Income
 
Miscellaneous Income
 
Applicable Income and Expenditure Items
 
  •  Income
  •  Cost of goods Sold
  •  Expenses
  •  Home used as Business
  •  Vehicles used in Business
  •  Depreciation on Assets other than vehicles
 
Are gifts, bequests, or inheritances taxable?
 
Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rentals, that income is taxable to you. If the gift, bequest or inheritance is the income from the property, that income is taxable to you. If you received any inherited pension or IRA, you may have to include part of the inherited amount in your income.
 
What is meant by "cost of goods sold"?
 
"Cost of goods sold" is what you spent to purchase or manufacture merchandise that you sold. If you don't manufacture products for sale or purchase products for resale, then you will not be in a position to deduct cost of goods sold. Also, to be able to determine cost of goods sold, you need to maintain inventories; the calculation of cost of goods sold begins with the value of your inventory at the beginning of the year and ends with the value of your inventory at the end of the year.
Here are the kinds of expenses that go into the calculation of cost of goods sold:

The cost of products or raw materials in your inventory, including the cost of having them shipped to you. The cost of storing the products you sell.

Direct labor costs (including contributions to pension or annuity plans) for workers who produce the products. Depreciation on machinery used to produce the products. Factory overhead expenses
 
 What to include in income and expense item? 
 
You can include gross receipts from your trade, business or professional service as a income and cost of goods sold, business related expenses like advertising, bad debts, interest etc, expenses and depreciation for vehicles used in business etc. as expenses.
 
What is depreciation?
  A deduction to reflect the gradual loss of value of business property as it wears out. The law assigns a tax life to various types of property, and allows a deduction over that period of time. Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year.

You are claiming depreciation on property placed in service during 2005.vhowever, stock in trade, inventories and land are not depreciable.
 
Business Income Earned
 
What are your incomes/receipts?
  Incomes or receipts means gross income/receipt you received from your trade or business whatever source derived, except as otherwise provided in the Internal Revenue Code. Gross income, however, does not include extraterritorial income that is qualifying foreign trade income.
 
What is meaning of statutory employee?
  Statutory employee includes full time life insurance agents, certain agent or commission drivers and traveling salespersons, and certain home worker. If you had both self-employment income and statutory employee income, you must file two Schedule C. you cannot combine these amounts on a single Schedule C.
 
Can I change my accounting method?
  The following methods, described below, are those generally available for valuing inventory.

Valued At Cost. (If you are using the cash method of accounting.)

At cost or Market value whichever is lower.

 Once you choose a method, you must use the same method every year unless you have permission from the IRS to change your method. You can request permission to change by filing Form 3115, Change in Accounting Method, with the IRS.
 
Business Expenses
 
Deductible Meal Allowance:
  Total meal and business expenses includes meal expenses incurred while traveling away from home for business. You can deduct the cost of meals in either of the following situations.
  • it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business.
  • the meal is business-related entertainment.
You can figure your meal expenses 50% of the unreimbursed cost of your meals using either of the following methods.
  • Actual cost
  • The standard meal allowance.
Generally, you can use standard meal allowance for daily meals and incidental expenses (M &IE) rather than actual cost of meal while traveling away from your home.
In standard meal allowance is the federal M&IE rate. For travel in 2005, the rate for most small localities in the United States is $31 a day from January 1 through September 30. 2005, and $39 a day from October 1 through December 31, 2005.  
 
Fore more information you go to internet at www.gsa.gov. and click on :Per Diem Rates”.
 
What is Depletion?
  Depletion is the using up of natural resources by mining, quarrying, drilling, or felling. The depletion deduction allows an owner or operator to account for the reduction of a product’s reserves. There are two ways of figuring depletion cost depletion and percentage depletion. For mineral property, you generally must use the method that gives you the larger deduction. For standing timber, you must use cost depletion.
 
Home Used as Business
 
Who can claim expenses for business use of a home?
  Generally, you cannot claim expenses such as mortgage interest and real estate taxes as business expenses, however , you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. You can claim expenses that apply to a part of your home only if that part is exclusively used on a regular basis:
  • Exclusively and regularly as your principal place of business,
  • Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
  • In the case of a separate structure which is not attached to your home, in connection with your trade or business,
  • On a regular basis for certain storage use
  • For rental use
  • As a daycare facility

    There are exceptions to above rule. After satisfying certain condition, you may be able to deduct the business expenses even though you use the same space for Non-business purposes. Exceptions to above rule are as under.

    1. Storage of inventory or product samples and

    2. Certain day care facilities

For More information see publication 587.
 
What are direct expenses?
  Direct expenses are those that you can specifically identify as being derived from or of benefit to the business part of your home. Direct expenses would include painting or repairs to a specific area of your home used for business.
 
What are indirect expenses?
  Indirect expenses are those that are for keeping the entire home up and running and cannot be specifically associated with just the business area. They benefit both the business and personal areas of your home.
 
Vehicles used in Business
 
What do we mean by passenger automobile?
  Passenger automobiles are 4-wheeled vehicles manufactured primarily for use on public roads that are rated at 6,000 pounds unloaded gross vehicle weight or less (for a truck or van, gross vehicle weight is substituted for unloaded gross vehicle weight)

Trucks and vans placed in service after 2002 that are not qualified non personal use vehicles are passenger automobiles built on a truck chassis, including minivans and sport utility vehicles built on a truck chassis. (Except certain exceptions)

Electric passenger automobiles are vehicles produced by an original equipment manufacturer and designed to run primarily on electricity. These maximum amounts are reduced if the business use of the vehicle is less than 100%.
 
What is salvage value?
  It is net realizable value of the assets at the end of useful life of the assets. Salvage value is generally helpful for determining the depreciation cost under SLM (straight line method). Whereby depreciation is arrived by deducting salvage value from the cost of the assets divided by its number of years in the useful life
 
Depreciation on Assets other than vehicles
 
What are the methods of depreciation? 
 
* MACRS
The Term “MODIFIED ACCELERATED COST RECOVERY SYSTEM “(MACRS) includes the General Depreciation System and the Alternative Depreciation System.
Generally MACRS is used to depreciate any tangible property placed in service after 1986.
However MACRS does not apply to films, videotapes, and sound recordings. Please refer PUBLICATION 946. Issued by IRS in this context on www.irs.gov.
*ADS
Under this method depreciation are depending up on the property’s class life.
(see publication 946 issued by IRS for detail of class life)
ADS stand for alternative depreciation system. Under this method of depreciation following type of property is covered.
1. Tax exempt use property
2. Tax exempt bond financed property
3. Tangible property used predominately used outside United States.
4. Imported property covered by an executive order of the president of the United States.
5. Property used predominately in a farming business and placed in service during any tax year in which u made an election u/s 263A(d)(3)
* ADS/SL
This is nothing but the combination of alternative depreciation system and straight line method of calculating deprecation.

* SL
Straight Line Which Applied To Following.
(Water utility property, residential rental property, non residential real property or any railroad grading or tunnel pole.)
* AMORTIZ
It is similar to straight line method of deprecation in that an annual deduction is allowed to recover certain costs over a fixed time period. You can amortize such items as the costs of starting a business, goodwill, and certain other intangibles.
* 200-DB
Declining Balance Of Depreciation Method Switching To Straight Line Method. Double declining balance (200% DB) allocates depreciation each year based on twice the straight-line rate applied to the declining balance (the basis reduced by previously taken depreciation). This method switches to straight-line when straight-line gives a greater deduction.

* 150DB
Declining Balance Of Depreciation Method Switching To Straight Line. 150% declining balance (150% DB). This is similar to 200% DB with the use of 1.5 times the straight-line rate rather than twice the straight-line rate.

* DDBSL
It stands for double declining balance method of depreciation under which depreciation is greatest in the first year and smaller in each succeeding year.
The deprecation deduction, and a uniform rate of up to 200% of the straight – line rate is applied to the resulting balance. Salvage is not taken into account in determining the annual allowance under the declining –balance method.
* DBSL
This method denotes for Declining Balance with Switch to Straight Line method of calculating depreciation.
 
What are the conventions?
 
* HY
It stands for Half Year convention. Which is not applicable to residential rental property, non residential real property and railroad grindings and tunnel bores.
* MQ
It stands for Mid Quarter Convention. It is generally applies in the following situations.

If the total depreciable bases (before any special depreciation allowance) of MACRS property placed in service during the last 3 months of your tax year exceeds 40% of the total depreciable bases of MACRS property placed in services during the entire tax year, the MQ applies instead of HY.
* MM
It stands for Mid Month Convention and which is applies only to residential property, non residential real property and rail road grindings and tunnel bores.
It treats all property placed in service during any month as placed in service on the mid point of that month.

(Form 4562 depreciation schedule.
http://www.irs.gov/pub/irs-pdf/i4562.pdf - - 98.4KB)
 
What is Section 179 deduction?
When you want to recover all or part of the cost of certain qualifying property, up to a limit , by deducting it in the year you place the property in service, you apply section 179 for depreciation deductions.
  If property for business has a useful life of more than one year, the cost must be spread across several tax years as depreciation with a portion of the cost deducted each year.

But there is a way to immediately receive these income tax benefits in one tax year. The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is purchased.

And tax-law changes have made this option much more appealing by dramatically increasing the amount that can be written off immediately. The inflation-adjusted amount for 2005 taxes is $105,000.

 

Eligible property

Property that may be written off in the tax year of purchase, rather than depreciated over the asset's useful life, includes:

1.Tangible personal property

• Machinery and equipment
• Property contain to attached to property like office equipment, testing equipment,
• Gasoline storage tanks and pumps at retail service station.
• Livestock including horses, cattle, hogs, sheep, etc
• Furniture and fixtures
•Single-purpose agricultural or horticultural structures
• Most storage facilities
• Any integral part of manufacturing, production, gas, water etc.

Also, the definition of eligible section 179 property was expanded by the 2003 legislative changes to include off-the-shelf computer software. Previously, it had to be written off over three years.

The IRS says ineligible property includes:

• Income-producing property (investment or rental property)
• Property held by an estate or trust
• Property used in a passive activity
• Property purchased from related parties
• Property used outside of the United States
• Buildings and their structural components
• Property acquired by gift or inheritance
 
What is included in Sec. 1245?
  Sec. 1245 property is property that is depreciable and is one of the following.

• Personal Property.
• Elevators and escalators placed in service before 1987.
• Real property subject to amortization or deductions under sec 169,179,179A,179B, 179C,( For property placed in service after 8 August. 2005), 179D (for property placed in service after 31 December, 2005,185 (repealed),188 (repealed),190,193 or 194.
• Tangible real property (except buildings and their structural components) if it is used in specified manner.

Sec 1245(b) for exceptions and limits involving the following way for depreciable.

• Gifts.
• Transfers at death.
• Certain tax-free transactions
• Certain like king exchanges, involuntary conversions, etc.
• Exchanges to comply with SEC orders.
• Property distributed by a partnership to a partner.
• Transfers to tax exempt organizations where the property will be used in an unrelated business.
• Timber property
 
What is included in Sec.1255?
 
Section 1255 property generally includes property that is acquired, improved or otherwise modified by applying payments that have been excluded from gross income under section 126. Section 126 payments include payments by various federal and state agencies for the conservation and reclamation of natural resources and wildlife
 
What is included in Sec.1231?
  Section 1231 transactions. The following are section 1231 transactions.
• Sales or exchanges of real or depreciable property used in a trade or business and held for more than 1 year. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of it.
 
• Cutting of timber that the taxpayer elects to treat as a sale or exchange under section 631(a).

• Disposal of timber with a retained economic interest that is treated as a sale or an outright sale of timber, under section 631(b).

• Disposal of coal (including lignite) or domestic iron ore with a retained economic interest that is treated as a sale under section 631(c).
• Sales or exchanges of cattle and horses, regardless of age, used in a trade or business for draft, breeding, dairy, or sporting purposes and held for 24 months or more from acquisition date.

• Sales or exchanges of livestock other than cattle and horses, regardless of age, used in a trade or business for draft, breeding, dairy, or sporting purposes and held for 12 months or more from acquisition date.


Note.
Livestock does not include poultry, chickens, turkeys, pigeons, geese, other birds, fish, frogs, reptiles, etc.

• Sales or exchanges of unharvested crops. See section 1231(b)(4).
• Involuntary conversions of trade or business property or capital assets held more than 1 year in connection with a trade or business or a transaction entered into for profit. These conversions may result from (a) part or total destruction, (b) theft or seizure, or (c) requisition or condemnation (whether threatened or carried out). If any recognized losses were from involuntary conversions from fire, storm, shipwreck, or other casualty or from theft and the losses exceed the recognized gains from the conversions, do not include any gains or losses from such conversions when figuring your net section 1231 losses.

Transactions to which section 1231 does not apply. Section 1231
transactions do not include sales or exchanges of:

• Inventory or property held primarily for sale to customers.
• Copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property,
• U.S.Goverment publications, including the Congressional Record, that you received from the Government other than by purchase at the normal sales price.
 
What is included in Sec. 1250?
  Section 1250 property is depreciable real property, property (other than section 1245 Property) Section 1250 recapture applies if you used an accelerated depreciation method or you claimed the 30% or 50% special depreciation allowance, or the commercial revitalization deduction. Section 1250 recapture does not apply to dispositions place service after 1986 or after July 31, 1986 if elected. If your property was placed in service before 1987, then Section 1250 property is:

15-, 18-, or 19- year real property and low-income housing that is residential rental property;

15-, 18-, or 19- year real property and low-income housing that is used mostly outside the United States;

15-, 18-, or 19- year real property and low-income housing for which a straight-line election was made; (Note: If you used the accelerated methods, then this is Section 1245 property.) Certain low-income rental housing-
Note: - you are not required to calculate additional depreciation for these properties on line 26 27.5 year (or 40 year if elected) residential rental property (except for 27.5 year qualified New York Liberty after September 10, 2001) 22-, 31.5-, or 39-year (or 40-year, if elected) nonresidential real property (except for 39-year qualified New York Liberty after September 10, 2001)