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            Department of the Treasury                        Contents
            Internal Revenue Service
                                                              Future Developments . . . . . . . . . . . . . . . . . . . . . . .        1
                                                              Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Publication 538
(Rev. January 2022)                                           Photographs of Missing Children            . . . . . . . . . . . . . .   2
Cat. No. 15068G
                                                              Accounting Periods     . . . . . . . . . . . . . . . . . . . . . . . .   2
                                                              Calendar Year      . . . . . . . . . . . . . . . . . . . . . . . . . .   2
                                                              Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    3
Accounting                                                    Short Tax Year . . . . . . . . . . . . . . . . . . . . . . . . . .       3
                                                              Improper Tax Year        . . . . . . . . . . . . . . . . . . . . . . .   4
Periods and                                                   Change in Tax Year         . . . . . . . . . . . . . . . . . . . . . .   4
                                                              Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    4
                                                              Partnerships, S Corporations, and Personal 
Methods                                                           Service Corporations (PSCs) . . . . . . . . . . . . . .              4
                                                              Corporations (Other Than S Corporations and 
                                                                  PSCs)    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
                                                              Accounting Methods       . . . . . . . . . . . . . . . . . . . . . . .   7
                                                              Cash Method . . . . . . . . . . . . . . . . . . . . . . . . . . .        8
                                                              Accrual Method       . . . . . . . . . . . . . . . . . . . . . . . .     10
                                                              Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . .      13
                                                              Change in Accounting Method . . . . . . . . . . . . . .                  18
                                                              How To Get Tax Help      . . . . . . . . . . . . . . . . . . . . . .     18

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

                                                              Introduction
                                                              Every  taxpayer  (individuals,  business  entities,  etc.)  must 
                                                              figure  taxable  income  for  an  annual  accounting  period 
                                                              called a tax year. The calendar year is the most common 
                                                              tax year. Other tax years include a fiscal year and a short 
                                                              tax year.
                                                              Each  taxpayer  must  use  a  consistent  accounting 
                                                              method, which is a set of rules for determining when to re-
                                                              port income and expenses. The most commonly used ac-
                                                              counting  methods  are  the  cash  method  and  the  accrual 
                                                              method.
                                                              Under the cash method, you generally report income in 
                                                              the tax year you receive it, and deduct expenses in the tax 
                                                              year in which you pay the expenses.
                                                              Under the accrual method, you generally report income 
                                                              in the tax year you earn it, regardless of when payment is 
                                                              received. You deduct expenses in the tax year you incur 
                                                              them, regardless of when payment is made.
                                                                  This publication explains some of the rules for ac-
Get forms and other information faster and easier at:         TIP counting  periods  and  accounting  methods.  In 
• IRS.gov (English)         • IRS.gov/Korean (한국어)                some cases, you may have to refer to other sour-
• IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)       ces for a more in-depth explanation of the topic.
• IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt) 

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Comments and suggestions. We welcome your com- 8716 8716 Election To Have a Tax Year Other Than a
ments about this publication and suggestions for future Required Tax Year
editions.
You can send us comments through IRS.gov/ See Ordering forms and publications, earlier, for informa-
FormComments. Or you can write to the Internal Revenue tion about getting these publications and forms.
Service, Tax Forms and Publications, 1111 Constitution
Ave. NW, IR-6526, Washington, DC 20224.
Although we can’t respond individually to each com- Accounting Periods
ment received, we do appreciate your feedback and will
consider your comments and suggestions as we revise You must use a tax year to figure your taxable income. A
our tax forms, instructions, and publications. Don’t send tax year is an annual accounting period for keeping re-
tax questions, tax returns, or payments to the above ad- cords and reporting income and expenses. An annual ac-
dress. counting period does not include a short tax year (dis-
Getting answers to your tax questions. If you have cussed later). You can use the following tax years:
a tax question not answered by this publication or the How • A calendar year; or
To Get Tax Help section at the end of this publication, go
to the IRS Interactive Tax Assistant page at IRS.gov/ • A fiscal year (including a 52-53-week tax year).

Help/ITA where you can find topics by using the search Unless you have a required tax year, you adopt a tax
feature or viewing the categories listed. year by filing your first income tax return using that tax
Getting tax forms, instructions, and publications. year. A required tax year is a tax year required under the
Go to IRS.gov/Forms to download current and prior-year Internal Revenue Code or the Treasury Regulations. You
forms, instructions, and publications. cannot adopt a tax year by merely:
Ordering forms and publications. Go to IRS.gov/ • Filing an application for an extension of time to file an
OrderForms to order current forms, instructions, and pub- income tax return;
lications; call 800-829-3676 to order prior-year forms and • Filing an application for an employer identification
instructions. The IRS will process your order for forms and number (Form SS-4); or
publications as soon as possible. Don’t resubmit requests
you’ve already sent us. You can get forms and publica- • Paying estimated taxes.

tions faster online. This section discusses:
• A calendar year.
• A fiscal year (including a period of 52 or 53 weeks).
Photographs of Missing
• A short tax year.
Children
• An improper tax year.
The Internal Revenue Service is a proud partner with the A change in tax year.
•
National Center for Missing & Exploited Children®
(NCMEC). Photographs of missing children selected by • Special situations that apply to individuals.
the Center may appear in this publication on pages that • Restrictions that apply to the accounting period of a
would otherwise be blank. You can help bring these partnership, S corporation, or personal service corpo-
children home by looking at the photographs and calling ration.
1-800-THE-LOST (1-800-843-5678) if you recognize a
child. • Special situations that apply to corporations.

Useful Items Calendar Year
You may want to see:
A calendar year is 12 consecutive months beginning on
Publication January 1st and ending on December 31st.

537 537 Installment Sales If you adopt the calendar year, you must maintain your
541 541 Partnerships books and records and report your income and expenses
from January 1st through December 31st of each year.
542 542 Corporations
If you file your first tax return using the calendar tax
Form (and Instructions) year and you later begin business as a sole proprietor, be-
1128 1128 Application To Adopt, Change, or Retain a Tax come a partner in a partnership, or become a shareholder
Year in an S corporation, you must continue to use the calendar
year unless you obtain approval from the IRS to change it,
2553 2553 Election by a Small Business Corporation or are otherwise allowed to change it without IRS appro-
3115 3115 Application for Change in Accounting Method val. See Change in Tax Year, later.

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Generally, anyone can adopt the calendar year. How-             Example.       Assume a tax provision applies to tax years 
ever, you must adopt the calendar year if:                      beginning  on  or  after  July  1,  which  (for  purposes  of  this 
                                                                example)  happens  to  be  a  Sunday.  For  this  purpose,  a 
• You keep no books or records;
                                                                52-53-week  tax  year  that  begins  on  the  last  Tuesday  of 
• You have no annual accounting period;                         June, which (for purposes of this example) falls on June 
• Your present tax year does not qualify as a fiscal year;      25, is treated as beginning on July 1.
  or
• You are required to use a calendar year by a provision        Short Tax Year
  in the Internal Revenue Code or Treasury Regula-
                                                                A short tax year is a tax year of less than 12 months. A 
  tions.
                                                                short  period  tax  return  may  be  required  when  you  (as  a 
                                                                taxable entity):
Fiscal Year
                                                                • Are not in existence for an entire tax year, or
A fiscal year is 12 consecutive months ending on the last       • Change your accounting period.
day  of  any  month  except  December  31st.  If  you  are  al-
                                                                Tax  on  a  short  period  tax  return  is  figured  differently  for 
lowed to adopt a fiscal year, you must consistently main-
                                                                each situation.
tain your books and records and report your income and 
expenses using the time period adopted.
                                                                Not in Existence Entire Year

52-53-Week Tax Year                                             Even if a taxable entity was not in existence for the entire 
                                                                year,  a  tax  return  is  required  for  the  time  it  was  in  exis-
You can elect to use a 52-53-week tax year if you keep 
                                                                tence. Requirements for filing the return and figuring the 
your books and records and report your income and ex-
                                                                tax are generally the same as the requirements for a re-
penses  on  that  basis.  If  you  make  this  election,  your 
                                                                turn for a full tax year (12 months) ending on the last day 
52-53-week tax year must always end on the same day of 
                                                                of the short tax year.
the week. Your 52-53-week tax year must always end on:
• Whatever date this same day of the week last occurs           Example 1.      XYZ Corporation was organized on July 
  in a calendar month, or                                       1. It elected the calendar year as its tax year. The corpora-
                                                                tion’s first tax return will cover the short period from July 1 
• Whatever date this same day of the week falls that is 
                                                                through December 31.
  nearest to the last day of the calendar month.
                                                                Example 2.      A calendar year corporation dissolved on 
Election.   To  make  the  election  for  the  52-53-week  tax 
                                                                July 23. The corporation’s final return will cover the short 
year, attach a statement with the following information to 
                                                                period from January 1 through July 23.
your tax return.
1. The month in which the new 52-53-week tax year               Death of individual.  Although the return of the decedent 
  ends.                                                         is a return for the short period beginning with the first day 
                                                                of  his  last  taxable  year  and  ending  with  the  date  of  his 
2. The day of the week on which the tax year always             death, the filing of a return and the payment of tax for the 
  ends.                                                         decedent may be made as though the decedent had lived 
3. The date the tax year ends. It can be either of the fol-     throughout his last taxable year. The decedent’s tax return 
  lowing dates on which the chosen day:                         must be filed for the decedent by the 15th day of the 4th 
                                                                month after the close of the individual's regular tax year. If 
  a. Last occurs in the month in (1), above, or                 the due date falls on a Saturday, Sunday, or legal holiday, 
  b. Occurs nearest to the last day of the month in (1),        file by the next business day. The decedent's final return 
    above.                                                      will  be  a  short  period  tax  return  that  begins  on  January 
                                                                1st, and ends on the date of death. In the case of a dece-
When  you  figure  depreciation  or  amortization,  a           dent who dies on December 31st, the last day of the regu-
52-53-week tax year is generally considered a year of 12        lar tax year, a full calendar-year tax return is required.
calendar months.
To determine an effective date (or apply provisions of          Figuring Tax for Short Year
any  law)  expressed  in  terms  of  tax  years  beginning,  in-
cluding, or ending on the first or last day of a specified cal- If the IRS approves a change in your tax year or if you are 
endar month, a 52-53-week tax year is considered to:            required to change your tax year, you must figure the tax 
• Begin on the first day of the calendar month beginning        and file your return for the short tax period. The short tax 
  nearest to the first day of the 52-53-week tax year,          period begins on the first day after the close of your old 
  and                                                           tax year and ends on the day before the first day of your 
                                                                new tax year.
• End on the last day of the calendar month ending 
  nearest to the last day of the 52-53-week tax year.           Figure tax for a short year under the general rule, ex-
                                                                plained  below.  You  may  then  be  able  to  use  a  relief 

Publication 538 (January 2022)                                                                            Page 3

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procedure, explained later, and claim a refund of part of withheld from your wages. Federal income tax is withheld
the tax you paid. on a calendar year basis. The amount of tax withheld in
any calendar year is allowed as a credit for the tax year
General rule. Income tax for a short tax year must be beginning in the calendar year.
annualized. However, self-employment tax is figured on
the actual self-employment income for the short period.
Improper Tax Year
Individuals. An individual must figure income tax for
the short tax year as follows. Taxpayers that have adopted an improper tax year must
change to a proper tax year. For example, if a taxpayer
1. Determine your adjusted gross income (AGI) for the began business on March 15 and adopted a tax year end-
short tax year and then subtract your actual itemized ing on March 14 (a period of exactly 12 months), this
deductions for the short tax year. You must itemize would be an improper tax year. See Accounting Periods,
deductions when you file a short period tax return. earlier, for a description of permissible tax years.
2. Multiply the dollar amount of your exemptions by the To change to a proper tax year, you must do one of the
number of months in the short tax year and divide the following.
result by 12. Note. For tax years beginning after 2017
and before 2026, the dollar amount of your exemption • If you are requesting a change to a calendar tax year,
is zero (-0-). file an amended income tax return based on a calen-
dar tax year that corrects the most recently filed tax re-
3. Subtract the amount in (2) from the amount in (1). The turn that was filed on the basis of an improper tax
result is your modified taxable income. year. Attach a completed Form 1128 to the amended
4. Multiply the modified taxable income in (3) by 12, then tax return. Write “FILED UNDER REV. PROC. 85-15”
divide the result by the number of months in the short at the top of Form 1128 and file the forms with the In-
tax year. The result is your annualized income. ternal Revenue Service Center where you filed your
original return.
5. Figure the total tax on your annualized income using
the appropriate tax rate schedule. • If you are requesting a change to a fiscal tax year, file
Form 1128 in accordance with the form instructions to
6. Multiply the total tax by the number of months in the request IRS approval for the change.
short tax year and divide the result by 12. The result is
your tax for the short tax year.
Change in Tax Year
Relief procedure. You can use a relief procedure to fig-
ure the tax for the short tax year. It may result in less tax. Generally, you must file Form 1128 to request IRS appro-
Under this procedure, the tax is figured by two separate val to change your tax year. See the Instructions for Form
methods. If the tax figured under both methods is less 1128 for exceptions. If you qualify for an automatic appro-
than the tax figured under the general rule, you can file a val request, a user fee is not required.
claim for a refund of part of the tax you paid. For more in-
formation, see section 443(b)(2) of the Internal Revenue Individuals
Code and the related Treasury Regulation.
Generally, individuals must adopt the calendar year as
Alternative minimum tax. Individuals, to figure the al- their tax year. An individual can adopt a fiscal year if the
ternative minimum tax (AMT) due for a short tax year: individual maintains his or her books and records on the
basis of the adopted fiscal year.
1. Figure the annualized alternative minimum taxable in-
come (AMTI) for the short tax period by completing
the following steps. Partnerships,
a. Multiply the AMTI by 12. S Corporations,
and Personal Service Corporations
b. Divide the result by the number of months in the
short tax year. (PSCs)

2. Multiply the annualized AMTI by the appropriate rate Generally, partnerships, S corporations (including electing
of tax under section 55(b)(1) of the Internal Revenue S corporations), and PSCs must use a required tax year.
Code. The result is the annualized AMT. A required tax year is a tax year that is required under the
Internal Revenue Code and Treasury Regulations. The
3. Multiply the annualized AMT by the number of months
entity does not have to use the required tax year if it re-
in the short tax year and divide the result by 12.
ceives IRS approval to use another permitted tax year or
For information on the AMT for individuals, see the In- makes an election under section 444 of the Internal Reve-
structions for Form 6251, Alternative Minimum Tax–Indi- nue Code (discussed later).
viduals.

Tax withheld from wages. You can claim a credit
against your income tax liability for federal income tax

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Partnership uses the calendar year and B uses a fiscal year ending
November 30. P must change its tax year to a fiscal year
A partnership must conform its tax year to its partners' tax ending November 30 because this results in the least ag-
years unless any of the following apply. gregate deferral of income to the partners, as shown in the
• The partnership makes an election under section 444 following table.
of the Internal Revenue Code to have a tax year other
than a required tax year by filing Form 8716. Months Interest
Year End Year Profits of ×
• The partnership elects to use a 52-53-week tax year 12/31: End Interest Deferral Deferral
that ends with reference to either its required tax year A 12/31 0.5 -0- -0-
or a tax year elected under section 444. B 11/30 0.5 11 5.5
Total Deferral. . . . . . . . . . . . . . . . . . . . . . . . . . 5.5
• The partnership can establish a business purpose for
Months Interest
a different tax year. Year End Year Profits of ×
The rules for the required tax year for partnerships are as 11/30: End Interest Deferral Deferral
follows. A 12/31 0.5 1 0.5
B 11/30 0.5 -0- -0-
• If one or more partners having the same tax year own Total Deferral. . . . . . . . . . . . . . . . . . . . . . . . . . 0.5
a majority interest (more than 50%) in partnership
profits and capital, the partnership must use the tax When determination is made. The determination of
year of those partners. the tax year under the least aggregate deferral rules must
• If there is no majority interest tax year, the partnership generally be made at the beginning of the partnership's
must use the tax year of all its principal partners. A current tax year. However, the IRS can require the part-
principal partner is one who has a 5% or more interest nership to use another day or period that will more accu-
in the profits or capital of the partnership. rately reflect the ownership of the partnership. This could
• If there is no majority interest tax year and the princi- occur, for example, if a partnership interest was transfer-
pal partners do not have the same tax year, the part- red for the purpose of qualifying for a particular tax year.
nership generally must use a tax year that results in Short period return. When a partnership changes its
the least aggregate deferral of income to the partners. tax year, a short period return must be filed. The short pe-
If a partnership changes to a required tax year be- riod return covers the months between the end of the part-
TIP cause of these rules, it can get automatic appro- nership's prior tax year and the beginning of its new tax
val by filing Form 1128. year.
If a partnership changes to the tax year resulting in the
least aggregate deferral, it must file a Form 1128 with the
Least aggregate deferral of income. The tax year that
short period return showing the computations used to de-
results in the least aggregate deferral of income is deter-
termine that tax year. The short period return must indi-
mined as follows.
cate at the top of page 1, “FILED UNDER SECTION
1. Figure the number of months of deferral for each part- 1.706-1.”
ner using one partner's tax year. Find the months of
deferral by counting the months from the end of that More information. For more information about changing
tax year forward to the end of each other partner's tax a partnership's tax year, and information about ruling re-
year. quests, see the Instructions for Form 1128.
2. Multiply each partner's months of deferral figured in
S Corporation
step (1) by that partner's share of interest in the part-
nership profits for the year used in step (1). All S corporations, regardless of when they became an S
3. Add the amounts in step (2) to get the aggregate (to- corporation, must use a permitted tax year. A permitted
tal) deferral for the tax year used in step (1). tax year is any of the following.
4. Repeat steps (1) through (3) for each partner's tax • The calendar year.
year that is different from the other partners' years. • A tax year elected under section 444 of the Internal
The partner's tax year that results in the lowest aggre- Revenue Code. See Section 444 Election, below, for
gate (total) number is the tax year that must be used by details.
the partnership. If the calculation results in more than one • A 52-53-week tax year ending with reference to the
tax year qualifying as the tax year with the least aggregate calendar year or a tax year elected under section 444.
deferral, the partnership can choose any one of those tax
• Any other tax year for which the corporation estab-
years as its tax year. However, if one of the tax years that
lishes a business purpose.
qualifies is the partnership's existing tax year, the partner-
ship must retain that tax year. If an electing S corporation wishes to adopt a tax year
other than a calendar year, it must request IRS approval
Example. A and B each have a 50% interest in part- using Form 2553, instead of filing Form 1128. For
nership P, which uses a fiscal year ending June 30. A information about changing an S corporation's tax year

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and information about ruling requests, see the Instructions election only if the deferral period of the new tax year is
for Form 1128. less than the shorter of:
• Three months, or
Personal Service Corporation (PSC)
• The deferral period of the tax year being changed.
A PSC must use a calendar tax year unless any of the fol- This is the tax year immediately preceding the year for
lowing apply. which the partnership, S corporation, or PSC wishes
to make the section 444 election.
• The corporation makes an election under section 444
of the Internal Revenue Code. See Section 444 Elec- If the partnership, S corporation, or PSC's tax year is the
tion, below, for details. same as its required tax year, the deferral period is zero.

• The corporation elects to use a 52-53-week tax year Example 1. BD Partnership uses a calendar year,
ending with reference to the calendar year or a tax which is also its required tax year. BD cannot make a sec-
year elected under section 444. tion 444 election because the deferral period is zero.
• The corporation establishes a business purpose for a
Example 2. E, a newly formed partnership, began op-
fiscal year.
erations on December 1. E is owned by calendar year
See the Instructions for Form 1120 and Pub. 542 for gen- partners. E wants to make a section 444 election to adopt
eral information about PSCs. For information on adopting a September 30 tax year. E's deferral period for the tax
or changing tax years for PSCs and information about rul- year beginning December 1 is 3 months, the number of
ing requests, see the Instructions for Form 1128. months between September 30 and December 31.

Section 444 Election Making the election. Make a section 444 election by fil-
ing Form 8716 with the Internal Revenue Service Center
A partnership, S corporation, electing S corporation, or where the entity will file its tax return. See the instructions
PSC can elect under section 444 of the Internal Revenue for Form 8716 for information on when to file.
Code to use a tax year other than its required tax year. Attach a copy of Form 8716 to Form 1065, Form
Certain restrictions apply to the election. A partnership or 1120S, or Form 1120 for the first tax year for which the
an S corporation that makes a section 444 election must election is made.
make certain required payments and a PSC must make
certain distributions (discussed later). The section 444 Terminating the election. The section 444 election re-
election does not apply to any partnership, S corporation, mains in effect until it is terminated. If the election is termi-
or PSC that establishes a business purpose for a different nated, another section 444 election cannot be made for
period, explained later. any tax year.
The election ends when any of the following applies to
A partnership, S corporation, or PSC can make a sec- the partnership, S corporation, or PSC.
tion 444 election if it meets all the following requirements.
• The entity changes to its required tax year.
• It is not a member of a tiered structure (defined in
• The entity liquidates.
Treasury Regulations section 1.444-2T).
• The entity becomes a member of a tiered structure.
• It has not previously had a section 444 election in ef-
fect. • The IRS determines that the entity willfully failed to
comply with the required payments or distributions.
• It elects a year that meets the deferral period require-
ment. The election will also end if either of the following
events occur.
Deferral period. The determination of the deferral pe-
• An S corporation's S election is terminated. However,
riod depends on whether the partnership, S corporation,
if the S corporation immediately becomes a PSC, the
or PSC is retaining its tax year or adopting or changing its
PSC can continue the section 444 election of the S
tax year with a section 444 election.
corporation.
Retaining tax year. Generally, a partnership, S cor- • A PSC ceases to be a PSC. If the PSC elects to be an
poration, or PSC can make a section 444 election to retain S corporation, the S corporation can continue the
its tax year only if the deferral period of the new tax year is election of the PSC.
3 months or less. This deferral period is the number of
months between the beginning of the retained year and Required payment for partnership or S corporation.
the close of the first required tax year. A partnership or an S corporation must make a required
Adopting or changing tax year. If the partnership, S payment for any tax year:
corporation, or PSC is adopting or changing to a tax year • The section 444 election is in effect.
other than its required year, the deferral period is the num-
• The required payment for that year (or any preceding
ber of months from the end of the new tax year to the end
tax year) is more than $500.
of the required tax year. The IRS will allow a section 444

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This payment represents the value of the tax deferral 52-53-Week Tax Year
the owners receive by using a tax year different from the
required tax year. A partnership, S corporation, or PSC can use a tax year
Form 8752, Required Payment or Refund Under Sec- other than its required tax year if it elects a 52-53-week
tion 7519, must be filed each year the section 444 election tax year (discussed earlier) that ends with reference to ei-
is in effect, even if no payment is due. If the required pay- ther its required tax year or a tax year elected under sec-
ment is more than $500 (or the required payment for any tion 444 (discussed earlier).
prior year was more than $500), the payment must be
made when Form 8752 is filed. If the required payment is A newly formed partnership, S corporation, or PSC can
$500 or less and no payment was required in a prior year, adopt a 52-53-week tax year ending with reference to ei-
Form 8752 must be filed showing a zero amount. See ther its required tax year or a tax year elected under sec-
Form 8752 and its instructions for more information. tion 444 without IRS approval. However, if the entity
wishes to change to a 52-53-week tax year or change
Applicable election year. Any tax year a section 444 from a 52-53-week tax year that references a particular
election is in effect, including the first year, is called an ap- month to a non-52-53-week tax year that ends on the last
plicable election year. Form 8752 must be filed and the re- day of that month, it must request IRS approval by filing
quired payment made (or zero amount reported) by May Form 1128.
15th of the calendar year following the calendar year in
which the applicable election year begins.
Business Purpose Tax Year
Required distribution for PSC. A PSC with a section
A partnership, S corporation, or PSC establishes the busi-
444 election in effect must distribute certain amounts to
ness purpose for a tax year by filing Form 1128. See the
employee-owners by December 31 of each applicable
Instructions for Form 1128 for details.
year. If it fails to make these distributions, it may be re-
quired to defer certain deductions for amounts paid to
owner-employees. The amount deferred is treated as paid Corporations (Other Than S
or incurred in the following tax year. Corporations and PSCs)
For information on the minimum distribution, see the in-
structions for Part I of Schedule H (Form 1120), Section A new corporation establishes its tax year when it files its
280H Limitations for a Personal Service Corporation first tax return. A newly reactivated corporation that has
(PSC). been inactive for a number of years is treated as a new
taxpayer for the purpose of adopting a tax year. An S cor-
Back-up election. A partnership, S corporation, or PSC poration or a PSC must use the required tax year rules,
can file a back-up section 444 election if it requests (or discussed earlier, to establish a tax year. Generally, a cor-
plans to request) permission to use a business purpose poration that wants to change its tax year must obtain ap-
tax year, discussed later. If the request is denied, the proval from the IRS under either the: (a) automatic appro-
back-up section 444 election must be activated (if the val procedures; or (b) ruling request procedures. See the
partnership, S corporation, or PSC otherwise qualifies). Instructions for Form 1128 for details.
Making back-up election. The general rules for mak-
ing a section 444 election, as discussed earlier, apply.
When filing Form 8716, type or print “BACK-UP ELEC- Accounting Methods
TION” at the top of the form. However, if Form 8716 is
filed on or after the date Form 1128 (or Form 2553) is An accounting method is a set of rules used to determine
filed, type or print “FORM 1128 (or FORM 2553) when and how income and expenses are reported on your
BACK-UP ELECTION” at the top of Form 8716. tax return. Your accounting method includes not only your
overall method of accounting, but also the accounting
Activating election. A partnership or S corporation
treatment you use for any material item.
activates its back-up election by filing the return required
and making the required payment with Form 8752. The You choose an accounting method when you file your
due date for filing Form 8752 and making the payment is first tax return. If you later want to change your accounting
the later of the following dates. method, you must generally get IRS approval. See
• May 15 of the calendar year following the calendar Change in Accounting Method, later.
year in which the applicable election year begins. No single accounting method is required of all taxpay-
• 60 days after the partnership or S corporation has ers. You must use a system that clearly reflects your in-
been notified by the IRS that the business year re- come and expenses and you must maintain records that
quest has been denied. will enable you to file a correct return. In addition to your
A PSC activates its back-up election by filing Form permanent accounting books, you must keep any other
8716 with its original or amended income tax return for the records necessary to support the entries on your books
tax year in which the election is first effective and printing and tax returns.
on the top of the income tax return, “ACTIVATING You must use the same accounting method from year
BACK-UP ELECTION.” to year. An accounting method clearly reflects income

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only if all items of gross income and expenses are treated accounting method for each business. No business is
the same from year to year. separate and distinct, unless a complete and separate set
If you do not regularly use an accounting method that of books and records is maintained for each business.
clearly reflects your income, your income will be refigured
Note. If you use different accounting methods to cre-
under the method that, in the opinion of the IRS, does
ate or shift profits or losses between businesses (for ex-
clearly reflect income.
ample, through inventory adjustments, sales, purchases,
Methods you can use. Generally, you can figure your or expenses) so that income is not clearly reflected, the
taxable income under any of the following accounting businesses will not be considered separate and distinct.
methods.
• Cash method. Cash Method

• Accrual method. Most individuals and many small businesses (as ex-
• Special methods of accounting for certain items of in- plained under Excluded Entities and Exceptions, later)
come and expenses. use the cash method of accounting. Generally, if you pro-
duce, purchase, or sell merchandise, you must keep an
• A hybrid method which combines elements of two or
inventory and use an accrual method for sales and pur-
more of the above accounting methods.
chases of merchandise. See Inventories, later, for excep-
Special methods. This publication does not discuss tions to this rule.
special methods of accounting for certain items of income
or expenses. For information on reporting income using Income
one of the long-term contract methods, see section 460 of
the Internal Revenue Code and the related regulations. Under the cash method, you include in your gross income
The following publications also discuss special methods all items of income you actually or constructively received
of reporting income or expenses. during the tax year. If you received property and services,
you must include their fair market value (FMV) in income.
• Publication 225, Farmer's Tax Guide.
• Publication 535, Business Expenses. Constructive receipt. Income is constructively received
when an amount is credited to your account or made
• Publication 537, Installment Sales.
available to you without restriction. You do not need to
• Publication 946, How To Depreciate Property. have possession of it. If you authorize someone to be your
agent and receive income for you, you are considered to
Hybrid method. Generally, you can use any combi-
have received it when your agent receives it. Income is
nation of cash, accrual, and special methods of account-
not constructively received if your control of its receipt is
ing if the combination clearly reflects your income and you
subject to substantial restrictions or limitations.
use it consistently. However, the following restrictions ap-
ply. Example. You are a calendar year taxpayer. Your
• If an inventory is necessary to account for your in- bank credited, and made available, interest to your bank
come, you must use an accrual method for purchases account in December 2021. You did not withdraw it or en-
and sales. However, see Exception for Small Busi- ter it into your books until 2022. You must include the
ness Taxpayers, later. Generally, you can use the amount in gross income for 2021, the year you construc-
cash method for all other items of income and expen- tively received the interest income.
ses. See Inventories, later. You cannot hold checks or postpone taking pos-
• If you use the cash method for reporting your income, TIP session of similar property from one tax year to
you must use the cash method for reporting your ex- another to postpone paying tax on the income.
penses. You must report the income in the year the property is re-
ceived or made available to you without restriction.
• If you use an accrual method for reporting your expen-
ses, you must use an accrual method for figuring your
income. Expenses
• Any combination that includes the cash method is
Under the cash method, generally, you deduct expenses
treated as the cash method for purposes of section
in the tax year in which you actually pay them. This in-
448 of the Internal Revenue Code.
cludes business expenses for which you contest liability.
Business and personal items. You can account for However, you may not be able to deduct an expense paid
business and personal items using different accounting in advance. Instead, you may be required to capitalize
methods. For example, you can determine your business certain costs, as explained later under Uniform Capitaliza-
income and expenses under an accrual method, even if tion Rules.
you use the cash method to figure personal items.
Expense paid in advance. An expense you pay in ad-
Two or more businesses. If you operate two or more vance is deductible only in the year to which it applies, un-
separate and distinct businesses, you can use a different less the expense qualifies for the 12-month rule.

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Under the 12-month rule, a taxpayer is not required to Determine an entity’s average annual gross receipts
capitalize amounts paid to create certain rights or benefits by:
for the taxpayer that do not extend beyond the earlier of
1. Adding the gross receipts for the 3 prior tax years;
the following.
and
• 12 months after the right or benefit begins, or
2. Dividing the total by 3.
• The end of the tax year after the tax year in which pay-
ment is made. Generally, a partnership applies the test at the partnership
level. Gross receipts for a short tax year are annualized.
If you have not been applying the general rule (an ex-
pense paid in advance is deductible only in the year to Aggregation rules. Organizations that are members
which it applies) and/or the 12-month rule to the expenses of an affiliated service group or a controlled group of cor-
you paid in advance, you must obtain approval from the porations treated as a single employer for tax purposes
IRS before using the general rule and/or the 12-month must aggregate their gross receipts to determine whether
rule. See Change in Accounting Method, later. the gross receipts test is met.
Change to accrual method. A corporation or part-
Example 1. You are a calendar year taxpayer and
nership that fails to meet the gross receipts test for any tax
pay $3,000 in 2021 for a business insurance policy that is
year cannot use the cash method and must change to an
effective for 3 years (36 months), beginning on July 1,
accrual method of accounting, effective for the tax year in
2021. The general rule that an expense paid in advance is
which the entity fails to meet this test. The entity must file
deductible only in the year to which it applies is applicable
Form 3115 to request the change. See the Instructions for
to this payment because the payment does not qualify for
Form 3115.
the 12-month rule. Therefore, only $500 (6/36 x $3,000) is
deductible in 2021, $1,000 (12/36 x $3,000) is deductible Special rules for farming businesses. Generally, a
in 2022, $1,000 (12/36 x $3,000) is deductible in 2023, taxpayer engaged in the trade or business of farming is al-
and the remaining $500 is deductible in 2024. lowed to use the cash method for its farming business.
However, certain corporations (other than S corporations)
Example 2. You are a calendar year taxpayer and
and partnerships that have a partner that is a corporation
pay $10,000 on July 1, 2021, for a business insurance
must use an accrual method for their farming business,
policy that is effective for only 1 year beginning on July 1,
unless they meet the gross receipts test discussed above.
2021. The 12-month rule applies. Therefore, the full
See chapter 2 of Pub. 225, Farmer's Tax Guide, for
$10,000 is deductible in 2021.
more information.

Excluded Entities Qualified Personal Service Corporation (PSC). A cor-
poration that meets the function and ownership tests be-
The following entities generally cannot use the cash low is a qualified PSC and can use the cash method.
method, including any combination of methods that in-
cludes the cash method. (However, see Special rules for Function test. A corporation meets the function test if
farming businesses, later.) at least 95% of its activities are in the performance of
services in the fields of health (including veterinary serv-
• A corporation (other than an S corporation). However,
ices), law, engineering (including surveying and mapping),
see Exceptions below.
architecture, accounting, actuarial science, performing
• A partnership with a corporation (other than an S cor- arts, or consulting.
poration) as a partner. However, see Exceptions be-
low. Ownership test. A corporation meets the ownership
test if substantially all of its stock is owned, directly or indi-
• A tax shelter, as defined in section 448(d)(3). rectly, at all times during the year by one or more of the
following.
Exceptions 1. Employees performing services for the corporation in
The following entities can use the cash method of ac- a field qualifying under the function test.
counting. 2. Retired employees who had performed services in
• Any corporation or partnership, other than a tax shel- those fields.
ter, that meets the gross receipts test explained be- 3. The estate of an employee described in (1) or (2).
low.
4. Any other person who acquired the stock by reason of
• A qualified personal service corporation (PSC). the death of an employee referred to in (1) or (2), but
only for the 2-year period beginning on the date of
Gross receipts test. A corporation or partnership, other
death.
than a tax shelter, that meets the gross receipts test can
generally use the cash method. A corporation or a part- Indirect ownership is generally taken into account if the
nership meets the test if its average annual gross receipts stock is owned indirectly through one or more partner-
for the 3 prior tax years were $26 million or less (indexed ships, S corporations, or qualified PSCs. Stock owned by
for inflation). one of these entities is considered owned by the entity's

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owners in proportion to their ownership interest in that en- AFS cost offset method. If you are required to account
tity. Other forms of indirect stock ownership, such as stock for income from the sale of inventory under the AFS in-
owned by family members, are generally not considered come inclusion rule, you may be eligible to elect the AFS
when determining if the ownership test is met. cost offset method. This method allows you to reduce the
For purposes of the ownership test, a person is not reported amount of income accelerated under this rule.
considered an employee of a corporation unless that per- See Regulations section 1.451-3(c) for more information
son performs more than minimal services for the corpora- on the application of this method. If you receive advance
tion. payments for the sale of inventory, you may elect to use
the advance payment cost offset method. See Advance
Change to accrual method. A corporation that fails
Payments below.
to meet the function test for any tax year; or fails to meet
the ownership test at any time during any tax year must Estimated income. If you include a reasonably estima-
change to an accrual method of accounting, effective for ted amount in gross income and later determine the exact
the year in which the corporation fails to meet either test. amount is different, take the difference into account in the
A corporation that fails to meet the function test or the tax year you make that determination.
ownership test is not treated as a qualified PSC for any
part of that tax year.
Advance Payments

Accrual Method Generally, you report an advance payment for goods,
services, or other items as income in the year you receive
Under an accrual method of accounting, you generally re- the payment. However, if you use an accrual method of
port income in the year it is earned and deduct or capital- accounting, you can elect to postpone including the ad-
ize expenses in the year incurred. The purpose of an ac- vance payment in income until the next year. However,
crual method of accounting is to match income and you cannot postpone including any payment beyond that
expenses in the correct year. tax year.

Income To be eligible for the deferral method, advance pay-
ments must meet the following requirements:
Generally, you include an amount in gross income for the Full inclusion of the payment in gross income in the
•
tax year in which the all events test is met. This test is met year of receipt is a permissible method of accounting;
when all events have occurred which fix your right to re-
ceive the income and you can determine the amount with • A portion of the advance payment is included in reve-
reasonable accuracy. However, if you have an applicable nue in your applicable financial statement (AFS) for a
financial statement (AFS), you include the amount in in- subsequent tax year, or if you do not have an AFS,
come no later than when the item of income is reported in you earn a portion of the payment in a subsequent tax
your applicable financial statement (AFS). This is known year; and
as the AFS income inclusion rule, discussed next. • You received the advance payment for goods, serv-
ices, or such other items that the Secretary has identi-
AFS income inclusion rule. Under this rule, you report
fied.
an amount in your gross income on the earliest of the fol-
lowing events. You are considered to receive an item of gross income
• When you receive payment. if you actually or constructively receive it or it is due and
payable to you.
• When the income amount is due to you.
• When you earn the income. Certain gift card sales are considered advance pay-
ments and eligible for the deferral method. Certain types
• When title passes. of prepayments are excluded from the definition of ad-
• When included as revenue in your AFS if you have an vance payments and are ineligible for this deferral method
AFS. such as some types of rent or insurance premiums. See
section 451(c)(B) for exclusions to the term “advance pay-
See Regulations section 1.451-3(a)(5) for a hierarchical
ment.”
list of financial statements. See Regulations section
1.451-3(b) for guidance in determining the appropriate See section 451(c) and Regulations section 1.451-8 for
AFS income amount when applying the inclusion rule. If more information.
your financial results are reported on the AFS for a group
of entities, use the group's AFS to apply the AFS income How to report payments. Generally, include an ad-
inclusion rule. Generally, the AFS income inclusion rule is vance payment in income in the year in which you receive
not applicable to you if you use a special method of ac- it. However, you may use the deferral method described
counting to report an item of income. See Regulations above for qualifying advance payments.
section 1.451-3(a)(13) for examples of special methods of
accounting to which the AFS income inclusion rule gener- Deferral method with AFS. Any advance payment
ally does not apply. you include in gross receipts on your tax return must be
included no later than when the income is included on an

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AFS (or other financial statement specified by the IRS in all events test. Under this analysis, the prepayment could
the year of receipt). The remaining portion of the advance be includible in the year of receipt.
payment is included as gross income for the subsequent If you are subject to this exception, you have the option
tax year independent of how it is treated on your AFS. to treat upfront payments that satisfy the criteria for the
specified good exception as a typical advance payment
Non-AFS deferral method. If you do not have an
under section 451(c). Under section 451(c), the advance
AFS and elect to use this deferral method, you must in-
payment is included in gross income under the full inclu-
clude the advance payment in gross income in the year
sion method or the 1-year deferral method.
received, to the extent you have earned the amount. The
remaining portion of the advance payment is included in
gross income in the subsequent tax year. Expenses

IRS approval. The election to defer advance payments Under an accrual method of accounting, you generally de-
is effective for the tax year that it is first made and for all duct or capitalize a business expense when both the fol-
subsequent tax years unless you receive consent to re- lowing apply.
voke the election. You must file Form 3115 to obtain IRS 1. The all-events test has been met. The test is met
approval to change your method of accounting for ad- when:
vance payment for services. See Form 3115 and the In-
structions for Form 3115. a. All events have occurred that fix the fact of liability,
and
Acceleration of advance payments. If you have elec-
b. The liability can be determined with reasonable
ted the deferral method for advance payments, certain
accuracy.
conditions may occur that require you to accelerate inclu-
sion of the advance payments into gross income. Exam- 2. Economic performance has occurred.
ples include if you cease to exist, or if your obligation for
the advance payment is satisfied. See Regulations sec- Economic Performance
tions 1.451-8(c)(4) and 1.451-8(d).
Generally, you cannot deduct or capitalize a business ex-
Advance Payment Cost Offset Method pense until economic performance occurs. If your ex-
pense is for property or services provided to you, or for
If you receive advance payments for the sale of inventory, your use of property, economic performance occurs as
you may elect to use the advance payment cost offset the property or services are provided or the property is
method. If elected, this method of accounting applies to all used. If your expense is for property or services you pro-
advance payments received in your trade or business that vide to others, economic performance occurs as you pro-
satisfy the criteria. See Regulations section 1.451-8(e) for vide the property or services.
the criteria and other information related to this optional
cost offset method. Example. You are a calendar year taxpayer. You buy
office supplies in December 2020. You receive the sup-
plies and the bill in December, but you pay the bill in Janu-
Specified Goods Exception
ary 2021. You can deduct the expense in 2020 because
The specified goods exception is for a taxpayer that re- all events have occurred to fix the liability, the amount of
ceives prepayments but does not deliver the good for sev- the liability can be determined, and economic perform-
eral years in the future. This exclusion applies if you re- ance occurred in 2020.
quire a customer to make an upfront payment under a Your office supplies may qualify as a recurring item,
contract in which all the following apply: discussed later. If so, you can deduct them in 2020, even
if the supplies are not delivered until 2021 (when eco-
1. The contracted delivery month and year of the good nomic performance occurs).
occurs at least 2 tax years after an upfront payment;
Workers' compensation and tort liability. If you are
2. You do not have the good or a substantially similar
required to make payments under workers' compensation
good on hand at the end of the year the upfront pay-
laws or in satisfaction of any tort liability, economic per-
ment is received; and
formance occurs as you make the payments. If you are re-
3. You recognized all of the revenue from the sale of the quired to make payments to a special designated settle-
good in your AFS in the year of delivery. ment fund established by court order for a tort liability,
economic performance occurs as you make the pay-
See Regulations section 1.451-8(f).
ments.
How to report payments. If you receive a prepayment
Taxes. Economic performance generally occurs as esti-
that satisfies the specified goods exception, it is excluded
mated income tax, property taxes, employment taxes, etc.
from the treatment afforded to advance payments and in-
are paid. However, you can elect to treat taxes as a recur-
stead is analyzed under sections 451(a) and (b), including
ring item, discussed later. You can also elect to ratably ac-
the all events test and existing case laws that address the
crue real estate taxes. See chapter 5 of Pub. 535 for infor-
mation about real estate taxes.

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Other liabilities. Other liabilities for which economic Recurrence and consistency. To determine
performance occurs as you make payments include liabili- whether an item is recurring and consistently reported,
ties for breach of contract (to the extent of incidental, con- consider the frequency with which the item and similar
sequential, and liquidated damages), violation of law, re- items are incurred (or expected to be incurred) and how
bates and refunds, awards, prizes, jackpots, insurance, you report these items for tax purposes. A new expense
and warranty and service contracts. or an expense not incurred every year can be treated as
recurring if it is reasonable to expect that it will be incurred
Interest. Economic performance occurs with the pas- regularly in the future.
sage of time (as the borrower uses, and the lender for-
goes use of, the lender's money) rather than as payments Materiality. Factors to consider in determining the
are made. materiality of a recurring item include the size of the item
(both in absolute terms and in relation to your income and
Compensation for services. Generally, economic per- other expenses) and the treatment of the item on your fi-
formance occurs as an employee renders service to the nancial statements.
employer. However, deductions for compensation or other An item considered material for financial statement pur-
benefits paid to an employee in a year subsequent to eco- poses is also considered material for tax purposes. How-
nomic performance are subject to the rules governing de- ever, in certain situations an immaterial item for financial
ferred compensation, deferred benefits, and funded wel- accounting purposes is treated as material for purposes of
fare benefit plans. For information on employee benefit economic performance.
programs, see Pub. 15-B, Employer's Tax Guide to Fringe
Matching expenses with income. Costs directly as-
Benefits.
sociated with the revenue of a period are properly alloca-
Vacation pay. You can take a current deduction for ble to that period. To determine whether the accrual of an
vacation pay earned by your employees if you pay it dur- expense in a particular year results in a better match with
ing the year or, if the amount is vested, within 2 / months 1 2 the income to which it relates, generally accepted ac-
after the end of the year. If you pay it later than this, you counting principles (GAAP) are an important factor.
must deduct it in the year actually paid. An amount is ves- For example, if you report sales income in the year of
ted if your right to it cannot be nullified or cancelled. sale, but you do not ship the goods until the following
year, the shipping costs are more properly matched to in-
Exception for recurring items. An exception to the come in the year of sale than the year the goods are ship-
economic performance rule allows certain recurring items ped. Expenses that cannot be practically associated with
to be treated as incurred during the tax year even though income of a particular period, such as advertising costs,
economic performance has not occurred. The exception should be assigned to the period the costs are incurred.
applies if all the following requirements are met. However, the matching requirement is considered met for
1. The all-events test, discussed earlier, is met. certain types of expenses. These expenses include taxes,
payments under insurance, warranty, and service con-
2. Economic performance occurs by the earlier of the tracts, rebates, refunds, awards, prizes, and jackpots.
following dates.
a. 8 / months after the close of the year.1 2 Expenses Paid in Advance

b. The date you file a timely return (including exten- An expense you pay in advance is deductible only in the
sions) for the year. year to which it applies, unless the expense qualifies for
the 12-month rule. Under the 12-month rule, a taxpayer is
3. The item is recurring in nature and you consistently
not required to capitalize amounts paid to create certain
treat similar items as incurred in the tax year in which
rights or benefits for the taxpayer that do not extend be-
the all-events test is met.
yond the earlier of the following.
4. Either:
• 12 months after the right or benefit begins, or
a. The item is not material, or • The end of the tax year after the tax year in which pay-
b. Accruing the item in the year in which the ment is made.
all-events test is met results in a better match
against income than accruing the item in the year If you have not been applying the general rule (an ex-
of economic performance. pense paid in advance is deductible only in the year to
which it applies) and/or the 12-month rule to the expenses
This exception does not apply to workers' compensation you paid in advance, you must get IRS approval before
or tort liabilities. using the general rule and/or the 12-month rule. See
Change in Accounting Method, later, for information on
Amended return. You may be able to file an amen-
how to get IRS approval. See Expense paid in advance
ded return and treat a liability as incurred under the recur-
under Cash Method, earlier, for examples illustrating the
ring item exception. You can do so if economic perform-
application of the general and 12-month rules.
ance for the liability occurs after you file your tax return for
the year, but within 8 / months after the close of the tax 1 2
year.

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Related Persons If your business has not been in existence for all of the
3 tax-year period used in figuring average gross receipts,
Business expenses and interest owed to a related person base your average on the period it has existed. If your
who uses the cash method of accounting are not deducti- business has a predecessor entity, include the gross re-
ble until you make the payment and the corresponding ceipts of the predecessor entity from the 3 tax-year period
amount is includible in the related person's gross income. when figuring average gross receipts. If your business (or
Determine the relationship for this rule as of the end of the predecessor entity) had short tax years for any of the 3
tax year for which the expense or interest would otherwise tax-year period, annualize your business’s gross receipts
be deductible. See section 267 of the Internal Revenue for the short tax years that are part of the 3 tax-year pe-
Code for the definition of related person. riod.

Changing your method of accounting for inventory.
Inventories
If you want to change your method of accounting for in-
ventory, you must file Form 3115. See the Instructions for
An inventory is necessary to clearly show income when
Form 3115.
the production, purchase, or sale of merchandise is an in-
come-producing factor. If you must account for an inven-
tory in your business, you must use an accrual method of Items Included in Inventory
accounting for your purchases and sales. However, see
Your inventory should include all of the following.
Exception for Small Business Taxpayers, below. Also, see
Accrual Method, earlier. • Merchandise or stock in trade.
To figure taxable income, you must value your inven- • Raw materials.
tory at the beginning and end of each tax year. To deter- • Work in process.
mine the value, you need a method for identifying the Finished products.
•
items in your inventory and a method for valuing these
items. See Identifying Cost and Valuing Inventory, later. • Supplies that physically become a part of the item in-
tended for sale.
The rules for valuing inventory are not the same for all
businesses. The method you use must conform to gener- Merchandise. Include the following merchandise in in-
ally accepted accounting principles for similar businesses ventory.
and must clearly reflect income. Your inventory practices • Purchased merchandise if title has passed to you,
must be consistent from year to year. even if the merchandise is in transit or you do not have
The rules discussed here apply only if they do not physical possession for another reason.
! conflict with the uniform capitalization rules of • Goods under contract for sale that you have not yet
CAUTION section 263A and the mark-to-market rules of sec-
segregated and applied to the contract.
tion 475.
• Goods out on consignment.
Exception for Small Business Taxpayers • Goods held for sale in display rooms, merchandise
mart rooms, or booths located away from your place
If you are a small business taxpayer (defined below), you of business.
can choose not to keep an inventory, but you must still C.O.D. mail sales. If you sell merchandise by mail
use a method of accounting for inventory that clearly re- and intend payment and delivery to happen at the same
flects income. A small business taxpayer can account for time, title passes when payment is made. Include the mer-
inventory by (a) treating the inventory as non-incidental chandise in your closing inventory until the buyer pays for
materials and supplies, or (b) conforming to its treatment it.
of inventory in an applicable financial statement (as de-
fined in section 451(b)(3)). If it does not have an applica- Containers. Containers such as kegs, bottles, and
ble financial statement, it can use the method of account- cases, regardless of whether they are on hand or returna-
ing used in its books and records prepared according to ble, should be included in inventory if title has not passed
its accounting procedures. See Regulations section to the buyer of the contents. If title has passed to the
1.471-1(b). If, however, you choose to keep an inventory, buyer, exclude the containers from inventory. Under cer-
you generally must use an accrual method of accounting tain circumstances, some containers can be depreciated.
and value the inventory each year to determine your cost See Pub. 946.
of goods sold. Merchandise not included. Do not include the fol-
lowing merchandise in inventory.
Small business taxpayer. You qualify as a small busi-
ness taxpayer if you: • Goods you have sold, but only if title has passed to
the buyer.
• Have average annual gross receipts of $26 million or
less (indexed for inflation) for the 3 prior tax years, and • Goods consigned to you.
• Are not a tax shelter (as defined in section 448(d)(3)).

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• Goods ordered for future delivery if you do not yet grouped into one or more pools (classes of items), de-
have title. pending on the kinds of goods or products in the invento-
ries. See Regulations section 1.472-8.
Assets. Do not include the following in inventory.
Simplified dollar-value method. Under this method,
• Land, buildings, and equipment used in your busi- you establish multiple inventory pools in general catego-
ness. ries from appropriate government price indexes. You then
• Notes, accounts receivable, and similar assets. use changes in the price index to estimate the annual
change in price for inventory items in the pools.
• Real estate held for sale by a real estate dealer in the
An eligible small business (average annual gross re-
ordinary course of business.
ceipts of $5 million or less for the 3 preceding tax years)
• Supplies that do not physically become part of the can elect the simplified dollar-value LIFO method. See
item intended for sale. section 474(c).
Taxpayers who cannot use the method under section
Special rules apply to the cost of inventory or
474 should see Regulations section 1.472-8(e)(3) for a
! property imported from a related person. See the similar simplified dollar-value method.
CAUTION regulations under section 1059A of the Internal
Revenue Code. Adopting LIFO method. File Form 970, Application To
Use LIFO Inventory Method, or a statement with all the in-
Identifying Cost formation required on Form 970 to adopt the LIFO
method. You must file the form (or the statement) with
You can use any of the following methods to identify the your timely filed tax return for the year in which you first
cost of items in inventory. use LIFO.

Specific Identification Method Differences Between
FIFO and LIFO
Use the specific identification method when you can iden-
tify and match the actual cost to the items in inventory. Each method produces different income results, depend-
ing on the trend of price levels at the time. In times of infla-
Use the FIFO or LIFO method, explained next, if: tion, when prices are rising, LIFO will produce a larger
• You cannot specifically identify items with their costs, cost of goods sold and a lower closing inventory. Under
or FIFO, the cost of goods sold will be lower and the closing
inventory will be higher. However, in times of falling pri-
• The same type of goods are intermingled in your in- ces, the opposite will hold.
ventory and they cannot be identified with specific in-
voices. Valuing Inventory

FIFO Method The value of your inventory is a major factor in figuring
your taxable income. The method you use to value the in-
The FIFO (first-in first-out) method assumes the items you ventory is very important.
purchased or produced first are the first items you sold,
consumed, or otherwise disposed of. The items in inven- The following methods, described below, are those
tory at the end of the tax year are matched with the costs generally available for valuing inventory.
of similar items that you most recently purchased or pro- Cost.
•
duced.
• Lower of cost or market.
LIFO Method • Retail.

The LIFO (last-in first-out) method assumes the items of Goods that cannot be sold. These are goods you can-
inventory you purchased or produced last are the first not sell at normal prices or they are unusable in the usual
items you sold, consumed, or otherwise disposed of. way because of damage, imperfections, shop wear,
Items included in closing inventory are considered to be changes of style, odd or broken lots, or other similar cau-
from the opening inventory in the order of acquisition and ses. You should value these goods at their bona fide sell-
from those acquired during the tax year. ing price minus direct cost of disposition, no matter which
method you use to value the rest of your inventory. If
LIFO rules. The rules for using the LIFO method are these goods consist of raw materials or partly finished
very complex. Two are discussed briefly here. For more goods held for use or consumption, you must value them
information on these and other LIFO rules, see sections on a reasonable basis, considering their usability and con-
472 through 474 of the Internal Revenue Code and the re- dition. Do not value them for less than scrap value. For
lated income tax regulations. more information, see Regulations section 1.471-2(c).
Dollar-value method. Under the dollar-value method
of pricing LIFO inventories, goods and products must be

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Cost Method You must value each item in the inventory separately.
You cannot value the entire inventory at cost ($950) and
To properly value your inventory at cost, you must include at market ($800) and then use the lower of the two figures.
all direct and indirect costs associated with it. The follow-
ing rules apply. Market value. Under ordinary circumstances for normal
goods, market value means the usual bid price on the
• For merchandise on hand at the beginning of the tax
date of inventory. This price is based on the volume of
year, cost means the ending inventory price of the
merchandise you usually buy. For example, if you buy
goods.
items in small lots at $10 an item and a competitor buys
• For merchandise purchased during the year, cost identical items in larger lots at $8.50 an item, your usual
means the invoice price minus appropriate discounts market price will be higher than your competitor's.
plus transportation or other charges incurred in acquir-
Lower than market. When you offer merchandise for
ing the goods. It can also include other costs that have
sale at a price lower than market in the normal course of
to be capitalized under the uniform capitalization rules
business, you can value the inventory at the lower price,
of section 263A of the Internal Revenue Code.
minus the direct cost of disposition. Determine these pri-
• For merchandise produced during the year, cost ces from the actual sales for a reasonable period before
means all direct and indirect costs that have to be and after the date of your inventory. Prices that vary mate-
capitalized under the uniform capitalization rules. rially from the actual prices will not be accepted as reflect-
ing the market.
Discounts. A trade discount is a discount allowed re-
gardless of when the payment is made. Generally, it is for No market exists. If no market exists, or if quotations
volume or quantity purchases. You must reduce the cost are nominal because of an inactive market, you must use
of inventory by a trade (or quantity) discount. the best available evidence of fair market price on the
A cash discount is a reduction in the invoice or pur- date or dates nearest your inventory date. This evidence
chase price for paying within a prescribed time period. could include the following items.
You can choose either to deduct cash discounts or in- • Specific purchases or sales you or others made in
clude them in income, but you must treat them consis- reasonable volume and in good faith.
tently from year to year.
• Compensation amounts paid for cancellation of con-
tracts for purchase commitments.
Lower of Cost or Market Method
Under the lower of cost or market method, compare the Retail Method
market value of each item on hand on the inventory date
with its cost and use the lower of the two as its inventory Under the retail method, the total retail selling price of
value. goods on hand at the end of the tax year in each depart-
ment or of each class of goods is reduced to approximate
This method applies to the following. cost by using an average markup expressed as a percent-
age of the total retail selling price.
• Goods purchased and on hand.
• The basic elements of cost (direct materials, direct la- To figure the average markup, apply the following steps
bor, and certain indirect costs) of goods being manu- in order.
factured and finished goods on hand. 1. Add the total of the retail selling prices of the goods in
the opening inventory and the retail selling prices of
This method does not apply to the following. They must
the goods you bought during the year (adjusted for all
be inventoried at cost.
markups and markdowns).
• Goods on hand or being manufactured for delivery at
a fixed price on a firm sales contract (that is, not le- 2. Subtract from the total in (1) the cost of goods inclu-
gally subject to cancellation by either you or the ded in the opening inventory plus the cost of goods
buyer). you bought during the year.
• Goods accounted for under the LIFO method. 3. Divide the balance in (2) by the total selling price in
(1). The result is the average markup percentage.
Example. Under the lower of cost or market method,
the following items would be valued at $600 in closing in- Then determine the approximate cost in three steps.
ventory. 1. Subtract the sales at retail from the total retail selling
price. The result is the closing inventory at retail.
Item Cost Market Lower
R. . . . . . . . . . . . . . . . . . $300 $500 $300 2. Multiply the closing inventory at retail by the average
S. . . . . . . . . . . . . . . . . . 200 100 100 markup percentage. The result is the markup in clos-
T. . . . . . . . . . . . . . . . . . 450 200 200 ing inventory.
Total. . . . . . . . . . . . . . . . $950 $800 $600

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3. Subtract the markup in (2) from the closing inventory sale can use an inventory price index provided by the Bu-
at retail. The result is the approximate closing reau of Labor Statistics. Other sellers can use this index if
inventory at cost. they can demonstrate the index is accurate, reliable, and
suitable for their use.
Closing inventory. The following example shows how
to figure your closing inventory using the retail method. Retail method without LIFO. If you do not use LIFO
and have been determining your inventory under the retail
Example. Your records show the following information method except that, to approximate the lower of cost or
on the last day of your tax year. market, you have followed the consistent practice of ad-
justing the retail selling prices of goods for markups (but
Retail not markdowns), you can continue that practice. The ad-
Item Cost Value justments must be bona fide, consistent, and uniform and
Opening inventory. . . . . . . . . . . . . . $52,000 $60,000 you must also exclude markups made to cancel or correct
Purchases. . . . . . . . . . . . . . . . . . . 53,000 78,500
Sales . . . . . . . . . . . . . . . . . . . . . . 98,000 markdowns. The markups you include must be reduced
Markups. . . . . . . . . . . . . . . . . . . . 2,000 by markdowns made to cancel or correct the markups.
Markdowns. . . . . . . . . . . . . . . . . . 500 If you do not use LIFO and you previously determined
inventories without eliminating markdowns in making ad-
Using the retail method, determine your closing inven- justments to retail selling prices, you can continue this
tory as follows. practice only if you first get IRS approval. You can adopt
and use this practice on the first tax return you file for the
business, subject to IRS approval on examination of your
Retail
Item Cost Value tax return.
Opening inventory. . . . . . . . . . . . . . $52,000 $60,000
Plus: Purchases . . . . . . . . . . . . . . . 53,000 78,500 Figuring income tax. Resellers who use the retail
Net markups method of pricing inventories can determine their tax on
($2,000 − $500 markdowns). . . . . . . 1,500 that basis.
Total. . . . . . . . . . . . . . . . . . . . . . $105,000 $140,000 To use this method, you must do all of the following.
Minus: Sales. . . . . . . . . . . . . . . . . . . . . . . . . . 98,000
• State that you are using the retail method on your tax
Closing inventory at retail. . . . . . . . . . . . . . . . . . $42,000
Minus: Markup* (.25 × $42,000). . . . . . . . . . . . . . 10,500 return.
Closing inventory at cost. . . . . . . . . . . . . . . . . . $31,500 • Keep accurate records.
* See Markup percentage, next, for an explanation of how the markup • Use this method each year unless the IRS allows you
percentage (25%) was figured for this example. to change to another method.
You must keep records for each separate department
Markup percentage. The markup ($35,000) is the
or class of goods carrying different percentages of gross
difference between cost ($105,000) and the retail value
profit. Purchase records should show the firm name, date
($140,000). Divide the markup by the total retail value to
of invoice, invoice cost, and retail selling price. You should
get the markup percentage (25%). You cannot use arbi-
also keep records of the respective departmental or class
trary standard percentages of purchase markup to deter-
accumulation of all purchases, markdowns, sales, stock,
mine markup. You must determine it as accurately as pos-
etc.
sible from department records for the period covered by
your tax return.
Perpetual or Book Inventory
Markdowns. When determining the retail selling price
of goods on hand at the end of the year, markdowns are You can figure the cost of goods on hand by either a per-
recognized only if the goods were offered to the public at petual or book inventory if inventory is kept by following
the reduced price. Markdowns not based on an actual re- sound accounting practices. Inventory accounts must be
duction of retail sales price, such as those based on de- charged with the actual cost of goods purchased or pro-
preciation and obsolescence, are not allowed. duced and credited with the value of goods used, transfer-
red, or sold. Credits must be determined on the basis of
Retail method with LIFO. If you use LIFO with the retail the actual cost of goods acquired during the year and their
method, you must adjust your retail selling prices for inventory value at the beginning of the tax year.
markdowns as well as markups.
Physical inventory. You must take a physical inventory
Price index. If you are using the retail method and LIFO, at reasonable intervals and the book amount for inventory
adjust the inventory value, determined using the retail must be adjusted to agree with the actual inventory.
method, at the end of the year to reflect price changes
since the close of the preceding year. Generally, to make Loss of Inventory
this adjustment, you must develop your own retail price in-
dex based on an analysis of your own data under a You claim a casualty or theft loss of inventory, including
method acceptable to the IRS. However, a department items you hold for sale to customers, through the increase
store using LIFO that offers a full line of merchandise for in the cost of goods sold by properly reporting your

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opening and closing inventories. You cannot claim the freelance authors, photographers, and artists are exempt
loss again as a casualty or theft loss. Any insurance or from the uniform capitalization rules if they qualify.
other reimbursement you receive for the loss is taxable.
Exceptions. The uniform capitalization rules do not apply
You can choose to claim the loss separately as a casu- to the following.
alty or theft loss. If you claim the loss separately, adjust A small business taxpayer that meets the gross re-
•
opening inventory or purchases to eliminate the loss items ceipts test under section 448(c) and that is not a tax
and avoid counting the loss twice. shelter.
If you claim the loss separately, reduce the loss by the • Property produced to use as personal or nonbusiness
reimbursement you receive or expect to receive. If you do property or for uses not connected with a trade or
not receive the reimbursement by the end of the year, you business or an activity conducted for profit.
cannot claim a loss for any amounts you reasonably ex-
• Research and experimental expenditures deductible
pect to recover.
under section 174.
Forgiveness of indebtedness by creditors or suppli- • Intangible drilling and development costs of oil and
ers. If your creditors or suppliers forgive part of what you gas or geothermal wells or any amortization deduction
owe them because of your inventory loss, this amount is allowable under section 59(e) for intangible drilling,
treated as taxable income. development, or mining exploration expenditures.
Disaster loss. If your inventory loss is due to a disaster • Property produced under a long-term contract, except
in an area determined by the President of the United for certain home construction contracts. See section
States to be eligible for federal assistance, you can 460(e).
choose to deduct the loss on your return for the immedi- • Timber and certain ornamental trees raised, harves-
ately preceding year. However, you must also decrease ted, or grown, and the underlying land.
your opening inventory for the year of the loss so the loss
will not show up again in inventory. • Qualified creative expenses paid or incurred as a free-
lance (self-employed) writer, photographer, or artist
that are otherwise deductible on your tax return.
Uniform Capitalization Rules
• Costs allocable to natural gas acquired for resale to
Under the uniform capitalization rules, you must capitalize the extent these costs would otherwise be allocable to
the direct costs and part of the indirect costs for produc- cushion gas stored underground.
tion or resale activities. Include these costs in the basis of
• Property produced if substantial construction occurred
property you produce or acquire for resale, rather than
before March 1, 1986.
claiming them as a current deduction. You recover the
costs through depreciation, amortization, or cost of goods • Property provided to customers in connection with
sold when you use, sell, or otherwise dispose of the prop- providing services. It must be de minimus in amount
erty. and not be included in inventory in the hands of the
service provider.
Special uniform capitalization rules apply to a
• Loan origination.
! farming business. See chapter 6 in Pub. 225.
CAUTION
• The costs of certain producers who use a simplified
production method and whose total indirect costs are
Activities subject to the rules. You are subject to the $200,000 or less. See Regulations section
uniform capitalization rules if you do any of the following, 1.263A-2(b)(3)(iv) for more information.
unless the property is produced for your use other than in
a trade or business or an activity carried on for profit. Qualified creative expenses. Qualified creative ex-
penses are expenses paid or incurred by a freelance
• Produce real or tangible personal property.
(self-employed) writer, photographer, or artist whose per-
• Acquire property for resale. However, see the excep- sonal efforts create (or can reasonably be expected to
tion for certain small taxpayers, discussed later. create) certain properties. These expenses do not include
expenses related to printing, photographic plates, motion
Producing property. You produce property if you
picture films, video tapes, or similar items.
construct, build, install, manufacture, develop, improve,
These individuals are defined as follows.
create, raise, or grow the property. Property produced for
you under a contract is treated as produced by you to the • A writer is an individual who creates a literary manu-
extent you make payments or otherwise incur costs in script, a musical composition (including any accompa-
connection with the property. nying words), or a dance score.
Tangible personal property. Tangible personal • A photographer is an individual who creates a photo-
property includes films, sound recordings, video tapes, graph or photographic negative or transparency.
books, artwork, photographs, or similar property contain- • An artist is an individual who creates a picture, paint-
ing words, ideas, concepts, images, or sounds. However, ing, sculpture, statue, etching, drawing, cartoon,
graphic design, or original print item. The originality

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and uniqueness of the item created and the predomi- • A change involving the adoption, use, or discontinu-
nance of aesthetic value over utilitarian value of the ance of any other specialized method of computing
item created are taken into account. taxable income.
Personal service corporation. The exemption for • A change where the Internal Revenue Code and
writers, photographers, and artists also applies to an ex- Treasury Regulations specifically require that the con-
pense of a personal service corporation that directly re- sent of the IRS must be obtained before adopting
lates to the activities of the qualified employee-owner. A such a change.
qualified employee-owner is a writer, photographer, or ar-
tist who owns, with certain members of his or her family, Approval not required. The following are examples of
substantially all the stock of the corporation. types of changes that are not changes in accounting
methods and do not require IRS approval.
Inventories. If you must adopt the uniform capitalization • Correction of a math or posting error.
rules, revalue the items or costs included in beginning in-
ventory for the year of change as if the capitalization rules • Correction of an error in figuring tax liability (such as
had been in effect for all prior periods. When revaluing in- an error in figuring a credit).
ventory costs, the capitalization rules apply to all inventory • An adjustment of any item of income or deduction that
costs accumulated in prior periods. An adjustment is re- does not involve the proper time for including it in in-
quired under section 481(a). It is the difference between come or deducting it.
the original value of the inventory and the revalued inven-
tory. • Certain adjustments in the useful life of a depreciable
If you must capitalize costs for production and resale or amortizable asset.
activities, you are required to make this change. If you
Form 3115. In general, you must file a current Form 3115
make the change for the first tax year you are subject to
to request a change in either an overall accounting
the uniform capitalization rules, it is an automatic change
method or the accounting treatment of any item. There are
of accounting method that does not need IRS approval.
some instances when you can obtain automatic consent
Otherwise, IRS approval is required to make the change.
from the IRS to change to certain accounting methods. In
other instances, you can file Form 3115 using the non-au-
Change in tomatic change request procedures to request an ac-
Accounting Method counting method change.

Generally, you can choose any permitted accounting More information. For more information on making
method when you file your first tax return. You do not need changes in accounting methods, see Form 3115 and the
to obtain IRS approval to choose the initial accounting Instructions for Form 3115. See Revenue Procedure
method. You must, however, use the method consistently 2021-34, 2021-35 I.R.B. 337 (or any successor), available
from year to year and it must clearly reflect your income. at IRS.gov/irb/2021-35_IRB#REV-PROC-2021-34, for ad-
See Accounting Methods, earlier. ditional procedures that may apply for obtaining automatic
consent to change methods of accounting for revenue
Once you have set up your accounting method and recognition and certain other methods of accounting that
filed your first return, generally, you must receive approval may affect the accounting for revenue recognition. Also
from the IRS before you change the method. A change in see Revenue Procedure 2022-09, 2022-02 I.R.B. 310 (or
your accounting method includes a change not only in any successor) available at IRS.gov/irb/
your overall system of accounting but also in the treatment 2022-02_IRB#REV-PROC-2022-9, for additional proce-
of any material item. A material item is one that affects the dures that may apply for obtaining automatic consent to
proper time for inclusion of income or allowance of a de- change certain methods of accounting related to small
duction. Although an accounting method can exist without businesses.
treating an item consistently, an accounting method is not
established for that item, in most cases, unless the item is When making changes in accounting methods or
treated consistently. ! when filing Form 3115, you must determine if the
CAUTION IRS has issued any new published guidance
Approval required. The following are examples of which includes revenue procedures, revenue rulings, noti-
changes in accounting method that require IRS approval. ces, regulations, or other relevant guidance in the Internal
Revenue Bulletin. For the latest information, visit IRS.gov.
• A change from the cash method to an accrual method
or vice versa.
• A change in the method or basis used to value inven-
tory. How To Get Tax Help
• A change in the depreciation or amortization method
If you have questions about a tax issue; need help prepar-
(except for certain permitted changes to the
ing your tax return; or want to download free publications,
straight-line method).
forms, or instructions, go to IRS.gov and find resources
that can help you right away.

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Preparing and filing your tax return. After receiving all Using online tools to help prepare your return. Go to
your wage and earnings statements (Forms W-2, W-2G, IRS.gov/Tools for the following.
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
• The Earned Income Tax Credit Assistant (IRS.gov/
compensation statements (by mail or in a digital format) or
EITCAssistant) determines if you’re eligible for the
other government payment statements (Form 1099-G);
earned income credit (EIC).
and interest, dividend, and retirement statements from
banks and investment firms (Forms 1099), you have sev- • The Online EIN Application (IRS.gov/EIN) helps you
eral options to choose from to prepare and file your tax re- get an employer identification number (EIN) at no
turn. You can prepare the tax return yourself, see if you cost.
qualify for free tax preparation, or hire a tax professional to • The Tax Withholding Estimator (IRS.gov/W4app)
prepare your return. makes it easier for everyone to pay the correct amount
For 2021, if you received an Economic Impact of tax during the year. The tool is a convenient, online
way to check and tailor your withholding. It’s more
! Payment (EIP), refer to your Notice 1444-C, Your
CAUTION 2021 Economic Impact Payment. If you received user-friendly for taxpayers, including retirees and
Advance Child Tax Credit payments, refer to your Letter self-employed individuals. The features include the
6419. following.
▶ Easy to understand language.
Free options for tax preparation. Go to IRS.gov to see ▶ The ability to switch between screens, correct
your options for preparing and filing your return online or previous entries, and skip screens that don’t apply.
in your local community, if you qualify, which include the ▶ Tips and links to help you determine if you qualify
following. for tax credits and deductions.
▶ A progress tracker.
• Free File. This program lets you prepare and file your ▶ A self-employment tax feature.
federal individual income tax return for free using ▶ Automatic calculation of taxable social security
brand-name tax-preparation-and-filing software or benefits.
Free File fillable forms. However, state tax preparation
may not be available through Free File. Go to IRS.gov/ • The First-Time Homebuyer Credit Account Look-up
FreeFile to see if you qualify for free online federal tax (IRS.gov/HomeBuyer) tool provides information on
preparation, e-filing, and direct deposit or payment op- your repayments and account balance.
tions. • The Sales Tax Deduction Calculator (IRS.gov/
• VITA. The Volunteer Income Tax Assistance (VITA) SalesTax) figures the amount you can claim if you
program offers free tax help to people with itemize deductions on Schedule A (Form 1040).
low-to-moderate incomes, persons with disabilities, Getting answers to your tax questions. On
and limited-English-speaking taxpayers who need IRS.gov, you can get up-to-date information on
help preparing their own tax returns. Go to IRS.gov/ current events and changes in tax law.
VITA, download the free IRS2Go app, or call
800-906-9887 for information on free tax return prepa- • IRS.gov/Help: A variety of tools to help you get an-
swers to some of the most common tax questions.
ration.
• TCE. The Tax Counseling for the Elderly (TCE) pro- • IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro-
gram offers free tax help for all taxpayers, particularly
vide answers on a number of tax law topics.
those who are 60 years of age and older. TCE volun-
teers specialize in answering questions about pen- • IRS.gov/Forms: Find forms, instructions, and publica-
sions and retirement-related issues unique to seniors. tions. You will find details on 2021 tax changes and
Go to IRS.gov/TCE, download the free IRS2Go app, hundreds of interactive links to help you find answers
or call 888-227-7669 for information on free tax return to your questions.
preparation. You may also be able to access tax law information in
•
• MilTax. Members of the U.S. Armed Forces and your electronic filing software.
qualified veterans may use MilTax, a free tax service
offered by the Department of Defense through Military
Need someone to prepare your tax return? There are
OneSource. For more information, go to
various types of tax return preparers, including tax prepar-
MilitaryOneSource (MilitaryOneSource.mil/Tax).
ers, enrolled agents, certified public accountants (CPAs),
Also, the IRS offers Free Fillable Forms, which can be attorneys, and many others who don’t have professional
completed online and then filed electronically regardless credentials. If you choose to have someone prepare your
of income. tax return, choose that preparer wisely. A paid tax pre-
parer is:
• Primarily responsible for the overall substantive accu-
racy of your return,
• Required to sign the return, and

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• Required to include their preparer tax identification return site. OPI service is accessible in more than 350 lan-
number (PTIN). guages.
Although the tax preparer always signs the return,
Accessibility Helpline available for taxpayers with
you're ultimately responsible for providing all the informa-
disabilities. Taxpayers who need information about ac-
tion required for the preparer to accurately prepare your
cessibility services can call 833-690-0598. The Accessi-
return. Anyone paid to prepare tax returns for others
bility Helpline can answer questions related to current and
should have a thorough understanding of tax matters. For
future accessibility products and services available in al-
more information on how to choose a tax preparer, go to
ternative media formats (for example, braille, large print,
Tips for Choosing a Tax Preparer on IRS.gov.
audio, etc.).
Advance child tax credit payments. From July
Getting tax forms and publications. Go to IRS.gov/
through December 2021, advance payments were sent
Forms to view, download, or print all of the forms and pub-
automatically to taxpayers with qualifying children who
lications you may need. Or, you can go to IRS.gov/
met certain criteria. The advance child tax credit pay-
OrderForms to place an order.
ments were early payments of up to 50% of the estimated
child tax credit that taxpayers may properly claim on their Getting tax publications and instructions in eBook
2021 returns. Go to IRS.gov/AdvCTC for more information format. You can also download and view popular tax
about these payments and how they can affect your taxes. publications and instructions (including the Instructions for
Form 1040) on mobile devices as eBooks at IRS.gov/
Coronavirus. Go to IRS.gov/Coronavirus for links to in-
eBooks.
formation on the impact of the coronavirus, as well as tax
relief available for individuals and families, small and large Note. IRS eBooks have been tested using Apple's
businesses, and tax-exempt organizations. iBooks for iPad. Our eBooks haven’t been tested on other
dedicated eBook readers, and eBook functionality may
Employers can register to use Business Services On-
not operate as intended.
line. The Social Security Administration (SSA) offers on-
line service at SSA.gov/employer for fast, free, and secure Access your online account (individual taxpayers
online W-2 filing options to CPAs, accountants, enrolled only). Go to IRS.gov/Account to securely access infor-
agents, and individuals who process Form W-2, Wage mation about your federal tax account.
and Tax Statement, and Form W-2c, Corrected Wage and
Tax Statement. • View the amount you owe and a breakdown by tax
year.
IRS social media. Go to IRS.gov/SocialMedia to see • See payment plan details or apply for a new payment
the various social media tools the IRS uses to share the plan.
latest information on tax changes, scam alerts, initiatives,
products, and services. At the IRS, privacy and security • Make a payment or view 5 years of payment history
are our highest priority. We use these tools to share public and any pending or scheduled payments.
information with you. Don’t post your social security num- • Access your tax records, including key data from your
ber (SSN) or other confidential information on social me- most recent tax return, your EIP amounts, and tran-
dia sites. Always protect your identity when using any so- scripts.
cial networking site. The following IRS YouTube channels
provide short, informative videos on various tax-related • View digital copies of select notices from the IRS.
topics in English, Spanish, and ASL. • Approve or reject authorization requests from tax pro-
• Youtube.com/irsvideos. fessionals.
• Youtube.com/irsvideosmultilingua. • View your address on file or manage your communi-
cation preferences.
• Youtube.com/irsvideosASL.
Tax Pro Account. This tool lets your tax professional
Watching IRS videos. The IRS Video portal submit an authorization request to access your individual
(IRSVideos.gov) contains video and audio presentations taxpayer IRS online account. For more information, go to
for individuals, small businesses, and tax professionals. IRS.gov/TaxProAccount.

Online tax information in other languages. You can Using direct deposit. The fastest way to receive a tax
find information on IRS.gov/MyLanguage if English isn’t refund is to file electronically and choose direct deposit,
your native language. which securely and electronically transfers your refund di-
rectly into your financial account. Direct deposit also
Free Over-the-Phone Interpreter (OPI) Service. The avoids the possibility that your check could be lost, stolen,
IRS is committed to serving our multilingual customers by or returned undeliverable to the IRS. Eight in 10 taxpayers
offering OPI services. The OPI service is a federally fun- use direct deposit to receive their refunds. If you don’t
ded program and is available at Taxpayer Assistance have a bank account, go to IRS.gov/DirectDeposit for
Centers (TACs), other IRS offices, and every VITA/TCE more information on where to find a bank or credit union
that can open an account online.

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Getting a transcript of a return. The quickest way to • Check or money order: Mail your payment to the ad-
get a copy of your tax transcript is to go to IRS.gov/ dress listed on the notice or instructions.
Transcripts. Click on either "Get Transcript Online" or "Get
• Cash: You may be able to pay your taxes with cash at
Transcript by Mail" to order a copy of your transcript. If
a participating retail store.
you prefer, you can order your transcript by calling
800-908-9946. • Same-Day Wire: You may be able to do same-day
wire from your financial institution. Contact your finan-
Reporting and resolving your tax-related identity cial institution for availability, cost, and time frames.
theft issues.
Note. The IRS uses the latest encryption technology to
• Tax-related identity theft happens when someone
ensure that the electronic payments you make online, by
steals your personal information to commit tax fraud.
phone, or from a mobile device using the IRS2Go app are
Your taxes can be affected if your SSN is used to file a
safe and secure. Paying electronically is quick, easy, and
fraudulent return or to claim a refund or credit.
faster than mailing in a check or money order.
• The IRS doesn’t initiate contact with taxpayers by
email, text messages, telephone calls, or social media What if I can’t pay now? Go to IRS.gov/Payments for
channels to request personal or financial information. more information about your options.
This includes requests for personal identification num- • Apply for an online payment agreement IRS.gov/ (
bers (PINs), passwords, or similar information for OPA) to meet your tax obligation in monthly install-
credit cards, banks, or other financial accounts. ments if you can’t pay your taxes in full today. Once
• Go to IRS.gov/IdentityTheft, the IRS Identity Theft you complete the online process, you will receive im-
Central webpage, for information on identity theft and mediate notification of whether your agreement has
data security protection for taxpayers, tax professio- been approved.
nals, and businesses. If your SSN has been lost or • Use the Offer in Compromise Pre-Qualifier to see if
stolen or you suspect you’re a victim of tax-related you can settle your tax debt for less than the full
identity theft, you can learn what steps you should amount you owe. For more information on the Offer in
take. Compromise program, go to IRS.gov/OIC.
• Get an Identity Protection PIN (IP PIN). IP PINs are
Filing an amended return. You can now file Form
six-digit numbers assigned to taxpayers to help pre-
1040-X electronically with tax filing software to amend
vent the misuse of their SSNs on fraudulent federal in-
2019 or 2020 Forms 1040 and 1040-SR. To do so, you
come tax returns. When you have an IP PIN, it pre-
must have e-filed your original 2019 or 2020 return. Amen-
vents someone else from filing a tax return with your
ded returns for all prior years must be mailed. Go to
SSN. To learn more, go to IRS.gov/IPPIN.
IRS.gov/Form1040X for information and updates.
Ways to check on the status of your refund.
Checking the status of an amended return. Go to
• Go to IRS.gov/Refunds. IRS.gov/WMAR to track the status of Form 1040X amen-
• Download the official IRS2Go app to your mobile de- ded returns.
vice to check your refund status.
Note. It can take up to 3 weeks from the date you filed
• Call the automated refund hotline at 800-829-1954. your amended return for it to show up in our system, and
processing it can take up to 16 weeks.
Note. The IRS can’t issue refunds before mid-Febru-
ary 2022 for returns that claimed the EIC or the additional Understanding an IRS notice or letter. Go to IRS.gov/
child tax credit (ACTC). This applies to the entire refund, Notices to find additional information about responding to
not just the portion associated with these credits. an IRS notice or letter.
You can use Schedule LEP, Request for Change in
Making a tax payment. Go to IRS.gov/Payments for in- Language Preference, to state a preference to receive no-
formation on how to make a payment using any of the fol- tices, letters, or other written communications from the
lowing options. IRS in an alternative language, when these are available.
• IRS Direct Pay: Pay your individual tax bill or estima- Once your Schedule LEP is processed, the IRS will deter-
ted tax payment directly from your checking or sav- mine your translation needs and provide you translations
ings account at no cost to you. when available. If you have a disability requiring notices in
an accessible format, see Form 9000.
• Debit or credit card: Choose an approved payment
processor to pay online or by phone. Contacting your local IRS office. Keep in mind, many
• Electronic Funds Withdrawal: Schedule a payment questions can be answered on IRS.gov without visiting an
when filing your federal taxes using tax return prepara- IRS Tax Assistance Center (TAC). Go to IRS.gov/
tion software or through a tax professional. LetUsHelp for the topics people ask about most. If you still
need help, IRS TACs provide tax help when a tax issue
• Electronic Federal Tax Payment System: Best option can’t be handled online or by phone. All TACs now pro-
for businesses. Enrollment is required. vide service by appointment so you’ll know in advance

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that you can get the service you need without long wait • You’ve tried repeatedly to contact the IRS but no one
times. Before you visit, go to IRS.gov/TACLocator to find has responded, or the IRS hasn’t responded by the
the nearest TAC, check hours, available services, and ap- date promised.
pointment options. Or, on the IRS2Go app, under the Stay
Connected tab, choose the Contact Us option and click on How Can You Reach TAS?
“Local Offices.”
TAS has offices in every state, the District of Columbia,
The Taxpayer Advocate Service (TAS) and Puerto Rico. Your local advocate’s number is in your
local directory and at TaxpayerAdvocate.IRS.gov/
Is Here To Help You Contact-Us. You can also call them at 877-777-4778.
What is TAS?
How Else Does TAS Help Taxpayers?
TAS is an independent organization within the IRS that
helps taxpayers and protects taxpayer rights. Their job is TAS works to resolve large-scale problems that affect
to ensure that every taxpayer is treated fairly and that you many taxpayers. If you know of one of these broad issues,
know and understand your rights under the Taxpayer Bill please report it to them at IRS.gov/SAMS.
of Rights.
TAS for Tax Professionals
How Can You Learn About Your Taxpayer
TAS can provide a variety of information for tax professio-
Rights?
nals, including tax law updates and guidance, TAS
The Taxpayer Bill of Rights describes 10 basic rights that programs, and ways to let TAS know about systemic
all taxpayers have when dealing with the IRS. Go to problems you’ve seen in your practice.
TaxpayerAdvocate.IRS.gov to help you understand what
these rights mean to you and how they apply. These are Low Income Taxpayer Clinics (LITCs)
your rights. Know them. Use them.
LITCs are independent from the IRS. LITCs represent in-
What Can TAS Do For You? dividuals whose income is below a certain level and need
to resolve tax problems with the IRS, such as audits, ap-
TAS can help you resolve problems that you can’t resolve peals, and tax collection disputes. In addition, clinics can
with the IRS. And their service is free. If you qualify for provide information about taxpayer rights and responsibili-
their assistance, you will be assigned to one advocate ties in different languages for individuals who speak Eng-
who will work with you throughout the process and will do lish as a second language. Services are offered for free or
everything possible to resolve your issue. TAS can help a small fee. To find a clinic near you, visit
you if: TaxpayerAdvocate.IRS.gov/about-us/Low-Income-
Taxpayer-Clinics-LITC or see IRS Pub. 4134, Low Income
• Your problem is causing financial difficulty for you,
Taxpayer Clinic List.
your family, or your business;
• You face (or your business is facing) an immediate
threat of adverse action; or

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