than when taken into account in formance, see Economic Performance under Accrual
an applicable financial statement or such other financial Method in Pub. 538.
statement.
Example. You are a calendar year taxpayer and use
Example. You are a calendar year accrual method tax- an accrual method of accounting. You buy office supplies
payer. You sold a computer on December 28, 2023. You in December 2023. You receive the supplies and the bill in
billed the customer in the first week of January 2024, but December, but you pay the bill in January 2024. You can

14 Chapter 2 Accounting Periods and Methods Publication 334 (2023)

deduct the expense in 2023 because all events that fix the Inventories
fact of liability have occurred, the amount of the liability
could be reasonably determined, and economic perform- Generally, if you produce, purchase, or sell merchandise
ance occurred in that year. in your business, you must keep an inventory and use an
Your office supplies may qualify as a recurring expense. accrual method for purchases and sales of merchandise.
In that case, you can deduct them in 2023 even if the sup-
plies are not delivered until 2024 (when economic per- Exception for small business taxpayers. If you are a
formance occurs). small business taxpayer, you can choose not to keep an
inventory, but you must still use a method of accounting
Keeping inventories. When the production, purchase, or for inventory that clearly reflects income. If you choose not
sale of merchandise is an income-producing factor in your to keep an inventory, you won’t be treated as failing to
business, you must generally take inventories into account clearly reflect income if your method of accounting for in-
at the beginning and the end of your tax year, unless you ventory treats inventory as non-incidental material or sup-
are a small business taxpayer. If you must account for an plies, or conforms to your financial accounting treatment
inventory, you must generally use an accrual method of of inventories. If, however, you choose to keep an inven-
accounting for your purchases and sales. For more infor- tory, you must generally use an accrual method of ac-
mation, see Inventories, later. counting and value the inventory each year to determine
your cost of goods sold in Part III of Schedule C.
Special rule for related persons. You cannot deduct
business expenses and interest owed to a related person Small business taxpayer. You qualify as a small busi-
who uses the cash method of accounting until you make ness taxpayer if you (a) have average annual gross re-
the payment and the corresponding amount is includible ceipts of $29 million or less for the 3 prior tax years, and
in the related person's gross income. Determine the rela- (b) are not a tax shelter (as defined in section 448(d)(3)). If
tionship, for this rule, as of the end of the tax year for your business has not been in existence for all of the
which the expense or interest would otherwise be deducti- 3-tax-year period used in figuring average gross receipts,
ble. If a deduction is not allowed under this rule, the rule base your average on the period it has existed, and if your
will continue to apply even if your relationship with the per- business has a predecessor entity, include the gross re-
son ends before the expense or interest is includible in the ceipts of the predecessor entity from the 3-tax-year period
gross income of that person. when figuring average gross receipts. If your business (or
Related persons include members of your immediate predecessor entity) had short tax years for any of the
family, including siblings (either whole or half), your 3-tax-year period, annualize your business’ gross receipts
spouse, ancestors, and lineal descendants. For a list of for the short tax years that are part of the 3-tax-year pe-
other related persons, see section 267 of the Internal Rev- riod. See Pub. 538 for more information.
enue Code.
Treating inventory as non-incidental material or
supplies. If you account for inventories as materials and
Combination Method supplies that are not incidental, you deduct the amounts
paid or incurred to acquire or produce the inventoriable
You can generally use any combination of cash, accrual,
items treated as non-incidental materials and supplies in
and special methods of accounting if the combination
the year in which they are first used or consumed in your
clearly shows your income and expenses and you use it
operations. Inventory treated as non-incidental materials
consistently. However, the following restrictions apply.
and supplies is used or consumed in your business in the
• If an inventory is necessary to account for your in- year you provide the inventory to your customers.
come, you must generally use an accrual method for
Financial accounting treatment of inventories.
purchases and sales. (See, however, Inventories,
Your financial accounting treatment of inventories is deter-
later.) You can use the cash method for all other items
mined with regard to the method of accounting you use in
of income and expenses.
your applicable financial statement (as defined in section
• If you use the cash method for figuring your income, 451(b)(3)) or, if you do not have an applicable financial
you must use the cash method for reporting your ex- statement, with regard to the method of accounting you
penses. use in your books and records that have been prepared in
• If you use an accrual method for reporting your expen- accordance with your accounting procedures.
ses, you must use an accrual method for figuring your Changing your method of accounting for inven-
income. tory. If you want to change your method of accounting for
• If you use a combination method that includes the inventory, you must file Form 3115, Application for Change
cash method, treat that combination method as the in Accounting Method. See Change in Accounting
cash method. 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.

Publication 334 (2023) Chapter 2 Accounting Periods and Methods 15

 • Raw materials. • Depreciation, discussed in Pub. 946, How To Depreci-
ate Property.
• Work in process.
• Finished products. • Installment sales, discussed in Pub. 537, Installment
Sales.
• Supplies that physically become a part of the item in-
tended for sale. • Long-term contract methods of accounting. See sec-
tion 460.
Valuing inventory. You must value your inventory at the
beginning and end of each tax year to determine your cost Change in Accounting Method
of goods sold (Schedule C, line 42). To determine the
value of your inventory, you need a method for identifying Once you have set up your accounting method, you must
the items in your inventory and a method for valuing these generally get IRS approval before you can change to an-
items. other method. A change in your accounting method in-
Inventory valuation rules cannot be the same for all cludes a change in:
kinds of businesses. The method you use to value your in- 1. Your overall method, such as from cash to an accrual
ventory must conform to generally accepted accounting method; and
principles for similar businesses and must clearly reflect
income. Your inventory practices must be consistent from 2. Your treatment of any material item.
year to year.
To get approval, you must file Form 3115. You can get
More information. For more information about invento- IRS approval to change an accounting method under ei-
ries, see Pub. 538. 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
Uniform Capitalization Rules 3115.
Under the uniform capitalization rules, you must capitalize Automatic change procedures. Certain taxpayers can
the direct costs and part of the indirect costs for produc- presume to have IRS approval to change their method of
tion or resale activities. Include these costs in the basis of accounting. The approval is granted for the tax year for
property you produce or acquire for resale, rather than which the taxpayer requests a change (year of change), if
claiming them as a current deduction. You recover the the taxpayer complies with the provisions of the automatic
costs through depreciation, amortization, or cost of goods change procedures. No user fee is required for an applica-
sold when you use, sell, or otherwise dispose of the prop- tion filed under an automatic change procedure generally
erty. covered in Revenue Procedure 2015-13, 2015-5 I.R.B.
419, which is available at IRS.gov/IRB/
Activities subject to the uniform capitalization rules. 2015-05_IRB#RP-2015-13 (or its successor).
You may be subject to the uniform capitalization rules if Generally, you must use Form 3115 to request an auto-
you do any of the following, unless the property is pro- matic change. For more information, see the Instructions
duced for your use other than in a business or an activity for Form 3115.
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. 3.
Exceptions. These rules do not apply to the following.
1. Small business taxpayers, defined earlier under In- Dispositions of Business
ventories.
2. Property you produce if your indirect costs of produc- Property
ing the property are $200,000 or less.

Special Methods Introduction

If you dispose of business property, you may have a gain
There are special methods of accounting for certain items or loss that you report on your tax return. However, in
of income or expense. These include the following. some cases, you may have a gain that is not taxable or a
loss that is not deductible. This chapter discusses
• Amortization, discussed in chapter 7 of Pub. 225.
whether you have a disposition, how to figure the gain or
• Bad debts, discussed under Topic No. 453, Bad Debt loss, and where to report the gain or loss.
Deduction.
• Depletion, discussed in chapter 7 of Pub. 225.

16 Chapter 3 Dispositions of Business Property Publication 334 (2023)

Useful Items year of the sale. If you finance the buyer's purchase of
You may want to see: your property, instead of having the buyer get a loan or
mortgage from a third party, you probably have an install-
Publication ment sale.
For more information about installment sales, see Pub.
544 Sales and Other Dispositions of Assets
537.
544

Form (and Instructions)

Sale of a business. The sale of a business is usually not
4797 Sales of Business Property
4797

a sale of one asset. Instead, all the assets of the business

Sch D (Form 1040) Capital Gains and Losses are sold. Generally, when this occurs, each asset is trea-
ted as being sold separately for determining the treatment
Sch D (Form 1040)

See chapter 12 for information about getting publications of gain or loss.

and forms. 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
What Is a Disposition of Acquisition Statement Under Section 1060, to provide this
Property? information. The buyer and seller should each attach Form
8594 to their federal income tax return for the year in
A disposition of property includes the following transac- which the sale occurred.
tions. For more information about the sale of a business, see
Pub. 544.
• 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 How Do I Figure a Gain or
lease. Loss?
• You receive money for granting the exclusive use of a
copyright throughout its life in a particular medium. Table 3-1. How To Figure a Gain or Loss
• You transfer property to satisfy a debt.
IF your... THEN you have a...
• You abandon property. adjusted basis is more than the amount
• Your bank or other financial institution forecloses on realized loss.
your mortgage or repossesses your property. amount realized is more than the
adjusted basis gain.
• Your property is damaged, destroyed, or stolen, and
you receive property or money in payment.
Basis, adjusted basis, amount realized, fair market
• Your property is condemned, or disposed of under the value, and amount recognized are defined next. You need
threat of condemnation, and you receive property or to know these definitions to figure your gain or loss.
money in payment.
Basis. The cost or purchase price of property is usually
• You give property away. its basis for figuring the gain or loss from its sale or other
For details about damaged, destroyed, or stolen property, disposition. However, if you acquired the property by gift,
see Pub. 547, Casualties, Disasters, and Thefts. For de- by inheritance, or in some way other than buying it, you
tails about other dispositions, see chapter 1 of Pub. 544. must use a basis other than its cost. For more information
about basis, see Pub. 551, Basis of Assets.
Nontaxable exchanges. Certain exchanges of property
are not taxable. This means any gain from the exchange is Adjusted basis. The adjusted basis of property generally
not recognized and you cannot deduct any loss. Your gain is your original cost or other basis plus certain additions,
or loss will not be recognized until you sell or otherwise and minus certain deductions such as depreciation and
dispose of the property you receive. casualty losses. In determining gain or loss, the costs of
transferring property to a new owner, such as selling ex-
Like-kind exchanges. A like-kind exchange is the ex-
penses, are added to the adjusted basis of the property.
change of property for other like-kind property. It is the
most common type of nontaxable exchange. To be a Amount realized. Generally, the amount you realize from
like-kind exchange, the property traded and the property a disposition is the total of all money you receive plus the
received must be both (a) real property, and (b) business fair market value of all property or services you receive.
or investment property. The amount you realize also includes any of your liabilities
Report the exchange of like-kind property on Form that were assumed by the buyer and any liabilities to
8824, Like-Kind Exchanges. For more information about which the property you transferred is subject, such as real
like-kind exchanges, see chapter 1 of Pub. 544. estate taxes or a mortgage.
Installment sales. An installment sale is a sale of prop-
erty where you receive at least one payment after the tax

Publication 334 (2023) Chapter 3 Dispositions of Business Property 17

Fair market value. Fair market value is the price at which Dispositions of business property and depreciable
the property would change hands between a buyer and a property. Use Form 4797. If you have taxable gain, you
seller, neither having to buy or sell, and both having rea- may also have to use Schedule D (Form 1040).
sonable knowledge of all necessary facts.
Like-kind exchanges. Use Form 8824. You may also
Amount recognized. Your gain or loss realized from a have to use Form 4797 and Schedule D (Form 1040).
disposition of property is usually a recognized gain or loss
for tax purposes. Recognized gains must be included in Installment sales. Use Form 6252, Installment Sale In-
gross income. Recognized losses are deductible from come. You may also have to use Form 4797 and Sched-
gross income. However, a gain or loss realized from cer- ule D (Form 1040).
tain exchanges of property is not recognized. See
Casualties and thefts. Use Form 4684, Casualties and
Nontaxable exchanges, earlier. Also, you cannot deduct a
Thefts. You may also have to use Form 4797.
loss from the disposition of property held for personal use.
Condemned property. Use Form 4797. You may also
Is My Gain or Loss Ordinary or have to use Schedule D (Form 1040).
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
4.
part, everything you own and use for personal purposes or
investment is a capital asset.
General Business Credits
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- Introduction
erty longer than 1 year, you may be able to treat the gain
Your general business credit for the year consists of your
or loss as a capital gain or loss. These gains and losses
carryforward of business credits from prior years plus the
are called section 1231 gains and losses.
total of your current year business credits. In addition, your
For more information about ordinary and capital gains general business credit for the current year may be in-
and losses, see chapters 2 and 3 of Pub. 544. creased later by the carryback of business credits from
later years. You subtract this credit directly from your tax.
Is My Capital Gain or Loss Short Term
Useful Items
or Long Term? You may want to see:
If you have a capital gain or loss, you must determine Form (and Instructions)
whether it is long term or short term. Whether a gain or
loss is long or short term depends on how long you own 3800 General Business Credit
3800

the property before you dispose of it. The time you own 6251 Alternative Minimum Tax—Individuals
property before disposing of it is called the holding period.
6251

See chapter 12 for information about getting publications

and forms.
Table 3-2. Do I Have a Short-Term or
Long-Term Gain or Loss?
Business Credits
IF you hold the property... THEN you have a...
1 year or less short-term capital gain or loss. All of the following credits are part of the general business
credit. The form you use to figure each credit is shown in
more than 1 year long-term capital gain or loss.
parentheses. You will also have to complete Form 3800.
For more information about short-term and long-term Some credits have expiration dates. Check the instruc-
capital gains and losses, see chapter 4 of Pub. 544. tions for each credit to make sure it is available for 2023.

Alternative fuel vehicle refueling property credit

Where Do I Report Gains and (Form 8911). This credit applies to the cost of any quali-
fied fuel vehicle refueling property. For more information,
Losses? see Form 8911.

Report gains and losses from the following dispositions on Biodiesel, renewable diesel, or sustainable aviation
the forms indicated. The instructions for the forms explain fuels credits (Form 8864). For more information, see
how to fill them out. Form 8864.

18 Chapter 4 General Business Credits Publication 334 (2023)

Biofuel producer credit (Form 6478). For more infor- Employer credit for paid family and medical leave
mation, see Form 6478. (Form 8994). This credit applies for wages paid to quali-
fying employees while they are on family and medical
Carbon oxide sequestration credit (Form 8933). This leave, subject to certain conditions. For more information,
credit is for carbon oxide that is captured at a qualified fa- see Form 8994.
cility and disposed of in secure geological storage or used
in a qualified enhanced oil or natural gas recovery project. Empowerment zone employment credit (Form 8844).
For more information, see Form 8933. You may qualify for this credit if you have employees and
are engaged in a business in an empowerment zone for
Credit for employer social security and Medicare which the credit is available. For more information, see
taxes paid on certain employee tips (Form 8846). Form 8844.
This credit is generally equal to your (employer's) portion
of social security and Medicare taxes paid on tips re- Energy efficient home credit (Form 8908). This credit
ceived by employees of your food and beverage establish- is available for eligible contractors of certain homes sold
ment where tipping is customary. The credit applies re- for use as a residence. For more information, see Form
gardless of whether the food is consumed on or off your 8908.
business premises. For more information, see Form 8846.
Investment credit (Form 3468). The investment credit
Credit for employer differential wage payments is the total of the several credits. For more information,
(Form 8932). This credit provides businesses with an in- see Form 3468.
centive to continue to pay wages to an employee perform-
ing services on active duty in the uniformed services of Low sulfur diesel fuel production credit (Form 8896).
the United States for a period of more than 30 days. For For more information, see Form 8896.
more information, see Form 8932.
Low-income housing credit (Form 8586). This credit
Credit for employer-provided childcare facilities and generally applies to each qualified low-income building
services (Form 8882). This credit applies to the quali- placed in service after 1986. For more information, see
fied expenses you paid for employee childcare and quali- Form 8586.
fied expenses you paid for childcare resource and referral
New markets credit (Form 8874). This credit is for
services. For more information, see Form 8882.
qualified equity investments made in qualified community
Credit for increasing research activities (Form 6765). development entities. For more information, see Form
This credit is designed to encourage businesses to in- 8874.
crease the amounts they spend on research and experi-
Orphan drug credit (Form 8820). This credit applies to
mental activities, including energy research. For more in-
qualified expenses incurred in testing certain drugs for
formation, see Form 6765.
rare diseases and conditions. For more information, see
Credit for small employer health insurance premiums Form 8820.
(Form 8941). This credit applies to the cost of certain
Clean vehicle credits (Form 8936). These credits are
health insurance coverage you provide to certain employ-
for certain clean vehicles placed in service during the tax
ees. For more information, see Form 8941.
year. For more information, see Form 8936.
Credit for small employer pension plan startup costs,
Qualified railroad track maintenance credit (Form
auto-enrollment, and military spouse participation
8900). This credit applies to qualified railroad track main-
(Form 8881). This credit applies to pension plan startup
tenance expenditures paid or incurred during the tax year.
costs of a new qualified defined benefit or defined contri-
For more information, see Form 8900.
bution plan (including a section 401(k) plan), SIMPLE
plan, or SEP plan. For more information, see Pub. 560, Renewable electricity production credit (Form 8835).
Retirement Plans for Small Business. This credit is for renewable energy sources produced in
the United States or U.S. territories from qualified energy
Disabled access credit (Form 8826). This credit is a
resources at a qualified facility. For more information, see
nonrefundable tax credit for an eligible small business that
Form 8835.
pays or incurs expenses to provide access to persons
who have disabilities. You must pay or incur the expenses Work opportunity credit (Form 5884). This credit pro-
to enable your business to comply with the Americans vides businesses with an incentive to hire individuals from
with Disabilities Act of 1990. For more information, see targeted groups that have a particularly high unemploy-
Form 8826. ment rate or other special employment needs. For more
information, see Form 5884.
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.

Publication 334 (2023) Chapter 4 General Business Credits 19

How To Claim the Credit Kinds of Income
To claim a general business credit, you will first have to get You must report on your tax return all income you receive
the forms you need to claim your current year business from your business unless it is excluded by law. In most
credits. cases, your business income will be in the form of cash,
checks, and credit card charges. But business income can
In addition to the credit form, you also need to file Form be in other forms, such as property or services. These and
3800. 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
CAUTION income), you must report that income on your tax

return unless it is exempt from tax under U.S. law. If you

5. 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-
Business Income dent Aliens Abroad.

Introduction Bartering for Property or Services

This chapter primarily explains business income and how Bartering is an exchange of property or services. You must
to account for it on your tax return and what items are not include in your gross receipts, at the time received, the fair
considered income, and it gives guidelines for selected market value of property or services you receive in ex-
occupations. change for something else. If you exchange services with
If there is a connection between any income you re- another person and you both have agreed ahead of time
ceive and your business, the income is business income. on the value of the services, that value will be accepted as
A connection exists if it is clear that the payment of in- the fair market value unless the value can be shown to be
come would not have been made if you did not have the otherwise.
business.
You can have business income even if you are not in- Example 1. You are a self-employed lawyer. You per-
volved in the activity on a regular full-time basis. Income form legal services for a client, a small corporation. In pay-
from work you do on the side in addition to your regular ment for your services, you receive shares of stock in the
job can be business income. For example, you may be in corporation. You must include the fair market value of the
the business of providing services for a ride-sharing busi- shares in income.
ness as a second job.
You report most business income, such as income from Example 2. You are an artist and create a work of art
selling your products or services, on Schedule C. But you to compensate your landlord for the rent-free use of your
report the income from the sale of business assets, such apartment. You must include the fair rental value of the
as land and office buildings, on other forms instead of apartment in your gross receipts. Your landlord must in-
Schedule C. For information on selling business assets, clude the fair market value of the work of art in their rental
see chapter 3. income.

Nonemployee compensation. Business income in- Example 3. You are a self-employed accountant. Both
cludes amounts you received in your business that were you and a house painter are members of a barter club, an
properly shown on Forms 1099-NEC. This includes organization that each year gives its members a directory
amounts reported as nonemployee compensation in box 1 of members and the services each member provides.
of the form. You can find more information in the instruc- Members get in touch with other members directly and
tions on the back of the Form 1099-NEC you received. bargain for the value of the services to be performed.
In return for accounting services you provided for the
Payment card and third-party network transactions. house painter's business, the house painter painted your
If you are in a business, you may receive a Form 1099-K home. You must include in gross receipts the fair market
representing the total dollar amount of total reportable value of the services you received from the house painter.
payment transactions. This may not be the amount you The house painter must include the fair market value of
should report as income, as it may not include all the re- your accounting services in their gross receipts.
ceipts and it may include items that are not included in
your receipts (such as sales tax). Example 4. You are a member of a barter club that
uses credit units to credit or debit members' accounts for
Business income deduction. Income you report on goods or services provided or received. As soon as units
Schedule C may be qualified business income and entitle are credited to your account, you can use them to buy
you to a deduction on Form 1040 or 1040-SR, line 13. See goods or services or sell or transfer the units to other
Form 8995-A or Form 8995 to figure your deduction, if any. members.

20 Chapter 5 Business Income Publication 334 (2023)

 You must include the value of credit units you received convenience and are not normally provided to maintain
in your gross receipts for the tax year in which the units the lots in a condition for occupancy. Services are sub-
are credited to your account. stantial if the compensation for the services makes up a
The dollar value of units received for services by an material part of the tenants' rental payments.
employee of the club, who can use the units in the same Examples of services that are not normally provided for
manner as other members, must be included in the em- the tenants' convenience include supervising and main-
ployee's gross income for the tax year in which received. It taining a recreational hall provided by the park, distributing
is wages subject to social security and Medicare taxes a monthly newsletter to tenants, operating a laundry fa-
(FICA), FUTA taxes, and income tax withholding. See cility, and helping tenants buy or sell their trailers.
Pub. 15. Examples of services that are normally provided to
maintain the lots in a condition for tenant occupancy in-
Example 5. You operate a plumbing business and use clude city sewerage, electrical connections, and road-
the cash method of accounting. You join a barter club and ways.
agree to provide plumbing services to any member for a
specified number of hours. Each member has access to a Hotels, boarding houses, and apartments. Rental in-
directory that lists the members of the club and the serv- come you receive for the use or occupancy of hotels,
ices available. boarding houses, or apartment houses is subject to SE
Members contact each other directly and request serv- tax if you provide services for the occupants.
ices to be performed. You are not required to provide serv- Generally, you are considered to provide services for
ices unless requested by another member, but you can the occupants if the services are primarily for their conven-
use as many of the offered services as you wish without ience and are not services normally provided with the
paying a fee. rental of rooms for occupancy only. An example of a serv-
You must include the fair market value of any services ice that is not normally provided for the convenience of the
you receive from club members in your gross receipts occupants is maid service. However, providing heat and
when you receive them even if you have not provided any light, cleaning stairways and lobbies, and collecting trash
services to club members. are services normally provided for the occupants' conven-
ience.
Information returns. If you are involved in a bartering
transaction, you may have to file either of the following Prepaid rent. Advance payments received under a lease
forms. that does not put any restriction on their use or enjoyment
are income in the year you receive them. This is generally
• Form 1099-B, Proceeds From Broker and Barter Ex-
true no matter what accounting method or period you use.
change Transactions.
• Form 1099-MISC. Lease bonus. A bonus you receive from a lessee for
granting a lease is an addition to the rent. Include it in your
For information about these forms, see the General In-
gross receipts in the year received.
structions for Certain Information Returns.
Lease cancellation payments. Report payments you re-
Real Estate Rents ceive from your lessee for canceling a lease in your gross
receipts in the year received.
If you are a real estate dealer who receives income from
renting real property or an owner of a hotel, motel, etc., Payments to third parties. If your lessee makes pay-
who provides services (maid services, etc.) for guests, re- ments to someone else under an agreement to pay your
port the rental income and expenses on Schedule C. If debts or obligations, include the payments in your gross
you are not a real estate dealer or the kind of owner de- receipts when the lessee makes the payments. A common
scribed in the preceding sentence, report the rental in- example of this kind of income is a lessee's payment of
come and expenses on Schedule E. For more information, your property taxes on leased real property.
see Pub. 527, Residential Rental Property.
Settlement payments. Payments you receive in settle-
Real estate dealer. You are a real estate dealer if you ment of a lessee's obligation to restore the leased prop-
are engaged in the business of selling real estate to cus- erty to its original condition are income in the amount that
tomers with the purpose of making a profit from those the payments exceed the adjusted basis of the leasehold
sales. Rent you receive from real estate held for sale to improvements destroyed, damaged, removed, or discon-
customers is subject to SE tax. However, rent you receive nected by the lessee.
from real estate held for speculation or investment is not
subject to SE tax. Personal Property Rents
Trailer park owner. Rental income from a trailer park is If you are in the business of renting personal property
subject to SE tax if you are a self-employed trailer park (equipment, vehicles, formal wear, etc.), include the rental
owner who provides trailer lots and facilities and substan- amount you receive in your gross receipts on Schedule C.
tial services for the convenience of your tenants. Prepaid rent and other payments described under Real
You are generally considered to provide substantial Estate Rents, earlier, can also be received for renting
services for tenants if they are primarily for the tenants'

Publication 334 (2023) Chapter 5 Business Income 21

personal property. If you receive any of those payments, Price reduced after purchase. If you owe a debt to the
include them in your gross receipts as explained in that seller for property you bought and the seller reduces the
discussion. amount you owe, you generally do not have income from
the reduction. Unless you are bankrupt or insolvent, treat
Interest and Dividend Income the amount of the reduction as a purchase price adjust-
ment and reduce your basis in the property.
Interest and dividends may be considered business in- Deductible debt. You do not realize income from a can-
come. celed debt to the extent the payment of the debt would
Interest. Interest received on notes receivable that you have led to a deduction.
have accepted in the ordinary course of business is busi- Example. You get accounting services for your busi-
ness income. Interest received on loans is business in- ness on credit. Later, you have trouble paying your busi-
come if you are in the business of lending money. ness debts, but you are not bankrupt or insolvent. Your ac-
Uncollectible loans. If a loan payable to you be- countant forgives part of the amount you owe for the
comes uncollectible during the tax year and you use an accounting services. How you treat the canceled debt de-
accrual method of accounting, you generally must include pends on your method of accounting.
in gross income qualified stated interest accrued up to the • Cash method—You do not include the canceled debt
time the loan became uncollectible. If the accrued interest in income because payment of the debt would have
that you previously included later becomes uncollectible, been deductible as a business expense.
you may be able to take a bad debt deduction. See Bad
Debts in chapter 8. • Accrual method—You include the canceled debt in in-
come because the expense was deductible when you
Unstated interest and Original Issue Discount incurred the debt.
(OID). If little or no interest is charged on an installment
For information on the cash and accrual methods of ac-
sale contract, you may have to treat a part of each pay-
counting, see chapter 2.
ment as unstated interest. See Unstated Interest and
Original Issue Discount (OID) in Pub. 537.
Exclusions
Dividends. Generally, dividends are business income to
dealers in securities. For most sole proprietors and statu- Do not include canceled debt in income in the following
tory employees, however, dividends are nonbusiness in- situations. However, you may be required to file Form
come. If you hold stock as a personal investment sepa- 982, Reduction of Tax Attributes Due to Discharge of In-
rately from your business activity, the dividends from the debtedness. For more information, see Form 982.
stock are nonbusiness income. 1. The cancellation takes place in a bankruptcy case un-
If you receive dividends from business insurance pre- der title 11 of the U.S. Code (relating to bankruptcy).
miums you deducted in an earlier year, you must report all See Pub. 908, Bankruptcy Tax Guide.
or part of the dividend as business income on your return.
To find out how much you have to report, see Recovery of 2. The cancellation takes place when you are insolvent.
items previously deducted under Other Income, later. You can exclude the canceled debt to the extent you
are insolvent. See Pub. 4681, Canceled Debts, Fore-
closures, Repossessions, and Abandonments.
Canceled Debt
3. The canceled debt is a qualified farm debt owed to a
The following explain the general rule for including can- qualified person. See chapter 3 of Pub. 225, Farmer's
celed debt in income and the exceptions to the general Tax Guide.
rule. 4. The canceled debt is a qualified real property busi-
ness debt. This situation is explained later.
General Rule
5. The canceled debt is qualified principal residence in-
Generally, if your debt is canceled or forgiven, other than debtedness which is discharged after 2006. See the
as a gift or bequest to you, you must include the canceled Instructions for Form 982 for more information about
amount in your gross income for tax purposes. Report the this exclusion.
canceled amount on line 6 of Schedule C if you incurred If a canceled debt is excluded from income because it
the debt in your business. If the debt is a nonbusiness takes place in a bankruptcy case, the exclusions in situa-
debt, report the canceled amount on line 8c of Schedule 1 tions 2 through 5 do not apply. If it takes place when you
(Form 1040). are insolvent, the exclusions in situations 3 and 4 do not
apply to the extent you are insolvent.
Exceptions
Debt. For purposes of this discussion, debt includes any
The following discussion covers some exceptions to the debt for which you are liable or which attaches to property
general rule for canceled debt. you hold.

22 Chapter 5 Business Income Publication 334 (2023)

Qualified real property business debt. You can elect which the cancellation occurs. You must file your return by
to exclude (up to certain limits) the cancellation of quali- the due date (including extensions). If you timely filed your
fied real property business debt. If you make the election, return for the year without making the election, you can
you must reduce the basis of your depreciable real prop- still make the election by filing an amended return within 6
erty by the amount excluded. Make this reduction at the months of the due date of the return (excluding exten-
beginning of your tax year following the tax year in which sions). For more information, see When To File in the form
the cancellation occurs. However, if you dispose of the instructions.
property before that time, you must reduce its basis imme-
diately before the disposition. Other Income
Cancellation of qualified real property business
debt. Qualified real property business debt is debt (other The following discussion explains how to treat other types
than qualified farm debt) that meets all the following condi- of business income you may receive.
tions. Restricted property. Restricted property is property that
1. It was incurred or assumed in connection with real has certain restrictions that affect its value. If you receive
property used in a trade or business. Real property restricted stock or other property for services performed,
used in a trade or business does not include real the fair market value of the property in excess of your cost
property developed and held primarily for sale to cus- is included in your income on Schedule C when the re-
tomers in the ordinary course of business. striction is lifted. However, you can choose to be taxed in
the year you receive the property. For more information on
2. It was secured by such real property. including restricted property in income, see Pub. 525, Tax-
3. It was incurred or assumed at either of the following able and Nontaxable Income.
times.
Gains and losses. Do not report on Schedule C a gain
a. Before January 1, 1993. or loss from the disposition of property that is neither stock
b. After December 31, 1992, if incurred or assumed in trade nor held primarily for sale to customers. Instead,
to acquire, construct, or substantially improve the you must report these gains and losses on other forms.
real property. For more information, see chapter 3.

4. It is debt to which you choose to apply these rules. Promissory notes. Report promissory notes and other
evidences of debt issued to you in a sale or exchange of
Qualified real property business debt includes refinanc- property that is stock in trade or held primarily for sale to
ing of debt described in (3) above, but only to the extent it customers on Schedule C. In general, you report them at
does not exceed the debt being refinanced. their stated principal amount (minus any unstated interest)
If you are the owner of a disregarded entity (for or issue price (for debt instruments with OID) when you re-
TIP example, a single-member LLC), see Qualified ceive them.
Real Property Business Indebtedness in chap-
ter 1 of Pub. 4681 to see if you qualify for this exclusion. Lost income payments. If you reduce or stop your busi-
ness activities, report on Schedule C any payment you re-
You cannot exclude more than either of the following ceive for the lost income of your business from insurance
amounts. or other sources. Report it on Schedule C even if your
1. The excess (if any) of: business is inactive when you receive the payment.

a. The outstanding principal of qualified real property Damages. You must include in gross income compensa-
business debt (immediately before the cancella- tion you receive during the tax year as a result of any of
tion); over the following injuries connected with your business.
b. The fair market value (immediately before the can- • Patent infringement.
cellation) of the business real property that is se- • Breach of contract or fiduciary duty.
curity for the debt, reduced by the outstanding
principal amount of any other qualified real prop- • Antitrust injury.
erty business debt secured by this property imme- Economic injury. You may be entitled to a deduction
diately before the cancellation. against the income if it compensates you for actual eco-
2. The total adjusted bases of depreciable real property nomic injury. Your deduction is the smaller of the following
held by you immediately before the cancellation. amounts.
These adjusted bases are determined after any basis • The amount you receive or accrue for damages in the
reduction due to a cancellation in bankruptcy or insol- tax year reduced by the amount you pay or incur in the
vency, or of qualified farm debt. Do not take into ac- tax year to recover that amount.
count depreciable real property acquired in contem-
plation of the cancellation. • Your loss from the injury that you have not yet deduc-
ted.
Election. To make this election, complete Form 982
and attach it to your income tax return for the tax year in

Publication 334 (2023) Chapter 5 Business Income 23

 Punitive damages. You must also include punitive Consignments. Consignments of merchandise to others
damages in income. to sell for you are not sales. The title of merchandise re-
mains with you, the consignor, even after the consignee
Kickbacks. If you receive any kickbacks, include them in possesses the merchandise. Therefore, if you ship goods
your income on Schedule C. However, do not include on consignment, you have no profit or loss until the con-
them if you properly treat them as a reduction of a related signee sells the merchandise. Merchandise you have
expense item, a capital expenditure, or cost of goods sold. shipped out on consignment is included in your inventory
until it is sold.
Recovery of items previously deducted. If you recover Do not include merchandise you receive on consign-
a bad debt or any other item deducted in a previous year, ment in your inventory. Include your profit or commission
include the recovery in income on Schedule C. However, if on merchandise consigned to you in your income when
all or part of the deduction in earlier years did not reduce you sell the merchandise or when you receive your profit
your tax, you can exclude the part that did not reduce your or commission, depending upon the method of accounting
tax. If you exclude part of the recovery from income, you you use.
must include with your return a computation showing how
you figured the exclusion. Construction allowances. If you enter into a lease after
Exception for depreciation. This rule does not apply August 5, 1997, you can exclude from income the con-
to depreciation. You recover depreciation using the rules struction allowance you receive (in cash or as a rent re-
explained next. duction) from your landlord if you receive it under both the
following conditions.
Recapture of depreciation. In the following situations, • Under a short-term lease of retail space.
you have to recapture the depreciation deduction. This
means you include in income part or all of the depreciation • For the purpose of constructing or improving qualified
you deducted in previous years. long-term real property for use in your business at that
retail space.
Listed property. If your business use of listed prop-
erty (explained in chapter 8 under Depreciation) falls to Amount you can exclude. You can exclude the con-
50% or less in a tax year after the tax year you placed the struction allowance to the extent it does not exceed the
property in service, you may have to recapture part of the amount you spent for construction or improvements.
depreciation deduction. You do this by including in income Short-term lease. A short-term lease is a lease (or
on Schedule C part of the depreciation you deducted in other agreement for occupancy or use) of retail space for
previous years. Use Part IV of Form 4797 to figure the 15 years or less. The following rules apply in determining
amount to include on Schedule C. For more information, whether the lease is for 15 years or less.
see What Is the Business-Use Requirement? in chapter 5
of Pub. 946. That chapter explains how to determine • Take into account options to renew when figuring
whether property is used more than 50% in your business. whether the lease is for 15 years or less. But do not
take into account any option to renew at fair market
Section 179 property. If you take a section 179 de- value determined at the time of renewal.
duction (explained in chapter 8 under Depreciation) for an
asset and before the end of the asset's recovery period • Two or more successive leases that are part of the
the percentage of business use drops to 50% or less, you same transaction (or a series of related transactions)
must recapture part of the section 179 deduction. You do for the same or substantially similar retail space are
this by including in income on Schedule C part of the de- treated as one lease.
duction you took. Use Part IV of Form 4797 to figure the Retail space. Retail space is real property leased, oc-
amount to include on Schedule C. See chapter 2 of Pub. cupied, or otherwise used by you as a tenant in your busi-
946 to find out when you recapture the deduction. ness of selling tangible personal property or services to
Sale or exchange of depreciable property. If you the general public.
sell or exchange depreciable property at a gain, you may Qualified long-term real property. Qualified
have to treat all or part of the gain due to depreciation as long-term real property is nonresidential real property that
ordinary income. You figure the income due to deprecia- is part of, or otherwise present at, your retail space and
tion recapture in Part III of Form 4797. For more informa- that reverts to the landlord when the lease ends.
tion, see chapter 4 of Pub. 544.
Exchange of like-kind property. Generally, if you ex-
change real property used for business or held as an in-
Items That Are Not Income vestment solely for other business or investment real
property of a like kind, no gain or loss is recognized. This
In some cases, the property or money you receive is not means that the gain is not taxable and the loss is not de-
income. ductible. For more information, see Form 8824.

Appreciation. Increases in value of your property are not Leasehold improvements. If a tenant erects buildings or
income until you realize the increases through a sale or makes improvements to your property, the increase in the
other taxable disposition. value of the property due to the improvements is not

24 Chapter 5 Business Income Publication 334 (2023)

income to you. However, if the facts indicate that the im- 2. A nonprofessional fiduciary (personal representative)
provements are a payment of rent to you, then the in- and both of the following apply.
crease in value would be income.
a. The estate includes an active trade or business in
Loans. Money borrowed through a bona fide loan is not which you actively participate.
income. b. Your fees are related to the operation of that trade
or business.
Sales tax. State and local sales taxes imposed on the
buyer, which you were required to collect and pay over to 3. A nonprofessional fiduciary of a single estate that re-
state or local governments, are not income. 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.
Guidelines for Selected If the fees do not meet the above requirements, report
Occupations them on line 8z of Schedule 1 (Form 1040).

This section provides information to determine whether Fishing crew member. If you are a member of a crew
your earnings should be reported on Schedule C (Form that catches fish or other aquatic life, your earnings are re-
1040). ported on Schedule C if you meet all the requirements
shown in chapter 10 under Fishing crew member.
Direct seller. You must report all income you receive as a
direct seller on Schedule C. This includes any of the fol- Insurance agent, former. Termination payments you re-
lowing. ceive as a former self-employed insurance agent from an
insurance company because of services you performed
• Income from sales—Payments you receive from cus- for that company are not reported on Schedule C if all the
tomers for products they buy from you. following conditions are met.
• Commissions, bonuses, or percentages you receive • You received payments after your agreement to per-
for sales and the sales of others who work under you. form services for the company ended.
• Prizes, awards, and gifts you receive from your selling • You did not perform any services for the company af-
business. ter your service agreement ended and before the end
You must report this income regardless of whether it is re- of the year in which you received the payment.
ported to you on an information return.
• You entered into a covenant not to compete against
You are a direct seller if you meet all the following con- the company for at least a 1-year period beginning on
ditions. the date your service agreement ended.
1. You are engaged in one of the following trades or • The amount of the payments depended primarily on
businesses. policies sold by you or credited to your account during
a. Selling or soliciting the sale of consumer products the last year of your service agreement or the extent to
either in a home or other place that is not a perma- which those policies remain in force for some period
nent retail establishment, or to any buyer on a after your service agreement ended, or both.
buy-sell basis or a deposit-commission basis for • The amount of the payment did not depend to any ex-
resale in a home or other place of business that is tent on length of service or overall earnings from serv-
not a permanent retail establishment. ices performed for the company (regardless of
b. Delivering or distributing newspapers or shopping whether eligibility for the payments depended on
news (including any services directly related to length of service).
that trade or business).
Insurance agent, retired. Income paid by an insurance
2. Substantially all your pay (whether paid in cash or not) company to a retired self-employed insurance agent
for services described above is directly related to based on a percentage of commissions received before
sales or other output (including performance of serv- retirement is reported on Schedule C. Also, renewal com-
ices) rather than to the number of hours worked. missions and deferred commissions for sales made before
retirement are generally reported on Schedule C.
3. Your services are performed under a written contract However, renewal commissions paid to the survivor of
between you and the person for whom you perform an insurance agent are not reported on Schedule C.
the services, and the contract provides that you will
not be treated as an employee for federal tax purpo- Newspaper carrier or distributor. You are a direct
ses. seller and your earnings are reported on Schedule C if all
the following conditions apply.
Executor or administrator. If you administer a de-
ceased person's estate, your fees are reported on Sched- • You are in the business of delivering or distributing
ule C if you are one of the following. newspapers or shopping news (including directly rela-
ted services such as soliciting customers and
1. A professional fiduciary. collecting receipts).

Publication 334 (2023) Chapter 5 Business Income 25

 • Substantially all your pay for these services directly re- contracts, foreign currency contracts, nonequity options,
lates to your sales or other output rather than to the dealer equity options, and dealer securities futures con-
number of hours you work. tracts) or property related to those contracts (such as
stock used to hedge options) are reported on Schedule C.
• You perform the services under a written contract that
For more information, see sections 1256 and 1402(i).
says you will not be treated as an employee for federal
tax purposes. Securities or commodities trader. You are a trader in
This rule applies whether or not you hire others to help securities or commodities if you are engaged in the busi-
you make deliveries. It also applies whether you buy the ness of buying and selling securities or commodities for
papers from the publisher or are paid based on the num- your own account. As a trader in securities or commodi-
ber of papers you deliver. ties (including if you made the section 475(f) mark-to-mar-
ket election as a trader in securities or commodities), your
Newspaper or magazine vendor. If you are age 18 or gain or loss from the disposition of securities or commodi-
older and you sell newspapers or magazines, your earn- ties is not reported on Schedule C. For more information
ings are reported on Schedule C if all the following condi- about traders in securities or commodities, see Pub. 550,
tions apply. Investment Income and Expenses, and Topic No. 429,
• You sell newspapers or magazines to ultimate con- Traders in Securities.
sumers.
• You sell them at a fixed price. Accounting for Your Income
• Your earnings are based on the difference between
the sales price and your cost of goods sold. Accounting for your income for income tax purposes dif-
fers at times from accounting for financial purposes. This
This rule applies whether or not you are guaranteed a
section discusses some of the more common differences
minimum amount of earnings. It also applies whether or
that may affect business transactions.
not you receive credit for unsold newspapers or maga-
zines you return to your supplier. Figure your business income on the basis of a tax year
and according to your regular method of accounting (see
Notary public. Fees you receive for services you perform
chapter 2). If the sale of a product is an income-producing
as a notary public are reported on Schedule C. These
factor in your business, you usually have to use invento-
payments are not subject to SE tax (see the Instructions
ries to clearly show your income. Dealers in real estate are
for Schedule SE (Form 1040)).
not allowed to use inventories. For more information on in-
Public official. Public officials generally do not report ventories, see chapter 2.
what they earn for serving in public office on Schedule C.
Income paid to a third party. All income you earn is tax-
This rule applies to payments received by an elected tax
able to you. You cannot avoid tax by having the income
collector from state funds on the basis of a fixed percent-
paid to a third party.
age of the taxes collected. Public office includes any elec-
tive or appointive office of the United States or its territo- Example. You rent out your property and the rental
ries, the District of Columbia, a state or its political agreement directs the lessee to pay the rent to your son.
subdivisions, or a wholly owned instrumentality of any of The amount paid to your son is gross income to you.
these.
Public officials of state or local governments report their Cash discounts. These are amounts the seller permits
fees from the public on Schedule C if they are paid solely you to deduct from the invoice price for prompt payment.
on a fee basis and if their services are eligible for, but not For income tax purposes, you can use either of the follow-
covered by, social security under a federal-state agree- ing two methods to account for cash discounts.
ment.
1. Deduct the cash discount from purchases (see
Real estate agent or direct seller. If you are a licensed Line 36—Purchases Less Cost of Items Withdrawn for
real estate agent or a direct seller, your earnings are re- Personal Use in chapter 6).
ported on Schedule C if both the following apply. 2. Credit the cash discount to a discount income ac-
• Substantially all your pay for services as a real estate count.
agent or direct seller directly relates to your sales or You must use the chosen method every year for all your
other output rather than to the number of hours you purchase discounts.
work. If you use the second method, the credit balance in the
• You perform the services under a written contract that account at the end of your tax year is business income.
says you will not be treated as an employee for federal Under this method, you do not reduce the cost of goods
tax purposes. sold by the cash discounts you received. When valuing
your closing inventory, you cannot reduce the invoice price
Dealer in section 1256 contracts. If you are a dealer in of merchandise on hand at the close of the tax year by the
options or commodities, your gains and losses from deal- average or estimated discounts received on the merchan-
ing or trading in section 1256 contracts (regulated futures dise.

26 Chapter 5 Business Income Publication 334 (2023)

Trade discounts. These are reductions from list or cata- There are exceptions for small business taxpayers
log prices and are usually not written into the invoice or ! that may change how you figure cost of goods
charged to the customer. Do not enter these discounts on CAUTION sold for your business. For more information, see

your books of account. Instead, use only the net amount chapter 2.
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 Figuring Cost of Goods Sold
places part or all of the purchase price in escrow, you do on Schedule C, Lines 35
not include any part of it in gross sales until you actually or
constructively receive it. However, upon completion of the
Through 42
terms of the contract and the escrow agreement, you will Figure your cost of goods sold by filling out lines 35
have taxable income, even if you do not accept the money through 42 of Schedule C. These lines are reproduced be-
until the next year. low and are explained in the discussion that follows.
Sales returns and allowances. Credits you allow cus-
35 Inventory at beginning of year. If different from last
tomers for returned merchandise and any other allowan-
year's closing inventory, attach explanation . . . . . . .
ces you make on sales are deductions from gross sales in
figuring net sales. 36 Purchases less cost of items withdrawn for personal
use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advance payments. Special rules dealing with an ac- 37 Cost of labor. Do not include any amounts paid to
crual method of accounting for payments received in ad- yourself . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
vance are discussed in chapter 2 under Accrual Method. 38 Materials and supplies . . . . . . . . . . . . . . . . . . . .
39 Other costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance proceeds. If you receive insurance or another
type of reimbursement for a casualty or theft loss, you 40 Add lines 35 through 39 . . . . . . . . . . . . . . . . . . .
must subtract it from the loss when you figure your deduc- 41 Inventory at end of year . . . . . . . . . . . . . . . . . . .
tion. You cannot deduct the reimbursed part of a casualty 42 Cost of goods sold. Subtract line 41 from line 40.
or theft loss. Enter the result here and on line 4 . . . . . . . . . . . . .
For information on casualty or theft losses, see Pub.
547.
Line 35—Inventory at Beginning of
Year
If you are a merchant, beginning inventory is the cost of
6. 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
How To Figure Cost of process, finished goods, and materials and supplies used
in manufacturing the goods (see Inventories in chapter 2).
Goods Sold 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.
Introduction
Donation of inventory. If you contribute inventory (prop-
If you make or buy goods to sell, you can deduct the cost
erty that you sell in the course of your business), the
of goods sold from your gross receipts on Schedule C.
amount you can claim as a contribution deduction is the
However, to determine these costs, you must value your
smaller of its fair market value on the day you contributed
inventory at the beginning and end of each tax year.
it or its basis. The basis of donated inventory is any cost
This chapter applies to you if you are a manufacturer,
incurred for the inventory in an earlier year that you would
wholesaler, or retailer or if you are engaged in any busi-
otherwise include in your opening inventory for the year of
ness that makes, buys, or sells goods to produce income.
the contribution. You must remove the amount of your con-
This chapter does not apply to a personal service busi-
tribution deduction from your opening inventory. It is not
ness, such as the business of a doctor, lawyer, carpenter,
part of the cost of goods sold.
or painter. However, if you work in a personal service busi-
If the cost of donated inventory is not included in your
ness and also sell or charge for the materials and supplies
opening inventory, the inventory's basis is zero and you
normally used in your business, this chapter applies to
cannot claim a charitable contribution deduction. Treat the
you.
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.

Publication 334 (2023) Chapter 6 How To Figure Cost of Goods Sold 27

 A special rule may apply to certain donations of food in- Merchandise withdrawn from sale. If you withdraw
ventory. See Pub. 526, Charitable Contributions. merchandise for your personal or family use, you must ex-
clude this cost from the total amount of merchandise you
Example 1. You are a calendar year taxpayer who bought for sale. Do this by crediting the purchases or
uses an accrual method of accounting. In 2023, you con- sales account with the cost of merchandise you withdraw
tributed property from inventory to a church. It had a fair for personal use. You must also charge the amount to your
market value of $600. The closing inventory at the end of drawing account.
2022 properly included $400 of costs due to the acquisi- A drawing account is a separate account you should
tion of the property, and in 2022, you properly deducted keep to record the business income you withdraw to pay
$50 of administrative and other expenses attributable to for personal and family expenses. As stated above, you
the property as business expenses. The charitable contri- also use it to record withdrawals of merchandise for per-
bution allowed for 2023 is $400 ($600 − $200). The $200 sonal or family use. This account is also known as a with-
is the amount that would be ordinary income if you had drawals account or personal account.
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.
Line 37—Cost of Labor
You remove that amount from opening inventory for 2023.
Labor costs are usually an element of cost of goods sold
Example 2. If, in Example 1, you acquired the contrib- only in a manufacturing or mining business. Small mer-
uted property in 2023 at a cost of $400, you would include chandisers (wholesalers, retailers, etc.) usually do not
the $400 cost of the property in figuring the cost of goods have labor costs that can properly be charged to cost of
sold for 2023 and deduct the $50 of administrative and goods sold. In a manufacturing business, labor costs
other expenses attributable to the property for that year. properly allocable to the cost of goods sold include both
You would not be allowed any charitable contribution de- the direct and indirect labor used in fabricating the raw
duction for the contributed property. material into a finished, saleable product.

Direct labor. Direct labor costs are the wages you pay to
Line 36—Purchases Less Cost of those employees who spend all their time working directly
Items Withdrawn for Personal Use on the product being manufactured. They also include a
part of the wages you pay to employees who work directly
If you are a merchant, use the cost of all merchandise you on the product part time if you can determine that part of
bought for sale. If you are a manufacturer or producer, this their wages.
includes the cost of all raw materials or parts purchased
for manufacture into a finished product. Indirect labor. Indirect labor costs are the wages you
pay to employees who perform a general factory function
Trade discounts. The differences between the stated that does not have any immediate or direct connection
prices of articles and the actual prices you pay for them with making the saleable product, but that is a necessary
are called trade discounts. You must use the prices you part of the manufacturing process.
pay (not the stated prices) in figuring your cost of purcha-
ses. Do not show the discount amount separately as an Other labor. Other labor costs not properly chargeable to
item in gross income. the cost of goods sold can be deducted as selling or ad-
An automobile dealer must record the cost of a car in ministrative expenses. Generally, the only kinds of labor
inventory reduced by any manufacturer's rebate that rep- costs properly chargeable to your cost of goods sold are
resents a trade discount. the direct or indirect labor costs and certain other costs
treated as overhead expenses properly charged to the
Cash discounts. Cash discounts are amounts your sup- manufacturing process, as discussed later under
pliers let you deduct from your purchase invoices for Line 39—Other Costs.
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
Line 38—Materials and Supplies
for the year. Whichever method you use, you must be con-
Materials and supplies, such as hardware and chemicals,
sistent. If you want to change your method of figuring in-
used in manufacturing goods are charged to cost of goods
ventory cost, you must file Form 3115. For more informa-
sold. Those that are not used in the manufacturing proc-
tion, see Change in Accounting Method in chapter 2.
ess are treated as deferred charges. You deduct them as
If you credit cash discounts to a separate account, you
a business expense when you use them. Business expen-
must include this credit balance in your business income
ses are discussed in chapter 8.
at the end of the tax year. If you use this method, do not
reduce your cost of goods sold by the cash discounts.
Line 39—Other Costs
Purchase returns and allowances. You must deduct all
returns and allowances from your total purchases during Examples of other costs incurred in a manufacturing or
the year. mining process that you charge to your cost of goods sold
are as follows.

28 Chapter 6 How To Figure Cost of Goods Sold Publication 334 (2023)

Containers. Containers and packages that are an inte- allowances include cash or credit refunds you make to
gral part of the product manufactured are a part of your customers, rebates, and other allowances off the actual
cost of goods sold. If they are not an integral part of the sales price.
manufactured product, their costs are shipping or selling Next, subtract the cost of goods sold (line 4) from net
expenses. receipts (line 3). The result is the gross profit from your
business.
Freight-in. Freight-in, express-in, and cartage-in on raw
materials, supplies you use in production, and merchan- Businesses that sell services. You do not have to fig-
dise you purchase for sale are all part of cost of goods ure the cost of goods sold if the sale of merchandise is not
sold. an income-producing factor for your business. Your gross
profit is the same as your net receipts (gross receipts mi-
Overhead expenses. Overhead expenses include ex- nus any refunds, rebates, or other allowances). Most pro-
penses such as rent, heat, light, power, insurance, depre- fessions and businesses that sell services rather than
ciation, taxes, maintenance, labor, and supervision. The products can figure gross profit directly from net receipts
overhead expenses you have as direct and necessary ex- in this way.
penses of the manufacturing operation are included in
your cost of goods sold. Illustration. This illustration of the gross profit section of
the income statement of a retail business shows how
Line 40—Add Lines 35 Through 39 gross profit is figured.

The total of lines 35 through 39 equals the cost of the Income Statement Year Ended December
goods available for sale during the year. 31, 2023
Gross receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400,000
Line 41—Inventory at End of Year Minus: Returns and allowances . . . . . . . . . . . . . . . . . 14,940
Net receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $385,060
Subtract the value of your closing inventory (including, as Minus: Cost of goods sold . . . . . . . . . . . . . . . . . . . . 288,140
appropriate, the allocable parts of the cost of raw materi- Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $96,920
als and supplies, direct labor, and overhead expenses)
from line 40. Inventory at the end of the year is also known The cost of goods sold for this business is figured as
as closing or ending inventory. Your ending inventory will follows.
usually become the beginning inventory of your next tax
year. Inventory at beginning of year . . . . . . . . . . . . . . . . . . $37,845
Plus: Purchases . . . . . . . . . . . . . . . . . . . $285,900

Line 42—Cost of Goods Sold Minus: Items withdrawn for personal use . . . . 2,650
Goods available for sale . . . . . . . . . . . . . . . . . . . . .
283,250
$321,095
Minus: Inventory at end of year . . . . . . . . . . . . . . . . . 32,955
When you subtract your closing inventory (inventory at the Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . $288,140
end of the year) from the cost of goods available for sale,
the remainder is your cost of goods sold during the tax
year.
Items To Check
Consider the following items before figuring your gross
profit.

7. 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
Figuring Gross Profit registers to keep track of receipts. You should also use a
proper invoicing system and keep a separate bank ac-
count for your business.
Introduction Sales tax collected. Check to make sure your records
After you have figured the gross receipts from your busi- show the correct sales tax collected.
ness (chapter 5) and the cost of goods sold (chapter 6), If you collect state and local sales taxes imposed on
you are ready to figure your gross profit. You must deter- you as the seller of goods or services from the buyer, you
mine gross profit before you can deduct any business ex- must include the amount collected in gross receipts.
penses. These expenses are discussed in chapter 8. If you are required to collect state and local taxes im-
posed on the buyer and turn them over to state or local
Businesses that sell products. Figure your gross profit governments, you generally do not include these amounts
by first figuring your net receipts. Figure net receipts in income.
(line 3) on Schedule C by subtracting any returns and al-
lowances (line 2) from gross receipts (line 1). Returns and

Publication 334 (2023) Chapter 7 Figuring Gross Profit 29

Inventory at beginning of year. Compare this figure sales, income from certain fuel tax credits and refunds,
with last year's ending inventory. The two amounts should and amounts recovered from bad debts.
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 8.
adjust cost of goods sold, see Merchandise withdrawn
from sale in chapter 6.
Business Expenses
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.
Introduction
Use inventory forms and adding machine tapes as the You can deduct the costs of operating your business.
only evidence for your inventory. Inventory forms are avail- These costs are known as business expenses. These are
able at office supply stores. These forms have columns for costs you do not have to capitalize or include in the cost of
recording the description, quantity, unit price, and value of goods sold but can deduct in the current year.
each inventory item. Each page has space to record who To be deductible, a business expense must be both or-
made the physical count, who priced the items, who made dinary and necessary. An ordinary expense is one that is
the extensions, and who proofread the calculations. These common and accepted in your field of business. A neces-
forms will help you confirm that the total inventory is accu- sary expense is one that is helpful and appropriate for
rate. They will also provide you with a permanent record to your business. An expense does not have to be indispen-
support its validity. sable to be considered necessary.
Inventories are discussed in chapter 2. For more information about the general rules for de-
ducting business expenses, see section 162 and its regu-
lations.
Testing Gross Profit Accuracy If you have an expense that is partly for business
! and partly personal, separate the personal part
If you are in a retail or wholesale business, you can check CAUTION from the business part. The personal part is not
the accuracy of your gross profit figure. First, divide gross deductible.
profit by net receipts. The resulting percentage measures
the average spread between the merchandise cost of
goods sold and the selling price. Useful Items
You may want to see:
Next, compare this percentage to your markup policy.
Little or no difference between these two percentages Publication
shows that your gross profit figure is accurate. A large dif-
ference between these percentages may show that you 463 Travel, Gift, and Car Expenses
463

did not accurately figure sales, purchases, inventory, or 946 How To Depreciate Property
946

other items of cost. You should determine the reason for See chapter 12 for information about getting publications
the difference. and forms.
Example. You operate a retail business. On the aver-
age, you mark up your merchandise so that you will realize
a gross profit of 331/3% on its sales. The net receipts Bad Debts
(gross receipts minus returns and allowances) shown on
your income statement are $300,000. Your cost of goods If someone owes you money you cannot collect, you have
sold is $200,000. This results in a gross profit of $100,000 a bad debt. There are two kinds of bad debts—business
($300,000 − $200,000). To test the accuracy of this year's bad debts and nonbusiness bad debts.
results, you divide gross profit ($100,000) by net receipts A business bad debt is generally one that comes from
($300,000). The resulting 331/3% confirms your markup operating your trade or business. You may be able to de-
percentage of 331/3%. duct business bad debts as an expense on your business
tax return.

Additions to Gross Profit Business bad debt. A business bad debt is a loss from
the worthlessness of a debt that was either of the follow-
If your business has income from a source other than its ing.
regular business operations, enter the income on line 6 of
1. Created or acquired in your business.
Schedule C and add it to gross profit. The result is gross
business income. Some examples include income from an 2. Closely related to your business when it became
interest-bearing checking account, income from scrap partly or totally worthless.

30 Chapter 8 Business Expenses Publication 334 (2023)

A debt is closely related to your business if your primary Local business transportation does not include expenses
motive for incurring the debt is a business reason. you have while traveling away from home overnight. Those
Business bad debts are mainly the result of credit sales expenses are deductible as travel expenses and are dis-
to customers. They can also be the result of loans to sup- cussed later under Travel and Meals. However, if you use
pliers, clients, employees, or distributors. Goods and serv- your car while traveling away from home overnight, use
ices that customers have not paid for are shown in your the rules in this section to figure your car expense deduc-
books as either accounts receivable or notes receivable. If tion.
you are unable to collect any part of these accounts or Generally, your tax home is your regular place of busi-
notes receivable, the uncollectible part is a business bad ness, regardless of where you maintain your family home.
debt. It includes the entire city or general area in which your
business or work is located.
You can take a bad debt deduction for these ac-
! counts and notes receivable only if the amount Example. You operate a printing business out of ren-
CAUTION you were owed was included in your gross income
ted office space. You use your van to deliver completed
either for the year the deduction is claimed or for a prior jobs to your customers. You can deduct the cost of
year. round-trip transportation between your customers and
your print shop.
Accrual method. If you use an accrual method of ac-
counting, you normally report income as you earn it. You You cannot deduct the costs of driving your car or
can take a bad debt deduction for an uncollectible receiva- ! truck between your home and your main or regu-
CAUTION lar workplace. These costs are personal commut-
ble if you have included the uncollectible amount in in-
come. ing expenses.
Cash method. If you use the cash method of account- Office in the home. Your workplace can be your
ing, you normally report income when you receive pay- home if you have an office in your home that qualifies as
ment. You cannot take a bad debt deduction for amounts your principal place of business. For more information,
owed to you that you have not received and cannot collect see Business Use of Your Home, later.
if you never included those amounts in income.
Example. You are a graphic designer. You operate
More information. For more information about business your business out of your home. Your home qualifies as
bad debts, see section 166 and its regulations. your principal place of business. You occasionally have to
drive to your clients to deliver your completed work. You
Nonbusiness bad debts. All other bad debts are non-
can deduct the cost of the round-trip transportation be-
business bad debts and are deductible as short-term cap-
tween your home and your clients.
ital losses on Form 8949 and Schedule D (Form 1040).
For more information on nonbusiness bad debts, see sec-
tion 166 and its regulations. Methods for Deducting Car and Truck
Expenses
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-
If you use your car or truck in your business, you may be ure your expenses.
able to deduct the costs of operating and maintaining your • Standard mileage rate.
vehicle. You may also be able to deduct other costs of lo-
cal transportation and traveling away from home overnight • Actual expenses.
on business.
Standard mileage rate. You may be able to use the
Local transportation expenses. Local transportation standard mileage rate to figure the deductible costs of op-
expenses include the ordinary and necessary costs of all erating your car, van, pickup, or panel truck for business
the following. purposes. The business standard mileage rate for 2023 is
65.5 cents a mile.
• Getting from one workplace to another in the course of
your business or profession when you are traveling If you choose to use the standard mileage rate for
within the city or general area that is your tax home. ! a year, you cannot deduct your actual expenses
CAUTION for that year except for business-related parking
Tax home is defined later.
fees and tolls.
• Visiting clients or customers.
• Going to a business meeting away from your regular Choosing the standard mileage rate. If you want to
workplace. 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-
• Getting from your home to a temporary workplace ble for use in your business. In later years, you can choose
when you have one or more regular places of work.
to use either the standard mileage rate or actual expen-
These temporary workplaces can be either within the
ses.
area of your tax home or outside that area.

Publication 334 (2023) Chapter 8 Business Expenses 31

 If you choose to use the standard mileage rate for a car under an accountable plan or a nonaccountable plan. For
you lease, you must use it for the entire lease period (in- details, see Pub. 15. That publication explains accounta-
cluding renewals). ble and nonaccountable plans and tells you whether to re-
port the reimbursement on your employee's Form W-2.
Standard mileage rate not allowed. You cannot use
the standard mileage rate if you:
1. Operate five or more cars at the same time; Depreciation
2. Claimed a depreciation deduction using any method If property you acquire to use in your business is expected
other than straight line, for example, ACRS or to last more than 1 year, you generally cannot deduct the
MACRS; entire cost as a business expense in the year you acquire
3. Claimed a section 179 deduction on the car; 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
4. Claimed the special depreciation allowance on the deducting the cost of business property is called depreci-
car; ation.
5. Claimed actual car expenses for a car you leased; or The following is a brief overview. You will find more in-
6. Are a rural mail carrier who received a qualified reim- formation about depreciation in Pub. 946.
bursement.
What property can be depreciated? You can depreci-
Parking fees and tolls. In addition to using the stand- ate property if it meets all the following requirements.
ard mileage rate, you can deduct any business-related
parking fees and tolls. (Parking fees you pay to park your
• It must be property you own.
car at your place of work are nondeductible commuting • It must be used in business or held to produce in-
expenses.) come. You can never depreciate inventory (explained
in chapter 2) because it is not held for use in your busi-
Actual expenses. If you do not choose to use the stand- ness.
ard mileage rate, you may be able to deduct your actual
car or truck expenses. • It must have a useful life that extends substantially be-
yond the year it is placed in service.
If you qualify to use both methods, figure your de-
TIP duction both ways to see which gives you a larger • It must have a determinable useful life, which means
deduction. that it must be something that wears out, decays, gets
used up, becomes obsolete, or loses its value from
Actual car expenses include the costs of the following natural causes. You can never depreciate the cost of
items. land because land does not wear out, become obso-
lete, or get used up.
Depreciation Lease payments Registration
Garage rent Licenses Repairs • It must not be excepted property. This includes prop-
Gas Oil Tires erty placed in service and disposed of in the same
Insurance Parking fees Tolls year.
If you use your vehicle for both business and personal Repairs. In general, you do not depreciate the costs of
purposes, you must divide your expenses between busi- repairs or maintenance if they do not improve your prop-
ness and personal use. You can divide your expenses erty. Instead, you deduct these amounts on line 21 of
based on the miles driven for each purpose. Schedule C. Improvements are amounts paid for better-
ments to your property, restorations of your property, or
Example. You are the sole proprietor of a flower shop. work that adapts your property to a new or different use.
You drove your van 20,000 miles during the year. 16,000
miles were for delivering flowers to customers and 4,000 Election to capitalize repair and maintenance
miles were for personal use (including commuting miles). costs that do not improve your property. You can
You can claim only 80% (16,000 ÷ 20,000) of the cost of make an election to treat certain repairs or replacements
operating your van as a business expense. in your trade or business as improvements subject to de-
preciation. This election is available if you treat these
More information. For more information about the rules amounts as capital expenditures on your books and re-
for claiming car and truck expenses, see Pub. 463. cords regularly used in computing your income and ex-
penses.
Reimbursing Your Employees for Depreciation method. The method for depreciating
Expenses most business and investment property placed in service
after 1986 is called the Modified Accelerated Cost Recov-
You can generally deduct the amount you reimburse your ery System (MACRS). MACRS is discussed in detail in
employees for car and truck expenses. The reimburse- Pub. 946.
ment you deduct and the manner in which you deduct it
depend in part on whether you reimburse the expenses

32 Chapter 8 Business Expenses Publication 334 (2023)

Section 179 deduction. You can elect to deduct a limi- Kinds of pay. Some of the ways you may provide pay to
ted amount of the cost of certain depreciable property in your employees are listed below.
the year you place the property in service. This deduction
• Awards.
is known as the section 179 deduction. The maximum
amount you can elect to deduct during 2023 is generally • Bonuses.
$1,160,000 (higher limits apply to certain property). • Education expenses.
This limit is generally reduced by the amount by which
the cost of the property placed in service during the tax • Fringe benefits (discussed later).
year exceeds $2,890,000. The total amount of deprecia- • Loans or advances you do not expect the employee to
tion (including the section 179 deduction) you can take for repay if they are for personal services actually per-
a passenger automobile you use in your business and first formed.
place in service in 2023 is $12,200 ($20,200 if you take
the special depreciation allowance for qualified passenger
• Property you transfer to an employee as payment for
services.
automobiles placed in service in 2023). Special rules ap-
ply to trucks and vans. For more information, see Pub. • Reimbursements for employee business expenses.
946. It explains what property qualifies for the deduction, • Sick pay.
what limits apply to the deduction, and when and how to
recapture the deduction. • Vacation pay.
Your section 179 election for the cost of any sport Fringe benefits. A fringe benefit is a form of pay for
utility vehicle (SUV) and certain other vehicles is the performance of services. The following are examples
!
CAUTION limited to $28,900. For more information, see the of fringe benefits.
Instructions for Form 4562 or Pub. 946. • Benefits under qualified employee benefit programs.
• Meals and lodging.
Listed property. You must follow special rules and re-
cordkeeping requirements when depreciating listed prop- • The use of a car.
erty. Listed property includes any of the following. • Flights on airplanes.
• Most passenger automobiles. • Discounts on property or services.
• Most other property used for transportation. Employee benefit programs include the following.
• Any property of a type generally used for entertain- • Accident and health plans.
ment, recreation, or amusement.
• Adoption assistance.
For more information about listed property, see Pub.
946.
• Cafeteria plans.
• Dependent care assistance.
Form 4562. Use Form 4562, Depreciation and Amortiza-
tion, if you are claiming any of the following.
• Educational assistance.

• Depreciation on property placed in service during the • Group-term life insurance coverage.
current tax year. • Welfare benefit funds.
• A section 179 deduction. You can generally deduct the cost of fringe benefits you
provide on your Schedule C in whatever category the cost
• Depreciation on any listed property (regardless of falls. For example, if you allow an employee to use a car or
when it was placed in service). 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
Employees' Pay deduction or a depreciation deduction.
You can generally deduct on Schedule C the pay you give You may be able to exclude all or part of the fringe
your employees for the services they perform for your TIP benefits you provide from your employees' wages.
business. The pay may be in cash, property, or services. For more information about fringe benefits and the
exclusion of benefits, see Pub. 15-B.
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. Insurance
• The pay must be reasonable. You can generally deduct premiums you pay for the follow-
• The pay must be for services performed. ing kinds of insurance related to your business.
1. Fire, theft, flood, or similar insurance.
You cannot deduct your own salary or any personal
withdrawals you make from your business. As a sole pro- 2. Credit insurance that covers losses from business
prietor, you are not an employee of the business. bad debts.

Publication 334 (2023) Chapter 8 Business Expenses 33

3. Group hospitalization and medical insurance for em- b. For contracts issued after June 8, 1997, you gen-
ployees, including long-term care insurance. erally cannot deduct the premiums on any life in-
surance policy, endowment contract, or annuity
4. Liability insurance.
contract if you are directly or indirectly a benefi-
5. Malpractice insurance that covers your personal liabil- ciary. The disallowance applies without regard to
ity for professional negligence resulting in injury or whom the policy covers.
damage to patients or clients.
4. Insurance to secure a loan. If you take out a policy on
6. Workers' compensation insurance set by state law your life or on the life of another person with a finan-
that covers any claims for bodily injuries or job-related cial interest in your business to get or protect a busi-
diseases suffered by employees in your business, re- ness loan, you cannot deduct the premiums as a busi-
gardless of fault. ness expense. Nor can you deduct the premiums as
interest on business loans or as an expense of financ-
7. Contributions to a state unemployment insurance ing loans. In the event of death, the proceeds of the
fund are deductible as taxes if they are considered policy are not taxed as income even if they are used
taxes under state law. to liquidate the debt.
8. Overhead insurance that pays for business overhead
expenses you have during long periods of disability Self-employed health insurance deduction. You may
caused by your injury or sickness. be able to deduct the amount you paid for medical and
dental insurance and qualified long-term care insurance
9. Car and other vehicle insurance that covers vehicles for you and your family.
used in your business for liability, damages, and other
losses. If you operate a vehicle partly for personal How to figure the deduction. Generally, you can use
use, deduct only the part of the insurance premium the worksheet in the Instructions for Form 1040 to figure
that applies to the business use of the vehicle. If you your deduction. However, if any of the following apply, you
use the standard mileage rate to figure your car ex- must use Form(s) 7206.
penses, you cannot deduct any car insurance premi- • You have more than one source of income subject to
ums. SE tax.
10. Life insurance covering your employees if you are not • You file Form 2555 (relating to foreign earned income).
directly or indirectly the beneficiary under the con-
tract.
• You are using amounts paid for qualified long-term
care insurance to figure the deduction.
11. Business interruption insurance that pays for lost prof- See Form 8962 and its separate instructions and use
its if your business is shut down due to a fire or other Pub. 974 if the insurance plan established, or considered
cause. to be established, under your business was obtained
through the Health Insurance Marketplace and you are
Nondeductible premiums. You cannot deduct premi-
claiming the premium tax credit.
ums on the following kinds of insurance.
1. Self-insurance reserve funds. You cannot deduct Prepayment. You cannot deduct expenses in advance,
amounts credited to a reserve set up for self-insur- even if you pay them in advance. This rule applies to any
ance. This applies even if you cannot get business in- expense paid far enough in advance to, in effect, create an
surance coverage for certain business risks. However, asset with a useful life extending substantially beyond the
your actual losses may be deductible. For more infor- end of the current tax year.
mation, see Pub. 547.
Example. In 2023, you signed a 3-year insurance con-
2. Loss of earnings. You cannot deduct premiums for a tract. Even though you paid the premiums for 2023, 2024,
policy that pays for your lost earnings due to sickness and 2025 when you signed the contract, you can only de-
or disability. However, see item 8 in the previous list. duct the premium for 2023 on your 2023 tax return. You
can deduct in 2024 and 2025 the premiums allocable to
3. Certain life insurance and annuities.
those years.
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 Interest
with a financial interest in your business if you are
directly or indirectly a beneficiary of the policy. You You can generally deduct as a business expense some or
are included among possible beneficiaries of the all interest you pay or accrue during the tax year on debts
policy if the policy owner is obligated to repay a related to your business. Interest relates to your business
loan from you using the proceeds of the policy. A if you use the proceeds of the loan for a business ex-
person has a financial interest in your business if pense. It does not matter what type of property secures
the person is an owner or part owner of the busi- the loan. You can deduct interest on a debt only if you
ness or has lent money to the business. meet all of the following requirements.
• You are legally liable for that debt.

34 Chapter 8 Business Expenses Publication 334 (2023)

 • Both you and the lender intend that the debt be re-
paid. Pension Plans
• You and the lender have a true debtor-creditor rela-
tionship. You can set up and maintain the following small business
retirement plans for yourself and your employees.
Certain taxpayers are required to limit their business in-
terest expense deduction. See the Instructions for Form • SEP (Simplified Employee Pension) plans.
8990 to determine whether you are required to limit your • SIMPLE (Savings Incentive Match Plan for Employ-
business interest expense deduction, who is required to ees) plans.
file Form 8990, and how certain businesses may elect out
• Qualified plans (including Keogh or H.R. 10 plans).
of the business interest expense limitation.
SEP, SIMPLE, and qualified plans offer you and your
You cannot deduct on Schedule C the interest you paid employees a tax-favored way to save for retirement. You
on personal loans. If a loan is part business and part per- can deduct contributions you make to the plan for your
sonal, you must divide the interest between the personal employees on line 19 of Schedule C. If you are a sole pro-
part and the business part. prietor, you can deduct contributions you make to the plan
for yourself on line 16 of Schedule 1 (Form 1040). You can
Example. In 2023, you paid $600 interest on a car also deduct trustees' fees if contributions to the plan do
loan. During 2023, you used the car 60% for business and not cover them. Earnings on the contributions are gener-
40% for personal purposes. You are claiming actual ex- ally tax free until you or your employees receive distribu-
penses on the car. You can only deduct $360 (60% (0.60) tions from the plan. You may also be able to claim a tax
× $600) for 2023 on Schedule C. The remaining interest of credit if you begin a new qualified defined benefit or de-
$240 is a nondeductible personal expense. fined contribution plan (including a 401(k) plan), SIMPLE
More information. Additional items to consider are plan, or SEP plan. For details on this credit and credits for
shown below. auto-enrollment and military spouse participation, see
Form 8881 and its separate instructions.
• How to allocate interest between personal and busi- Under certain plans, employees can have you contrib-
ness use. ute limited amounts of their before-tax pay to a plan.
• Limitation on business interest. These amounts (and earnings on them) are generally tax
free until your employees receive distributions from the
• When to deduct interest. plan.
• The rules for a below-market interest rate loan. (This is For more information on retirement plans for small busi-
generally a loan on which no interest is charged or on ness, see Pub. 560.
which interest is charged at a rate below the applica-
ble federal rate.) Pub. 590-A, Contributions to Individual Retire-
TIP ment Arrangements (IRAs), discusses other
tax-favored ways to save for retirement.
Legal and Professional Fees
Legal and professional fees, such as fees charged by ac-
countants, that are ordinary and necessary expenses di-
Rent Expense
rectly related to operating your business are deductible on Rent is any amount you pay for the use of property you do
Schedule C. However, you usually cannot deduct legal not own. In general, you can deduct rent as a business ex-
fees you pay to acquire business assets. Add them to the pense only if the rent is for property you use in your busi-
basis of the property. ness. If you have or will receive equity in or title to the
If the fees include payments for work of a personal na- property, you cannot deduct the rent.
ture (such as making a will), you can take a business de-
Unreasonable rent. You cannot take a rental deduction
duction only for the part of the fee related to your busi-
for unreasonable rents. Ordinarily, the issue of reasona-
ness.
bleness arises only if you and the lessor are related. Rent
Tax preparation fees. You can deduct on Schedule C paid to a related person is reasonable if it is the same
the cost of preparing that part of your tax return relating to amount you would pay to a stranger for use of the same
your business as a sole proprietor or statutory employee. property. Rent is not unreasonable just because it is fig-
You can also deduct on Schedule C the amount you ured as a percentage of gross receipts.
pay or incur in resolving asserted tax deficiencies for your Related persons include members of your immediate
business as a sole proprietor or statutory employee. 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

Publication 334 (2023) Chapter 8 Business Expenses 35

the rent you pay for that part. You must meet the require- Sales tax. Treat any sales tax you pay on a service or on
ments for business use of your home. For more informa- the purchase or use of property as part of the cost of the
tion, see Business Use of Your Home, later. service or property. If the service or the cost or use of the
property is a deductible business expense, you can de-
Rent paid in advance. Generally, rent paid in your busi- duct the tax as part of that service or cost. If the property
ness is deductible in the year paid or accrued. If you pay is merchandise bought for resale, the sales tax is part of
rent in advance, you can deduct only the amount that ap- the cost of the merchandise. If the property is depreciable,
plies to your use of the rented property during the tax year. add the sales tax to the basis for depreciation. For infor-
You can deduct the rest of your payment only over the pe- mation on the basis of property, see Pub. 551.
riod to which it applies.
Do not deduct state and local sales taxes im-
! posed on the buyer that you must collect and pay
Taxes CAUTION over to the state or local government. Do not in-

clude these taxes in gross receipts or sales.

You can deduct on Schedule C various federal, state, lo-
cal, and foreign taxes directly attributable to your busi- ,
ness. Excise taxes. You can deduct on Schedule C all excise
Income taxes. You can deduct on Schedule C a state tax taxes that are ordinary and necessary expenses of carry-
on gross income (as distinguished from net income) di- ing on your business. Excise taxes are discussed briefly in
rectly attributable to your business. You can deduct other chapter 1.
state and local income taxes on Schedule A (Form 1040) Fuel taxes. Taxes on gasoline, diesel fuel, and other mo-
if you itemize your deductions. Do not deduct federal in- tor fuels you use in your business are usually included as
come tax. part of the cost of the fuel. Do not deduct these taxes as a
Employment taxes. You can deduct the social security, separate item.
Medicare, and FUTA taxes you paid out of your own funds You may be entitled to a credit or refund for federal ex-
as an employer. Employment taxes are discussed briefly cise tax you paid on fuels used for certain purposes. For
in chapter 1. You can also deduct payments you made as more information, see Pub. 510.
an employer to a state unemployment compensation fund
or to a state disability benefit fund. Deduct these pay-
ments as taxes. Travel and Meals
SE tax. You can deduct one-half of your SE tax on line 15 This section briefly explains the kinds of travel and meal
of Schedule 1 (Form 1040). SE tax is discussed in chap- expenses you can deduct on Schedule C.
ter 1 and chapter 10.
Travel expenses. These are the ordinary and necessary
Personal property tax. You can deduct on Schedule C expenses of traveling away from home for your business.
any tax imposed by a state or local government on per- You are traveling away from home if both the following
sonal property used in your business. conditions are met.
You can also deduct registration fees for the right to use 1. Your duties require you to be away from the general
property within a state or local area. area of your tax home (defined later) substantially lon-
ger than an ordinary day's work.
Example. You and your spouse drove your car 7,000
business miles out of a total of 10,000 miles. You and your 2. You need to get sleep or rest to meet the demands of
spouse had to pay $25 for your annual state license tags your work while away from home.
and $20 for your city registration sticker. You and your
spouse also paid $235 in city personal property tax on the Generally, your tax home is your regular place of busi-
car, for a total of $280. You and your spouse are claiming ness, regardless of where you maintain your family home.
your actual car expenses. Because you and your spouse It includes the entire city or general area in which your
used the car 70% for business, you and your spouse can business is located. See Pub. 463 for more information.
deduct 70% of the $280, or $196, as a business expense. The following is a brief discussion of the expenses you
can deduct.
Real estate taxes. You can deduct on Schedule C the Transportation. You can deduct the cost of travel by
real estate taxes you pay on your business property. De- airplane, train, bus, or car between your home and your
ductible real estate taxes are any state, local, or foreign business destination.
taxes on real estate levied for the general public welfare.
The taxing authority must assess these taxes uniformly at Taxi, commuter bus, and limousine. You can deduct
a like rate on all real property under its jurisdiction, and the fares for these and other types of transportation between
proceeds must be for general community or governmental the airport or station and your hotel, or between the hotel
purposes. and your work location away from home.

36 Chapter 8 Business Expenses Publication 334 (2023)

 Baggage and shipping. You can deduct the cost of b. A place where you meet or deal with patients, cli-
sending baggage and sample or display material between ents, or customers in the normal course of your
your regular and temporary work locations. business; or
Car or truck. You can deduct the costs of operating c. A separate structure (not attached to your home)
and maintaining your vehicle when traveling away from you use in connection with your business.
home on business. You can deduct actual expenses or the
standard mileage rate (discussed earlier under Car and Exclusive use. To qualify under the exclusive use test,
Truck Expenses), as well as business-related tolls and you must use a specific area of your home only for your
parking. If you rent a car while away from home on busi- trade or business. The area used for business can be a
ness, you can deduct only the business-use portion of the room or other separately identifiable space. The space
expenses. does not need to be marked off by a permanent partition.
You do not meet the requirements of the exclusive use
Meals and lodging. You can deduct the cost of meals test if you use the area in question both for business and
and lodging if your business trip is overnight or long for personal purposes.
enough that you need to stop for sleep or rest to properly
perform your duties. You can use actual expenses or the Example. You are an attorney and use a den in your
standard meal allowance to calculate your deduction. In home to write legal briefs and prepare clients' tax returns.
most cases, you can deduct only 50% of your meal expen- Your family also uses the den for recreation. The den is
ses. See Pub. 463 for additional information. not used exclusively in your profession, so you cannot
claim a business deduction for its use.
Cleaning. You can deduct the costs of dry cleaning
and laundry while on your business trip. Exceptions to exclusive use. You do not have to
meet the exclusive use test to the extent you use part of
Telephone. You can deduct the cost of business calls
your home in either of the following ways.
while on your business trip, including business communi-
cation by fax machine or other communication devices. 1. For the storage of inventory or product samples.
Tips. You can deduct the tips you pay for any expense 2. As a daycare facility.
in this list.
For an explanation of these exceptions, see Pub. 587,
More information. For more information about travel Business Use of Your Home.
expenses, see Pub. 463.
Regular use. To qualify under the regular use test, you
Reimbursing your employees for expenses. You can must use a specific area of your home for business on a
generally deduct the amount you reimburse your employ- continuing basis. You do not meet the test if your business
ees for travel and meal expenses. The reimbursement you use of the area is only occasional or incidental, even if you
deduct and the manner in which you deduct it depend in do not use that area for any other purpose.
part on whether you reimburse the expenses under an ac-
countable plan or a nonaccountable plan. For details, see Principal place of business. You can have more than
Pub. 15. That publication explains accountable and non- one business location, including your home, for a single
accountable plans and tells you whether to report the re- trade or business. To qualify to deduct the expenses for
imbursement on your employee's Form W-2. 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
Business Use of Your Home place of business, you must consider all the facts and cir-
cumstances.
To deduct expenses related to the part of your home used Your home office will qualify as your principal place of
for business, you must meet specific requirements. Even business for deducting expenses for its use if you meet
then, your deduction may be limited. the following requirements.
To qualify to claim expenses for business use of your • You use it exclusively and regularly for administrative
home, you must meet the following tests. or management activities of your business.

1. Your use of the business part of your home must be: • You have no other fixed location where you conduct
substantial administrative or management activities of
a. Exclusive (however, see Exceptions to exclusive your business.
use, later),
Alternatively, if you use your home exclusively and reg-
b. Regular, and ularly for your business, but your home office does not
qualify as your principal place of business based on the
c. For your business.
previous rules, you determine your principal place of busi-
2. The business part of your home must be: ness based on the following factors.
a. Your principal place of business (defined later); • The relative importance of the activities performed at
each location.

Publication 334 (2023) Chapter 8 Business Expenses 37

 • If the relative importance factor does not determine amounts are deducted by you for financial accounting pur-
your principal place of business, you can also con- poses or in keeping your books and records.
sider the time spent at each location.
If you have an applicable financial statement, you may
If, after considering your business locations, your home use this safe harbor to deduct amounts paid for tangible
cannot be identified as your principal place of business, property up to $5,000 per item or invoice. If you do not
you cannot deduct home office expenses. However, for have an applicable financial statement, you may use the
other ways to qualify to deduct home office expenses, see de minimis safe harbor to deduct amounts paid for tangi-
Pub. 587. ble property up to $2,500 per item or invoice.
Deduction limit. If your gross income from the business Amounts qualifying under this de minimis safe harbor
use of your home equals or exceeds your total business should be included as other expenses in Part V of Sched-
expenses (including depreciation), you can deduct all your ule C.
business expenses related to the use of your home. If your
gross income from the business use is less than your total More information. For details on making this election
business expenses, your deduction for certain expenses and requirements for using the de minimis safe harbor for
for the business use of your home is limited. tangible property, see Tangible Property Regulations.
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-
Other Expenses You Can
nus the sum of the following. Deduct
1. The business part of expenses you could deduct even You may also be able to deduct the following expenses.
if you did not use your home for business (such as
mortgage interest, real estate taxes, and casualty and
• Advertising.
theft losses that are allowable as itemized deductions • Bank fees.
on Schedule A (Form 1040)). • Donations to business organizations.
2. The business expenses that relate to the business ac- • Education expenses.
tivity in the home (for example, business phone, sup-
plies, and depreciation on equipment), but not to the • Impairment-related expenses.
use of the home itself. • Interview expense allowances.
Do not include in (2) above your deduction for one-half of • Licenses and regulatory fees.
your SE tax.
Use Form 8829, Expenses for Business Use of Your
• Moving machinery.
Home, to figure your deduction. • Outplacement services.

Simplified method. The IRS provides a simplified • Penalties and fines you pay for late performance or
nonperformance of a contract.
method to determine your expenses for business use of
your home. The simplified method is an alternative to cal- • Repairs and maintenance to real or tangible personal
culating and substantiating actual expenses. In most ca- property.
ses, you will figure your deduction by multiplying $5 by the
• Repayments of income.
area of your home used for a qualified business use. The
area you use to figure your deduction is limited to 300 • Supplies and materials.
square feet. For more information, see the Instructions for • Utilities.
Schedule C.

More information. For more information on deducting

expenses for the business use of your home, see Pub. Expenses You Cannot Deduct
587.
You usually cannot deduct the following as business ex-
penses.
De Minimis Safe Harbor for • Bribes and kickbacks.
Tangible Property • Charitable contributions.
• Demolition expenses or losses.
Generally, you must capitalize costs to acquire or produce
real or tangible personal property used in your trade or • Dues to business, social, athletic, luncheon, sporting,
business, such as buildings, equipment, or furniture. How- airline, and hotel clubs.
ever, if you elect to use the de minimis safe harbor for tan- • Entertainment expenses.
gible property, you may deduct de minimis amounts paid
to acquire or produce certain tangible property if these • Improvements to real or tangible personal property.
Improvements are amounts paid for betterments to

38 Chapter 8 Business Expenses Publication 334 (2023)

 your property, restorations of your property, or work Examples of typical losses that may produce an NOL
that adapts your property to a new or different use. include, but are not limited to, losses incurred from the fol-
lowing.
• Lobbying expenses.
• Penalties and fines you pay to a governmental agency • Your trade or business.
or instrumentality because you broke the law. • A casualty or theft resulting from a federally declared
disaster.
• Personal, living, and family expenses.
• Political contributions. • Moving expenses.
• Settlements or payments related to sexual harass- • Rental property.
ment or sexual abuse if such settlement or payment is A loss from operating a business is the most common
subject to a nondisclosure agreement. You also can- reason for an NOL.
not deduct attorney fees related to such settlement or
For details about NOLs, see Pub. 536. It explains how
payment.
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
9. 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
Figuring Net Profit or loss from the activity to offset other income. Activities you
do as a hobby, or mainly for sport or recreation, come un-
Loss der this limit.
For details about not-for-profit activities, see Hobby or
business: here’s what to know about that side hustle.
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- 10.
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 Self-Employment (SE) Tax
loss. You can usually deduct it from gross income on line 3
of Schedule 1 (Form 1040). But in some situations your The SE tax rules apply no matter how old you are
loss is limited. This chapter briefly explains three of those and even if you are already receiving social secur-
situations. Other situations that may limit your loss are ex-
!
CAUTION ity and Medicare benefits.
plained in the instructions for Schedule C, line G and
line 32.
If you have more than one business, you must fig- Who Must Pay SE Tax?
! ure your net profit or loss for each business on a
CAUTION separate Schedule C. Generally, you must pay SE tax and file Schedule SE
(Form 1040) if your net earnings from self-employment
Excess business loss limitation. Your loss from a trade were $400 or more. Use Schedule SE to figure net earn-
or business may be limited. Use Form 461 to determine ings from self-employment.
the amount of your excess business loss, if any. Your ex-
cess business loss will be included as income on line 8p Sole proprietor or independent contractor. If you are
of Schedule 1 (Form 1040) and treated as an NOL that self-employed as a sole proprietor or independent con-
you must carry forward and deduct in a subsequent year. tractor, you generally use Schedule C (Form 1040) to fig-
For more information about the excess business loss ure your earnings subject to SE tax.
limitation, see Form 461 and its instructions. SE tax rate. The 2023 SE tax rate on net earnings is
15.3% (12.4% social security tax plus 2.9% Medicare tax).
Net Operating Losses (NOLs) Maximum earnings subject to SE tax. Only the first
$160,200 of your combined wages, tips, and net earnings
If your deductions for the year are more than your income in 2023 is subject to any combination of the 12.4% social
for the year, you may have an NOL. You can use an NOL security part of SE tax, social security tax, or the Tier 1
by deducting it from your income in another year or years. part of railroad retirement tax.

Publication 334 (2023) Chapter 9 Figuring Net Profit or Loss 39

 All of your combined wages, tips, and net earnings in 2. You get a share of the catch or a share of the pro-
2023 are subject to any combination of the 2.9% Medicare ceeds from the sale of the catch.
part of SE tax, Medicare tax, or Medicare part of railroad
3. Your share depends on the amount of the catch.
retirement tax.
If your wages and tips are subject to either social secur- 4. The boat's operating crew normally numbers fewer
ity tax or the Tier 1 part of railroad retirement tax, or both, than 10 individuals. (An operating crew is considered
and total at least $160,200, do not pay the 12.4% social as normally made up of fewer than 10 if the average
security part of the SE tax on any of your net earnings. size of the crew on trips made during the last 4 calen-
However, you must pay the 2.9% Medicare part of the SE dar quarters is fewer than 10.)
tax on all your net earnings.
Notary public. Fees you receive for services you perform
Additional Medicare Tax. A 0.9% Additional Medicare as a notary public are reported on Schedule C but are not
Tax may apply to you if your net earnings from self-em- subject to SE tax (see the Instructions for Schedule SE
ployment exceed a threshold amount (based on your filing (Form 1040)).
status). For more information, see Self-Employment (SE)
Tax in chapter 1, and Form 8959 and its instructions. 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
Special Rules and Exceptions not covered under a federal-state social security agree-
Aliens. Generally, resident aliens must pay SE tax under ment.
the same rules that apply to U.S. citizens. Nonresident ali-
Foreign government or international organization
ens are not subject to SE tax unless an international social
employee. You are subject to SE tax if both the following
security agreement (also known as a totalization agree-
conditions are true.
ment) in effect determines that they are covered under the
U.S. social security system. However, residents of the U.S. 1. You are a U.S. citizen employed in the United States,
Virgin Islands, Puerto Rico, Guam, the Commonwealth of Puerto Rico, Guam, American Samoa, the Common-
the Northern Mariana Islands, or American Samoa are wealth of the Northern Mariana Islands, or the U.S.
subject to SE tax, as they are considered U.S. residents Virgin Islands by:
for SE tax purposes. For more information on aliens, see
a. A foreign government,
Pub. 519, U.S. Tax Guide for Aliens.
b. A wholly owned agency of a foreign government,
Child employed by parent. You are not subject to SE or
tax if you are under age 18 and you are working for your
father or mother. c. An international organization.
2. Your employer is not required to withhold social secur-
Church employee. If you work for a church or a qualified
ity and Medicare taxes from your wages.
church-controlled organization (other than as a minister,
member of a religious order, or Christian Science practi- U.S. citizen or resident alien residing abroad. If you
tioner) that elected an exemption from social security and are a self-employed U.S. citizen or resident alien living
Medicare taxes, you are subject to SE tax if you receive outside the United States, in most cases you must pay SE
$108.28 or more in wages from the church or organization. tax. Foreign earnings from self-employment can’t be re-
For more information, see Pub. 517, Social Security and duced by your foreign earned income exclusion when
Other Information for Members of the Clergy and Reli- computing self-employment tax.
gious Workers.
Exception. The United States has social security
Fishing crew member. If you are a member of the crew agreements with many countries to eliminate double taxa-
on a boat that catches fish or other aquatic life, your earn- tion under two social security systems. Under these
ings are subject to SE tax if all the following conditions ap- agreements, you must generally only pay social security
ply. and Medicare taxes to the country in which you live. The
country to which you must pay the tax will issue a certifi-
1. You do not get any pay for the work except your share
cate that serves as proof of exemption from social security
of the catch or a share of the proceeds from the sale
tax in the other country.
of the catch, unless the pay meets all the following
For more information, see the Instructions for Sched-
conditions.
ule SE (Form 1040).
a. The pay is not more than $100 per trip.
b. The pay is received only if there is a minimum More Than One Business
catch.
If you have earnings subject to SE tax from more than one
c. The pay is solely for additional duties (such as trade, business, or profession, you must combine the net
mate, engineer, or cook) for which additional cash profit (or loss) from each to determine your total earnings
pay is traditional in the fishing industry. subject to SE tax. A loss from one business reduces your
profit from another business.

40 Chapter 10 Self-Employment (SE) Tax Publication 334 (2023)

Community Property Income 1040 or 1040-SR, which may affect your eligibility for cred-
its, deductions, or other items that are subject to an AGI
If any of the income from a trade or business, other than a limit. Figure your AGI with and without using the optional
partnership, is community property income under state methods to see if the optional methods will benefit you.
law, it is included in the earnings subject to SE tax of the If you use either or both optional methods, you must fig-
spouse carrying on the trade or business. 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-
Gain or Loss lar method.
The optional methods may be used only to figure your
Do not include in earnings subject to SE tax a gain or loss SE tax. To figure your income tax, include your actual
from the disposition of property that is neither stock in earnings in gross income, regardless of which method you
trade nor held primarily for sale to customers. It does not use to determine SE tax.
matter whether the disposition is a sale, an exchange, or
an involuntary conversion. Regular Method
Lost Income Payments To figure net earnings using the regular method, multiply
your self-employment earnings by 92.35% (0.9235). For
If you are self-employed and reduce or stop your business your net earnings figured using the regular method, see
activities, any payment you receive from insurance or line 4a of your Schedule SE (Form 1040).
other sources for the lost business income is included in
earnings subject to SE tax. If you are not working when Net earnings figured using the regular method are also
you receive the payment, it still relates to your business called actual net earnings.
and is included in earnings subject to SE tax, even though
your business is temporarily inactive. Nonfarm Optional Method
Use the nonfarm optional method only for earnings that do
Figuring Earnings Subject to SE Tax not come from farming. You may use this method if you
Methods for Figuring Net Earnings meet all the following tests.
1. You are self-employed on a regular basis. This means
There are three ways to figure net earnings from self-em- that your actual net earnings from self-employment
ployment. were $400 or more in at least 2 of the 3 tax years be-
1. The regular method. fore the one for which you use this method. For this
purpose, the prior-year net earnings can be from ei-
2. The nonfarm optional method. ther farm or nonfarm earnings or both.
3. The farm optional method. 2. You have used this method less than 5 years. (There
is a 5-year lifetime limit.) The years do not have to be
You must use the regular method to the extent you do
one after another.
not use one or both of the optional methods.
3. Your net nonfarm profits were:
Why use an optional method? You may want to use the
optional methods (discussed later) when you have a loss a. Less than $7,103, and
or a small net profit and any one of the following applies. b. Less than 72.189% of your gross nonfarm income.
• You want to receive credit for social security benefit
coverage. Net nonfarm profit. Net nonfarm profit is generally the
total of the amounts from:
• You incurred child or dependent care expenses for
which you could claim a credit. (An optional method • Line 31 of Schedule C (Form 1040); and
may increase your earned income, which could in- • Box 14, code A, of Schedule K-1 (Form 1065) (from
crease your credit.) nonfarm partnerships).
• You are entitled to the earned income credit. (An op- However, you may need to adjust the amount reported
tional method may increase your earned income, on Schedule K-1 if you are a general partner or if it is a
which could increase your credit.) loss.
• You are entitled to the additional child tax credit. (An Gross nonfarm income. Your gross nonfarm income is
optional method may increase your earned income, generally the total of the amounts from:
which could increase your credit.)
• Line 7 of Schedule C (Form 1040); and
Effects of using an optional method. Using an optional • Box 14, code C, of Schedule K-1 (Form 1065) (from
method could increase your SE tax. Paying more SE tax nonfarm partnerships).
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

Publication 334 (2023) Chapter 10 Self-Employment (SE) Tax 41

Figuring Nonfarm Net Earnings and a net profit of $175. In this situation, you would not
pay any SE tax under either the regular method or the
If you meet the three tests explained earlier, use the fol- nonfarm optional method because your net earnings un-
lowing table to figure your nonfarm net earnings from der both methods are less than $400.
self-employment under the nonfarm optional method.
Gross nonfarm income of more than $9,840. The fol-
Table 10-1. Figuring Nonfarm Net Earnings lowing examples illustrate how to figure net earnings when
gross nonfarm income is more than $9,840.
IF your gross nonfarm THEN your net Example 1. Net nonfarm profit less than $7,103
income is... earnings are equal to... and less than 72.189% of gross nonfarm income. You
$9,840 or less two-thirds of your gross run an appliance repair shop. Your actual net earnings
nonfarm income. from self-employment were $10,500 in 2021 and $9,500 in
2022. You meet the test for being self-employed on a reg-
more than $9,840 $7,103. ular basis. You have used the nonfarm optional method
less than 5 years. Your gross income and net profit in 2023
Optional net earnings less than actual net earnings. are as follows.
You cannot use this method to report an amount less than
your actual nonfarm net earnings from self-employment. Gross nonfarm income . . . . . . . . . . . . . . . . . . . . . . $12,000
Net nonfarm profit . . . . . . . . . . . . . . . . . . . . . . . . . $1,200
Your actual nonfarm net earnings are your nonfarm net
earnings figured using the regular method, explained ear- Your actual net earnings for 2023 are $1,108 ($1,200 ×
lier. 0.9235). Because your net profit is less than $7,103 and
less than 72.189% of your gross income, you can use the
Gross nonfarm income of $9,840 or less. The follow-
nonfarm optional method to figure net earnings of $6,560.
ing examples illustrate how to figure net earnings when
Because these net earnings are higher than your actual
gross nonfarm income is $9,840 or less.
net earnings, you can report net earnings of $6,560 for
Example 1. Net nonfarm profit less than $7,103 2023.
and less than 72.189% of gross nonfarm income. You
Example 2. Net nonfarm profit not less than
run a craft business. Your actual net earnings from
$7,103. Assume that in Example 1 your net profit is
self-employment were $800 in 2021 and $900 in 2022.
$8,900. You must use the regular method. You cannot use
You meet the test for being self-employed on a regular ba-
the nonfarm optional method because your net nonfarm
sis. You have used the nonfarm optional method less than
profit is not less than $7,103.
5 years. Your gross income and net profit in 2023 are as
follows. Example 3. Net loss from a nonfarm business. As-
sume that in Example 1 you have a net loss of $700. You
Gross nonfarm income . . . . . . . . . . . . . . . . . . . . . . $5,400 can use the nonfarm optional method and report $6,560
Net nonfarm profit . . . . . . . . . . . . . . . . . . . . . . . . . $1,200 as your net earnings from self-employment.
Your actual net earnings for 2023 are $1,108 ($1,200 ×
0.9235). Because your net profit is less than $7,103 and Farm Optional Method
less than 72.189% of your gross income, you can use the
nonfarm optional method to figure net earnings of $3,600 Use the farm optional method only for earnings from a
(2/3 × $5,400). Because these net earnings are higher than farming business. See Pub. 225 for information about this
your actual net earnings, you can report net earnings of method.
$3,600 for 2023.
Using Both Optional Methods
Example 2. Net nonfarm profit less than $7,103 but
not less than 72.189% of gross nonfarm income. As- If you have both farm and nonfarm earnings, you may be
sume that in Example 1 your gross income is $1,200 and able to use both optional methods to determine your net
your net profit is $900. You must use the regular method to earnings from self-employment.
figure your net earnings. You cannot use the nonfarm op- To figure your net earnings using both optional meth-
tional method because your net profit is not less than ods, you must do the following.
72.189% of your gross income.
• Figure your farm and nonfarm net earnings separately
Example 3. Net loss from a nonfarm business. As- under each method. Do not combine farm earnings
sume that in Example 1 you have a net loss of $700. You with nonfarm earnings to figure your net earnings un-
can use the nonfarm optional method and report $3,600 der either method.
(2/3 × $5,400) as your net earnings. • Add the net earnings figured under each method to ar-
Example 4. Nonfarm net earnings less than $400. rive at your total net earnings from self-employment.
Assume that in Example 1 you have gross income of $525 You can report less than your total actual farm and non-
farm net earnings but not less than actual nonfarm net

42 Chapter 10 Self-Employment (SE) Tax Publication 334 (2023)

earnings. If you use both optional methods, you can report * Limited to $6,560 because you used both optional methods.
no more than $6,560 as your combined net earnings from
self-employment. Fiscal Year Filer
Example. You are a self-employed farmer. You also
operate a retail grocery store. Your gross income, actual If you use a tax year other than the calendar year, you
net earnings from self-employment, and optional farm and must use the tax rate and maximum earnings limit in effect
optional nonfarm net earnings from self-employment are at the beginning of your tax year. Even if the tax rate or
shown in Table 10-2. maximum earnings limit changes during your tax year,
continue to use the same rate and limit throughout your
tax year.
Table 10-2. Example—Farm and Nonfarm
Earnings

Income and
Reporting SE Tax
Earnings Farm Nonfarm Use Schedule SE (Form 1040) to figure and report your
Gross income $4,500 $6,000 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
Actual net earnings $900 $500 form. If you file Form 1040-SS, enter the SE tax on line 3,
Optional net and attach Schedule SE to your form.
earnings (2/3 of If you need to pay SE tax, you must file Form
gross income) $3,000 $4,000 ! 1040, 1040-SR, or 1040-SS, as applicable (with
CAUTION Schedule SE attached) even if you do not other-

Table 10-3 shows four methods or combinations of wise have to file a federal income tax return.
methods you can use to figure net earnings from self-em-
ployment using the farm and nonfarm gross income and Joint return. Even if you file a joint return, you cannot file
actual net earnings shown in Table 10-2. a joint Schedule SE. This is true whether one spouse or
• Method 1. Using the regular method for both farm and both spouses have earnings subject to SE tax. If both of
nonfarm income. you have earnings subject to SE tax, each of you must
complete a separate Schedule SE. Attach both schedules
• Method 2. Using the optional method for farm income to the joint return.
and the regular method for nonfarm income.
• Method 3. Using the regular method for farm income More than one business. If you have more than one
and the optional method for nonfarm income. trade or business, you must combine the net profit (or
loss) from each business to figure your SE tax. A loss from
• Method 4. Using the optional method for both farm one business will reduce your profit from another busi-
and nonfarm income. ness. File one Schedule SE showing the earnings from
Note. Actual net earnings are the same as net earnings self-employment, but file a separate Schedule C or F for
figured using the regular method. each business.

Table 10-3. Example—Net Earnings 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
Net
that had a net loss of $500. You must file a Schedule C for
Earnings 1 2 3 4 the restaurant showing your net profit of $25,000 and an-
Actual other Schedule C for the cabinetmaking business showing
your net loss of $500. You file one Schedule SE showing
farm $ 900 $ 900
total earnings subject to SE tax of $24,500.
Optional
farm $ 3,000 $ 3,000

Actual
nonfarm $ 500 $ 500 11.
Optional
nonfarm $4,000 $4,000
Your Rights as a
Amount
you can Taxpayer
report: $1,400 $3,500 $4,900 $6,560*
This chapter explains the examination, appeal, collection,
and refund processes.

Publication 334 (2023) Chapter 11 Your Rights as a Taxpayer 43

 District Court where you live. If you take your case to
Examinations, Appeals, court, the IRS will have the burden of proving certain facts
if you kept adequate records to show your tax liability, co-
Collections, and Refunds operated with the IRS, and meet certain other conditions.
If the court agrees with you on most issues in your case
Examinations (audits). We accept most taxpayers' re- and finds that our position was largely unjustified, you may
turns as filed. If we inquire about your return or select it for be able to recover some of your administrative and litiga-
examination, it does not suggest that you are dishonest. tion costs. You will not be eligible to recover these costs
The inquiry or examination may or may not result in more unless you tried to resolve your case administratively, in-
tax. We may close your case without change or you may cluding going through the appeals system, and you gave
receive a refund. us the information necessary to resolve the case.
The process of selecting a return for examination usu-
ally begins in one of two ways. One way is to use com- Collections. Pub. 594, The IRS Collection Process, ex-
puter programs to identify returns that may have incorrect plains your rights and responsibilities regarding payment
amounts. These programs may be based on information of federal taxes. It describes the following.
returns, such as Forms 1099 and W-2; on studies of past
examinations; or on certain issues identified by other spe- • What to do when you owe taxes. It describes what to
cial projects. Another way is to use information from com- do if you get a tax bill and what to do if you think your
pliance projects that indicates that a return may have in- bill is wrong. It also covers making installment pay-
correct amounts. These sources may include ments, delaying collection action, and submitting an
newspapers, public records, and individuals. If we deter- offer in compromise.
mine that the information is accurate and reliable, we may • IRS collection actions. It covers liens, releasing a lien,
use it to select a return for examination. levies, releasing a levy, seizures and sales, and re-
Pub. 556, Examination of Returns, Appeal Rights, and lease of property.
Claims for Refund, explains the rules and procedures that
we follow in examinations. The following sections give an
• IRS certification to the State Department of a seriously
delinquent tax debt, which will generally result in de-
overview of how we conduct examinations.
nial of a passport application and may lead to revoca-
By mail. We handle many examinations and inquiries tion of a passport.
by mail. We will send you a letter with either a request for Your collection appeal rights are explained in detail in
more information or a reason why we believe a change to Pub. 1660, Collection Appeal Rights.
your return may be needed. You can respond by mail or
you can request a personal interview with an examiner. If Innocent spouse relief. Generally, both you and your
you mail us the requested information or provide an ex- spouse are responsible, jointly and individually, for paying
planation, we may or may not agree with you, and we will the full amount of any tax, interest, or penalties due on
explain the reasons for any changes. Do not hesitate to your joint return. To seek relief from any liability related to
write to us about anything you do not understand. your spouse (or former spouse), you must file a claim on
By interview. If we notify you that we will conduct your Form 8857, Request for Innocent Spouse Relief. In some
examination through a personal interview, or you request cases, Form 8857 may need to be filed within 2 years of
such an interview, you have the right to ask that the exami- the date on which the IRS first attempted to collect the tax
nation take place at a reasonable time and place that is from you. Do not file Form 8857 with your Form 1040 or
convenient for both you and the IRS. If our examiner pro- 1040-SR. For more information, see Pub. 971, Innocent
poses any changes to your return, they will explain the Spouse Relief, and Form 8857, or you can call the Inno-
reasons for the changes. If you do not agree with these cent Spouse office toll free at 855-851-2009.
changes, you can meet with the examiner's supervisor. Potential third-party contacts. Generally, the IRS will
Repeat examinations. If we examined your return for deal directly with you or your duly authorized representa-
the same items in either of the 2 previous years and pro- tive. However, we sometimes talk with other persons if we
posed no change to your tax liability, contact us as soon need information that you have been unable to provide, or
as possible so we can see if we should discontinue the ex- to verify information we have received. If we do contact
amination. other persons, such as a neighbor, bank, employer, or em-
ployees, we will generally need to tell them limited infor-
Appeals. If you do not agree with the examiner's pro- mation, such as your name. The law prohibits us from dis-
posed changes, you can appeal them to the IRS Inde- closing any more information than is necessary to obtain
pendent Office of Appeals. Most differences can be set- or verify the information we are seeking. Our need to con-
tled without expensive and time-consuming court trials. tact other persons may continue as long as there is activ-
Your appeal rights are explained in detail in both Pub. 5, ity in your case. If we do contact other persons, you have a
Your Appeal Rights and How to Prepare a Protest if You right to request a list of those contacted. Your request can
Disagree, and Pub. 556. be made by telephone, in writing, or during a personal in-
If you do not wish to use the Appeals Office or disagree terview.
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.

44 Chapter 11 Your Rights as a Taxpayer Publication 334 (2023)

Refunds. You can file a claim for refund if you think you VITA, download the free IRS2Go app, or call
paid too much tax. You must generally file the claim within 800-906-9887 for information on free tax return prepa-
3 years from the date you filed your original return or 2 ration.
years from the date you paid the tax, whichever is later.
• TCE. The Tax Counseling for the Elderly (TCE) pro-
Pub. 556 has more information on refunds.
gram offers free tax help for all taxpayers, particularly
If you were due a refund but you did not file a return,
those who are 60 years of age and older. TCE volun-
you must file a refund claim within 2 years from the time
teers specialize in answering questions about pen-
the tax was paid to get that refund. The law generally pro-
sions and retirement-related issues unique to seniors.
vides for interest on your refund if it is not paid within 45
Go to IRS.gov/TCE or download the free IRS2Go app
days of the date you filed your return or claim for refund. 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
12. MilitaryOneSource (MilitaryOneSource.mil/MilTax).
Also, the IRS offers Free Fillable Forms, which can
be completed online and then e-filed regardless of in-
How To Get More come.

Information Using online tools to help prepare your return. Go to

IRS.gov/Tools for the following.
This section describes the help the IRS and other federal • The Earned Income Tax Credit Assistant (IRS.gov/
agencies offer to taxpayers who operate their own busi- EITCAssistant) determines if you’re eligible for the
nesses. earned income credit (EIC).
• The Online EIN Application (IRS.gov/EIN) helps you
How To Get Tax Help get an employer identification number (EIN) at no
cost.
If you have questions about a tax issue; need help prepar- • The Tax Withholding Estimator (IRS.gov/W4App)
ing your tax return; or want to download free publications, makes it easier for you to estimate the federal income
forms, or instructions, go to IRS.gov to find resources that tax you want your employer to withhold from your pay-
can help you right away. check. This is tax withholding. See how your withhold-
ing affects your refund, take-home pay, or tax due.
Preparing and filing your tax return. After receiving all
your wage and earnings statements (Forms W-2, W-2G, • The First-Time Homebuyer Credit Account Look-up
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment (IRS.gov/HomeBuyer) tool provides information on
compensation statements (by mail or in a digital format) or your repayments and account balance.
other government payment statements (Form 1099-G); • The Sales Tax Deduction Calculator (IRS.gov/
and interest, dividend, and retirement statements from SalesTax) figures the amount you can claim if you
banks and investment firms (Forms 1099), you have sev- itemize deductions on Schedule A (Form 1040).
eral options to choose from to prepare and file your tax re-
Getting answers to your tax questions. On
turn. You can prepare the tax return yourself, see if you
IRS.gov, you can get up-to-date information on
qualify for free tax preparation, or hire a tax professional to
current events and changes in tax law.
prepare your return.
• IRS.gov/Help: A variety of tools to help you get an-
Free options for tax preparation. Your options for pre- swers to some of the most common tax questions.
paring and filing your return online or in your local com-
munity, if you qualify, include the following. • IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro-
• Free File. This program lets you prepare and file your vide answers on a number of tax topics.
federal individual income tax return for free using soft-
ware or Free File Fillable Forms. However, state tax • IRS.gov/Forms: Find forms, instructions, and publica-
preparation may not be available through Free File. Go tions. You will find details on the most recent tax
to IRS.gov/FreeFile to see if you qualify for free online changes and interactive links to help you find answers
federal tax preparation, e-filing, and direct deposit or to your questions.
payment options. • You may also be able to access tax information in your
• VITA. The Volunteer Income Tax Assistance (VITA) e-filing software.
program offers free tax help to people with
low-to-moderate incomes, persons with disabilities, Need someone to prepare your tax return? There are
and limited-English-speaking taxpayers who need various types of tax return preparers, including enrolled
help preparing their own tax returns. Go to IRS.gov/ agents, certified public accountants (CPAs), accountants,

Publication 334 (2023) Chapter 12 How To Get More Information 45

and many others who don’t have professional credentials. cessibility services can call 833-690-0598. The Accessi-
If you choose to have someone prepare your tax return, bility Helpline can answer questions related to current and
choose that preparer wisely. A paid tax preparer is: future accessibility products and services available in al-
ternative media formats (for example, braille, large print,
• Primarily responsible for the overall substantive accu-
racy of your return, audio, etc.). The Accessibility Helpline does not have ac-
cess to your IRS account. For help with tax law, refunds, or
• Required to sign the return, and account-related issues, go to IRS.gov/LetUsHelp.
• Required to include their preparer tax identification Note. Form 9000, Alternative Media Preference, or
number (PTIN).
Form 9000(SP) allows you to elect to receive certain types
Although the tax preparer always signs the return, of written correspondence in the following formats.
! you're ultimately responsible for providing all the
CAUTION information required for the preparer to accurately
• Standard Print.
prepare your return and for the accuracy of every item re- • Large Print.
ported on the return. Anyone paid to prepare tax returns • Braille.
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax pre- • Audio (MP3).
parer, go to Tips for Choosing a Tax Preparer on IRS.gov. • Plain Text File (TXT).
• Braille Ready File (BRF).
Employers can register to use Business Services On-
line. The Social Security Administration (SSA) offers on- Disasters. Go to IRS.gov/DisasterRelief to review the
line service at SSA.gov/employer for fast, free, and secure available disaster tax relief.
W-2 filing options to CPAs, accountants, enrolled agents,
and individuals who process Form W-2, Wage and Tax Getting tax forms and publications. Go to IRS.gov/
Statement, and Form W-2c, Corrected Wage and Tax Forms to view, download, or print all the forms, instruc-
Statement. tions, and publications you may need. Or, you can go to
IRS.gov/OrderForms to place an order.
IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest Getting tax publications and instructions in eBook
information on tax changes, scam alerts, initiatives, prod- format. Download and view most tax publications and in-
ucts, and services. At the IRS, privacy and security are our structions (including the Instructions for Form 1040) on
highest priority. We use these tools to share public infor- mobile devices as eBooks at IRS.gov/eBooks.
mation with you. Don’t post your social security number IRS eBooks have been tested using Apple's iBooks for
(SSN) or other confidential information on social media iPad. Our eBooks haven’t been tested on other dedicated
sites. Always protect your identity when using any social eBook readers, and eBook functionality may not operate
networking site. as intended.
The following IRS YouTube channels provide short, in- Access your online account (individual taxpayers
formative videos on various tax-related topics in English, only). Go to IRS.gov/Account to securely access infor-
Spanish, and ASL. mation about your federal tax account.
• Youtube.com/irsvideos. • View the amount you owe and a breakdown by tax
• Youtube.com/irsvideosmultilingua. year.
• Youtube.com/irsvideosASL. • See payment plan details or apply for a new payment
plan.
Watching IRS videos. The IRS Video portal
(IRSVideos.gov) contains video and audio presentations • Make a payment or view 5 years of payment history
for individuals, small businesses, and tax professionals. and any pending or scheduled payments.
• Access your tax records, including key data from your
Online tax information in other languages. You can most recent tax return, and transcripts.
find information on IRS.gov/MyLanguage if English isn’t
your native language. • View digital copies of select notices from the IRS.
• Approve or reject authorization requests from tax pro-
Free Over-the-Phone Interpreter (OPI) Service. The fessionals.
IRS is committed to serving taxpayers with limited-English
proficiency (LEP) by offering OPI services. The OPI Serv- • View your address on file or manage your communica-
ice is a federally funded program and is available at Tax- tion preferences.
payer Assistance Centers (TACs), most IRS offices, and
Get a transcript of your return. With an online account,
every VITA/TCE tax return site. The OPI Service is acces-
you can access a variety of information to help you during
sible in more than 350 languages.
the filing season. You can get a transcript, review your
Accessibility Helpline available for taxpayers with most recently filed tax return, and get your adjusted gross
disabilities. Taxpayers who need information about ac-

46 Chapter 12 How To Get More Information Publication 334 (2023)

income. Create or access your online account at IRS.gov/ accepted. Go to IRS.gov/Payments for information on how
Account. to make a payment using any of the following options.

Tax Pro Account. This tool lets your tax professional • IRS Direct Pay: Pay your individual tax bill or estimated
submit an authorization request to access your individual tax payment directly from your checking or savings ac-
taxpayer IRS online account. For more information, go to count at no cost to you.
IRS.gov/TaxProAccount. • Debit Card, Credit Card, or Digital Wallet: Choose an
approved payment processor to pay online or by
Using direct deposit. The safest and easiest way to re- phone.
ceive a tax refund is to e-file and choose direct deposit,
which securely and electronically transfers your refund di- • Electronic Funds Withdrawal: Schedule a payment
rectly into your financial account. Direct deposit also when filing your federal taxes using tax return prepara-
avoids the possibility that your check could be lost, stolen, tion software or through a tax professional.
destroyed, or returned undeliverable to the IRS. Eight in • Electronic Federal Tax Payment System: Best option
10 taxpayers use direct deposit to receive their refunds. If for businesses. Enrollment is required.
you don’t have a bank account, go to IRS.gov/
DirectDeposit for more information on where to find a bank • Check or Money Order: Mail your payment to the ad-
or credit union that can open an account online. dress listed on the notice or instructions.
• Cash: You may be able to pay your taxes with cash at
Reporting and resolving your tax-related identity a participating retail store.
theft issues.
• Same-Day Wire: You may be able to do same-day
• Tax-related identity theft happens when someone wire from your financial institution. Contact your finan-
steals your personal information to commit tax fraud. cial institution for availability, cost, and time frames.
Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit. Note. The IRS uses the latest encryption technology to
• The IRS doesn’t initiate contact with taxpayers by ensure that the electronic payments you make online, by
email, text messages (including shortened links), tele- phone, or from a mobile device using the IRS2Go app are
phone calls, or social media channels to request or safe and secure. Paying electronically is quick, easy, and
verify personal or financial information. This includes faster than mailing in a check or money order.
requests for personal identification numbers (PINs), What if I can’t pay now? Go to IRS.gov/Payments for
passwords, or similar information for credit cards, more information about your options.
banks, or other financial accounts.
• Apply for an online payment agreement (IRS.gov/
• Go to IRS.gov/IdentityTheft, the IRS Identity Theft OPA) to meet your tax obligation in monthly install-
Central webpage, for information on identity theft and ments if you can’t pay your taxes in full today. Once
data security protection for taxpayers, tax professio- you complete the online process, you will receive im-
nals, and businesses. If your SSN has been lost or mediate notification of whether your agreement has
stolen or you suspect you’re a victim of tax-related been approved.
identity theft, you can learn what steps you should
take. • Use the Offer in Compromise Pre-Qualifier to see if
you can settle your tax debt for less than the full
• Get an Identity Protection PIN (IP PIN). IP PINs are amount you owe. For more information on the Offer in
six-digit numbers assigned to taxpayers to help pre- Compromise program, go to IRS.gov/OIC.
vent the misuse of their SSNs on fraudulent federal in-
come tax returns. When you have an IP PIN, it pre- Filing an amended return. Go to IRS.gov/Form1040X
vents someone else from filing a tax return with your for information and updates.
SSN. To learn more, go to IRS.gov/IPPIN.
Checking the status of your amended return. Go to
Ways to check on the status of your refund. IRS.gov/WMAR to track the status of Form 1040-X amen-
• Go to IRS.gov/Refunds. ded returns.
• Download the official IRS2Go app to your mobile de- It can take up to 3 weeks from the date you filed
vice to check your refund status. ! your amended return for it to show up in our sys-
tem, and processing it can take up to 16 weeks.
• Call the automated refund hotline at 800-829-1954.
CAUTION

The IRS can’t issue refunds before mid-February Understanding an IRS notice or letter you’ve re-
! for returns that claimed the EIC or the additional ceived. Go to IRS.gov/Notices to find additional informa-
CAUTION child tax credit (ACTC). This applies to the entire tion about responding to an IRS notice or letter.
refund, not just the portion associated with these credits.
Responding to an IRS notice or letter. You can now
Making a tax payment. Payments of U.S. tax must be upload responses to all notices and letters using the
remitted to the IRS in U.S. dollars. Digital assets are not Document Upload Tool. For notices that require additional
action, taxpayers will be redirected appropriately on

Publication 334 (2023) Chapter 12 How To Get More Information 47

IRS.gov to take further action. To learn more about the • You’ve tried repeatedly to contact the IRS but no one
tool, go to IRS.gov/Upload. has responded, or the IRS hasn’t responded by the
date promised.
Note. You can use Schedule LEP (Form 1040), Re-
quest for Change in Language Preference, to state a pref- How Can You Reach TAS?
erence to receive notices, letters, or other written commu-
nications from the IRS in an alternative language. You may TAS has offices in every state, the District of Columbia,
not immediately receive written communications in the re- and Puerto Rico. To find your advocate’s number:
quested language. The IRS’s commitment to LEP taxpay-
ers is part of a multi-year timeline that began providing • Go to TaxpayerAdvocate.IRS.gov/Contact-Us;
translations in 2023. You will continue to receive communi- • Download Pub. 1546, The Taxpayer Advocate Service
cations, including notices and letters, in English until they Is Your Voice at the IRS, available at IRS.gov/pub/irs-
are translated to your preferred language. pdf/p1546.pdf;

Contacting your local TAC. Keep in mind, many ques- • Call the IRS toll free at 800-TAX-FORM
tions can be answered on IRS.gov without visiting a TAC. (800-829-3676) to order a copy of Pub. 1546;
Go to IRS.gov/LetUsHelp for the topics people ask about • Check your local directory; or
most. If you still need help, TACs provide tax help when a • Call TAS toll free at 877-777-4778.
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
How Else Does TAS Help Taxpayers?
wait times. Before you visit, go to IRS.gov/TACLocator to TAS works to resolve large-scale problems that affect
find the nearest TAC and to check hours, available serv- many taxpayers. If you know of one of these broad issues,
ices, and appointment options. Or, on the IRS2Go app, report it to TAS at IRS.gov/SAMS. Be sure to not include
under the Stay Connected tab, choose the Contact Us op- any personal taxpayer information.
tion and click on “Local Offices.”
Low Income Taxpayer Clinics (LITCs)
The Taxpayer Advocate Service (TAS)
Is Here To Help You LITCs are independent from the IRS and TAS. LITCs rep-
resent individuals whose income is below a certain level
What Is TAS? and who need to resolve tax problems with the IRS. LITCs
can represent taxpayers in audits, appeals, and tax collec-
TAS is an independent organization within the IRS that
tion disputes before the IRS and in court. In addition,
helps taxpayers and protects taxpayer rights. TAS strives
LITCs can provide information about taxpayer rights and
to ensure that every taxpayer is treated fairly and that you
responsibilities in different languages for individuals who
know and understand your rights under the Taxpayer Bill
speak English as a second language. Services are offered
of Rights.
for free or a small fee. For more information or to find an
LITC near you, go to the LITC page at
How Can You Learn About Your Taxpayer TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134,
Rights? Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/
p4134.pdf.
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 Small Business Administration
your rights. Know them. Use them. The Small Business Administration (SBA) offers training
and educational programs, counseling services, financial
What Can TAS Do for You? programs, and contract assistance for small business
owners. The SBA also has publications and videos on a
TAS can help you resolve problems that you can’t resolve
variety of business topics. The following briefly describes
with the IRS. And their service is free. If you qualify for
assistance provided by the SBA.
their assistance, you will be assigned to one advocate
who will work with you throughout the process and will do Small Business Development Centers (SBDCs).
everything possible to resolve your issue. TAS can help SBDCs provide counseling, training, and technical serv-
you if: ices to current and prospective small business owners
• Your problem is causing financial difficulty for you, who cannot afford the services of a private consultant.
your family, or your business; Help is available when beginning, improving, or expanding
a small business.
• You face (or your business is facing) an immediate
threat of adverse action; or Service Corps of Retired Executives (SCORE).
SCORE provides small business counseling and training
to current and prospective small business owners.

48 Chapter 12 How To Get More Information Publication 334 (2023)

SCORE is made up of current and former business people Government Publishing Office. You can get information
who offer their expertise and knowledge to help people and order these publications and pamphlets in several
start, manage, and expand a small business. SCORE also ways.
offers a variety of small business workshops.
Internet. You can visit the GPO website at
Internet. You can visit the SBA website at SBA.gov. Catalog.GPO.gov.
While visiting the SBA website, you can find a variety of in-
formation of interest to small business owners. Mail. Write to the GPO at the following address.

Phone. Call the SBA Answer Desk at 800-U-ASK-SBA Superintendent of Documents

(800-827-5722) for general information about programs U.S. Government Publishing Office
available to assist small business owners. P.O. Box 979050
St. Louis, MO 63197-9000
Walk-in. You can walk in to an SBDC to request assis-
tance with your small business. To find the location near- Phone. Call the GPO toll free at 866-512-1800 or at
est you, visit the SBA website or call the SBA Answer 202-512-1800 from the Washington, DC, area.
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.

Publication 334 (2023) Chapter 12 How To Get More Information 49

 To help us develop a more useful index, please let us know if you have ideas for index entries.
Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Construction allowances 24 Basis 17

A Cost of goods sold 27 Business bad debt 30
Accounting method: Credit: Calendar tax year 12
Accrual 14, 31 Alternative fuel vehicle refueling Cash discount 26, 28
Automatic procedures 16 property 18 Disposition of property 17
Cash 13, 31 Biodiesel and renewable diesel Drawing account 28
Change in 16 fuels credit 18 Fair market value 18
Combination 15 Biofuel producer credit 19 Fiscal tax year 13
Special 16 Carbon oxide sequestration 19 Fringe benefit 33
Accounting periods 12 Clean vehicle credit 19 Local transportation expenses 31
Accrual method: Credit for employer differential Necessary expense 30
wage payments 19 Net operating loss 39
Income - general rule 14
Credit for increasing research Nonbusiness bad debt 31
Income - special rules 14 activities 19
Of accounting 14 Ordinary expense 30
Disabled access 19
Adjusted basis 17 Principal place of business 37
Distilled spirits 19
Administrator 25 Qualified long-term real
Employer credit for family and property 24
Alternative fuel vehicle refueling medical leave 19
property credit 18 Qualified real property business
Employer-provided childcare 19 debt 23
Appeal rights 44 Empowerment zone employment Rent 35
Appreciation 24 credit 19
Assistance (See Tax help) Restricted property 23
Energy efficient home credit 19
Audits 44 Retail space 24
How to claim 20
Automobile (See Car expenses) Self-employment (SE) tax 9
Indian coal 19
Tax home 31
Investment 19
B Low sulfur diesel fuel production 19
Trade discount 27, 28
Bad debts 30 Travel expenses 36
Low-income housing 19
Barter income 20 Depreciation:
New markets 19
Basis of property 17 Deduction 32
Orphan drug 19
Biodiesel and renewable diesel Listed property 33
Qualified railroad track
fuels credit 18 maintenance credit 19 Depreciation, recapture 24
Biofuel producer credit 19 Refined coal 19 Direct seller 25, 26
Bribes 38 Renewable electricity 19 Disabled access credit 19
Business expenses 30 Small employer health insurance Disposition of property:
Business income 20 premiums 19 Business property 16
Business use of your home 37 Small employer pension plan Installment sale 17, 18
startup costs 19 Like-kind exchange 17, 18, 24
C Taxes paid on certain employee Nontaxable exchange 17
Canceled debt 22 tips 19 Sale of a business 17
Cancellation of qualified real Work opportunity credit 19 Distilled spirits credit 19
property business debt 23 Credit for employer differential Dividend income 22
Capital gain or loss 18 wage payments 19 Donation of inventory 27
Car expenses 31 Credit for increasing research Drawing account 28
Carbon oxide sequestration activities 19 Due date of return 8
credit 19
Cash discount 26, 28 D E
Cash method: Damages 23 e-file 7
Expenses 14 De Minimis Safe Harbor for Economic injury 23
Income 13 Tangible Property 38 EFTPS 8
Charitable contributions 38 Debt: Electronic filing 7
Child employed by parent 40 Bad 30 Employee 6
Claim for refund 45 Canceled 22 Employee benefit programs 33
Clean vehicle credit 19 Qualified real property business 23 Employees' pay 33
Collection of tax 44 Refund offset against 7 Employer identification number
Combination method of Definitions 3 (EIN) 6
accounting 15 Accounting methods 13 Employment taxes:
Condemned property 18 Accounting periods 12 About 10
Consignments 24 Barter 20 Deduction for 36

50 Publication 334 (2023)

Empowerment zone employment 8300 (cash payments over
credit 19 $10,000) 11 H
Energy efficient home credit 19 8586 (low-income housing) 19 Home, business use of 37
Entertainment expenses 8594 (asset acquisition) 17 Hotels, boarding houses, and
(See Travel expenses) 8820 (orphan drug credit) 19 apartments 21
Escrow, payments placed in 27 8824 (like-kind exchange) 17, 18 Husband and wife business 3
Estimated tax 8 8826 (disabled access credit) 19
Examinations (audits) 44 8829 (business in home) 38 I
Excise taxes: 8835 (renewable electricity, coal Identification numbers 6
About 10 credit) 19 Income 24
Deduction for 36 8846 (credit for social security on (See also Not income)
Executor 25 tip income) 19 Accounting for your 26
Expenses 30 8857 (innocent spouse) 44 Barter 20
Bad debts 30 8874 (new markets credit) 19 Business 20
Car 31 8879 (self-selected PIN) 7 Damages 23
Depreciation 32 8881 (pension plan startup costs Gains and losses 23
Employees' pay 33 credit) 19 Kickbacks 24
Entertainment 36 8882 (employer-provided childcare Kinds of income 20
Home, business use 37 credit) 19
Lost income payments 23
Insurance 33 8886 (transaction statement) 5
Other 23
Interest 34 8896 (low sulfur diesel fuel
production credit) 19 Paid to a third party 26
Legal and professional fees 35 Personal property rent 21
8906 (distilled spirits credit) 19
Meals 36 Promissory notes 23
8911 (alternative fuel vehicle
Nondeductible 38 refueling property credit) 18 Recapture of depreciation 24
Other 38 8933 (carbon oxide sequestration Recovery of items previously
Pension plans 35 credit) 19 deducted 24
Rent 35 8936 (clean vehicle credit) 19 Rental 21
Taxes 36 8941 (small employer health Restricted property 23
Travel 36 insurance premiums) 19 Income tax:
Truck 31 8994 (employer credit for paid About 6
family and medical leave) 19 Deduction for 36
F 940 (unemployment tax) 10 How to pay 8
Fair market value 18 941 (quarterly employment tax) 10 Underpayment penalty 9
Filing business taxes 5 944 (annual employment tax) 10 Income tax return, who must file 6
Fishing crew member 25, 40 982 (discharge of Independent contractor 3, 10, 39
Form: indebtedness) 22 Individual taxpayer identification
1040 (tax return) 7, 10 Final 12 number (ITIN) 6
1040-ES (estimated tax) 8, 10 Information returns 10 Information returns 11
1040-SR (tax return) 7, 10 Schedule C (sole proprietor) 10 Information, How to get more 45
1040-V (voucher) 7 Schedule SE (self-employment Innocent spouse relief 44
1099-B (barter) 21 tax) 9, 10 Installment sales 17
1099-MISC (miscellaneous) 11 SS-4 (application for EIN) 6 Insurance:
1099-NEC (nonemployee SS-5 (application for SSN) 6 Expense 33
compensation) 11 W-2 (report wages) 10, 11 Nondeductible premiums 34
1128 (change tax year) 13 W-3 (transmittal of W-2) 10 Prepayment 34
2210 (underpayment of estimated W-4 (employee withholding) 6 Proceeds 27
tax) 9 W-7 (application for ITIN) 6 Insurance agent:
2290 (excise tax for heavy W-9 (request for TIN) 6 Former 25
trucks) 11 When to file 10 Retired 25
3115 (change accounting Which to file 10 Interest:
method) 16 Fringe benefits 33 Expenses 34
3468 (investment credit) 19 Fuel taxes 36 Income 22
3800 (general business credit) 18 Inventories 15
4562 (depreciation) 33 G Investment credit 19
4684 (casualty and theft) 18 Gains and losses 23
4797 (sale of business General business credits 18 K
property) 18, 24 Gross profit: Kickbacks 24, 38
4868 (extension) 8 Accuracy 30
6251 (alternative minimum tax) 18 Additions to 30 L
6252 (installment sale) 18 Guidelines for selected Lease bonus 21
720 (excise tax return) 11 occupations 25 Lease cancellation payments 21
(See also Occupations, selected)

Publication 334 (2023) 51

Legal fees 35 Orphan drug credit 19
Like-kind exchanges 17, 24 S
Limited liability company 3 P Salaries 33
Listed property 24 Parking fees 32 Sale of a business 17
Lobbying expense 39 Partners, husband and wife 3 Sale of property 17
Local transportation expenses 31 Pay, kinds of 33 (See also Disposition of property)
Lodging 37 Paying: Sales of assets 16
Long-term capital gain or loss 18 Business taxes 5 Sales tax 36
Lost income payments 23 Income tax 8 Schedule C 7
Low sulfur diesel fuel production Payments to third parties 21 Schedule SE (Form 1040 or
credit 19 Penalties and fines 39 1040-SR) 9
Low-income housing credit 19 Penalty: Schedule SE, filing requirement 43
Failure to file Form 8300 12 SE tax:
M Failure to file information returns 11 About 9
Meals 37 Failure to furnish correct payee Aliens 40
Methods for figuring net statements 11 Child employed by parent 40
earnings 41 Underpayment of tax 9 Church employee 40
Mileage rate for vehicles 31 Waiver of 11 Community property income 41
Pension plans 35 Deduction for 36
N Personal property tax 36 Earning credits 9
Net operating losses 39 Prepaid expense: Effects of using an optional
Net profit or loss 39 Extends useful life 34 method 41
New markets credit 19 Rent 36 Farm optional method 42
Newspaper carrier or Professional fees 35 Fiscal year filer 43
distributor 25 Promissory notes 23 Fishing crew member 40
Newspaper or magazine vendor 26 Public official 26 Gain or loss 41
Nonbusiness bad debt 31 Publications (See Tax help) Government employee 40
Nondeductible insurance Punitive damages 24 Joint return 43
premiums 34 Lost income payments 41
Nonemployee compensation 20 Q Maximum earnings:
Nontaxable exchanges 17 Qualified railroad track For 2020 9
Not income: maintenance credit 19 Subject to 39
Appreciation 24 Qualified real property business Methods for figuring net
Consignments 24 debt 23 earnings 41
Constructions allowances 24 More than one business 40, 43
Exchange of like-kind property 24 R Nonfarm optional method 41
Leasehold improvements 24 Real estate: Notary public 40
Loans 25 Agent 26 Optional methods:
Sales tax 25 Dealer 21 Farm 42
Not-for-profit activities 39 Rent 21 Nonfarm 41
Notary public 26, 40 Taxes 36 Rate 39
Recovery of items previously Regular method 41
O deducted 24 Residing abroad 40
Occupations, selected: Refund: Special rules and exceptions 40
Administrator 25 Inquiries 7 Tax rate 9
Direct seller 25, 26 Offsets against debts 7 Time limit for posting income 9
Executor 25 Related persons: Who must pay? 39
Fishing crew member 25 Unreasonable rent 35 Why use an optional method 41
Insurance agent, former 25 Renewable electricity, refined coal, Section 179:
Insurance agent, retired 25 and Indian coal production Deduction 33
Newspaper carrier or distributor 25 credit 19 Property 24
Newspaper or magazine vendor 26 Rent expense 35 Securities:
Notary public 26 Rental income 21 Dealer 26
Public official 26 Repayment of income 14 Trader 26
Real estate agent 26 Reportable transaction disclosure Self-employment tax (See SE tax)
Securities dealer 26 statement 5 Settlement payments 21
Securities trader 26 Reporting self-employment tax 43 Short-term capital gain or loss 18
Office in the home 31 Restricted property 23 Signature, electronic 7
(See also Business use of your Retirement plans (See Pension Small Business Administration 48
home) plans) Small employer health insurance
Optional methods, using both 42 premiums credit 19
Ordinary gain or loss 18 Social security coverage 9

52 Publication 334 (2023)

Social security number (SSN) 6 Who must file 6 Third parties, Payments to 21
Sole proprietor 3, 39 Tax year 12 Tolls 32
Sport utility vehicle 33 Calendar 12 Trade discount 27, 28
Standard mileage rate 31 Change in 13 Trade or business 2
Statutory employee 3 Fiscal 13 Trailer park owner 21
SUV 33 Taxes: Transportation expenses 31
Deduction for 36 Travel expenses 36
T Employment 10, 36
Tax help 45 Excise 10, 36 U
Tax home 31, 36 Fuel 36 Underpayment of tax penalty 9
Tax preparation fees 35 Income 6, 36 Uniform capitalization rules 16
Tax refund: Paid on certain employee tips 19
Claim for 45 Personal property 36 W
Offset against debts 7 Real estate 36 Wages 33
Tax return: Sales 36 Work opportunity credit 19
How to file 7 Self-employment 9, 36

Publication 334 (2023) 53