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Tax Guide for 

Small Business

(For Individuals Who Use 

Schedule C)

Publication 334

Catalog Number 11063P

For use in preparing

2023 Returns

Feb 2, 2024
Contents

What's New for 2023 ........................... 4

What's New for 2024 ........................... 4

Reminders ................................. 4

Photographs of Missing Children ................... 5

Chapter 1. Filing and Paying Business Taxes ........... 5

Identification Numbers ...................... 6

Income Tax .............................. 6

Self-Employment (SE) Tax .................... 9

Employment Taxes ........................ 10

Excise Taxes ............................ 10

Information Returns ....................... 11

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

Accounting Periods ....................... 12

Accounting Methods ....................... 13

Chapter 3. Dispositions of Business Property ......... 16

What Is a Disposition of Property? .............. 17

How Do I Figure a Gain or Loss? ............... 17

Where Do I Report Gains and Losses? ............ 18

Chapter 4. General Business Credits ............... 18

Business Credits ......................... 18

How To Claim the Credit ..................... 20

Chapter 5. Business Income .................... 20

Kinds of Income ......................... 20

Items That Are Not Income ................... 24

Guidelines for Selected Occupations ............ 25

Accounting for Your Income .................. 26

Chapter 6. How To Figure Cost of Goods Sold ......... 27

Figuring Cost of Goods Sold on Schedule C, Lines 

35 Through 42 ......................... 27

Chapter 7. Figuring Gross Profit .................. 29

Items To Check .......................... 29

Testing Gross Profit Accuracy ................. 30

Additions to Gross Profit .................... 30

Chapter 8. Business Expenses ................... 30

Bad Debts ............................. 30

Car and Truck Expenses .................... 31

Depreciation ............................ 32

Employees' Pay .......................... 33

Insurance ............................. 33

Interest ............................... 34

Legal and Professional Fees .................. 35

Pension Plans ........................... 35

Rent Expense ........................... 35

Taxes ................................ 36

Travel and Meals ......................... 36

Business Use of Your Home .................. 37

Other Expenses You Can Deduct ............... 38

Expenses You Cannot Deduct ................. 38

Chapter 9. Figuring Net Profit or Loss .............. 39

Net Operating Losses (NOLs) ................. 39

Not-for-Profit Activities ..................... 39

Chapter 10. Self-Employment (SE) Tax .............. 39

Who Must Pay SE Tax? ..................... 39

Reporting SE Tax ......................... 43

Chapter 11. Your Rights as a Taxpayer .............. 43

Examinations, Appeals, Collections, and Refunds .... 44

Chapter 12. How To Get More Information ............ 45

Small Business Administration ................ 48

Other Federal Agencies ..................... 49

How To Get Tax Help .......................... 45

Index ................................... 50

Future Developments

For the latest information about developments related to 

Pub. 334, such as legislation enacted after it was 

published, go to IRS.gov/Pub334.

Introduction

This publication provides general information about the 

federal tax laws that apply to you if you are a self-employed person or a statutory employee. This publication 

has information on business income, expenses, and tax 

credits that may help you, as a small business owner, file 

your income tax return.

This publication does not cover the topics listed in 

the following table. 

IF you need information about: THEN you should see:

Corporations ................... Pub. 542

Farming ....................... Pub. 225

Fishermen (Capital Construction Fund) ... Pub. 595

International business .............. IRS.gov/International

Partnerships .................... Pub. 541

Passive activities ................. Pub. 925

Recordkeeping and starting a business ... Pub. 583

Rental ........................ Pub. 527

S corporations ................... Instructions for Form 

1120-S

Are You Self-Employed?

You are a self-employed person if you carry on a trade or 

business as a sole proprietor or an independent 

contractor.

You do not have to carry on regular full-time business activities to be self-employed. Having a 

part-time business in addition to your regular job 

or business may be self-employment.

Trade or business. A trade or business is generally an 

activity carried on to make a profit. The facts and 

circumstances of each case determine whether or not an 

CAUTION

!

2 Publication 334 (2023)
activity is a trade or business. You do not need to actually 

make a profit to be in a trade or business as long as you 

have a profit motive. You do need to make ongoing efforts 

to further the interests of your business.

Limited liability company (LLC). An LLC is an entity 

formed under state law by filing articles of organization. 

Generally, for income tax purposes, a single-member LLC 

is disregarded as an entity separate from its owner and 

reports its income and deductions on its owner's federal 

income tax return. For example, if the single-member LLC 

is not engaged in farming and the owner is an individual, 

they may use Schedule C.

Sole proprietor. A sole proprietor is someone who owns 

an unincorporated business by themselves. You are also a 

sole proprietor for income tax purposes if you are an individual and the sole member of a domestic LLC unless you 

elect to have the LLC treated as a corporation.

Independent contractor. People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, 

subcontractors, public stenographers, or auctioneers who 

are in an independent trade, business, or profession in 

which they offer their services to the general public are 

generally independent contractors. However, whether they 

are independent contractors or employees depends on 

the facts in each case. The general rule is that an individual is an independent contractor if the person paying for 

the work has the right to control or to direct only the result 

of the work and not how it will be done. The earnings of a 

person who is working as an independent contractor are 

subject to self-employment tax. For more information on 

determining whether you are an employee or independent 

contractor, see Pub. 15-A, Employer's Supplemental Tax 

Guide.

Are You a Statutory Employee?

A statutory employee has a checkmark in box 13 of their 

Form W-2, Wage and Tax Statement. Statutory employees 

use Schedule C to report their wages and expenses.

Business Owned and Operated 

by Spouses

If you and your spouse jointly own and operate an 

unincorporated business and share in the profits and 

losses, you are partners in a partnership, whether or not 

you have a formal partnership agreement. Do not use 

Schedule C. Instead, file Form 1065, U.S. Return of 

Partnership Income. For more information, see Pub. 541, 

Partnerships.

Exception—Community income. If you and your 

spouse wholly own an unincorporated business as community property under the community property laws of a 

state, foreign country, or U.S. territory, you can treat the 

business either as a sole proprietorship or a partnership. 

States with community property laws include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, 

Washington, and Wisconsin. A change in your reporting 

position will be treated as a conversion of the entity. See 

Pub. 555 for more information about community property 

laws.

Exception—Qualified joint venture (QJV). If you and 

your spouse each materially participate as the only members of a jointly owned and operated business, and you 

file a joint return for the tax year, you can make a joint 

election to be treated as a QJV instead of a partnership for 

the tax year. Making this election will allow you to avoid 

the complexity of Form 1065 but still give each spouse 

credit for social security earnings on which retirement benefits are based. For an explanation of "material participation," see the instructions for Schedule C (Form 1040), 

line G.

Only businesses that are owned and operated by 

spouses as co-owners (and not in the name of a 

state law entity) qualify for the election. Thus, a 

business owned and operated by spouses through an LLC 

does not qualify for the election of a QJV.

To make this election, you must divide all items of 

income, gain, loss, deduction, and credit attributable to 

the business between you and your spouse in accordance 

with your respective interests in the venture. Each of you 

must file a separate Schedule C and a separate 

Schedule SE. For more information, see Qualified Joint 

Ventures in the Instructions for Schedule SE.

Additional Information

What you need to know. Table A provides a list of questions you need to answer to help you meet your federal tax 

obligations. After each question is the location in this publication where you will find the related discussion.

The IRS mission. Provide America's taxpayers top-quality service by helping them understand and meet their tax 

responsibilities and enforce the law with integrity and fairness to all.

Comments and suggestions. We welcome your comments about this publication and suggestions for future 

editions.

You can send us comments through IRS.gov/

FormComments. Or, you can write to the Internal Revenue 

Service, Tax Forms and Publications, 1111 Constitution 

Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will 

consider your comments and suggestions as we revise 

our tax forms, instructions, and publications. Don’t send 

tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions. If you have a 

tax question not answered by this publication or the How 

To Get Tax Help section at the end of this publication, go 

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search 

feature or viewing the categories listed.

Getting tax forms, instructions, and publications. Go 

to IRS.gov/Forms to download current and prior-year 

forms, instructions, and publications.

CAUTION

!

Publication 334 (2023) 3
Ordering tax forms, instructions, and publications. 

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order 

prior-year forms and instructions. The IRS will process 

your order for forms and publications as soon as possible. 

Don’t resubmit requests you’ve already sent us. You can 

get forms and publications faster online.

What's New for 2023

The following are some of the tax changes for 2023.

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the 

self-employment tax is $160,200 for 2023. There is no 

maximum limit on earnings subject to the Medicare part.

Standard mileage rate. For 2023, the standard mileage 

rate for the cost of operating your car, van, pickup, or 

panel truck for each mile of business use during 2023 increased to 65.5 cents a mile.

For more information, see Car and Truck Expenses in 

chapter 8.

Redesigned Form 1040-SS. For 2023, Schedule(s) C 

and SE (Form 1040) are available to be filed with Form 

1040-SS, if applicable. For additional information, see the 

Instructions for Form 1040-SS.

Bonus depreciation. The bonus depreciation deduction 

under section 168(k) begins its phaseout in 2023 with a 

reduction of the applicable limit from 100% to 80%.

Form 7205, Energy efficient commercial buildings 

deduction. This form and its separate instructions are 

used to claim the section 179D deduction for qualifying 

energy efficient commercial building expenses that are 

now reported on new line 27b of Schedule C (Form 1040). 

See Form 7205 and its instructions for more information.

Commercial clean vehicle credit. Businesses that buy 

a qualified commercial clean vehicle may qualify for a 

clean vehicle tax credit. See Form 8936 and its instructions for more information.

Business meal expense. The temporary 100% deduction for business meal expense has expired. The business 

meal deduction reverts back to the previous 50% allowable deduction beginning January 1, 2023. See Meals and 

lodging, later, for more information.

What's New for 2024

The following are some of the tax changes for 2024. For 

information on other changes, go to IRS.gov.

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the 

self-employment tax is $168,600 for 2024.

Standard mileage rate. For 2024, the standard mileage 

rate for the cost of operating your car, van, pickup, or 

panel truck for each mile of business use is 67 cents a 

mile.

Reminders

Excess business loss limitation. Your loss from a trade 

or business may be limited. Use Form 461 to determine 

the amount of your excess business loss, if any. Your excess business loss will be included as income on line 8p 

of Schedule 1 (Form 1040) and treated as a net operating 

loss (NOL) that you must carry forward and deduct in a 

subsequent tax year.

For more information about the excess business loss 

limitation, see Form 461 and its instructions.

Qualified paid sick leave and qualified paid family 

leave payroll tax credit. Generally, the credit for qualified sick and family leave wages, as enacted under the 

Families First Coronavirus Response Act (FFCRA) and 

amended and extended by the COVID-related Tax Relief 

What You Need To Know About Federal Taxes

(Note. The following is a list of questions you may need to answer so you can fill out your federal income tax return. 

Chapters are given to help you find the related discussion in this publication.)

 What must I know? Where to find the answer

What kinds of federal taxes do I have to pay? How do I pay them? See chapter 1.

What forms must I file? See chapter 1.

What must I do if I have employees? See Employment Taxes in chapter 1.

Do I have to start my tax year in January, or can I start it in any other month? See Accounting Periods in chapter 2.

What method can I use to account for my income and expenses? See Accounting Methods in chapter 2.

What must I do if I disposed of business property during the year? See chapter 3.

What kinds of business income do I have to report on my tax return? See chapter 5.

What kinds of business expenses can I deduct on my tax return? See Business Expenses in chapter 8.

What kinds of expenses are not deductible as business expenses? See Expenses You Cannot Deduct in chapter 8.

What happens if I have a business loss? Can I deduct it? See chapter 9.

What are my rights as a taxpayer? See chapter 11.

Where do I go if I need help with federal tax matters? See chapter 12.

Table A.

4 Publication 334 (2023)
Act of 2020, for leave taken after March 31, 2020, and before April 1, 2021, and the credit for qualified sick and family leave wages under sections 3131, 3132, and 3133 of 

the Internal Revenue Code, as enacted under the American Rescue Plan Act of 2021 (the ARP), for leave taken 

after March 31, 2021, and before October 1, 2021, have 

expired. However, employers that pay qualified sick and 

family leave wages in 2023 for leave taken after March 31, 

2020, and before October 1, 2021, are eligible to claim a 

credit for qualified sick and family leave wages in the quarter of 2023 in which the qualified wages were paid. For 

more information, see Form 941, lines 11b, 11d, 13c, and 

13e; and Form 944, lines 8b, 8d, 10d, and 10f. You must 

include the full amount (both the refundable and nonrefundable portions) of the credit for qualified sick and family 

leave wages in gross income on line 3 or 4, as applicable, 

for the tax year that includes the last day of any calendar 

quarter with respect to which a credit is allowed.

Note. A credit is available only if the leave was taken 

after March 31, 2020, and before October 1, 2021, and 

only after the qualified leave wages were paid, which 

might, under certain circumstances, not occur until a quarter after September 30, 2021, including qualifying quarterly payments made during 2023. Accordingly, all lines related to qualified sick and family leave wages remain on 

the employment tax returns for 2023.

Reportable transactions. You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. You may have to pay a penalty if you are 

required to file Form 8886 but do not do so. You may also 

have to pay interest and penalties on any reportable transaction understatements. Reportable transactions include:

1. Transactions the same as or substantially similar to 

tax avoidance transactions identified by the IRS;

2. Transactions offered to you under conditions of confidentiality for which you paid an advisor a minimum 

fee;

3. Transactions for which you have, or a related party 

has, contractual protection against disallowance of 

the tax benefits;

4. Transactions that result in losses of at least $2 million 

in any single tax year ($50,000 if from certain foreign 

currency transactions) or $4 million in any combination of tax years; and

5. Transactions the same as or substantially similar to 

one of the types of transactions the IRS has identified 

as a transaction of interest.

For more information, see the Instructions for Form 

8886 or Abusive Tax Shelters and Transactions.

Small Business and Self-Employed (SB/SE) Tax Center. Do you need help with a tax issue or preparing your 

return, or do you need a free publication or form? The 

SB/SE Tax Center serves taxpayers who file Form 1040; 

Form 1040-SR; Schedule C, E, or F; or Form 2106, as well 

as small business taxpayers with assets under $10 million. For additional information, go to the SB/SE Tax Center at IRS.gov/Businesses/Small.

Gig Economy Tax Center. The gig (or on-demand, sharing, or access) economy refers to an area of activity where 

people earn income providing on-demand work, services, 

or goods. Go to IRS.gov/Gig to get more information about 

the tax consequences of participating in the gig economy.

Photographs of Missing 

Children

The Internal Revenue Service is a proud partner with the 

National Center for Missing & Exploited Children® 

(NCMEC). Photographs of missing children selected by 

the Center may appear in this publication on pages that 

would otherwise be blank. You can help bring these 

children home by looking at the photographs and calling 

1-800-THE-LOST (1-800-843-5678) if you recognize a 

child.

1.

Filing and Paying 

Business Taxes

Introduction

This chapter explains the business taxes you may have to 

pay and the forms you may have to file. It also discusses 

taxpayer identification numbers (TINs).

Table 1-1 lists the benefits of filing electronically.

Table 1-2 lists the federal taxes you may have to pay, 

their due dates, and the forms you use to report them.

Table 1-3 provides checklists that highlight the typical 

forms and schedules you may need to file if you ever go 

out of business.

You may want to get Pub. 509, Tax Calendars. It 

has tax calendars that tell you when to file returns 

and make tax payments.

Useful Items

You may want to see:

Publication

0 Tax Withholding and Estimated Tax

83 Starting a Business and Keeping Records

Form (and Instructions)

461 Limitation on Business Losses

1040 U.S. Individual Income Tax Return

1040-SR U.S. Tax Return for Seniors

1040-ESstimated Tax for Individuals

TIP

 505

 583

 461

 1040

 1040-SR

 1040-ES

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 5
Energy Efficient Commercial Buildings 

Deduction

Profit or Loss From Business

Self-Employment Tax

See chapter 12 for information about getting publications 

and forms.

Identification Numbers

This section explains three types of TINs, who needs 

them, when to use them, and how to get them.

Social security number (SSN). Generally, use your 

SSN as your TIN. You must put this number on each of 

your individual income tax forms, such as Form 1040 and 

its schedules.

To apply for an SSN, use Form SS-5, Application for a 

Social Security Card. This form is available at Social Security Administration (SSA) offices or by calling 

800-772-1213. It is also available from the SSA website at 

SSA.gov/forms/ss-5. 

Individual taxpayer identification number (ITIN). The 

IRS will issue an ITIN if you are a nonresident or resident 

alien and you do not have and are not eligible to get an 

SSN. The ITIN will expire for any taxpayer who does not 

file a federal income tax return (or who is not included as a 

dependent on the return of another taxpayer) for 3 consecutive years. In general, if you need to obtain an ITIN, 

you must attach Form W-7, Application for IRS Individual 

Taxpayer Identification Number, with your signed, original, 

completed tax return and any other required documentation and mail them to the address in the Instructions for 

Form W-7. Exceptions are covered in the instructions. If 

you must include another person's SSN on your return 

and that person does not have and cannot get an SSN, 

enter that person's ITIN. The application is also available 

in Spanish. The form is available at IRS.gov/FormW7.

An ITIN is for tax use only. It does not entitle the 

holder to social security benefits or change the 

holder's employment or immigration status.

Employer identification number (EIN). You must also 

have an EIN to use as a TIN if you do either of the following.

• Pay wages to one or more employees.

• File pension or excise tax returns.

If you must have an EIN, include it along with your SSN 

on your Schedule C as instructed.

You can apply for an EIN:

• Online by clicking on the Employer ID Numbers (EINs) 

link at IRS.gov/EIN as long as the principal business 

location is in the United States or U.S. territories—the 

EIN is issued immediately once the application information is validated;

 7205

 Sch C (Form 1040)

 Sch SE (Form 1040)

CAUTION

!

• By telephone at 267-941-1099 (not a toll-free number) 

only if the principal business is located outside the 

United States or U.S. territories; or

• By mailing or faxing Form SS-4, Application for Employer Identification Number.

New EIN. You may need to get a new EIN if either the 

form or the ownership of your business changes. For more 

information, see Pub. 1635, Understanding Your EIN.

When you need identification numbers of other persons. In operating your business, you will probably make 

certain payments you must report on information returns. 

These payments are discussed under Information Returns, later in this chapter. You must give the recipient of 

these payments (the payee) a statement showing the total 

amount paid during the year. You must include the payee's 

identification number and your identification number on 

the returns and statements.

Employee. If you have employees, you must get an 

SSN from each of them. Record the name and SSN of 

each employee exactly as they are shown on the employee's social security card. If the employee's name is not 

correct as shown on the card, the employee should request a new card from the SSA. This may occur if the employee's name was changed due to marriage or divorce.

Form W-4, Employee's Withholding Allowance Certificate, is completed by each employee so the correct federal income tax can be withheld from their pay.

If your employee does not have an SSN, they should 

file Form SS-5 with the SSA.

Other payee. If you make payments to someone who 

is not your employee and you must report the payments 

on an information return, get that person's SSN. If you 

must report payments to an organization, such as a corporation or partnership, you must get its EIN.

To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification.

A payee who does not provide you with an identification 

number may be subject to backup withholding. For information on backup withholding, see the Instructions for the 

Requester of Form W-9 and the General Instructions for 

Certain Information Returns.

Income Tax

This part explains whether you have to file an income tax 

return and when you file it. It also explains how you pay 

the tax.

Do I Have To File an Income Tax 

Return?

You have to file an income tax return for 2023 if your net 

earnings from self-employment were $400 or more. If your 

net earnings from self-employment were less than $400, 

you still have to file an income tax return if you meet any 

other filing requirement listed in the Instructions for Form 

1040.

6 Chapter 1 Filing and Paying Business Taxes Publication 334 (2023)
How Do I File?

File your income tax return on Form 1040 or 1040-SR 

and attach Schedule C. Enter the net profit or loss from 

Schedule C on Schedule 1 (Form 1040). Use Schedule C 

to figure your net profit or loss from your business. If you 

operated more than one business as a sole proprietorship, 

you must attach a separate Schedule C for each business.

IRS e-file (Electronic Filing)

You may be able to file your tax returns electronically using 

an IRS e-file option. Table 1-1 lists the benefits of IRS 

e-file. IRS e-file uses automation to replace most of the 

manual steps needed to process paper returns. As a result, the processing of IRS e-file returns is faster and more 

accurate than the processing of paper returns. As with a 

paper return, you are responsible for making sure your return contains accurate information and is filed on time.

Using IRS e-file does not affect your chances of an IRS 

examination of your return.

You can file most commonly used business forms using 

IRS e-file. For more information, go to IRS.gov.

Electronic signatures. Paperless filing is easier than 

you think and it's available to most taxpayers who file electronically—including those first-time filers who were 16 or 

older at the end of 2023. If you file electronically using tax 

preparation software or a tax professional, you will sign 

your return using the Self-Select PIN (personal identification number) Method for IRS e-file. If you are married filing 

jointly, you and your spouse will each need to create a PIN 

and enter these PINs as your electronic signatures.

To create a PIN, you must know your adjusted gross income (AGI) from your originally filed 2022 income tax return (not from an amended return, Form 1040-X, or after 

receiving any math error notice from the IRS). You will also 

need to provide your date of birth (DOB). Make sure your 

DOB is accurate and matches the information on record 

with the SSA before you e-file. To do this, check your annual Social Security Statement.

With a Self-Select PIN, there is nothing to sign and 

nothing to mail—not even your Form(s) W-2. For more details on the Self-Select PIN Method, go to IRS.gov.

State returns. In most states, you can file an electronic 

state return simultaneously with your federal return. For 

more information, check with your state tax agency, tax 

professional, or IRS.gov.

Refunds. You can have your refund check mailed to you, 

or you can have your refund deposited directly to your 

checking or savings account.

With IRS e-file, your refund will be issued in half the 

time as when filing on paper. Most refunds are issued in 

less than 21 days.

Offset against debts. As with a paper return, you may 

not get all of your refund if you owe certain past-due 

amounts, such as federal tax, state tax, a student loan, or 

child support. You will be notified if the refund you claimed 

has been offset against your debts.

Refund inquiries. You can check the status of your refund if it has been at least 24 hours (4 weeks if you mailed 

a paper return) from the date you filed your return. Be sure 

to have a copy of your tax return available because you 

will need to know the filing status, the first SSN shown on 

the return, and the exact whole-dollar amount of the refund. To check on your refund, do one of the following.

• Go to IRS.gov/Refunds.

• Download the free IRS2Go app to your smart phone 

and use it to check your refund status.

• Call 800-829-1954 for automated refund information, 

and follow the recorded instructions.

The IRS can’t issue refunds before mid-February 2024 

for returns that claimed the earned income credit or the 

additional child tax credit. This applies to the entire refund, 

not just the portion associated with these credits.

Balance due. If your return shows that you owe tax, you 

must pay it by the due date of your return (without regard 

to any extension to file) to avoid late-payment penalties 

and interest. For calendar year 2023, pay by April 15, 

2024. You have many options for making your payment, 

including by scheduling an electronic funds withdrawal 

from your checking or savings account or by debit or credit 

card. For more information about your payment options, 

go to IRS.gov/Payments.

Using an Authorized IRS e-file Provider

Many tax professionals can electronically file paperless returns for their clients. You have two options.

1. You can prepare your return, take it to an authorized 

IRS e-file provider, and have the provider transmit it 

electronically to the IRS.

2. You can have an authorized IRS e-file provider prepare your return and transmit it for you electronically.

You will be asked to complete Form 8879, IRS e-file 

Signature Authorization, to authorize the provider to enter 

your self-selected PIN on your return.

Depending on the provider and the specific services requested, a fee may be charged. To find an authorized IRS 

e-file provider near you, go to IRS.gov/Efile/Providers.

Using Your Personal Computer

A computer with Internet access is all you need to file your 

tax return using IRS e-file. When you use your personal 

computer, you can e-file your return from your home any 

time of the day or night. Sign your return electronically using a self-selected PIN to complete the process. There is 

no signature form to submit or Forms W-2 to send in.

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 7
Free software options for doing your taxes. If your 

AGI was $79,000 or less in 2023, you can use free tax 

software to prepare and e-file your tax return.

Free File. This public-private partnership, between 

the IRS and tax software providers, makes approximately 

a dozen brand-name commercial software products and 

e-file available for free. Just go to IRS.gov/FreeFile for details. You can review each software provider's criteria for 

free usage or use an online tool to find which free software 

products match your situation. Some software providers 

offer state tax return preparation for free.

Free File Fillable Forms. The IRS also offers electronic versions of IRS paper forms that can also be e-filed 

for free. Free File Fillable Forms is best for people experienced in preparing their own tax returns. There is no income limitation to using these forms. Free File Fillable 

Forms does basic math calculations. It supports only federal tax forms.

Filing Through Employers and Financial 

Institutions

Some businesses offer free e-file to their employees, 

members, or customers. Others offer it for a fee. Ask your 

employer or financial institution if they offer IRS e-file as 

an employee, member, or customer benefit.

Free Help With Your Return

Free help in preparing your return is available nationwide 

from IRS-trained volunteers. The Volunteer Income Tax 

Assistance (VITA) program is designed to help low-income taxpayers, and the Tax Counseling for the Elderly 

(TCE) program is designed to assist taxpayers age 60 or 

older with their tax returns. Some locations offer free electronic filing.

Table 1-1. Benefits of IRS e-file

Accuracy • Your chance of getting an error notice from the IRS is significantly reduced.

Security • Your privacy and security are assured.

Electronic signatures • Create your own personal identification number (PIN) and file a completely paperless return through your 

tax preparation software or tax professional. There is nothing to mail.

Proof of acceptance • You receive an electronic acknowledgment within 48 hours that the IRS has accepted your return for 

processing.

Fast refunds • You get your refund faster with direct deposit.

Free Internet filing options • Use IRS.gov to access commercial tax preparation and e-file services available at no cost to eligible 

taxpayers.

Electronic payment options • Convenient, safe, and secure electronic payment options are available. E-file and pay your taxes in a 

single step. Schedule direct payment from your checking or savings account (up to and including April 15, 

2024) or pay by debit or credit card.

Federal/State filing • Prepare and file your federal and state tax returns together and double the benefits you get from e-file.

When Is My Tax Return Due?

For calendar year 2023, Form 1040 or 1040-SR is due by 

April 15, 2024. If you use a fiscal year (explained in chapter 2), your return is due by the 15th day of the 4th month 

after the end of your fiscal year. If you file late, you may 

have to pay penalties and interest.

If you cannot file your return on time, use Form 4868, 

Application for Automatic Extension of Time To File U.S. 

Individual Income Tax Return, to request an automatic 

6-month extension. For calendar year taxpayers, this will 

extend the tax filing due date until October 15. Filing an 

extension does not extend the time to pay your taxes, only 

the time to file the tax return.

How Do I Pay Income Tax?

Federal income tax is a pay-as-you-go tax. You must pay it 

as you earn or receive income during the year. An employee usually has income tax withheld from their pay. If 

you do not pay your tax through withholding, or do not pay 

enough tax that way, you might have to pay estimated tax.

Estimated tax payments. You generally have to make 

estimated tax payments if you expect to owe taxes, including self-employment tax (discussed later), of $1,000 or 

more when you file your return. Use Form 1040-ES to figure and pay the tax. If you do not have to make estimated 

tax payments, you can pay any tax due when you file your 

return. For more information on estimated tax, see Pub. 

505.

What are my options for paying estimated tax? 

You can pay your estimated tax electronically using various options. If you pay electronically, there is no need to 

mail in Form 1040-ES payment vouchers. These options 

include:

1. Paying electronically through the Electronic Federal 

Tax Payment System (EFTPS),

2. Paying with Direct Pay by authorizing an electronic 

funds withdrawal when you file Form 1040 or 1040-SR 

electronically, or

3. Paying by credit or debit card over the phone or by Internet.

Other options include crediting an overpayment from your 

2022 return to your 2023 estimated tax, or mailing a check 

or money order with a Form 1040-ES payment voucher.

EFTPS. 

1. To enroll in EFTPS, go to EFTPS.gov or call 

800-555-4477.

8 Chapter 1 Filing and Paying Business Taxes Publication 334 (2023)
2. When you request a new EIN, you may be automatically enrolled in EFTPS.

3. Benefits of EFTPS include the following.

a. The chance of an error in making your payments is 

reduced.

b. You receive immediate confirmation of every transaction.

Penalty for underpayment of tax. If you did not pay 

enough income tax and self-employment tax for 2023 by 

withholding or by making estimated tax payments, you 

may have to pay a penalty on the amount not paid. The 

IRS will figure the penalty for you and send you a bill. Or 

you can use Form 2210, Underpayment of Estimated Tax 

by Individuals, Estates, and Trusts, to see if you have to 

pay a penalty and to figure the penalty amount. For more 

information, see Pub. 505.

Self-Employment (SE) Tax

SE tax is a social security and Medicare tax primarily for 

individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of 

most wage earners.

If you earned income as a statutory employee, 

you do not pay SE tax on that income. Social security and Medicare taxes should have already 

been withheld from those earnings.

Social security coverage. Social security benefits are 

available to self-employed persons just as they are to 

wage earners. Your payments of SE tax contribute to your 

coverage under the social security system. Social security 

coverage provides you with retirement benefits, disability 

benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Be sure to report all of your self-employment income. By not reporting all of it, you could cause 

your social security benefits to be lower when you 

retire.

How to become insured under social security. You 

must be insured under the social security system before 

you begin receiving social security benefits. You are insured if you have the required number of credits (also 

called quarters of coverage), discussed next.

Earning credits in 2023 and 2024. For 2023, you received one credit, up to a maximum of four credits, for 

each $1,640 ($1,730 for 2024) of income subject to social 

security tax. Therefore, for 2023, if you had income 

(self-employment and wages) of $6,560 that was subject 

to social security tax, you received four credits ($6,560 ÷ 

$1,640).

For an explanation of the number of credits you must 

have to be insured and the benefits available to you and 

your family under the social security program, consult your 

nearest SSA office.

CAUTION

!

CAUTION

!

Making false statements to get or to increase social security benefits may subject you to penalties.

The SSA time limit for posting self-employment income. Generally, the SSA will give you credit only for 

self-employment income reported on a tax return filed 

within 3 years, 3 months, and 15 days after the tax year 

you earned the income. If you file your tax return or report 

a change in your self-employment income after this time 

limit, the SSA may change its record but only to remove or 

reduce the amount. The SSA will not change its records to 

increase your self-employment income.

Who must pay SE tax. You must pay SE tax and file 

Schedule SE (Form 1040) if either of the following applies.

1. Your net earnings from self-employment (excluding 

church employee income) were $400 or more.

2. You had church employee income of $108.28 or more.

The SE tax rules apply no matter how old you are 

and even if you are already receiving social security or Medicare benefits.

SE tax rate. The SE tax rate on net earnings is 15.3% 

(12.4% social security tax plus 2.9% Medicare tax).

Maximum earnings subject to SE tax. Only the first 

$160,200 of your combined wages, tips, and net earnings 

in 2023 is subject to any combination of the 12.4% social 

security part of SE tax, social security tax, or the Tier 1 

part of railroad retirement tax.

All your combined wages, tips, and net earnings in 

2023 are subject to any combination of the 2.9% Medicare 

part of SE tax, Medicare tax, or Medicare part of railroad 

retirement tax.

If wages and tips you receive as an employee are subject to either social security tax or the Tier 1 part of railroad retirement tax, or both, and total at least $160,200, 

do not pay the 12.4% social security part of the SE tax on 

any of your net earnings. However, you must pay the 2.9% 

Medicare part of the SE tax on all your net earnings.

Deduct one-half of your SE tax as an adjustment 

to income on line 15 of Schedule 1 (Form 1040). 

Additional Medicare Tax. A 0.9% Additional Medicare 

Tax may apply to you if your net earnings from self-employment exceed one of the following threshold amounts 

(based on your filing status).

• Married filing jointly—$250,000

• Married filing separately—$125,000

• Single, Head of household, or Qualifying surviving 

spouse—$200,000

If you have both wages and self-employment income, 

the threshold amount for applying the Additional Medicare 

Tax on the self-employment income is reduced (but not 

below zero) by the amount of wages subject to Additional 

CAUTION

!

CAUTION

!

TIP

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 9
Medicare Tax. Use Form 8959, Additional Medicare Tax, 

to figure this tax.

More information. For information on methods of calculating SE tax, see chapter 10.

Table 1-2. Which Forms Must I File?

IF you are liable for... THEN use Form... DUE by...1

Income tax 1040, or 1040-SR, and Schedule C2 15th day of 4th month after end of 

tax year.

Self-employment tax Schedule SE File with Form 1040, Form 1040-SR, or 

1040-SS.

Estimated tax 1040-ES 15th day of 4th, 6th, and 9th months of tax 

year, and 15th day of 1st month after the end 

of tax year.

Social security and Medicare taxes and income 

tax withholding

941 or 944 April 30, July 31, October 31, and January 31.3

See Pub. 15.

Providing information on social security and 

Medicare taxes and income tax withholding

W-2 (to employee)

W-2 and W-3 (to the SSA)

January 31.3

January 31.3

Federal unemployment tax (FUTA) 940 January 31.3

April 30, July 31, October 31, and January 31, 

but only if the liability for unpaid tax is more 

than $500.

Filing information returns for payments to 

nonemployees and transactions with other 

persons

See Information Returns Forms 1099—to the recipient by January 31 

and to the IRS by February 28 (March 31 if 

filing electronically).4

Other forms—see the General Instructions for 

Certain Information Returns.

Excise tax See Excise Taxes See the instructions for the forms.

1

 If a due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday. For more information, see Pub. 509.

2

 File a separate schedule for each business.

3

 See the form instructions if you go out of business, change the form of your business, or stop paying wages.

4

 Form 1099-NEC—to the IRS by January 31 (even if filing electronically) if you are reporting nonemployee compensation.

Employment Taxes

If you have employees, you will need to file forms to report 

employment taxes. Employment taxes include the following items.

• Social security and Medicare taxes.

• Federal income tax withholding.

• Federal unemployment tax (FUTA).

For more information, see Pub. 15 (Circular E), Employer's Tax Guide. That publication explains your tax responsibilities as an employer.

Do not reduce your deduction for social security 

and Medicare taxes by the nonrefundable and refundable portions of the FFCRA and ARP of 2021 

credits for qualified sick and family leave wages claimed 

on an employment tax return. Instead, report the credits 

as income.

To help you determine whether the people working for 

you are your employees, see Pub. 15-A. That publication 

has information to help you determine whether an 

individual is an independent contractor or an employee.

CAUTION

!

If you incorrectly classify an employee as an independent contractor, you may be held liable for employment taxes for that worker plus a penalty.

An independent contractor is someone who is self-employed. You generally do not have to withhold or pay any 

taxes on payments made to an independent contractor. 

Excise Taxes

This section identifies some of the excise taxes you may 

have to pay and the forms you have to file if you do any of 

the following.

• Manufacture or sell certain products.

• Operate certain kinds of businesses.

• Use various kinds of equipment, facilities, or products.

• Receive payment for certain services.

For more information on excise taxes, see Pub. 510, Excise Taxes.

CAUTION

!

10 Chapter 1 Filing and Paying Business Taxes Publication 334 (2023)
Form 720. The federal excise taxes reported on Form 

720, Quarterly Federal Excise Tax Return, consist of 

several broad categories of taxes, including the following.

• Environmental taxes on the sale or use of ozone-depleting chemicals and imported products containing or 

manufactured with these chemicals.

• Communications and air transportation taxes.

• Fuel taxes.

• Tax on the first retail sale of heavy trucks, trailers, and 

tractors.

• Manufacturer’s taxes on the sale or use of a variety of 

different articles.

• Tax on indoor tanning services.

Form 2290. There is a federal excise tax on the use of 

certain trucks, truck tractors, and buses on public highways. The tax applies to vehicles having a taxable gross 

weight of 55,000 pounds or more. Report the tax on Form 

2290, Heavy Highway Vehicle Use Tax Return. For more 

information, see the Instructions for Form 2290.

Depositing excise taxes. If you have to file a quarterly 

excise tax return on Form 720, you may have to deposit 

your excise taxes before the return is due. For details on 

depositing excise taxes, see the Instructions for Form 720.

Information Returns

If you make or receive payments in your business, you 

may have to report them to the IRS on information returns. 

The IRS compares the payments shown on the information returns with each person's income tax return to see if 

the payments were included in income. You must give a 

copy of each information return you are required to file to 

the recipient or payer. In addition to the forms described 

below, you may have to use other returns to report certain 

kinds of payments or transactions. For more details on information returns and when you have to file them, see the 

General Instructions for Certain Information Returns.

Form 1099-MISC. Use Form 1099-MISC, Miscellaneous 

Information, to report certain payments you make in your 

business. These payments include the following items.

• Rent payments of $600 or more, other than rents paid 

to real estate agents.

• Prizes and awards of $600 or more that are not for 

services, such as winnings on TV or radio shows.

• Royalty payments of $10 or more.

• Payments to certain crew members by owners or operators of fishing boats.

• Amounts paid for the purchase of fish for resale from 

any person engaged in the business of catching fish.

You also use Form 1099-MISC to report your sales of 

$5,000 or more of consumer products to a person for resale anywhere other than in a permanent retail establishment.

Form 1099-NEC. File Form 1099-NEC, Nonemployee 

Compensation, for each person in the course of your business to whom you have paid at least $600 during the year 

in:

• Services performed by someone who is not your employee (including parts and materials) (box 1),

• Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business 

of catching fish (box 1), or

• Payments to an attorney (box 1).

You must also file Form 1099-NEC for each person 

from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

If you use Form 1099-NEC to report sales totaling 

$5,000 or more of consumer products, then you 

are required to file Form 1099-NEC with the IRS 

by January 31.

Form W-2. You must file Form W-2 to report payments to 

your employees, such as wages, tips, and other compensation; and withheld income, social security, and Medicare 

taxes. You can file Form W-2 online. For more information 

about Form W-2, see the General Instructions for Forms 

W-2 and W-3.

Penalties. The law provides for the following penalties if 

you do not file Form(s) 1099-MISC, Form(s) 1099-NEC, or 

Form(s) W-2 or do not correctly report the information. For 

more information, see the General Instructions for Certain 

Information Returns.

• Failure to file information returns. This penalty applies 

if you do not file information returns by the due date, 

do not include all required information, or report incorrect information.

• Failure to furnish correct payee statements. This penalty applies if you do not furnish a required statement 

to a payee by the required date, do not include all required information, or report incorrect information.

Waiver of penalties. These penalties will not apply if 

you can show that the failure was due to reasonable cause 

and not willful neglect.

In addition, there is no penalty for failure to include all 

required information, or for including incorrect information, 

on a de minimis (small) number of information returns if 

you correct the errors by August 1 of the year the returns 

are due. (A de minimis number of returns is the greater of 

10 or 1/2 of 1% of the total number of returns you are required to file for the year.)

Form 8300. You must file Form 8300, Report of Cash 

Payments Over $10,000 Received in a Trade or Business, 

if you receive more than $10,000 in cash in one transaction, or two or more related business transactions. Cash 

includes U.S. and foreign coin and currency. It also includes certain monetary instruments such as cashier's 

and traveler's checks and money orders. Cash does not 

include a check drawn on an individual's personal account 

CAUTION

!

Publication 334 (2023) Chapter 1 Filing and Paying Business Taxes 11
(personal check). For more information, see Pub. 1544, 

Reporting Cash Payments of Over $10,000.

Penalties. There are civil and criminal penalties, including up to 5 years in prison, for not filing Form 8300, filing (or causing the filing of) a false or fraudulent Form 

8300, or structuring a transaction to evade reporting requirements.

Going Out of Business Checklists

(Note. The following checklists highlight the typical final forms and schedules you may need to file if you ever go out of 

business. For more information, see the instructions for the listed forms.)

IF you are liable for... THEN you may need to...

Income tax File Schedule C with your Form 1040 or 1040-SR for the year in which you go out of business.

File Form 4797 with your Form 1040 or 1040-SR for each year in which you sell or exchange 

property used in your business or in which the business use of certain section 179 or listed 

property drops to 50% or less.

File Form 8594 with your Form 1040 or 1040-SR if you sold your business.

SE tax File Schedule SE with your Form 1040 or 1040-SR for the year in which you go out of business.

Employment taxes File Form 941 for the calendar quarter (or Form 944 for the year) in which you make final wage 

payments. Note. Do not forget to check the box and enter the date final wages were paid on line 

17 of Form 941 or line 14 of Form 944.

File Form 940 for the calendar year in which final wages were paid. Note. Do not forget to check 

box d, Final: Business closed or stopped paying wages under Type of Return.

Information returns Provide Forms W-2 to your employees for the calendar year in which you make final wage 

payments. 

File Form W-3 to file Forms W-2. 

Provide Form(s) 1099-MISC and Form(s) 1099-NEC to each person to whom you have paid at 

least $600 for services (including parts and materials) during the calendar year in which you go 

out of business.

File Form 1096 to file Form(s) 1099-MISC and Form(s) 1099-NEC.

Table 1-3.

2.

Accounting Periods and 

Methods

Introduction

You must figure your taxable income and file an income 

tax return for an annual accounting period called a tax 

year. Also, you must consistently use an accounting 

method that clearly shows your income and expenses for 

the tax year.

Useful Items

You may want to see:

Publication

538 Accounting Periods and Methods

See chapter 12 for information about getting publications 

and forms.

 538

Accounting Periods

When preparing a statement of income and expenses 

(generally, your income tax return), you must use your 

books and records for a specific interval of time called an 

accounting period. The annual accounting period for your 

income tax return is called a tax year. You can use one of 

the following tax years.

• A calendar tax year.

• A fiscal tax year.

Unless you have a required tax year, you adopt a tax year 

by filing your first income tax return using that tax year. A 

required tax year is a tax year required under the Internal 

Revenue Code or the Income Tax Regulations.

Calendar tax year. A calendar tax year is 12 consecutive 

months beginning January 1 and ending December 31.

You must adopt the calendar tax year if any of the following apply.

• You do not keep books.

• You have no annual accounting period.

• Your present tax year does not qualify as a fiscal year.

• Your use of the calendar tax year is required under the 

Internal Revenue Code or the Income Tax Regulations.

12 Chapter 2 Accounting Periods and Methods Publication 334 (2023)
If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise 

allowed to change it without IRS approval. For more information, see Change in tax year, later.

If you adopt the calendar tax year, you must maintain 

your books and records and report your income and expenses for the period from January 1 through December 

31 of each year.

Fiscal tax year. A fiscal tax year is 12 consecutive 

months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the 

last day of a month.

If you adopt a fiscal tax year, you must maintain your 

books and records and report your income and expenses 

using the same tax year.

For more information on a fiscal tax year, including a 

52-53-week tax year, see Pub. 538.

Change in tax year. Generally, you must file Form 1128, 

Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. See the Instructions for Form 1128 for exceptions. If you qualify for 

an automatic approval request, a user fee is not required. 

If you do not qualify for automatic approval, a ruling must 

be requested. See the Instructions for Form 1128 for information about user fees if you are requesting a ruling.

Accounting Methods

An accounting method is a set of rules used to determine 

when and how income and expenses are reported. Your 

accounting method includes not only the overall method of 

accounting you use, but also the accounting treatment you 

use for any material item.

You choose an accounting method for your business 

when you file your first income tax return that includes a 

Schedule C for the business. After that, if you want to 

change your accounting method, you must generally get 

IRS approval. See Change in Accounting Method, later.

Kinds of methods. Generally, you can use any of the following accounting methods.

• Cash method.

• An accrual method.

• Special methods of accounting for certain items of income and expenses.

• Combination method using elements of two or more of 

the above.

You must use the same accounting method to figure 

your taxable income and to keep your books. Also, you 

must use an accounting method that clearly shows your 

income.

Business and personal items. You can account for 

business and personal items under different accounting 

methods. For example, you can figure your business income under an accrual method, even if you use the cash 

method to figure personal items.

Two or more businesses. If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the 

income of each business. They are separate and distinct 

only if you maintain complete and separate books and records for each business.

Cash Method

Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to 

keep cash method records. However, if an inventory is 

necessary to account for your income, you must generally 

use an accrual method of accounting for sales and purchases, unless you are a small business taxpayer (defined 

later in this chapter). For more information, see Inventories, later.

Income

Under the cash method, include in your gross income all 

items of income you actually or constructively receive during your tax year. If you receive property or services, you 

must include their fair market value in income.

Example. On December 30, 2022, a client sent you a 

check for interior decorating services you provided to 

them. You received the check on January 4, 2023. You 

must include the amount of the check in income for 2023.

Constructive receipt. You have constructive receipt of 

income when an amount is credited to your account or 

made available to you without restriction. You do not need 

to have possession of it. If you authorize someone to be 

your agent and receive income for you, you are treated as 

having received it when your agent received it.

Example. Interest is credited to your bank account in 

December 2023. You do not withdraw it or enter it into 

your passbook until 2024. You must include it in your 

gross income for 2023.

Delaying receipt of income. You cannot hold checks 

or postpone taking possession of similar property from 

one tax year to another to avoid paying tax on the income. 

You must report the income in the year the property is received or made available to you without restriction.

Example. A service contractor was entitled to receive 

a $10,000 payment on a contract in December 2023. They 

were told in December that their payment was available. 

At their request, they were not paid until January 2024. 

They must include this payment in their 2023 income because it was constructively received in 2023.

Checks. Receipt of a valid check by the end of the tax 

year is constructive receipt of income in that year, even if 

you cannot cash or deposit the check until the following 

year.

Publication 334 (2023) Chapter 2 Accounting Periods and Methods 13
Example. You received a check for $500 on December 

30, 2023, from a client. You could not deposit the check in 

your business account until January 3, 2024. You must include this fee in income for 2023.

Debts paid by another person or canceled. If your 

debts are paid by another person or are canceled by your 

creditors, you may have to report part or all of this debt relief as income. If you receive income in this way, you constructively receive the income when the debt is canceled 

or paid. For more information, see Canceled Debt under 

Kinds of Income in chapter 5.

Repayment of income. If you include an amount in income and in a later year you have to repay all or part of it, 

you can usually deduct the repayment in the year in which 

you make it. If the amount you repay is over $3,000, a special rule applies. For details about the special rule, see Repayments in chapter 8 of Pub. 17.

Expenses

Under the cash method, you generally deduct expenses in 

the tax year in which you actually pay them. This includes 

business expenses for which you contest liability. However, you may not be able to deduct an expense paid in 

advance or you may be required to capitalize certain 

costs, as explained later under Uniform Capitalization 

Rules.

Expenses paid in advance. You can deduct an expense 

you pay in advance only in the year to which it applies.

Example. You are a calendar year taxpayer and you 

pay $1,000 in 2023 for a business insurance policy effective for 1 year, beginning July 1. You can deduct $500 in 

2023 and $500 in 2024.

Accrual Method

Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize 

expenses in the year incurred. The purpose of an accrual 

method of accounting is to match income and expenses in 

the correct year.

Income—General Rule

Under an accrual method, you generally include an 

amount in your gross income for the tax year in which all 

events that fix your right to receive the income have occurred and you can determine the amount with reasonable 

accuracy. For a taxpayer with an applicable financial statement or other financial statement as the Secretary may 

specify, the all-events test for an item of gross income is 

considered met no later than when taken into account in 

an applicable financial statement or such other financial 

statement.

Example. You are a calendar year accrual method taxpayer. You sold a computer on December 28, 2023. You 

billed the customer in the first week of January 2024, but 

you did not receive payment until February 2024. You 

must include the amount received for the computer in your 

2023 income.

Income—Special Rules

The following are special rules that apply to advance payments, estimating income, and changing a payment 

schedule for services.

Estimated income. If you include a reasonably estimated amount in gross income, and later determine the exact 

amount is different, take the difference into account in the 

tax year in which you make the determination.

Change in payment schedule for services. If you perform services for a basic rate specified in a contract, you 

must accrue the income at the basic rate, even if you 

agree to receive payments at a lower rate until you complete the services and then receive the difference.

Advance payments. Generally, you report an advance 

payment as income in the year you receive the payment. 

However, if you receive an advance payment, you can 

elect to postpone including the advance payment in income until the next tax year. You cannot postpone including any payment beyond that tax year.

For more information, see Pub. 538 and section 451.

Expenses

Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply.

1. The all-events test has been met. The test has been 

met when:

a. All events have occurred that fix the fact of liability, 

and

b. The liability can be determined with reasonable 

accuracy.

2. Economic performance has occurred.

Economic performance. You generally cannot deduct or 

capitalize a business expense until economic performance occurs. If your expense is for property or services 

provided to you, or for your use of property, economic performance occurs as the property or services are provided 

or as the property is used. If your expense is for property 

or services you provide to others, economic performance 

occurs as you provide the property or services. An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance 

has not occurred. For more information on economic performance, see Economic Performance under Accrual 

Method in Pub. 538.

Example. You are a calendar year taxpayer and use 

an accrual method of accounting. You buy office supplies 

in December 2023. You receive the supplies and the bill in 

December, but you pay the bill in January 2024. You can 

14 Chapter 2 Accounting Periods and Methods Publication 334 (2023)
deduct the expense in 2023 because all events that fix the 

fact of liability have occurred, the amount of the liability 

could be reasonably determined, and economic performance occurred in that year.

Your office supplies may qualify as a recurring expense. 

In that case, you can deduct them in 2023 even if the supplies are not delivered until 2024 (when economic performance occurs).

Keeping inventories. When the production, purchase, or 

sale of merchandise is an income-producing factor in your 

business, you must generally take inventories into account 

at the beginning and the end of your tax year, unless you 

are a small business taxpayer. If you must account for an 

inventory, you must generally use an accrual method of 

accounting for your purchases and sales. For more information, see Inventories, later.

Special rule for related persons. You cannot deduct 

business expenses and interest owed to a related person 

who uses the cash method of accounting until you make 

the payment and the corresponding amount is includible 

in the related person's gross income. Determine the relationship, for this rule, as of the end of the tax year for 

which the expense or interest would otherwise be deductible. If a deduction is not allowed under this rule, the rule 

will continue to apply even if your relationship with the person ends before the expense or interest is includible in the 

gross income of that person.

Related persons include members of your immediate 

family, including siblings (either whole or half), your 

spouse, ancestors, and lineal descendants. For a list of 

other related persons, see section 267 of the Internal Revenue Code.

Combination Method

You can generally use any combination of cash, accrual, 

and special methods of accounting if the combination 

clearly shows your income and expenses and you use it 

consistently. However, the following restrictions apply.

• If an inventory is necessary to account for your income, you must generally use an accrual method for 

purchases and sales. (See, however, Inventories, 

later.) You can use the cash method for all other items 

of income and expenses.

• If you use the cash method for figuring your income, 

you must use the cash method for reporting your expenses.

• If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your 

income.

• If you use a combination method that includes the 

cash method, treat that combination method as the 

cash method.

Inventories

Generally, if you produce, purchase, or sell merchandise 

in your business, you must keep an inventory and use an 

accrual method for purchases and sales of merchandise.

Exception for small business taxpayers. If you are a 

small business taxpayer, you can choose not to keep an 

inventory, but you must still use a method of accounting 

for inventory that clearly reflects income. If you choose not 

to keep an inventory, you won’t be treated as failing to 

clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment 

of inventories. If, however, you choose to keep an inventory, you must generally use an accrual method of accounting and value the inventory each year to determine 

your cost of goods sold in Part III of Schedule C.

Small business taxpayer. You qualify as a small business taxpayer if you (a) have average annual gross receipts of $29 million or less for the 3 prior tax years, and 

(b) are not a tax shelter (as defined in section 448(d)(3)). If 

your business has not been in existence for all of the 

3-tax-year period used in figuring average gross receipts, 

base your average on the period it has existed, and if your 

business has a predecessor entity, include the gross receipts of the predecessor entity from the 3-tax-year period 

when figuring average gross receipts. If your business (or 

predecessor entity) had short tax years for any of the 

3-tax-year period, annualize your business’ gross receipts 

for the short tax years that are part of the 3-tax-year period. See Pub. 538 for more information.

Treating inventory as non-incidental material or 

supplies. If you account for inventories as materials and 

supplies that are not incidental, you deduct the amounts 

paid or incurred to acquire or produce the inventoriable 

items treated as non-incidental materials and supplies in 

the year in which they are first used or consumed in your 

operations. Inventory treated as non-incidental materials 

and supplies is used or consumed in your business in the 

year you provide the inventory to your customers.

Financial accounting treatment of inventories. 

Your financial accounting treatment of inventories is determined with regard to the method of accounting you use in 

your applicable financial statement (as defined in section 

451(b)(3)) or, if you do not have an applicable financial 

statement, with regard to the method of accounting you 

use in your books and records that have been prepared in 

accordance with your accounting procedures.

Changing your method of accounting for inventory. If you want to change your method of accounting for 

inventory, you must file Form 3115, Application for Change 

in Accounting Method. See Change in Accounting 

Method, later.

Items included in inventory. If you are required to account for inventories, include the following items when accounting for your inventory.

• Merchandise or stock in trade.

Publication 334 (2023) Chapter 2 Accounting Periods and Methods 15
• Raw materials.

• Work in process.

• Finished products.

• Supplies that physically become a part of the item intended for sale.

Valuing inventory. You must value your inventory at the 

beginning and end of each tax year to determine your cost 

of goods sold (Schedule C, line 42). To determine the 

value of your inventory, you need a method for identifying 

the items in your inventory and a method for valuing these 

items.

Inventory valuation rules cannot be the same for all 

kinds of businesses. The method you use to value your inventory must conform to generally accepted accounting 

principles for similar businesses and must clearly reflect 

income. Your inventory practices must be consistent from 

year to year.

More information. For more information about inventories, see Pub. 538.

Uniform Capitalization Rules

Under the uniform capitalization rules, you must capitalize 

the direct costs and part of the indirect costs for production or resale activities. Include these costs in the basis of 

property you produce or acquire for resale, rather than 

claiming them as a current deduction. You recover the 

costs through depreciation, amortization, or cost of goods 

sold when you use, sell, or otherwise dispose of the property.

Activities subject to the uniform capitalization rules. 

You may be subject to the uniform capitalization rules if 

you do any of the following, unless the property is produced for your use other than in a business or an activity 

carried on for profit.

• Produce real or tangible personal property. For this 

purpose, tangible personal property includes a film, 

sound recording, videotape, book, or similar property.

• Acquire property for resale.

Exceptions. These rules do not apply to the following.

1. Small business taxpayers, defined earlier under Inventories.

2. Property you produce if your indirect costs of producing the property are $200,000 or less.

Special Methods

There are special methods of accounting for certain items 

of income or expense. These include the following.

• Amortization, discussed in chapter 7 of Pub. 225.

• Bad debts, discussed under Topic No. 453, Bad Debt 

Deduction.

• Depletion, discussed in chapter 7 of Pub. 225.

• Depreciation, discussed in Pub. 946, How To Depreciate Property.

• Installment sales, discussed in Pub. 537, Installment 

Sales.

• Long-term contract methods of accounting. See section 460.

Change in Accounting Method

Once you have set up your accounting method, you must 

generally get IRS approval before you can change to another method. A change in your accounting method includes a change in:

1. Your overall method, such as from cash to an accrual 

method; and

2. Your treatment of any material item.

To get approval, you must file Form 3115. You can get 

IRS approval to change an accounting method under either the automatic change procedures or the advance 

consent request procedures. You may have to pay a user 

fee. For more information, see the Instructions for Form 

3115. 

Automatic change procedures. Certain taxpayers can 

presume to have IRS approval to change their method of 

accounting. The approval is granted for the tax year for 

which the taxpayer requests a change (year of change), if 

the taxpayer complies with the provisions of the automatic 

change procedures. No user fee is required for an application filed under an automatic change procedure generally 

covered in Revenue Procedure 2015-13, 2015-5 I.R.B. 

419, which is available at IRS.gov/IRB/

2015-05_IRB#RP-2015-13 (or its successor).

Generally, you must use Form 3115 to request an automatic change. For more information, see the Instructions 

for Form 3115.

3.

Dispositions of Business 

Property

Introduction

If you dispose of business property, you may have a gain 

or loss that you report on your tax return. However, in 

some cases, you may have a gain that is not taxable or a 

loss that is not deductible. This chapter discusses 

whether you have a disposition, how to figure the gain or 

loss, and where to report the gain or loss.

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

You may want to see:

Publication

Sales and Other Dispositions of Assets

Form (and Instructions)

Sales of Business Property

Capital Gains and Losses

See chapter 12 for information about getting publications 

and forms.

What Is a Disposition of 

Property?

A disposition of property includes the following transactions.

• You sell property for cash or other property.

• You exchange property for other property.

• You receive money as a tenant for the cancellation of a 

lease.

• You receive money for granting the exclusive use of a 

copyright throughout its life in a particular medium.

• You transfer property to satisfy a debt.

• You abandon property.

• Your bank or other financial institution forecloses on 

your mortgage or repossesses your property.

• Your property is damaged, destroyed, or stolen, and 

you receive property or money in payment.

• Your property is condemned, or disposed of under the 

threat of condemnation, and you receive property or 

money in payment.

• You give property away.

For details about damaged, destroyed, or stolen property, 

see Pub. 547, Casualties, Disasters, and Thefts. For details about other dispositions, see chapter 1 of Pub. 544.

Nontaxable exchanges. Certain exchanges of property 

are not taxable. This means any gain from the exchange is 

not recognized and you cannot deduct any loss. Your gain 

or loss will not be recognized until you sell or otherwise 

dispose of the property you receive.

Like-kind exchanges. A like-kind exchange is the exchange of property for other like-kind property. It is the 

most common type of nontaxable exchange. To be a 

like-kind exchange, the property traded and the property 

received must be both (a) real property, and (b) business 

or investment property.

Report the exchange of like-kind property on Form 

8824, Like-Kind Exchanges. For more information about 

like-kind exchanges, see chapter 1 of Pub. 544. 

Installment sales. An installment sale is a sale of property where you receive at least one payment after the tax 

 544

 4797

 Sch D (Form 1040)

year of the sale. If you finance the buyer's purchase of 

your property, instead of having the buyer get a loan or 

mortgage from a third party, you probably have an installment sale.

For more information about installment sales, see Pub. 

537.

Sale of a business. The sale of a business is usually not 

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

are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment 

of gain or loss.

Both the buyer and seller involved in the sale of a business must report to the IRS the allocation of the sales 

price among the business assets. Use Form 8594, Asset 

Acquisition Statement Under Section 1060, to provide this 

information. The buyer and seller should each attach Form 

8594 to their federal income tax return for the year in 

which the sale occurred. 

For more information about the sale of a business, see 

Pub. 544.

How Do I Figure a Gain or 

Loss?

Table 3-1. How To Figure a Gain or Loss

IF your... THEN you have a...

adjusted basis is more than the amount 

realized loss.

amount realized is more than the 

adjusted basis gain.

Basis, adjusted basis, amount realized, fair market 

value, and amount recognized are defined next. You need 

to know these definitions to figure your gain or loss.

Basis. The cost or purchase price of property is usually 

its basis for figuring the gain or loss from its sale or other 

disposition. However, if you acquired the property by gift, 

by inheritance, or in some way other than buying it, you 

must use a basis other than its cost. For more information 

about basis, see Pub. 551, Basis of Assets.

Adjusted basis. The adjusted basis of property generally 

is your original cost or other basis plus certain additions, 

and minus certain deductions such as depreciation and 

casualty losses. In determining gain or loss, the costs of 

transferring property to a new owner, such as selling expenses, are added to the adjusted basis of the property.

Amount realized. Generally, the amount you realize from 

a disposition is the total of all money you receive plus the 

fair market value of all property or services you receive. 

The amount you realize also includes any of your liabilities 

that were assumed by the buyer and any liabilities to 

which the property you transferred is subject, such as real 

estate taxes or a mortgage.

Publication 334 (2023) Chapter 3 Dispositions of Business Property 17
Fair market value. Fair market value is the price at which 

the property would change hands between a buyer and a 

seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Amount recognized. Your gain or loss realized from a 

disposition of property is usually a recognized gain or loss 

for tax purposes. Recognized gains must be included in 

gross income. Recognized losses are deductible from 

gross income. However, a gain or loss realized from certain exchanges of property is not recognized. See 

Nontaxable exchanges, earlier. Also, you cannot deduct a 

loss from the disposition of property held for personal use.

Is My Gain or Loss Ordinary or 

Capital?

You must classify your gains and losses as either ordinary 

or capital gains or losses. You must do this to figure your 

net capital gain or loss. Generally, you will have a capital 

gain or loss if you dispose of a capital asset. For the most 

part, everything you own and use for personal purposes or 

investment is a capital asset.

Certain property you use in your business is not a capital asset. A gain or loss from a disposition of this property 

is an ordinary gain or loss. However, if you held the property longer than 1 year, you may be able to treat the gain 

or loss as a capital gain or loss. These gains and losses 

are called section 1231 gains and losses.

For more information about ordinary and capital gains 

and losses, see chapters 2 and 3 of Pub. 544.

Is My Capital Gain or Loss Short Term 

or Long Term?

If you have a capital gain or loss, you must determine 

whether it is long term or short term. Whether a gain or 

loss is long or short term depends on how long you own 

the property before you dispose of it. The time you own 

property before disposing of it is called the holding period.

Do I Have a Short-Term or 

Long-Term Gain or Loss?

Table 3-2.

IF you hold the property... THEN you have a...

1 year or less short-term capital gain or loss.

more than 1 year long-term capital gain or loss.

For more information about short-term and long-term 

capital gains and losses, see chapter 4 of Pub. 544.

Where Do I Report Gains and 

Losses?

Report gains and losses from the following dispositions on 

the forms indicated. The instructions for the forms explain 

how to fill them out.

Dispositions of business property and depreciable 

property. Use Form 4797. If you have taxable gain, you 

may also have to use Schedule D (Form 1040). 

Like-kind exchanges. Use Form 8824. You may also 

have to use Form 4797 and Schedule D (Form 1040). 

Installment sales. Use Form 6252, Installment Sale Income. You may also have to use Form 4797 and Schedule D (Form 1040). 

Casualties and thefts. Use Form 4684, Casualties and 

Thefts. You may also have to use Form 4797. 

Condemned property. Use Form 4797. You may also 

have to use Schedule D (Form 1040).

4.

General Business Credits

Introduction

Your general business credit for the year consists of your 

carryforward of business credits from prior years plus the 

total of your current year business credits. In addition, your 

general business credit for the current year may be increased later by the carryback of business credits from 

later years. You subtract this credit directly from your tax.

Useful Items

You may want to see:

Form (and Instructions)

General Business Credit

Alternative Minimum Tax—Individuals

See chapter 12 for information about getting publications 

and forms.

Business Credits

All of the following credits are part of the general business 

credit. The form you use to figure each credit is shown in 

parentheses. You will also have to complete Form 3800.

Some credits have expiration dates. Check the instructions for each credit to make sure it is available for 2023.

Alternative fuel vehicle refueling property credit 

(Form 8911). This credit applies to the cost of any qualified fuel vehicle refueling property. For more information, 

see Form 8911.

Biodiesel, renewable diesel, or sustainable aviation 

fuels credits (Form 8864). For more information, see 

Form 8864.

 3800

 6251

18 Chapter 4 General Business Credits Publication 334 (2023)
Biofuel producer credit (Form 6478). For more information, see Form 6478.

Carbon oxide sequestration credit (Form 8933). This 

credit is for carbon oxide that is captured at a qualified facility and disposed of in secure geological storage or used 

in a qualified enhanced oil or natural gas recovery project. 

For more information, see Form 8933.

Credit for employer social security and Medicare 

taxes paid on certain employee tips (Form 8846). 

This credit is generally equal to your (employer's) portion 

of social security and Medicare taxes paid on tips received by employees of your food and beverage establishment where tipping is customary. The credit applies regardless of whether the food is consumed on or off your 

business premises. For more information, see Form 8846.

Credit for employer differential wage payments 

(Form 8932). This credit provides businesses with an incentive to continue to pay wages to an employee performing services on active duty in the uniformed services of 

the United States for a period of more than 30 days. For 

more information, see Form 8932.

Credit for employer-provided childcare facilities and 

services (Form 8882). This credit applies to the qualified expenses you paid for employee childcare and qualified expenses you paid for childcare resource and referral 

services. For more information, see Form 8882.

Credit for increasing research activities (Form 6765). 

This credit is designed to encourage businesses to increase the amounts they spend on research and experimental activities, including energy research. For more information, see Form 6765.

Credit for small employer health insurance premiums 

(Form 8941). This credit applies to the cost of certain 

health insurance coverage you provide to certain employees. For more information, see Form 8941.

Credit for small employer pension plan startup costs, 

auto-enrollment, and military spouse participation 

(Form 8881). This credit applies to pension plan startup 

costs of a new qualified defined benefit or defined contribution plan (including a section 401(k) plan), SIMPLE 

plan, or SEP plan. For more information, see Pub. 560, 

Retirement Plans for Small Business.

Disabled access credit (Form 8826). This credit is a 

nonrefundable tax credit for an eligible small business that 

pays or incurs expenses to provide access to persons 

who have disabilities. You must pay or incur the expenses 

to enable your business to comply with the Americans 

with Disabilities Act of 1990. For more information, see 

Form 8826.

Distilled spirits credit (Form 8906). This credit is available to distillers and importers of distilled spirits and eligible wholesalers of distilled spirits. For more information, 

see Form 8906.

Employer credit for paid family and medical leave 

(Form 8994). This credit applies for wages paid to qualifying employees while they are on family and medical 

leave, subject to certain conditions. For more information, 

see Form 8994.

Empowerment zone employment credit (Form 8844). 

You may qualify for this credit if you have employees and 

are engaged in a business in an empowerment zone for 

which the credit is available. For more information, see 

Form 8844.

Energy efficient home credit (Form 8908). This credit 

is available for eligible contractors of certain homes sold 

for use as a residence. For more information, see Form 

8908.

Investment credit (Form 3468). The investment credit 

is the total of the several credits. For more information, 

see Form 3468.

Low sulfur diesel fuel production credit (Form 8896). 

For more information, see Form 8896.

Low-income housing credit (Form 8586). This credit 

generally applies to each qualified low-income building 

placed in service after 1986. For more information, see 

Form 8586.

New markets credit (Form 8874). This credit is for 

qualified equity investments made in qualified community 

development entities. For more information, see Form 

8874.

Orphan drug credit (Form 8820). This credit applies to 

qualified expenses incurred in testing certain drugs for 

rare diseases and conditions. For more information, see 

Form 8820.

Clean vehicle credits (Form 8936). These credits are 

for certain clean vehicles placed in service during the tax 

year. For more information, see Form 8936.

Qualified railroad track maintenance credit (Form 

8900). This credit applies to qualified railroad track maintenance expenditures paid or incurred during the tax year. 

For more information, see Form 8900.

Renewable electricity production credit (Form 8835). 

This credit is for renewable energy sources produced in 

the United States or U.S. territories from qualified energy 

resources at a qualified facility. For more information, see 

Form 8835.

Work opportunity credit (Form 5884). This credit provides businesses with an incentive to hire individuals from 

targeted groups that have a particularly high unemployment rate or other special employment needs. For more 

information, see Form 5884.

Publication 334 (2023) Chapter 4 General Business Credits 19
How To Claim the Credit

To claim a general business credit, you will first have to get 

the forms you need to claim your current year business 

credits.

In addition to the credit form, you also need to file Form 

3800.

5.

Business Income

Introduction

This chapter primarily explains business income and how 

to account for it on your tax return and what items are not 

considered income, and it gives guidelines for selected 

occupations.

If there is a connection between any income you receive and your business, the income is business income. 

A connection exists if it is clear that the payment of income would not have been made if you did not have the 

business.

You can have business income even if you are not involved in the activity on a regular full-time basis. Income 

from work you do on the side in addition to your regular 

job can be business income. For example, you may be in 

the business of providing services for a ride-sharing business as a second job.

You report most business income, such as income from 

selling your products or services, on Schedule C. But you 

report the income from the sale of business assets, such 

as land and office buildings, on other forms instead of 

Schedule C. For information on selling business assets, 

see chapter 3.

Nonemployee compensation. Business income includes amounts you received in your business that were 

properly shown on Forms 1099-NEC. This includes 

amounts reported as nonemployee compensation in box 1 

of the form. You can find more information in the instructions on the back of the Form 1099-NEC you received.

Payment card and third-party network transactions. 

If you are in a business, you may receive a Form 1099-K 

representing the total dollar amount of total reportable 

payment transactions. This may not be the amount you 

should report as income, as it may not include all the receipts and it may include items that are not included in 

your receipts (such as sales tax).

Business income deduction. Income you report on 

Schedule C may be qualified business income and entitle 

you to a deduction on Form 1040 or 1040-SR, line 13. See 

Form 8995-A or Form 8995 to figure your deduction, if any.

Kinds of Income

You must report on your tax return all income you receive 

from your business unless it is excluded by law. In most 

cases, your business income will be in the form of cash, 

checks, and credit card charges. But business income can 

be in other forms, such as property or services. These and 

other types of income are explained next.

If you are a U.S. citizen who has business income 

from sources outside the United States (foreign 

income), you must report that income on your tax 

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

live outside the United States, you may be able to exclude 

part or all of your foreign-source business income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Bartering for Property or Services

Bartering is an exchange of property or services. You must 

include in your gross receipts, at the time received, the fair 

market value of property or services you receive in exchange for something else. If you exchange services with 

another person and you both have agreed ahead of time 

on the value of the services, that value will be accepted as 

the fair market value unless the value can be shown to be 

otherwise.

Example 1. You are a self-employed lawyer. You perform legal services for a client, a small corporation. In payment for your services, you receive shares of stock in the 

corporation. You must include the fair market value of the 

shares in income.

Example 2. You are an artist and create a work of art 

to compensate your landlord for the rent-free use of your 

apartment. You must include the fair rental value of the 

apartment in your gross receipts. Your landlord must include the fair market value of the work of art in their rental 

income.

Example 3. You are a self-employed accountant. Both 

you and a house painter are members of a barter club, an 

organization that each year gives its members a directory 

of members and the services each member provides. 

Members get in touch with other members directly and 

bargain for the value of the services to be performed.

In return for accounting services you provided for the 

house painter's business, the house painter painted your 

home. You must include in gross receipts the fair market 

value of the services you received from the house painter. 

The house painter must include the fair market value of 

your accounting services in their gross receipts.

Example 4. You are a member of a barter club that 

uses credit units to credit or debit members' accounts for 

goods or services provided or received. As soon as units 

are credited to your account, you can use them to buy 

goods or services or sell or transfer the units to other 

members.

CAUTION

!

20 Chapter 5 Business Income Publication 334 (2023)
You must include the value of credit units you received 

in your gross receipts for the tax year in which the units 

are credited to your account.

The dollar value of units received for services by an 

employee of the club, who can use the units in the same 

manner as other members, must be included in the employee's gross income for the tax year in which received. It 

is wages subject to social security and Medicare taxes 

(FICA), FUTA taxes, and income tax withholding. See 

Pub. 15.

Example 5. You operate a plumbing business and use 

the cash method of accounting. You join a barter club and 

agree to provide plumbing services to any member for a 

specified number of hours. Each member has access to a 

directory that lists the members of the club and the services available.

Members contact each other directly and request services to be performed. You are not required to provide services unless requested by another member, but you can 

use as many of the offered services as you wish without 

paying a fee.

You must include the fair market value of any services 

you receive from club members in your gross receipts 

when you receive them even if you have not provided any 

services to club members.

Information returns. If you are involved in a bartering 

transaction, you may have to file either of the following 

forms.

• Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. 

• Form 1099-MISC.

For information about these forms, see the General Instructions for Certain Information Returns.

Real Estate Rents

If you are a real estate dealer who receives income from 

renting real property or an owner of a hotel, motel, etc., 

who provides services (maid services, etc.) for guests, report the rental income and expenses on Schedule C. If 

you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. For more information, 

see Pub. 527, Residential Rental Property.

Real estate dealer. You are a real estate dealer if you 

are engaged in the business of selling real estate to customers with the purpose of making a profit from those 

sales. Rent you receive from real estate held for sale to 

customers is subject to SE tax. However, rent you receive 

from real estate held for speculation or investment is not 

subject to SE tax.

Trailer park owner. Rental income from a trailer park is 

subject to SE tax if you are a self-employed trailer park 

owner who provides trailer lots and facilities and substantial services for the convenience of your tenants.

You are generally considered to provide substantial 

services for tenants if they are primarily for the tenants' 

convenience and are not normally provided to maintain 

the lots in a condition for occupancy. Services are substantial if the compensation for the services makes up a 

material part of the tenants' rental payments.

Examples of services that are not normally provided for 

the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing 

a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers.

Examples of services that are normally provided to 

maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways.

Hotels, boarding houses, and apartments. Rental income you receive for the use or occupancy of hotels, 

boarding houses, or apartment houses is subject to SE 

tax if you provide services for the occupants.

Generally, you are considered to provide services for 

the occupants if the services are primarily for their convenience and are not services normally provided with the 

rental of rooms for occupancy only. An example of a service that is not normally provided for the convenience of the 

occupants is maid service. However, providing heat and 

light, cleaning stairways and lobbies, and collecting trash 

are services normally provided for the occupants' convenience.

Prepaid rent. Advance payments received under a lease 

that does not put any restriction on their use or enjoyment 

are income in the year you receive them. This is generally 

true no matter what accounting method or period you use.

Lease bonus. A bonus you receive from a lessee for 

granting a lease is an addition to the rent. Include it in your 

gross receipts in the year received.

Lease cancellation payments. Report payments you receive from your lessee for canceling a lease in your gross 

receipts in the year received.

Payments to third parties. If your lessee makes payments to someone else under an agreement to pay your 

debts or obligations, include the payments in your gross 

receipts when the lessee makes the payments. A common 

example of this kind of income is a lessee's payment of 

your property taxes on leased real property.

Settlement payments. Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that 

the payments exceed the adjusted basis of the leasehold 

improvements destroyed, damaged, removed, or disconnected by the lessee.

Personal Property Rents

If you are in the business of renting personal property 

(equipment, vehicles, formal wear, etc.), include the rental 

amount you receive in your gross receipts on Schedule C. 

Prepaid rent and other payments described under Real 

Estate Rents, earlier, can also be received for renting 

Publication 334 (2023) Chapter 5 Business Income 21
personal property. If you receive any of those payments, 

include them in your gross receipts as explained in that 

discussion.

Interest and Dividend Income

Interest and dividends may be considered business income.

Interest. Interest received on notes receivable that you 

have accepted in the ordinary course of business is business income. Interest received on loans is business income if you are in the business of lending money.

Uncollectible loans. If a loan payable to you becomes uncollectible during the tax year and you use an 

accrual method of accounting, you generally must include 

in gross income qualified stated interest accrued up to the 

time the loan became uncollectible. If the accrued interest 

that you previously included later becomes uncollectible, 

you may be able to take a bad debt deduction. See Bad 

Debts in chapter 8.

Unstated interest and Original Issue Discount 

(OID). If little or no interest is charged on an installment 

sale contract, you may have to treat a part of each payment as unstated interest. See Unstated Interest and 

Original Issue Discount (OID) in Pub. 537.

Dividends. Generally, dividends are business income to 

dealers in securities. For most sole proprietors and statutory employees, however, dividends are nonbusiness income. If you hold stock as a personal investment separately from your business activity, the dividends from the 

stock are nonbusiness income.

If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all 

or part of the dividend as business income on your return. 

To find out how much you have to report, see Recovery of 

items previously deducted under Other Income, later.

Canceled Debt

The following explain the general rule for including canceled debt in income and the exceptions to the general 

rule.

General Rule

Generally, if your debt is canceled or forgiven, other than 

as a gift or bequest to you, you must include the canceled 

amount in your gross income for tax purposes. Report the 

canceled amount on line 6 of Schedule C if you incurred 

the debt in your business. If the debt is a nonbusiness 

debt, report the canceled amount on line 8c of Schedule 1 

(Form 1040).

Exceptions

The following discussion covers some exceptions to the 

general rule for canceled debt.

Price reduced after purchase. If you owe a debt to the 

seller for property you bought and the seller reduces the 

amount you owe, you generally do not have income from 

the reduction. Unless you are bankrupt or insolvent, treat 

the amount of the reduction as a purchase price adjustment and reduce your basis in the property.

Deductible debt. You do not realize income from a canceled debt to the extent the payment of the debt would 

have led to a deduction.

Example. You get accounting services for your business on credit. Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Your accountant forgives part of the amount you owe for the 

accounting services. How you treat the canceled debt depends on your method of accounting.

• Cash method—You do not include the canceled debt 

in income because payment of the debt would have 

been deductible as a business expense.

• Accrual method—You include the canceled debt in income because the expense was deductible when you 

incurred the debt.

For information on the cash and accrual methods of accounting, see chapter 2.

Exclusions

Do not include canceled debt in income in the following 

situations. However, you may be required to file Form 

982, Reduction of Tax Attributes Due to Discharge of Indebtedness. For more information, see Form 982. 

1. The cancellation takes place in a bankruptcy case under title 11 of the U.S. Code (relating to bankruptcy). 

See Pub. 908, Bankruptcy Tax Guide.

2. The cancellation takes place when you are insolvent. 

You can exclude the canceled debt to the extent you 

are insolvent. See Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

3. The canceled debt is a qualified farm debt owed to a 

qualified person. See chapter 3 of Pub. 225, Farmer's 

Tax Guide.

4. The canceled debt is a qualified real property business debt. This situation is explained later.

5. The canceled debt is qualified principal residence indebtedness which is discharged after 2006. See the 

Instructions for Form 982 for more information about 

this exclusion.

If a canceled debt is excluded from income because it 

takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. If it takes place when you 

are insolvent, the exclusions in situations 3 and 4 do not 

apply to the extent you are insolvent.

Debt. For purposes of this discussion, debt includes any 

debt for which you are liable or which attaches to property 

you hold.

22 Chapter 5 Business Income Publication 334 (2023)
Qualified real property business debt. You can elect 

to exclude (up to certain limits) the cancellation of qualified real property business debt. If you make the election, 

you must reduce the basis of your depreciable real property by the amount excluded. Make this reduction at the 

beginning of your tax year following the tax year in which 

the cancellation occurs. However, if you dispose of the 

property before that time, you must reduce its basis immediately before the disposition.

Cancellation of qualified real property business 

debt. Qualified real property business debt is debt (other 

than qualified farm debt) that meets all the following conditions.

1. It was incurred or assumed in connection with real 

property used in a trade or business. Real property 

used in a trade or business does not include real 

property developed and held primarily for sale to customers in the ordinary course of business.

2. It was secured by such real property.

3. It was incurred or assumed at either of the following 

times.

a. Before January 1, 1993.

b. After December 31, 1992, if incurred or assumed 

to acquire, construct, or substantially improve the 

real property.

4. It is debt to which you choose to apply these rules.

Qualified real property business debt includes refinancing of debt described in (3) above, but only to the extent it 

does not exceed the debt being refinanced.

If you are the owner of a disregarded entity (for 

example, a single-member LLC), see Qualified 

Real Property Business Indebtedness in chapter 1 of Pub. 4681 to see if you qualify for this exclusion.

You cannot exclude more than either of the following 

amounts.

1. The excess (if any) of:

a. The outstanding principal of qualified real property 

business debt (immediately before the cancellation); over

b. The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding 

principal amount of any other qualified real property business debt secured by this property immediately before the cancellation.

2. The total adjusted bases of depreciable real property 

held by you immediately before the cancellation. 

These adjusted bases are determined after any basis 

reduction due to a cancellation in bankruptcy or insolvency, or of qualified farm debt. Do not take into account depreciable real property acquired in contemplation of the cancellation.

Election. To make this election, complete Form 982 

and attach it to your income tax return for the tax year in 

TIP

which the cancellation occurs. You must file your return by 

the due date (including extensions). If you timely filed your 

return for the year without making the election, you can 

still make the election by filing an amended return within 6 

months of the due date of the return (excluding extensions). For more information, see When To File in the form 

instructions.

Other Income

The following discussion explains how to treat other types 

of business income you may receive.

Restricted property. Restricted property is property that 

has certain restrictions that affect its value. If you receive 

restricted stock or other property for services performed, 

the fair market value of the property in excess of your cost 

is included in your income on Schedule C when the restriction is lifted. However, you can choose to be taxed in 

the year you receive the property. For more information on 

including restricted property in income, see Pub. 525, Taxable and Nontaxable Income.

Gains and losses. Do not report on Schedule C a gain 

or loss from the disposition of property that is neither stock 

in trade nor held primarily for sale to customers. Instead, 

you must report these gains and losses on other forms. 

For more information, see chapter 3.

Promissory notes. Report promissory notes and other 

evidences of debt issued to you in a sale or exchange of 

property that is stock in trade or held primarily for sale to 

customers on Schedule C. In general, you report them at 

their stated principal amount (minus any unstated interest) 

or issue price (for debt instruments with OID) when you receive them.

Lost income payments. If you reduce or stop your business activities, report on Schedule C any payment you receive for the lost income of your business from insurance 

or other sources. Report it on Schedule C even if your 

business is inactive when you receive the payment.

Damages. You must include in gross income compensation you receive during the tax year as a result of any of 

the following injuries connected with your business.

• Patent infringement.

• Breach of contract or fiduciary duty.

• Antitrust injury.

Economic injury. You may be entitled to a deduction 

against the income if it compensates you for actual economic injury. Your deduction is the smaller of the following 

amounts.

• The amount you receive or accrue for damages in the 

tax year reduced by the amount you pay or incur in the 

tax year to recover that amount.

• Your loss from the injury that you have not yet deducted.

Publication 334 (2023) Chapter 5 Business Income 23
Punitive damages. You must also include punitive 

damages in income.

Kickbacks. If you receive any kickbacks, include them in 

your income on Schedule C. However, do not include 

them if you properly treat them as a reduction of a related 

expense item, a capital expenditure, or cost of goods sold.

Recovery of items previously deducted. If you recover 

a bad debt or any other item deducted in a previous year, 

include the recovery in income on Schedule C. However, if 

all or part of the deduction in earlier years did not reduce 

your tax, you can exclude the part that did not reduce your 

tax. If you exclude part of the recovery from income, you 

must include with your return a computation showing how 

you figured the exclusion.

Exception for depreciation. This rule does not apply 

to depreciation. You recover depreciation using the rules 

explained next.

Recapture of depreciation. In the following situations, 

you have to recapture the depreciation deduction. This 

means you include in income part or all of the depreciation 

you deducted in previous years.

Listed property. If your business use of listed property (explained in chapter 8 under Depreciation) falls to 

50% or less in a tax year after the tax year you placed the 

property in service, you may have to recapture part of the 

depreciation deduction. You do this by including in income 

on Schedule C part of the depreciation you deducted in 

previous years. Use Part IV of Form 4797 to figure the 

amount to include on Schedule C. For more information, 

see What Is the Business-Use Requirement? in chapter 5 

of Pub. 946. That chapter explains how to determine 

whether property is used more than 50% in your business.

Section 179 property. If you take a section 179 deduction (explained in chapter 8 under Depreciation) for an 

asset and before the end of the asset's recovery period 

the percentage of business use drops to 50% or less, you 

must recapture part of the section 179 deduction. You do 

this by including in income on Schedule C part of the deduction you took. Use Part IV of Form 4797 to figure the 

amount to include on Schedule C. See chapter 2 of Pub. 

946 to find out when you recapture the deduction.

Sale or exchange of depreciable property. If you 

sell or exchange depreciable property at a gain, you may 

have to treat all or part of the gain due to depreciation as 

ordinary income. You figure the income due to depreciation recapture in Part III of Form 4797. For more information, see chapter 4 of Pub. 544.

Items That Are Not Income

In some cases, the property or money you receive is not 

income.

Appreciation. Increases in value of your property are not 

income until you realize the increases through a sale or 

other taxable disposition.

Consignments. Consignments of merchandise to others 

to sell for you are not sales. The title of merchandise remains with you, the consignor, even after the consignee 

possesses the merchandise. Therefore, if you ship goods 

on consignment, you have no profit or loss until the consignee sells the merchandise. Merchandise you have 

shipped out on consignment is included in your inventory 

until it is sold.

Do not include merchandise you receive on consignment in your inventory. Include your profit or commission 

on merchandise consigned to you in your income when 

you sell the merchandise or when you receive your profit 

or commission, depending upon the method of accounting 

you use.

Construction allowances. If you enter into a lease after 

August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the 

following conditions.

• Under a short-term lease of retail space.

• For the purpose of constructing or improving qualified 

long-term real property for use in your business at that 

retail space.

Amount you can exclude. You can exclude the construction allowance to the extent it does not exceed the 

amount you spent for construction or improvements.

Short-term lease. A short-term lease is a lease (or 

other agreement for occupancy or use) of retail space for 

15 years or less. The following rules apply in determining 

whether the lease is for 15 years or less.

• Take into account options to renew when figuring 

whether the lease is for 15 years or less. But do not 

take into account any option to renew at fair market 

value determined at the time of renewal.

• Two or more successive leases that are part of the 

same transaction (or a series of related transactions) 

for the same or substantially similar retail space are 

treated as one lease.

Retail space. Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to 

the general public.

Qualified long-term real property. Qualified 

long-term real property is nonresidential real property that 

is part of, or otherwise present at, your retail space and 

that reverts to the landlord when the lease ends.

Exchange of like-kind property. Generally, if you exchange real property used for business or held as an investment solely for other business or investment real 

property of a like kind, no gain or loss is recognized. This 

means that the gain is not taxable and the loss is not deductible. For more information, see Form 8824.

Leasehold improvements. If a tenant erects buildings or 

makes improvements to your property, the increase in the 

value of the property due to the improvements is not 

24 Chapter 5 Business Income Publication 334 (2023)
income to you. However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income.

Loans. Money borrowed through a bona fide loan is not 

income.

Sales tax. State and local sales taxes imposed on the 

buyer, which you were required to collect and pay over to 

state or local governments, are not income.

Guidelines for Selected 

Occupations

This section provides information to determine whether 

your earnings should be reported on Schedule C (Form 

1040).

Direct seller. You must report all income you receive as a 

direct seller on Schedule C. This includes any of the following.

• Income from sales—Payments you receive from customers for products they buy from you.

• Commissions, bonuses, or percentages you receive 

for sales and the sales of others who work under you.

• Prizes, awards, and gifts you receive from your selling 

business.

You must report this income regardless of whether it is reported to you on an information return.

You are a direct seller if you meet all the following conditions.

1. You are engaged in one of the following trades or 

businesses.

a. Selling or soliciting the sale of consumer products 

either in a home or other place that is not a permanent retail establishment, or to any buyer on a 

buy-sell basis or a deposit-commission basis for 

resale in a home or other place of business that is 

not a permanent retail establishment.

b. Delivering or distributing newspapers or shopping 

news (including any services directly related to 

that trade or business).

2. Substantially all your pay (whether paid in cash or not) 

for services described above is directly related to 

sales or other output (including performance of services) rather than to the number of hours worked.

3. Your services are performed under a written contract 

between you and the person for whom you perform 

the services, and the contract provides that you will 

not be treated as an employee for federal tax purposes.

Executor or administrator. If you administer a deceased person's estate, your fees are reported on Schedule C if you are one of the following.

1. A professional fiduciary.

2. A nonprofessional fiduciary (personal representative) 

and both of the following apply.

a. The estate includes an active trade or business in 

which you actively participate.

b. Your fees are related to the operation of that trade 

or business.

3. A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for 

a long period of time, provided these activities are 

enough to be considered a trade or business.

If the fees do not meet the above requirements, report 

them on line 8z of Schedule 1 (Form 1040).

Fishing crew member. If you are a member of a crew 

that catches fish or other aquatic life, your earnings are reported on Schedule C if you meet all the requirements 

shown in chapter 10 under Fishing crew member.

Insurance agent, former. Termination payments you receive as a former self-employed insurance agent from an 

insurance company because of services you performed 

for that company are not reported on Schedule C if all the 

following conditions are met.

• You received payments after your agreement to perform services for the company ended.

• You did not perform any services for the company after your service agreement ended and before the end 

of the year in which you received the payment.

• You entered into a covenant not to compete against 

the company for at least a 1-year period beginning on 

the date your service agreement ended.

• The amount of the payments depended primarily on 

policies sold by you or credited to your account during 

the last year of your service agreement or the extent to 

which those policies remain in force for some period 

after your service agreement ended, or both.

• The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of 

whether eligibility for the payments depended on 

length of service).

Insurance agent, retired. Income paid by an insurance 

company to a retired self-employed insurance agent 

based on a percentage of commissions received before 

retirement is reported on Schedule C. Also, renewal commissions and deferred commissions for sales made before 

retirement are generally reported on Schedule C.

However, renewal commissions paid to the survivor of 

an insurance agent are not reported on Schedule C.

Newspaper carrier or distributor. You are a direct 

seller and your earnings are reported on Schedule C if all 

the following conditions apply.

• You are in the business of delivering or distributing 

newspapers or shopping news (including directly related services such as soliciting customers and 

collecting receipts).

Publication 334 (2023) Chapter 5 Business Income 25
• Substantially all your pay for these services directly relates to your sales or other output rather than to the 

number of hours you work.

• You perform the services under a written contract that 

says you will not be treated as an employee for federal 

tax purposes.

This rule applies whether or not you hire others to help 

you make deliveries. It also applies whether you buy the 

papers from the publisher or are paid based on the number of papers you deliver.

Newspaper or magazine vendor. If you are age 18 or 

older and you sell newspapers or magazines, your earnings are reported on Schedule C if all the following conditions apply.

• You sell newspapers or magazines to ultimate consumers.

• You sell them at a fixed price.

• Your earnings are based on the difference between 

the sales price and your cost of goods sold.

This rule applies whether or not you are guaranteed a 

minimum amount of earnings. It also applies whether or 

not you receive credit for unsold newspapers or magazines you return to your supplier.

Notary public. Fees you receive for services you perform 

as a notary public are reported on Schedule C. These 

payments are not subject to SE tax (see the Instructions 

for Schedule SE (Form 1040)).

Public official. Public officials generally do not report 

what they earn for serving in public office on Schedule C. 

This rule applies to payments received by an elected tax 

collector from state funds on the basis of a fixed percentage of the taxes collected. Public office includes any elective or appointive office of the United States or its territories, the District of Columbia, a state or its political 

subdivisions, or a wholly owned instrumentality of any of 

these.

Public officials of state or local governments report their 

fees from the public on Schedule C if they are paid solely 

on a fee basis and if their services are eligible for, but not 

covered by, social security under a federal-state agreement.

Real estate agent or direct seller. If you are a licensed 

real estate agent or a direct seller, your earnings are reported on Schedule C if both the following apply.

• Substantially all your pay for services as a real estate 

agent or direct seller directly relates to your sales or 

other output rather than to the number of hours you 

work.

• You perform the services under a written contract that 

says you will not be treated as an employee for federal 

tax purposes.

Dealer in section 1256 contracts. If you are a dealer in 

options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures 

contracts, foreign currency contracts, nonequity options, 

dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as 

stock used to hedge options) are reported on Schedule C. 

For more information, see sections 1256 and 1402(i).

Securities or commodities trader. You are a trader in 

securities or commodities if you are engaged in the business of buying and selling securities or commodities for 

your own account. As a trader in securities or commodities (including if you made the section 475(f) mark-to-market election as a trader in securities or commodities), your 

gain or loss from the disposition of securities or commodities is not reported on Schedule C. For more information 

about traders in securities or commodities, see Pub. 550, 

Investment Income and Expenses, and Topic No. 429, 

Traders in Securities.

Accounting for Your Income

Accounting for your income for income tax purposes differs at times from accounting for financial purposes. This 

section discusses some of the more common differences 

that may affect business transactions.

Figure your business income on the basis of a tax year 

and according to your regular method of accounting (see 

chapter 2). If the sale of a product is an income-producing 

factor in your business, you usually have to use inventories to clearly show your income. Dealers in real estate are 

not allowed to use inventories. For more information on inventories, see chapter 2.

Income paid to a third party. All income you earn is taxable to you. You cannot avoid tax by having the income 

paid to a third party.

Example. You rent out your property and the rental 

agreement directs the lessee to pay the rent to your son. 

The amount paid to your son is gross income to you.

Cash discounts. These are amounts the seller permits 

you to deduct from the invoice price for prompt payment. 

For income tax purposes, you can use either of the following two methods to account for cash discounts.

1. Deduct the cash discount from purchases (see 

Line 36—Purchases Less Cost of Items Withdrawn for 

Personal Use in chapter 6).

2. Credit the cash discount to a discount income account.

You must use the chosen method every year for all your 

purchase discounts.

If you use the second method, the credit balance in the 

account at the end of your tax year is business income. 

Under this method, you do not reduce the cost of goods 

sold by the cash discounts you received. When valuing 

your closing inventory, you cannot reduce the invoice price 

of merchandise on hand at the close of the tax year by the 

average or estimated discounts received on the merchandise.

26 Chapter 5 Business Income Publication 334 (2023)
Trade discounts. These are reductions from list or catalog prices and are usually not written into the invoice or 

charged to the customer. Do not enter these discounts on 

your books of account. Instead, use only the net amount 

as the cost of the merchandise purchased. For more information, see Trade discounts in chapter 6.

Payment placed in escrow. If the buyer of your property 

places part or all of the purchase price in escrow, you do 

not include any part of it in gross sales until you actually or 

constructively receive it. However, upon completion of the 

terms of the contract and the escrow agreement, you will 

have taxable income, even if you do not accept the money 

until the next year.

Sales returns and allowances. Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in 

figuring net sales.

Advance payments. Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method.

Insurance proceeds. If you receive insurance or another 

type of reimbursement for a casualty or theft loss, you 

must subtract it from the loss when you figure your deduction. You cannot deduct the reimbursed part of a casualty 

or theft loss.

For information on casualty or theft losses, see Pub. 

547.

6.

How To Figure Cost of 

Goods Sold

Introduction

If you make or buy goods to sell, you can deduct the cost 

of goods sold from your gross receipts on Schedule C. 

However, to determine these costs, you must value your 

inventory at the beginning and end of each tax year.

This chapter applies to you if you are a manufacturer, 

wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. 

This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, 

or painter. However, if you work in a personal service business and also sell or charge for the materials and supplies 

normally used in your business, this chapter applies to 

you.

There are exceptions for small business taxpayers 

that may change how you figure cost of goods 

sold for your business. For more information, see 

chapter 2.

Figuring Cost of Goods Sold 

on Schedule C, Lines 35

Through 42

Figure your cost of goods sold by filling out lines 35 

through 42 of Schedule C. These lines are reproduced below and are explained in the discussion that follows.

35 Inventory at beginning of year. If different from last 

year's closing inventory, attach explanation .......

36 Purchases less cost of items withdrawn for personal 

use ................................

37 Cost of labor. Do not include any amounts paid to 

yourself .............................

38 Materials and supplies ....................

39 Other costs ...........................

40 Add lines 35 through 39 ...................

41 Inventory at end of year ...................

42 Cost of goods sold. Subtract line 41 from line 40.

Enter the result here and on line 4 .............

Line 35—Inventory at Beginning of 

Year

If you are a merchant, beginning inventory is the cost of 

merchandise on hand at the beginning of the year that you 

will sell to customers. If you are a manufacturer or producer, it includes the total cost of raw materials, work in 

process, finished goods, and materials and supplies used 

in manufacturing the goods (see Inventories in chapter 2).

Opening inventory will usually be identical to the closing inventory of the year before. You must explain any difference in a schedule attached to your return.

Donation of inventory. If you contribute inventory (property that you sell in the course of your business), the 

amount you can claim as a contribution deduction is the 

smaller of its fair market value on the day you contributed 

it or its basis. The basis of donated inventory is any cost 

incurred for the inventory in an earlier year that you would 

otherwise include in your opening inventory for the year of 

the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not 

part of the cost of goods sold.

If the cost of donated inventory is not included in your 

opening inventory, the inventory's basis is zero and you 

cannot claim a charitable contribution deduction. Treat the 

inventory's cost as you would ordinarily treat it under your 

method of accounting. For example, include the purchase 

price of inventory bought and donated in the same year in 

the cost of goods sold for that year.

CAUTION

!

Publication 334 (2023) Chapter 6 How To Figure Cost of Goods Sold 27
A special rule may apply to certain donations of food inventory. See Pub. 526, Charitable Contributions.

Example 1. You are a calendar year taxpayer who 

uses an accrual method of accounting. In 2023, you contributed property from inventory to a church. It had a fair 

market value of $600. The closing inventory at the end of 

2022 properly included $400 of costs due to the acquisition of the property, and in 2022, you properly deducted 

$50 of administrative and other expenses attributable to 

the property as business expenses. The charitable contribution allowed for 2023 is $400 ($600 − $200). The $200 

is the amount that would be ordinary income if you had 

sold the contributed inventory at fair market value on the 

date of the gift. The cost of goods sold you use in determining gross income for 2023 must not include the $400. 

You remove that amount from opening inventory for 2023.

Example 2. If, in Example 1, you acquired the contributed property in 2023 at a cost of $400, you would include 

the $400 cost of the property in figuring the cost of goods 

sold for 2023 and deduct the $50 of administrative and 

other expenses attributable to the property for that year. 

You would not be allowed any charitable contribution deduction for the contributed property.

Line 36—Purchases Less Cost of 

Items Withdrawn for Personal Use

If you are a merchant, use the cost of all merchandise you 

bought for sale. If you are a manufacturer or producer, this 

includes the cost of all raw materials or parts purchased 

for manufacture into a finished product.

Trade discounts. The differences between the stated 

prices of articles and the actual prices you pay for them 

are called trade discounts. You must use the prices you 

pay (not the stated prices) in figuring your cost of purchases. Do not show the discount amount separately as an 

item in gross income.

An automobile dealer must record the cost of a car in 

inventory reduced by any manufacturer's rebate that represents a trade discount.

Cash discounts. Cash discounts are amounts your suppliers let you deduct from your purchase invoices for 

prompt payments. There are two methods of accounting 

for cash discounts. You can either credit them to a separate discount account or deduct them from total purchases 

for the year. Whichever method you use, you must be consistent. If you want to change your method of figuring inventory cost, you must file Form 3115. For more information, see Change in Accounting Method in chapter 2.

If you credit cash discounts to a separate account, you 

must include this credit balance in your business income 

at the end of the tax year. If you use this method, do not 

reduce your cost of goods sold by the cash discounts.

Purchase returns and allowances. You must deduct all 

returns and allowances from your total purchases during 

the year.

Merchandise withdrawn from sale. If you withdraw 

merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you 

bought for sale. Do this by crediting the purchases or 

sales account with the cost of merchandise you withdraw 

for personal use. You must also charge the amount to your 

drawing account. 

A drawing account is a separate account you should 

keep to record the business income you withdraw to pay 

for personal and family expenses. As stated above, you 

also use it to record withdrawals of merchandise for personal or family use. This account is also known as a withdrawals account or personal account.

Line 37—Cost of Labor

Labor costs are usually an element of cost of goods sold 

only in a manufacturing or mining business. Small merchandisers (wholesalers, retailers, etc.) usually do not 

have labor costs that can properly be charged to cost of 

goods sold. In a manufacturing business, labor costs 

properly allocable to the cost of goods sold include both 

the direct and indirect labor used in fabricating the raw 

material into a finished, saleable product.

Direct labor. Direct labor costs are the wages you pay to 

those employees who spend all their time working directly 

on the product being manufactured. They also include a 

part of the wages you pay to employees who work directly 

on the product part time if you can determine that part of 

their wages.

Indirect labor. Indirect labor costs are the wages you 

pay to employees who perform a general factory function 

that does not have any immediate or direct connection 

with making the saleable product, but that is a necessary 

part of the manufacturing process.

Other labor. Other labor costs not properly chargeable to 

the cost of goods sold can be deducted as selling or administrative expenses. Generally, the only kinds of labor 

costs properly chargeable to your cost of goods sold are 

the direct or indirect labor costs and certain other costs 

treated as overhead expenses properly charged to the 

manufacturing process, as discussed later under 

Line 39—Other Costs.

Line 38—Materials and Supplies

Materials and supplies, such as hardware and chemicals, 

used in manufacturing goods are charged to cost of goods 

sold. Those that are not used in the manufacturing process are treated as deferred charges. You deduct them as 

a business expense when you use them. Business expenses are discussed in chapter 8.

Line 39—Other Costs

Examples of other costs incurred in a manufacturing or 

mining process that you charge to your cost of goods sold 

are as follows.

28 Chapter 6 How To Figure Cost of Goods Sold Publication 334 (2023)
Containers. Containers and packages that are an integral part of the product manufactured are a part of your 

cost of goods sold. If they are not an integral part of the 

manufactured product, their costs are shipping or selling 

expenses.

Freight-in. Freight-in, express-in, and cartage-in on raw 

materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods 

sold.

Overhead expenses. Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. The 

overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in 

your cost of goods sold.

Line 40—Add Lines 35 Through 39

The total of lines 35 through 39 equals the cost of the 

goods available for sale during the year.

Line 41—Inventory at End of Year

Subtract the value of your closing inventory (including, as 

appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) 

from line 40. Inventory at the end of the year is also known 

as closing or ending inventory. Your ending inventory will 

usually become the beginning inventory of your next tax 

year.

Line 42—Cost of Goods Sold

When you subtract your closing inventory (inventory at the 

end of the year) from the cost of goods available for sale, 

the remainder is your cost of goods sold during the tax 

year.

7.

Figuring Gross Profit

Introduction

After you have figured the gross receipts from your business (chapter 5) and the cost of goods sold (chapter 6), 

you are ready to figure your gross profit. You must determine gross profit before you can deduct any business expenses. These expenses are discussed in chapter 8.

Businesses that sell products. Figure your gross profit 

by first figuring your net receipts. Figure net receipts 

(line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). Returns and 

allowances include cash or credit refunds you make to 

customers, rebates, and other allowances off the actual 

sales price.

Next, subtract the cost of goods sold (line 4) from net 

receipts (line 3). The result is the gross profit from your 

business.

Businesses that sell services. You do not have to figure the cost of goods sold if the sale of merchandise is not 

an income-producing factor for your business. Your gross 

profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). Most professions and businesses that sell services rather than 

products can figure gross profit directly from net receipts 

in this way.

Illustration. This illustration of the gross profit section of 

the income statement of a retail business shows how 

gross profit is figured.

Income Statement Year Ended December 

31, 2023

Gross receipts ............................ $400,000

Minus: Returns and allowances ................. 14,940

Net receipts ............................. $385,060

Minus: Cost of goods sold .................... 288,140

Gross profit ............................. $96,920

The cost of goods sold for this business is figured as 

follows.

Inventory at beginning of year .................. $37,845

Plus: Purchases ................... $285,900

Minus: Items withdrawn for personal use .... 2,650 283,250

Goods available for sale ..................... $321,095

Minus: Inventory at end of year ................. 32,955

Cost of goods sold ....................... $288,140

Items To Check

Consider the following items before figuring your gross 

profit.

Gross receipts. At the end of each business day, make 

sure your records balance with your actual cash and credit 

receipts for the day. You may find it helpful to use cash 

registers to keep track of receipts. You should also use a 

proper invoicing system and keep a separate bank account for your business.

Sales tax collected. Check to make sure your records 

show the correct sales tax collected.

If you collect state and local sales taxes imposed on 

you as the seller of goods or services from the buyer, you 

must include the amount collected in gross receipts.

If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local 

governments, you generally do not include these amounts 

in income.

Publication 334 (2023) Chapter 7 Figuring Gross Profit 29
Inventory at beginning of year. Compare this figure 

with last year's ending inventory. The two amounts should 

usually be the same.

Purchases. If you take any inventory items for your personal use (use them yourself, provide them to your family, 

or give them as personal gifts, etc.), be sure to remove 

them from the cost of goods sold. For details on how to 

adjust cost of goods sold, see Merchandise withdrawn 

from sale in chapter 6.

Inventory at end of year. Check to make sure your procedures for taking inventory are adequate. These procedures should ensure all items have been included in inventory and proper pricing techniques have been used.

Use inventory forms and adding machine tapes as the 

only evidence for your inventory. Inventory forms are available at office supply stores. These forms have columns for 

recording the description, quantity, unit price, and value of 

each inventory item. Each page has space to record who 

made the physical count, who priced the items, who made 

the extensions, and who proofread the calculations. These 

forms will help you confirm that the total inventory is accurate. They will also provide you with a permanent record to 

support its validity.

Inventories are discussed in chapter 2.

Testing Gross Profit Accuracy

If you are in a retail or wholesale business, you can check 

the accuracy of your gross profit figure. First, divide gross 

profit by net receipts. The resulting percentage measures 

the average spread between the merchandise cost of 

goods sold and the selling price.

Next, compare this percentage to your markup policy. 

Little or no difference between these two percentages 

shows that your gross profit figure is accurate. A large difference between these percentages may show that you 

did not accurately figure sales, purchases, inventory, or 

other items of cost. You should determine the reason for 

the difference.

Example. You operate a retail business. On the average, you mark up your merchandise so that you will realize 

a gross profit of 331/3% on its sales. The net receipts 

(gross receipts minus returns and allowances) shown on 

your income statement are $300,000. Your cost of goods 

sold is $200,000. This results in a gross profit of $100,000 

($300,000 − $200,000). To test the accuracy of this year's 

results, you divide gross profit ($100,000) by net receipts 

($300,000). The resulting 331/3% confirms your markup 

percentage of 331/3%.

Additions to Gross Profit

If your business has income from a source other than its 

regular business operations, enter the income on line 6 of 

Schedule C and add it to gross profit. The result is gross 

business income. Some examples include income from an 

interest-bearing checking account, income from scrap 

sales, income from certain fuel tax credits and refunds, 

and amounts recovered from bad debts.

8.

Business Expenses

Introduction

You can deduct the costs of operating your business. 

These costs are known as business expenses. These are 

costs you do not have to capitalize or include in the cost of 

goods sold but can deduct in the current year.

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is 

common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for 

your business. An expense does not have to be indispensable to be considered necessary.

For more information about the general rules for deducting business expenses, see section 162 and its regulations.

If you have an expense that is partly for business 

and partly personal, separate the personal part 

from the business part. The personal part is not 

deductible.

Useful Items

You may want to see:

Publication

Travel, Gift, and Car Expenses

How To Depreciate Property

See chapter 12 for information about getting publications 

and forms.

Bad Debts

If someone owes you money you cannot collect, you have 

a bad debt. There are two kinds of bad debts—business 

bad debts and nonbusiness bad debts.

A business bad debt is generally one that comes from 

operating your trade or business. You may be able to deduct business bad debts as an expense on your business 

tax return.

Business bad debt. A business bad debt is a loss from 

the worthlessness of a debt that was either of the following.

1. Created or acquired in your business.

2. Closely related to your business when it became 

partly or totally worthless.

CAUTION

!

 463

 946

30 Chapter 8 Business Expenses Publication 334 (2023)
A debt is closely related to your business if your primary 

motive for incurring the debt is a business reason.

Business bad debts are mainly the result of credit sales 

to customers. They can also be the result of loans to suppliers, clients, employees, or distributors. Goods and services that customers have not paid for are shown in your 

books as either accounts receivable or notes receivable. If 

you are unable to collect any part of these accounts or 

notes receivable, the uncollectible part is a business bad 

debt.

You can take a bad debt deduction for these accounts and notes receivable only if the amount 

you were owed was included in your gross income 

either for the year the deduction is claimed or for a prior 

year.

Accrual method. If you use an accrual method of accounting, you normally report income as you earn it. You 

can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income.

Cash method. If you use the cash method of accounting, you normally report income when you receive payment. You cannot take a bad debt deduction for amounts 

owed to you that you have not received and cannot collect 

if you never included those amounts in income.

More information. For more information about business 

bad debts, see section 166 and its regulations.

Nonbusiness bad debts. All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). 

For more information on nonbusiness bad debts, see section 166 and its regulations.

Car and Truck Expenses

If you use your car or truck in your business, you may be 

able to deduct the costs of operating and maintaining your 

vehicle. You may also be able to deduct other costs of local transportation and traveling away from home overnight 

on business.

Local transportation expenses. Local transportation 

expenses include the ordinary and necessary costs of all 

the following.

• Getting from one workplace to another in the course of 

your business or profession when you are traveling 

within the city or general area that is your tax home. 

Tax home is defined later.

• Visiting clients or customers.

• Going to a business meeting away from your regular 

workplace.

• Getting from your home to a temporary workplace 

when you have one or more regular places of work. 

These temporary workplaces can be either within the 

area of your tax home or outside that area.

CAUTION

!

Local business transportation does not include expenses 

you have while traveling away from home overnight. Those 

expenses are deductible as travel expenses and are discussed later under Travel and Meals. However, if you use 

your car while traveling away from home overnight, use 

the rules in this section to figure your car expense deduction. 

Generally, your tax home is your regular place of business, regardless of where you maintain your family home. 

It includes the entire city or general area in which your 

business or work is located.

Example. You operate a printing business out of rented office space. You use your van to deliver completed 

jobs to your customers. You can deduct the cost of 

round-trip transportation between your customers and 

your print shop.

You cannot deduct the costs of driving your car or 

truck between your home and your main or regular workplace. These costs are personal commuting expenses.

Office in the home. Your workplace can be your 

home if you have an office in your home that qualifies as 

your principal place of business. For more information, 

see Business Use of Your Home, later.

Example. You are a graphic designer. You operate 

your business out of your home. Your home qualifies as 

your principal place of business. You occasionally have to 

drive to your clients to deliver your completed work. You 

can deduct the cost of the round-trip transportation between your home and your clients.

Methods for Deducting Car and Truck 

Expenses

For local transportation or overnight travel by car or truck, 

you can generally use one of the following methods to figure your expenses.

• Standard mileage rate.

• Actual expenses.

Standard mileage rate. You may be able to use the 

standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business 

purposes. The business standard mileage rate for 2023 is 

65.5 cents a mile.

If you choose to use the standard mileage rate for 

a year, you cannot deduct your actual expenses 

for that year except for business-related parking 

fees and tolls.

Choosing the standard mileage rate. If you want to 

use the standard mileage rate for a car or truck you own, 

you must choose to use it in the first year the car is available for use in your business. In later years, you can choose 

to use either the standard mileage rate or actual expenses.

CAUTION

!

CAUTION

!

Publication 334 (2023) Chapter 8 Business Expenses 31
If you choose to use the standard mileage rate for a car 

you lease, you must use it for the entire lease period (including renewals).

Standard mileage rate not allowed. You cannot use 

the standard mileage rate if you:

1. Operate five or more cars at the same time;

2. Claimed a depreciation deduction using any method 

other than straight line, for example, ACRS or 

MACRS;

3. Claimed a section 179 deduction on the car;

4. Claimed the special depreciation allowance on the 

car;

5. Claimed actual car expenses for a car you leased; or

6. Are a rural mail carrier who received a qualified reimbursement.

Parking fees and tolls. In addition to using the standard mileage rate, you can deduct any business-related 

parking fees and tolls. (Parking fees you pay to park your 

car at your place of work are nondeductible commuting 

expenses.)

Actual expenses. If you do not choose to use the standard mileage rate, you may be able to deduct your actual 

car or truck expenses.

If you qualify to use both methods, figure your deduction both ways to see which gives you a larger 

deduction.

Actual car expenses include the costs of the following 

items.

Depreciation Lease payments Registration 

Garage rent Licenses Repairs

Gas Oil Tires

Insurance Parking fees Tolls

If you use your vehicle for both business and personal 

purposes, you must divide your expenses between business and personal use. You can divide your expenses 

based on the miles driven for each purpose.

Example. You are the sole proprietor of a flower shop. 

You drove your van 20,000 miles during the year. 16,000 

miles were for delivering flowers to customers and 4,000 

miles were for personal use (including commuting miles). 

You can claim only 80% (16,000 ÷ 20,000) of the cost of 

operating your van as a business expense.

More information. For more information about the rules 

for claiming car and truck expenses, see Pub. 463.

Reimbursing Your Employees for 

Expenses

You can generally deduct the amount you reimburse your 

employees for car and truck expenses. The reimbursement you deduct and the manner in which you deduct it 

depend in part on whether you reimburse the expenses 

TIP

under an accountable plan or a nonaccountable plan. For 

details, see Pub. 15. That publication explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2.

Depreciation

If property you acquire to use in your business is expected 

to last more than 1 year, you generally cannot deduct the 

entire cost as a business expense in the year you acquire 

it. You must spread the cost over more than 1 tax year and 

deduct part of it each year on Schedule C. This method of 

deducting the cost of business property is called depreciation.

The following is a brief overview. You will find more information about depreciation in Pub. 946.

What property can be depreciated? You can depreciate property if it meets all the following requirements.

• It must be property you own.

• It must be used in business or held to produce income. You can never depreciate inventory (explained 

in chapter 2) because it is not held for use in your business.

• It must have a useful life that extends substantially beyond the year it is placed in service.

• It must have a determinable useful life, which means 

that it must be something that wears out, decays, gets 

used up, becomes obsolete, or loses its value from 

natural causes. You can never depreciate the cost of 

land because land does not wear out, become obsolete, or get used up.

• It must not be excepted property. This includes property placed in service and disposed of in the same 

year.

Repairs. In general, you do not depreciate the costs of 

repairs or maintenance if they do not improve your property. Instead, you deduct these amounts on line 21 of 

Schedule C. Improvements are amounts paid for betterments to your property, restorations of your property, or 

work that adapts your property to a new or different use.

Election to capitalize repair and maintenance 

costs that do not improve your property. You can 

make an election to treat certain repairs or replacements 

in your trade or business as improvements subject to depreciation. This election is available if you treat these 

amounts as capital expenditures on your books and records regularly used in computing your income and expenses.

Depreciation method. The method for depreciating 

most business and investment property placed in service 

after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed in detail in 

Pub. 946.

32 Chapter 8 Business Expenses Publication 334 (2023)
Section 179 deduction. You can elect to deduct a limited amount of the cost of certain depreciable property in 

the year you place the property in service. This deduction 

is known as the section 179 deduction. The maximum 

amount you can elect to deduct during 2023 is generally 

$1,160,000 (higher limits apply to certain property).

This limit is generally reduced by the amount by which 

the cost of the property placed in service during the tax 

year exceeds $2,890,000. The total amount of depreciation (including the section 179 deduction) you can take for 

a passenger automobile you use in your business and first 

place in service in 2023 is $12,200 ($20,200 if you take 

the special depreciation allowance for qualified passenger 

automobiles placed in service in 2023). Special rules apply to trucks and vans. For more information, see Pub. 

946. It explains what property qualifies for the deduction, 

what limits apply to the deduction, and when and how to 

recapture the deduction.

Your section 179 election for the cost of any sport 

utility vehicle (SUV) and certain other vehicles is 

limited to $28,900. For more information, see the 

Instructions for Form 4562 or Pub. 946.

Listed property. You must follow special rules and recordkeeping requirements when depreciating listed property. Listed property includes any of the following.

• Most passenger automobiles.

• Most other property used for transportation.

• Any property of a type generally used for entertainment, recreation, or amusement.

For more information about listed property, see Pub. 

946.

Form 4562. Use Form 4562, Depreciation and Amortization, if you are claiming any of the following.

• Depreciation on property placed in service during the 

current tax year.

• A section 179 deduction.

• Depreciation on any listed property (regardless of 

when it was placed in service).

Employees' Pay

You can generally deduct on Schedule C the pay you give 

your employees for the services they perform for your 

business. The pay may be in cash, property, or services.

To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it 

in the tax year. In addition, the pay must meet both the following tests.

• The pay must be reasonable.

• The pay must be for services performed.

You cannot deduct your own salary or any personal 

withdrawals you make from your business. As a sole proprietor, you are not an employee of the business.

CAUTION

!

Kinds of pay. Some of the ways you may provide pay to 

your employees are listed below.

• Awards.

• Bonuses.

• Education expenses.

• Fringe benefits (discussed later).

• Loans or advances you do not expect the employee to 

repay if they are for personal services actually performed.

• Property you transfer to an employee as payment for 

services.

• Reimbursements for employee business expenses.

• Sick pay.

• Vacation pay.

Fringe benefits. A fringe benefit is a form of pay for 

the performance of services. The following are examples 

of fringe benefits.

• Benefits under qualified employee benefit programs.

• Meals and lodging.

• The use of a car.

• Flights on airplanes.

• Discounts on property or services.

Employee benefit programs include the following.

• Accident and health plans.

• Adoption assistance.

• Cafeteria plans.

• Dependent care assistance.

• Educational assistance.

• Group-term life insurance coverage.

• Welfare benefit funds.

You can generally deduct the cost of fringe benefits you 

provide on your Schedule C in whatever category the cost 

falls. For example, if you allow an employee to use a car or 

other property you lease, deduct the cost of the lease as a 

rent or lease expense. If you own the property, include 

your deduction for its cost or other basis as a section 179 

deduction or a depreciation deduction.

You may be able to exclude all or part of the fringe 

benefits you provide from your employees' wages. 

For more information about fringe benefits and the 

exclusion of benefits, see Pub. 15-B.

Insurance

You can generally deduct premiums you pay for the following kinds of insurance related to your business.

1. Fire, theft, flood, or similar insurance.

2. Credit insurance that covers losses from business 

bad debts.

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Publication 334 (2023) Chapter 8 Business Expenses 33
3. Group hospitalization and medical insurance for employees, including long-term care insurance.

4. Liability insurance.

5. Malpractice insurance that covers your personal liability for professional negligence resulting in injury or 

damage to patients or clients.

6. Workers' compensation insurance set by state law 

that covers any claims for bodily injuries or job-related 

diseases suffered by employees in your business, regardless of fault.

7. Contributions to a state unemployment insurance 

fund are deductible as taxes if they are considered 

taxes under state law.

8. Overhead insurance that pays for business overhead 

expenses you have during long periods of disability 

caused by your injury or sickness.

9. Car and other vehicle insurance that covers vehicles 

used in your business for liability, damages, and other 

losses. If you operate a vehicle partly for personal 

use, deduct only the part of the insurance premium 

that applies to the business use of the vehicle. If you 

use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums.

10. Life insurance covering your employees if you are not 

directly or indirectly the beneficiary under the contract.

11. Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other 

cause.

Nondeductible premiums. You cannot deduct premiums on the following kinds of insurance.

1. Self-insurance reserve funds. You cannot deduct 

amounts credited to a reserve set up for self-insurance. This applies even if you cannot get business insurance coverage for certain business risks. However, 

your actual losses may be deductible. For more information, see Pub. 547.

2. Loss of earnings. You cannot deduct premiums for a 

policy that pays for your lost earnings due to sickness 

or disability. However, see item 8 in the previous list.

3. Certain life insurance and annuities.

a. For contracts issued before June 9, 1997, you 

cannot deduct the premiums on a life insurance 

policy covering you, an employee, or any person 

with a financial interest in your business if you are 

directly or indirectly a beneficiary of the policy. You 

are included among possible beneficiaries of the 

policy if the policy owner is obligated to repay a 

loan from you using the proceeds of the policy. A 

person has a financial interest in your business if 

the person is an owner or part owner of the business or has lent money to the business.

b. For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity 

contract if you are directly or indirectly a beneficiary. The disallowance applies without regard to 

whom the policy covers.

4. Insurance to secure a loan. If you take out a policy on 

your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Nor can you deduct the premiums as 

interest on business loans or as an expense of financing loans. In the event of death, the proceeds of the 

policy are not taxed as income even if they are used 

to liquidate the debt.

Self-employed health insurance deduction. You may 

be able to deduct the amount you paid for medical and 

dental insurance and qualified long-term care insurance 

for you and your family.

How to figure the deduction. Generally, you can use 

the worksheet in the Instructions for Form 1040 to figure 

your deduction. However, if any of the following apply, you 

must use Form(s) 7206.

• You have more than one source of income subject to 

SE tax.

• You file Form 2555 (relating to foreign earned income).

• You are using amounts paid for qualified long-term 

care insurance to figure the deduction.

See Form 8962 and its separate instructions and use 

Pub. 974 if the insurance plan established, or considered 

to be established, under your business was obtained 

through the Health Insurance Marketplace and you are 

claiming the premium tax credit.

Prepayment. You cannot deduct expenses in advance, 

even if you pay them in advance. This rule applies to any 

expense paid far enough in advance to, in effect, create an 

asset with a useful life extending substantially beyond the 

end of the current tax year.

Example. In 2023, you signed a 3-year insurance contract. Even though you paid the premiums for 2023, 2024, 

and 2025 when you signed the contract, you can only deduct the premium for 2023 on your 2023 tax return. You 

can deduct in 2024 and 2025 the premiums allocable to 

those years.

Interest

You can generally deduct as a business expense some or 

all interest you pay or accrue during the tax year on debts 

related to your business. Interest relates to your business 

if you use the proceeds of the loan for a business expense. It does not matter what type of property secures 

the loan. You can deduct interest on a debt only if you 

meet all of the following requirements.

• You are legally liable for that debt.

34 Chapter 8 Business Expenses Publication 334 (2023)
• Both you and the lender intend that the debt be repaid.

• You and the lender have a true debtor-creditor relationship.

Certain taxpayers are required to limit their business interest expense deduction. See the Instructions for Form 

8990 to determine whether you are required to limit your 

business interest expense deduction, who is required to 

file Form 8990, and how certain businesses may elect out 

of the business interest expense limitation.

You cannot deduct on Schedule C the interest you paid 

on personal loans. If a loan is part business and part personal, you must divide the interest between the personal 

part and the business part.

Example. In 2023, you paid $600 interest on a car 

loan. During 2023, you used the car 60% for business and 

40% for personal purposes. You are claiming actual expenses on the car. You can only deduct $360 (60% (0.60) 

× $600) for 2023 on Schedule C. The remaining interest of 

$240 is a nondeductible personal expense.

More information. Additional items to consider are 

shown below.

• How to allocate interest between personal and business use.

• Limitation on business interest.

• When to deduct interest.

• The rules for a below-market interest rate loan. (This is 

generally a loan on which no interest is charged or on 

which interest is charged at a rate below the applicable federal rate.)

Legal and Professional Fees

Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on 

Schedule C. However, you usually cannot deduct legal 

fees you pay to acquire business assets. Add them to the 

basis of the property.

If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business.

Tax preparation fees. You can deduct on Schedule C 

the cost of preparing that part of your tax return relating to 

your business as a sole proprietor or statutory employee.

You can also deduct on Schedule C the amount you 

pay or incur in resolving asserted tax deficiencies for your 

business as a sole proprietor or statutory employee.

Pension Plans

You can set up and maintain the following small business 

retirement plans for yourself and your employees.

• SEP (Simplified Employee Pension) plans.

• SIMPLE (Savings Incentive Match Plan for Employees) plans.

• Qualified plans (including Keogh or H.R. 10 plans).

SEP, SIMPLE, and qualified plans offer you and your 

employees a tax-favored way to save for retirement. You 

can deduct contributions you make to the plan for your 

employees on line 19 of Schedule C. If you are a sole proprietor, you can deduct contributions you make to the plan 

for yourself on line 16 of Schedule 1 (Form 1040). You can 

also deduct trustees' fees if contributions to the plan do 

not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. You may also be able to claim a tax 

credit if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE 

plan, or SEP plan. For details on this credit and credits for 

auto-enrollment and military spouse participation, see 

Form 8881 and its separate instructions.

Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. 

These amounts (and earnings on them) are generally tax 

free until your employees receive distributions from the 

plan.

For more information on retirement plans for small business, see Pub. 560.

Pub. 590-A, Contributions to Individual Retirement Arrangements (IRAs), discusses other 

tax-favored ways to save for retirement.

Rent Expense

Rent is any amount you pay for the use of property you do 

not own. In general, you can deduct rent as a business expense only if the rent is for property you use in your business. If you have or will receive equity in or title to the 

property, you cannot deduct the rent.

Unreasonable rent. You cannot take a rental deduction 

for unreasonable rents. Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Rent 

paid to a related person is reasonable if it is the same 

amount you would pay to a stranger for use of the same 

property. Rent is not unreasonable just because it is figured as a percentage of gross receipts.

Related persons include members of your immediate 

family, including siblings (either whole or half), your 

spouse, ancestors, and lineal descendants. For a list of 

the other related persons, see section 267 of the Internal 

Revenue Code.

Rent on your home. If you rent your home and use part 

of it as your place of business, you may be able to deduct 

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Publication 334 (2023) Chapter 8 Business Expenses 35
the rent you pay for that part. You must meet the requirements for business use of your home. For more information, see Business Use of Your Home, later.

Rent paid in advance. Generally, rent paid in your business is deductible in the year paid or accrued. If you pay 

rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. 

You can deduct the rest of your payment only over the period to which it applies.

Taxes

You can deduct on Schedule C various federal, state, local, and foreign taxes directly attributable to your business.

Income taxes. You can deduct on Schedule C a state tax 

on gross income (as distinguished from net income) directly attributable to your business. You can deduct other 

state and local income taxes on Schedule A (Form 1040) 

if you itemize your deductions. Do not deduct federal income tax.

Employment taxes. You can deduct the social security, 

Medicare, and FUTA taxes you paid out of your own funds 

as an employer. Employment taxes are discussed briefly 

in chapter 1. You can also deduct payments you made as 

an employer to a state unemployment compensation fund 

or to a state disability benefit fund. Deduct these payments as taxes.

SE tax. You can deduct one-half of your SE tax on line 15 

of Schedule 1 (Form 1040). SE tax is discussed in chapter 1 and chapter 10.

Personal property tax. You can deduct on Schedule C 

any tax imposed by a state or local government on personal property used in your business.

You can also deduct registration fees for the right to use 

property within a state or local area.

Example. You and your spouse drove your car 7,000 

business miles out of a total of 10,000 miles. You and your 

spouse had to pay $25 for your annual state license tags 

and $20 for your city registration sticker. You and your 

spouse also paid $235 in city personal property tax on the 

car, for a total of $280. You and your spouse are claiming 

your actual car expenses. Because you and your spouse 

used the car 70% for business, you and your spouse can 

deduct 70% of the $280, or $196, as a business expense.

Real estate taxes. You can deduct on Schedule C the 

real estate taxes you pay on your business property. Deductible real estate taxes are any state, local, or foreign 

taxes on real estate levied for the general public welfare. 

The taxing authority must assess these taxes uniformly at 

a like rate on all real property under its jurisdiction, and the 

proceeds must be for general community or governmental 

purposes.

Sales tax. Treat any sales tax you pay on a service or on 

the purchase or use of property as part of the cost of the 

service or property. If the service or the cost or use of the 

property is a deductible business expense, you can deduct the tax as part of that service or cost. If the property 

is merchandise bought for resale, the sales tax is part of 

the cost of the merchandise. If the property is depreciable, 

add the sales tax to the basis for depreciation. For information on the basis of property, see Pub. 551.

Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay 

over to the state or local government. Do not include these taxes in gross receipts or sales.

,

Excise taxes. You can deduct on Schedule C all excise 

taxes that are ordinary and necessary expenses of carrying on your business. Excise taxes are discussed briefly in 

chapter 1.

Fuel taxes. Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as 

part of the cost of the fuel. Do not deduct these taxes as a 

separate item.

You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. For 

more information, see Pub. 510.

Travel and Meals

This section briefly explains the kinds of travel and meal 

expenses you can deduct on Schedule C.

Travel expenses. These are the ordinary and necessary 

expenses of traveling away from home for your business. 

You are traveling away from home if both the following 

conditions are met.

1. Your duties require you to be away from the general 

area of your tax home (defined later) substantially longer than an ordinary day's work.

2. You need to get sleep or rest to meet the demands of 

your work while away from home.

Generally, your tax home is your regular place of business, regardless of where you maintain your family home. 

It includes the entire city or general area in which your 

business is located. See Pub. 463 for more information.

The following is a brief discussion of the expenses you 

can deduct.

Transportation. You can deduct the cost of travel by 

airplane, train, bus, or car between your home and your 

business destination.

Taxi, commuter bus, and limousine. You can deduct 

fares for these and other types of transportation between 

the airport or station and your hotel, or between the hotel 

and your work location away from home.

CAUTION

!

36 Chapter 8 Business Expenses Publication 334 (2023)
Baggage and shipping. You can deduct the cost of 

sending baggage and sample or display material between 

your regular and temporary work locations.

Car or truck. You can deduct the costs of operating 

and maintaining your vehicle when traveling away from 

home on business. You can deduct actual expenses or the 

standard mileage rate (discussed earlier under Car and 

Truck Expenses), as well as business-related tolls and 

parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the 

expenses.

Meals and lodging. You can deduct the cost of meals 

and lodging if your business trip is overnight or long 

enough that you need to stop for sleep or rest to properly 

perform your duties. You can use actual expenses or the 

standard meal allowance to calculate your deduction. In 

most cases, you can deduct only 50% of your meal expenses. See Pub. 463 for additional information.

Cleaning. You can deduct the costs of dry cleaning 

and laundry while on your business trip.

Telephone. You can deduct the cost of business calls 

while on your business trip, including business communication by fax machine or other communication devices.

Tips. You can deduct the tips you pay for any expense 

in this list.

More information. For more information about travel 

expenses, see Pub. 463.

Reimbursing your employees for expenses. You can 

generally deduct the amount you reimburse your employees for travel and meal expenses. The reimbursement you 

deduct and the manner in which you deduct it depend in 

part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see 

Pub. 15. That publication explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2.

Business Use of Your Home

To deduct expenses related to the part of your home used 

for business, you must meet specific requirements. Even 

then, your deduction may be limited.

To qualify to claim expenses for business use of your 

home, you must meet the following tests.

1. Your use of the business part of your home must be:

a. Exclusive (however, see Exceptions to exclusive 

use, later),

b. Regular, and

c. For your business.

2. The business part of your home must be:

a. Your principal place of business (defined later);

b. A place where you meet or deal with patients, clients, or customers in the normal course of your 

business; or

c. A separate structure (not attached to your home) 

you use in connection with your business.

Exclusive use. To qualify under the exclusive use test, 

you must use a specific area of your home only for your 

trade or business. The area used for business can be a 

room or other separately identifiable space. The space 

does not need to be marked off by a permanent partition.

You do not meet the requirements of the exclusive use 

test if you use the area in question both for business and 

for personal purposes.

Example. You are an attorney and use a den in your 

home to write legal briefs and prepare clients' tax returns. 

Your family also uses the den for recreation. The den is 

not used exclusively in your profession, so you cannot 

claim a business deduction for its use.

Exceptions to exclusive use. You do not have to 

meet the exclusive use test to the extent you use part of 

your home in either of the following ways.

1. For the storage of inventory or product samples.

2. As a daycare facility.

For an explanation of these exceptions, see Pub. 587, 

Business Use of Your Home.

Regular use. To qualify under the regular use test, you 

must use a specific area of your home for business on a 

continuing basis. You do not meet the test if your business 

use of the area is only occasional or incidental, even if you 

do not use that area for any other purpose.

Principal place of business. You can have more than 

one business location, including your home, for a single 

trade or business. To qualify to deduct the expenses for 

the business use of your home under the principal place 

of business test, your home must be your principal place 

of business for that business. To determine your principal 

place of business, you must consider all the facts and circumstances.

Your home office will qualify as your principal place of 

business for deducting expenses for its use if you meet 

the following requirements.

• You use it exclusively and regularly for administrative 

or management activities of your business.

• You have no other fixed location where you conduct 

substantial administrative or management activities of 

your business.

Alternatively, if you use your home exclusively and regularly for your business, but your home office does not 

qualify as your principal place of business based on the 

previous rules, you determine your principal place of business based on the following factors.

• The relative importance of the activities performed at 

each location.

Publication 334 (2023) Chapter 8 Business Expenses 37
• If the relative importance factor does not determine 

your principal place of business, you can also consider the time spent at each location.

If, after considering your business locations, your home 

cannot be identified as your principal place of business, 

you cannot deduct home office expenses. However, for 

other ways to qualify to deduct home office expenses, see 

Pub. 587.

Deduction limit. If your gross income from the business 

use of your home equals or exceeds your total business 

expenses (including depreciation), you can deduct all your 

business expenses related to the use of your home. If your 

gross income from the business use is less than your total 

business expenses, your deduction for certain expenses 

for the business use of your home is limited.

Your deduction of otherwise nondeductible expenses, 

such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to 

the gross income from the business use of your home minus the sum of the following.

1. The business part of expenses you could deduct even 

if you did not use your home for business (such as 

mortgage interest, real estate taxes, and casualty and 

theft losses that are allowable as itemized deductions 

on Schedule A (Form 1040)).

2. The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the 

use of the home itself.

Do not include in (2) above your deduction for one-half of 

your SE tax.

Use Form 8829, Expenses for Business Use of Your 

Home, to figure your deduction. 

Simplified method. The IRS provides a simplified 

method to determine your expenses for business use of 

your home. The simplified method is an alternative to calculating and substantiating actual expenses. In most cases, you will figure your deduction by multiplying $5 by the 

area of your home used for a qualified business use. The 

area you use to figure your deduction is limited to 300 

square feet. For more information, see the Instructions for 

Schedule C.

More information. For more information on deducting 

expenses for the business use of your home, see Pub. 

587.

De Minimis Safe Harbor for 

Tangible Property

Generally, you must capitalize costs to acquire or produce 

real or tangible personal property used in your trade or 

business, such as buildings, equipment, or furniture. However, if you elect to use the de minimis safe harbor for tangible property, you may deduct de minimis amounts paid 

to acquire or produce certain tangible property if these 

amounts are deducted by you for financial accounting purposes or in keeping your books and records.

If you have an applicable financial statement, you may 

use this safe harbor to deduct amounts paid for tangible 

property up to $5,000 per item or invoice. If you do not 

have an applicable financial statement, you may use the 

de minimis safe harbor to deduct amounts paid for tangible property up to $2,500 per item or invoice.

Amounts qualifying under this de minimis safe harbor 

should be included as other expenses in Part V of Schedule C.

More information. For details on making this election 

and requirements for using the de minimis safe harbor for 

tangible property, see Tangible Property Regulations.

Other Expenses You Can 

Deduct

You may also be able to deduct the following expenses.

• Advertising.

• Bank fees.

• Donations to business organizations.

• Education expenses.

• Impairment-related expenses.

• Interview expense allowances.

• Licenses and regulatory fees.

• Moving machinery.

• Outplacement services.

• Penalties and fines you pay for late performance or 

nonperformance of a contract.

• Repairs and maintenance to real or tangible personal 

property.

• Repayments of income.

• Supplies and materials.

• Utilities.

Expenses You Cannot Deduct

You usually cannot deduct the following as business expenses.

• Bribes and kickbacks.

• Charitable contributions.

• Demolition expenses or losses.

• Dues to business, social, athletic, luncheon, sporting, 

airline, and hotel clubs.

• Entertainment expenses.

• Improvements to real or tangible personal property. 

Improvements are amounts paid for betterments to 

38 Chapter 8 Business Expenses Publication 334 (2023)
your property, restorations of your property, or work 

that adapts your property to a new or different use.

• Lobbying expenses.

• Penalties and fines you pay to a governmental agency 

or instrumentality because you broke the law.

• Personal, living, and family expenses.

• Political contributions.

• Settlements or payments related to sexual harassment or sexual abuse if such settlement or payment is 

subject to a nondisclosure agreement. You also cannot deduct attorney fees related to such settlement or 

payment.

9.

Figuring Net Profit or 

Loss

Introduction

After figuring your business income and expenses, you 

are ready to figure the net profit or net loss from your business. You do this by subtracting business expenses from 

business income. If your expenses are less than your income, the difference is net profit and becomes part of your 

income on line 3 of Schedule 1 (Form 1040). If your expenses are more than your income, the difference is a net 

loss. You can usually deduct it from gross income on line 3 

of Schedule 1 (Form 1040). But in some situations your 

loss is limited. This chapter briefly explains three of those 

situations. Other situations that may limit your loss are explained in the instructions for Schedule C, line G and 

line 32.

If you have more than one business, you must figure your net profit or loss for each business on a 

separate Schedule C.

Excess business loss limitation. Your loss from a trade 

or business may be limited. Use Form 461 to determine 

the amount of your excess business loss, if any. Your excess business loss will be included as income on line 8p 

of Schedule 1 (Form 1040) and treated as an NOL that 

you must carry forward and deduct in a subsequent year.

For more information about the excess business loss 

limitation, see Form 461 and its instructions.

Net Operating Losses (NOLs)

If your deductions for the year are more than your income 

for the year, you may have an NOL. You can use an NOL 

by deducting it from your income in another year or years.

CAUTION

!

Examples of typical losses that may produce an NOL 

include, but are not limited to, losses incurred from the following.

• Your trade or business.

• A casualty or theft resulting from a federally declared 

disaster.

• Moving expenses.

• Rental property.

A loss from operating a business is the most common 

reason for an NOL.

For details about NOLs, see Pub. 536. It explains how 

to figure an NOL, when to use it, how to claim an NOL deduction, and how to figure an NOL carryover.

Not-for-Profit Activities

If you do not carry on your business to make a profit, there 

is a limit on the deductions you can take. You cannot use a 

loss from the activity to offset other income. Activities you 

do as a hobby, or mainly for sport or recreation, come under this limit.

For details about not-for-profit activities, see Hobby or 

business: here’s what to know about that side hustle.

10.

Self-Employment (SE) Tax

The SE tax rules apply no matter how old you are 

and even if you are already receiving social security and Medicare benefits.

Who Must Pay SE Tax?

Generally, you must pay SE tax and file Schedule SE 

(Form 1040) if your net earnings from self-employment 

were $400 or more. Use Schedule SE to figure net earnings from self-employment.

Sole proprietor or independent contractor. If you are 

self-employed as a sole proprietor or independent contractor, you generally use Schedule C (Form 1040) to figure your earnings subject to SE tax.

SE tax rate. The 2023 SE tax rate on net earnings is 

15.3% (12.4% social security tax plus 2.9% Medicare tax).

Maximum earnings subject to SE tax. Only the first 

$160,200 of your combined wages, tips, and net earnings 

in 2023 is subject to any combination of the 12.4% social 

security part of SE tax, social security tax, or the Tier 1 

part of railroad retirement tax.

CAUTION

!

Publication 334 (2023) Chapter 9 Figuring Net Profit or Loss 39
All of your combined wages, tips, and net earnings in 

2023 are subject to any combination of the 2.9% Medicare 

part of SE tax, Medicare tax, or Medicare part of railroad 

retirement tax.

If your wages and tips are subject to either social security tax or the Tier 1 part of railroad retirement tax, or both, 

and total at least $160,200, do not pay the 12.4% social 

security part of the SE tax on any of your net earnings. 

However, you must pay the 2.9% Medicare part of the SE 

tax on all your net earnings.

Additional Medicare Tax. A 0.9% Additional Medicare 

Tax may apply to you if your net earnings from self-employment exceed a threshold amount (based on your filing 

status). For more information, see Self-Employment (SE) 

Tax in chapter 1, and Form 8959 and its instructions.

Special Rules and Exceptions

Aliens. Generally, resident aliens must pay SE tax under 

the same rules that apply to U.S. citizens. Nonresident aliens are not subject to SE tax unless an international social 

security agreement (also known as a totalization agreement) in effect determines that they are covered under the 

U.S. social security system. However, residents of the U.S. 

Virgin Islands, Puerto Rico, Guam, the Commonwealth of 

the Northern Mariana Islands, or American Samoa are 

subject to SE tax, as they are considered U.S. residents 

for SE tax purposes. For more information on aliens, see 

Pub. 519, U.S. Tax Guide for Aliens.

Child employed by parent. You are not subject to SE 

tax if you are under age 18 and you are working for your 

father or mother.

Church employee. If you work for a church or a qualified 

church-controlled organization (other than as a minister, 

member of a religious order, or Christian Science practitioner) that elected an exemption from social security and 

Medicare taxes, you are subject to SE tax if you receive 

$108.28 or more in wages from the church or organization. 

For more information, see Pub. 517, Social Security and 

Other Information for Members of the Clergy and Religious Workers.

Fishing crew member. If you are a member of the crew 

on a boat that catches fish or other aquatic life, your earnings are subject to SE tax if all the following conditions apply.

1. You do not get any pay for the work except your share 

of the catch or a share of the proceeds from the sale 

of the catch, unless the pay meets all the following 

conditions.

a. The pay is not more than $100 per trip.

b. The pay is received only if there is a minimum 

catch.

c. The pay is solely for additional duties (such as 

mate, engineer, or cook) for which additional cash 

pay is traditional in the fishing industry.

2. You get a share of the catch or a share of the proceeds from the sale of the catch.

3. Your share depends on the amount of the catch.

4. The boat's operating crew normally numbers fewer 

than 10 individuals. (An operating crew is considered 

as normally made up of fewer than 10 if the average 

size of the crew on trips made during the last 4 calendar quarters is fewer than 10.)

Notary public. Fees you receive for services you perform 

as a notary public are reported on Schedule C but are not 

subject to SE tax (see the Instructions for Schedule SE 

(Form 1040)).

State or local government employee. You are subject 

to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are 

not covered under a federal-state social security agreement.

Foreign government or international organization 

employee. You are subject to SE tax if both the following 

conditions are true.

1. You are a U.S. citizen employed in the United States, 

Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the U.S. 

Virgin Islands by:

a. A foreign government,

b. A wholly owned agency of a foreign government, 

or

c. An international organization.

2. Your employer is not required to withhold social security and Medicare taxes from your wages.

U.S. citizen or resident alien residing abroad. If you 

are a self-employed U.S. citizen or resident alien living 

outside the United States, in most cases you must pay SE 

tax. Foreign earnings from self-employment can’t be reduced by your foreign earned income exclusion when 

computing self-employment tax.

Exception. The United States has social security 

agreements with many countries to eliminate double taxation under two social security systems. Under these 

agreements, you must generally only pay social security 

and Medicare taxes to the country in which you live. The 

country to which you must pay the tax will issue a certificate that serves as proof of exemption from social security 

tax in the other country.

For more information, see the Instructions for Schedule SE (Form 1040).

More Than One Business

If you have earnings subject to SE tax from more than one 

trade, business, or profession, you must combine the net 

profit (or loss) from each to determine your total earnings 

subject to SE tax. A loss from one business reduces your 

profit from another business.

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

If any of the income from a trade or business, other than a 

partnership, is community property income under state 

law, it is included in the earnings subject to SE tax of the 

spouse carrying on the trade or business.

Gain or Loss

Do not include in earnings subject to SE tax a gain or loss 

from the disposition of property that is neither stock in 

trade nor held primarily for sale to customers. It does not 

matter whether the disposition is a sale, an exchange, or 

an involuntary conversion.

Lost Income Payments

If you are self-employed and reduce or stop your business 

activities, any payment you receive from insurance or 

other sources for the lost business income is included in 

earnings subject to SE tax. If you are not working when 

you receive the payment, it still relates to your business 

and is included in earnings subject to SE tax, even though 

your business is temporarily inactive.

Figuring Earnings Subject to SE Tax

Methods for Figuring Net Earnings

There are three ways to figure net earnings from self-employment.

1. The regular method.

2. The nonfarm optional method.

3. The farm optional method.

You must use the regular method to the extent you do 

not use one or both of the optional methods.

Why use an optional method? You may want to use the 

optional methods (discussed later) when you have a loss 

or a small net profit and any one of the following applies.

• You want to receive credit for social security benefit 

coverage.

• You incurred child or dependent care expenses for 

which you could claim a credit. (An optional method 

may increase your earned income, which could increase your credit.)

• You are entitled to the earned income credit. (An optional method may increase your earned income, 

which could increase your credit.)

• You are entitled to the additional child tax credit. (An 

optional method may increase your earned income, 

which could increase your credit.)

Effects of using an optional method. Using an optional 

method could increase your SE tax. Paying more SE tax 

could result in your getting higher benefits when you retire.

Using the optional methods may also decrease your 

AGI due to the deduction for one-half of SE tax on Form 

1040 or 1040-SR, which may affect your eligibility for credits, deductions, or other items that are subject to an AGI 

limit. Figure your AGI with and without using the optional 

methods to see if the optional methods will benefit you.

If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if 

you would have had a smaller tax or no tax using the regular method.

The optional methods may be used only to figure your 

SE tax. To figure your income tax, include your actual 

earnings in gross income, regardless of which method you 

use to determine SE tax.

Regular Method

To figure net earnings using the regular method, multiply 

your self-employment earnings by 92.35% (0.9235). For 

your net earnings figured using the regular method, see 

line 4a of your Schedule SE (Form 1040).

Net earnings figured using the regular method are also 

called actual net earnings.

Nonfarm Optional Method

Use the nonfarm optional method only for earnings that do 

not come from farming. You may use this method if you 

meet all the following tests.

1. You are self-employed on a regular basis. This means 

that your actual net earnings from self-employment 

were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. For this 

purpose, the prior-year net earnings can be from either farm or nonfarm earnings or both.

2. You have used this method less than 5 years. (There 

is a 5-year lifetime limit.) The years do not have to be 

one after another.

3. Your net nonfarm profits were:

a. Less than $7,103, and

b. Less than 72.189% of your gross nonfarm income.

Net nonfarm profit. Net nonfarm profit is generally the 

total of the amounts from:

• Line 31 of Schedule C (Form 1040); and

• Box 14, code A, of Schedule K-1 (Form 1065) (from 

nonfarm partnerships).

However, you may need to adjust the amount reported 

on Schedule K-1 if you are a general partner or if it is a 

loss.

Gross nonfarm income. Your gross nonfarm income is 

generally the total of the amounts from:

• Line 7 of Schedule C (Form 1040); and

• Box 14, code C, of Schedule K-1 (Form 1065) (from 

nonfarm partnerships).

Publication 334 (2023) Chapter 10 Self-Employment (SE) Tax 41
Figuring Nonfarm Net Earnings

If you meet the three tests explained earlier, use the following table to figure your nonfarm net earnings from 

self-employment under the nonfarm optional method.

Table 10-1. Figuring Nonfarm Net Earnings

IF your gross nonfarm 

income is...

THEN your net 

earnings are equal to...

$9,840 or less two-thirds of your gross 

nonfarm income.

more than $9,840 $7,103.

Optional net earnings less than actual net earnings. 

You cannot use this method to report an amount less than 

your actual nonfarm net earnings from self-employment. 

Your actual nonfarm net earnings are your nonfarm net 

earnings figured using the regular method, explained earlier.

Gross nonfarm income of $9,840 or less. The following examples illustrate how to figure net earnings when 

gross nonfarm income is $9,840 or less.

Example 1. Net nonfarm profit less than $7,103 

and less than 72.189% of gross nonfarm income. You 

run a craft business. Your actual net earnings from 

self-employment were $800 in 2021 and $900 in 2022. 

You meet the test for being self-employed on a regular basis. You have used the nonfarm optional method less than 

5 years. Your gross income and net profit in 2023 are as 

follows.

Gross nonfarm income ...................... $5,400

Net nonfarm profit ......................... $1,200

Your actual net earnings for 2023 are $1,108 ($1,200 × 

0.9235). Because your net profit is less than $7,103 and 

less than 72.189% of your gross income, you can use the 

nonfarm optional method to figure net earnings of $3,600 

(

2/3 × $5,400). Because these net earnings are higher than 

your actual net earnings, you can report net earnings of 

$3,600 for 2023.

Example 2. Net nonfarm profit less than $7,103 but 

not less than 72.189% of gross nonfarm income. Assume that in Example 1 your gross income is $1,200 and 

your net profit is $900. You must use the regular method to 

figure your net earnings. You cannot use the nonfarm optional method because your net profit is not less than 

72.189% of your gross income.

Example 3. Net loss from a nonfarm business. Assume that in Example 1 you have a net loss of $700. You 

can use the nonfarm optional method and report $3,600 

(

2/3 × $5,400) as your net earnings.

Example 4. Nonfarm net earnings less than $400. 

Assume that in Example 1 you have gross income of $525 

and a net profit of $175. In this situation, you would not 

pay any SE tax under either the regular method or the 

nonfarm optional method because your net earnings under both methods are less than $400.

Gross nonfarm income of more than $9,840. The following examples illustrate how to figure net earnings when 

gross nonfarm income is more than $9,840.

Example 1. Net nonfarm profit less than $7,103 

and less than 72.189% of gross nonfarm income. You 

run an appliance repair shop. Your actual net earnings 

from self-employment were $10,500 in 2021 and $9,500 in 

2022. You meet the test for being self-employed on a regular basis. You have used the nonfarm optional method 

less than 5 years. Your gross income and net profit in 2023 

are as follows.

Gross nonfarm income ...................... $12,000

Net nonfarm profit ......................... $1,200

Your actual net earnings for 2023 are $1,108 ($1,200 × 

0.9235). Because your net profit is less than $7,103 and 

less than 72.189% of your gross income, you can use the 

nonfarm optional method to figure net earnings of $6,560. 

Because these net earnings are higher than your actual 

net earnings, you can report net earnings of $6,560 for 

2023.

Example 2. Net nonfarm profit not less than 

$7,103. Assume that in Example 1 your net profit is 

$8,900. You must use the regular method. You cannot use 

the nonfarm optional method because your net nonfarm 

profit is not less than $7,103.

Example 3. Net loss from a nonfarm business. Assume that in Example 1 you have a net loss of $700. You 

can use the nonfarm optional method and report $6,560 

as your net earnings from self-employment.

Farm Optional Method

Use the farm optional method only for earnings from a 

farming business. See Pub. 225 for information about this 

method.

Using Both Optional Methods

If you have both farm and nonfarm earnings, you may be 

able to use both optional methods to determine your net 

earnings from self-employment.

To figure your net earnings using both optional methods, you must do the following.

• Figure your farm and nonfarm net earnings separately 

under each method. Do not combine farm earnings 

with nonfarm earnings to figure your net earnings under either method.

• Add the net earnings figured under each method to arrive at your total net earnings from self-employment.

You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net 

42 Chapter 10 Self-Employment (SE) Tax Publication 334 (2023)
earnings. If you use both optional methods, you can report 

no more than $6,560 as your combined net earnings from 

self-employment.

Example. You are a self-employed farmer. You also 

operate a retail grocery store. Your gross income, actual 

net earnings from self-employment, and optional farm and 

optional nonfarm net earnings from self-employment are 

shown in Table 10-2.

Example—Farm and Nonfarm 

Earnings

Table 10-2.

Income and 

Earnings Farm Nonfarm

Gross income $4,500 $6,000

Actual net earnings  $900  $500

Optional net 

earnings (2/3 of 

gross income)  $3,000 $4,000

Table 10-3 shows four methods or combinations of 

methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and 

actual net earnings shown in Table 10-2.

• Method 1. Using the regular method for both farm and 

nonfarm income.

• Method 2. Using the optional method for farm income 

and the regular method for nonfarm income.

• Method 3. Using the regular method for farm income 

and the optional method for nonfarm income.

• Method 4. Using the optional method for both farm 

and nonfarm income.

Note. Actual net earnings are the same as net earnings 

figured using the regular method.

Table 10-3. Example—Net Earnings

Net 

Earnings 1 2 3 4

Actual

 farm $ 900 $ 900

Optional

 farm $ 3,000 $ 3,000

Actual

 nonfarm $ 500 $ 500

Optional

 nonfarm $4,000 $4,000

Amount 

you can 

report: $1,400 $3,500 $4,900 $6,560*

* Limited to $6,560 because you used both optional methods.

Fiscal Year Filer

If you use a tax year other than the calendar year, you 

must use the tax rate and maximum earnings limit in effect 

at the beginning of your tax year. Even if the tax rate or 

maximum earnings limit changes during your tax year, 

continue to use the same rate and limit throughout your 

tax year.

Reporting SE Tax

Use Schedule SE (Form 1040) to figure and report your 

SE tax. If you file Form 1040 or 1040-SR, enter the SE tax 

on line 4 of Schedule 2 and attach Schedule SE to your 

form. If you file Form 1040-SS, enter the SE tax on line 3, 

and attach Schedule SE to your form.

If you need to pay SE tax, you must file Form 

1040, 1040-SR, or 1040-SS, as applicable (with 

Schedule SE attached) even if you do not otherwise have to file a federal income tax return.

Joint return. Even if you file a joint return, you cannot file 

a joint Schedule SE. This is true whether one spouse or 

both spouses have earnings subject to SE tax. If both of 

you have earnings subject to SE tax, each of you must 

complete a separate Schedule SE. Attach both schedules 

to the joint return.

More than one business. If you have more than one 

trade or business, you must combine the net profit (or 

loss) from each business to figure your SE tax. A loss from 

one business will reduce your profit from another business. File one Schedule SE showing the earnings from 

self-employment, but file a separate Schedule C or F for 

each business.

Example. You are the sole proprietor of two separate 

businesses. You operate a restaurant that made a net 

profit of $25,000. You also have a cabinetmaking business 

that had a net loss of $500. You must file a Schedule C for 

the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing 

your net loss of $500. You file one Schedule SE showing 

total earnings subject to SE tax of $24,500.

11.

Your Rights as a 

Taxpayer

This chapter explains the examination, appeal, collection, 

and refund processes.

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

Collections, and Refunds

Examinations (audits). We accept most taxpayers' returns as filed. If we inquire about your return or select it for 

examination, it does not suggest that you are dishonest. 

The inquiry or examination may or may not result in more 

tax. We may close your case without change or you may 

receive a refund.

The process of selecting a return for examination usually begins in one of two ways. One way is to use computer programs to identify returns that may have incorrect 

amounts. These programs may be based on information 

returns, such as Forms 1099 and W-2; on studies of past 

examinations; or on certain issues identified by other special projects. Another way is to use information from compliance projects that indicates that a return may have incorrect amounts. These sources may include 

newspapers, public records, and individuals. If we determine that the information is accurate and reliable, we may 

use it to select a return for examination.

Pub. 556, Examination of Returns, Appeal Rights, and 

Claims for Refund, explains the rules and procedures that 

we follow in examinations. The following sections give an 

overview of how we conduct examinations.

By mail. We handle many examinations and inquiries 

by mail. We will send you a letter with either a request for 

more information or a reason why we believe a change to 

your return may be needed. You can respond by mail or 

you can request a personal interview with an examiner. If 

you mail us the requested information or provide an explanation, we may or may not agree with you, and we will 

explain the reasons for any changes. Do not hesitate to 

write to us about anything you do not understand.

By interview. If we notify you that we will conduct your 

examination through a personal interview, or you request 

such an interview, you have the right to ask that the examination take place at a reasonable time and place that is 

convenient for both you and the IRS. If our examiner proposes any changes to your return, they will explain the 

reasons for the changes. If you do not agree with these 

changes, you can meet with the examiner's supervisor.

Repeat examinations. If we examined your return for 

the same items in either of the 2 previous years and proposed no change to your tax liability, contact us as soon 

as possible so we can see if we should discontinue the examination.

Appeals. If you do not agree with the examiner's proposed changes, you can appeal them to the IRS Independent Office of Appeals. Most differences can be settled without expensive and time-consuming court trials. 

Your appeal rights are explained in detail in both Pub. 5, 

Your Appeal Rights and How to Prepare a Protest if You 

Disagree, and Pub. 556.

If you do not wish to use the Appeals Office or disagree 

with its findings, you may be able to take your case to the 

U.S. Tax Court, U.S. Court of Federal Claims, or the U.S. 

District Court where you live. If you take your case to 

court, the IRS will have the burden of proving certain facts 

if you kept adequate records to show your tax liability, cooperated with the IRS, and meet certain other conditions. 

If the court agrees with you on most issues in your case 

and finds that our position was largely unjustified, you may 

be able to recover some of your administrative and litigation costs. You will not be eligible to recover these costs 

unless you tried to resolve your case administratively, including going through the appeals system, and you gave 

us the information necessary to resolve the case.

Collections. Pub. 594, The IRS Collection Process, explains your rights and responsibilities regarding payment 

of federal taxes. It describes the following.

• What to do when you owe taxes. It describes what to 

do if you get a tax bill and what to do if you think your 

bill is wrong. It also covers making installment payments, delaying collection action, and submitting an 

offer in compromise.

• IRS collection actions. It covers liens, releasing a lien, 

levies, releasing a levy, seizures and sales, and release of property.

• IRS certification to the State Department of a seriously 

delinquent tax debt, which will generally result in denial of a passport application and may lead to revocation of a passport.

Your collection appeal rights are explained in detail in 

Pub. 1660, Collection Appeal Rights.

Innocent spouse relief. Generally, both you and your 

spouse are responsible, jointly and individually, for paying 

the full amount of any tax, interest, or penalties due on 

your joint return. To seek relief from any liability related to 

your spouse (or former spouse), you must file a claim on 

Form 8857, Request for Innocent Spouse Relief. In some 

cases, Form 8857 may need to be filed within 2 years of 

the date on which the IRS first attempted to collect the tax 

from you. Do not file Form 8857 with your Form 1040 or 

1040-SR. For more information, see Pub. 971, Innocent 

Spouse Relief, and Form 8857, or you can call the Innocent Spouse office toll free at 855-851-2009.

Potential third-party contacts. Generally, the IRS will 

deal directly with you or your duly authorized representative. However, we sometimes talk with other persons if we 

need information that you have been unable to provide, or 

to verify information we have received. If we do contact 

other persons, such as a neighbor, bank, employer, or employees, we will generally need to tell them limited information, such as your name. The law prohibits us from disclosing any more information than is necessary to obtain 

or verify the information we are seeking. Our need to contact other persons may continue as long as there is activity in your case. If we do contact other persons, you have a 

right to request a list of those contacted. Your request can 

be made by telephone, in writing, or during a personal interview.

44 Chapter 11 Your Rights as a Taxpayer Publication 334 (2023)
Refunds. You can file a claim for refund if you think you 

paid too much tax. You must generally file the claim within 

3 years from the date you filed your original return or 2 

years from the date you paid the tax, whichever is later. 

Pub. 556 has more information on refunds.

If you were due a refund but you did not file a return, 

you must file a refund claim within 2 years from the time 

the tax was paid to get that refund. The law generally provides for interest on your refund if it is not paid within 45 

days of the date you filed your return or claim for refund.

12.

How To Get More 

Information

This section describes the help the IRS and other federal 

agencies offer to taxpayers who operate their own businesses.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, 

forms, or instructions, go to IRS.gov to find resources that 

can help you right away.

Preparing and filing your tax return. After receiving all 

your wage and earnings statements (Forms W-2, W-2G, 

1099-R, 1099-MISC, 1099-NEC, etc.); unemployment 

compensation statements (by mail or in a digital format) or 

other government payment statements (Form 1099-G); 

and interest, dividend, and retirement statements from 

banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you 

qualify for free tax preparation, or hire a tax professional to 

prepare your return.

Free options for tax preparation. Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

• Free File. This program lets you prepare and file your 

federal individual income tax return for free using software or Free File Fillable Forms. However, state tax 

preparation may not be available through Free File. Go 

to IRS.gov/FreeFile to see if you qualify for free online 

federal tax preparation, e-filing, and direct deposit or 

payment options.

• VITA. The Volunteer Income Tax Assistance (VITA) 

program offers free tax help to people with 

low-to-moderate incomes, persons with disabilities, 

and limited-English-speaking taxpayers who need 

help preparing their own tax returns. Go to IRS.gov/

VITA, download the free IRS2Go app, or call 

800-906-9887 for information on free tax return preparation.

• TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly 

those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. 

Go to IRS.gov/TCE or download the free IRS2Go app 

for information on free tax return preparation.

• MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military 

OneSource. For more information, go to 

MilitaryOneSource (MilitaryOneSource.mil/MilTax).

Also, the IRS offers Free Fillable Forms, which can 

be completed online and then e-filed regardless of income.

Using online tools to help prepare your return. Go to 

IRS.gov/Tools for the following.

• The Earned Income Tax Credit Assistant (IRS.gov/

EITCAssistant) determines if you’re eligible for the 

earned income credit (EIC).

• The Online EIN Application (IRS.gov/EIN) helps you 

get an employer identification number (EIN) at no 

cost.

• The Tax Withholding Estimator (IRS.gov/W4App) 

makes it easier for you to estimate the federal income 

tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

• The First-Time Homebuyer Credit Account Look-up 

(IRS.gov/HomeBuyer) tool provides information on 

your repayments and account balance.

• The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you 

itemize deductions on Schedule A (Form 1040).

Getting answers to your tax questions. On 

IRS.gov, you can get up-to-date information on 

current events and changes in tax law.

• IRS.gov/Help: A variety of tools to help you get answers to some of the most common tax questions.

• IRS.gov/ITA: The Interactive Tax Assistant, a tool that 

will ask you questions and, based on your input, provide answers on a number of tax topics.

• IRS.gov/Forms: Find forms, instructions, and publications. You will find details on the most recent tax 

changes and interactive links to help you find answers 

to your questions.

• You may also be able to access tax information in your 

e-filing software.

Need someone to prepare your tax return? There are 

various types of tax return preparers, including enrolled 

agents, certified public accountants (CPAs), accountants, 

Publication 334 (2023) Chapter 12 How To Get More Information 45
and many others who don’t have professional credentials. 

If you choose to have someone prepare your tax return, 

choose that preparer wisely. A paid tax preparer is:

• Primarily responsible for the overall substantive accuracy of your return,

• Required to sign the return, and

• Required to include their preparer tax identification 

number (PTIN).

Although the tax preparer always signs the return, 

you're ultimately responsible for providing all the 

information required for the preparer to accurately 

prepare your return and for the accuracy of every item reported on the return. Anyone paid to prepare tax returns 

for others should have a thorough understanding of tax 

matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Employers can register to use Business Services Online. The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure 

W-2 filing options to CPAs, accountants, enrolled agents, 

and individuals who process Form W-2, Wage and Tax 

Statement, and Form W-2c, Corrected Wage and Tax 

Statement.

IRS social media. Go to IRS.gov/SocialMedia to see the 

various social media tools the IRS uses to share the latest 

information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our 

highest priority. We use these tools to share public information with you. Don’t post your social security number 

(SSN) or other confidential information on social media 

sites. Always protect your identity when using any social 

networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, 

Spanish, and ASL.

• Youtube.com/irsvideos.

• Youtube.com/irsvideosmultilingua.

• Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal 

(IRSVideos.gov) contains video and audio presentations 

for individuals, small businesses, and tax professionals.

Online tax information in other languages. You can 

find information on IRS.gov/MyLanguage if English isn’t 

your native language.

Free Over-the-Phone Interpreter (OPI) Service. The 

IRS is committed to serving taxpayers with limited-English 

proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and 

every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.

Accessibility Helpline available for taxpayers with 

disabilities. Taxpayers who need information about acCAUTION

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cessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and 

future accessibility products and services available in alternative media formats (for example, braille, large print, 

audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or 

account-related issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Preference, or 

Form 9000(SP) allows you to elect to receive certain types 

of written correspondence in the following formats.

• Standard Print.

• Large Print.

• Braille.

• Audio (MP3).

• Plain Text File (TXT).

• Braille Ready File (BRF).

Disasters. Go to IRS.gov/DisasterRelief to review the 

available disaster tax relief.

Getting tax forms and publications. Go to IRS.gov/

Forms to view, download, or print all the forms, instructions, and publications you may need. Or, you can go to 

IRS.gov/OrderForms to place an order.

Getting tax publications and instructions in eBook 

format. Download and view most tax publications and instructions (including the Instructions for Form 1040) on 

mobile devices as eBooks at IRS.gov/eBooks.

IRS eBooks have been tested using Apple's iBooks for 

iPad. Our eBooks haven’t been tested on other dedicated 

eBook readers, and eBook functionality may not operate 

as intended.

Access your online account (individual taxpayers 

only). Go to IRS.gov/Account to securely access information about your federal tax account.

• View the amount you owe and a breakdown by tax 

year.

• See payment plan details or apply for a new payment 

plan.

• Make a payment or view 5 years of payment history 

and any pending or scheduled payments.

• Access your tax records, including key data from your 

most recent tax return, and transcripts.

• View digital copies of select notices from the IRS.

• Approve or reject authorization requests from tax professionals.

• View your address on file or manage your communication preferences.

Get a transcript of your return. With an online account, 

you can access a variety of information to help you during 

the filing season. You can get a transcript, review your 

most recently filed tax return, and get your adjusted gross 

46 Chapter 12 How To Get More Information Publication 334 (2023)
income. Create or access your online account at IRS.gov/

Account.

Tax Pro Account. This tool lets your tax professional 

submit an authorization request to access your individual 

taxpayer IRS online account. For more information, go to 

IRS.gov/TaxProAccount.

Using direct deposit. The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, 

which securely and electronically transfers your refund directly into your financial account. Direct deposit also 

avoids the possibility that your check could be lost, stolen, 

destroyed, or returned undeliverable to the IRS. Eight in 

10 taxpayers use direct deposit to receive their refunds. If 

you don’t have a bank account, go to IRS.gov/

DirectDeposit for more information on where to find a bank 

or credit union that can open an account online.

Reporting and resolving your tax-related identity 

theft issues. 

• Tax-related identity theft happens when someone 

steals your personal information to commit tax fraud. 

Your taxes can be affected if your SSN is used to file a 

fraudulent return or to claim a refund or credit.

• The IRS doesn’t initiate contact with taxpayers by 

email, text messages (including shortened links), telephone calls, or social media channels to request or 

verify personal or financial information. This includes 

requests for personal identification numbers (PINs), 

passwords, or similar information for credit cards, 

banks, or other financial accounts.

• Go to IRS.gov/IdentityTheft, the IRS Identity Theft 

Central webpage, for information on identity theft and 

data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or 

stolen or you suspect you’re a victim of tax-related 

identity theft, you can learn what steps you should 

take.

• Get an Identity Protection PIN (IP PIN). IP PINs are 

six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your 

SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund. 

• Go to IRS.gov/Refunds.

• Download the official IRS2Go app to your mobile device to check your refund status.

• Call the automated refund hotline at 800-829-1954.

The IRS can’t issue refunds before mid-February 

for returns that claimed the EIC or the additional 

child tax credit (ACTC). This applies to the entire 

refund, not just the portion associated with these credits.

Making a tax payment. Payments of U.S. tax must be 

remitted to the IRS in U.S. dollars. Digital assets are not 

CAUTION

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accepted. Go to IRS.gov/Payments for information on how 

to make a payment using any of the following options.

• IRS Direct Pay: Pay your individual tax bill or estimated 

tax payment directly from your checking or savings account at no cost to you.

• Debit Card, Credit Card, or Digital Wallet: Choose an 

approved payment processor to pay online or by 

phone.

• Electronic Funds Withdrawal: Schedule a payment 

when filing your federal taxes using tax return preparation software or through a tax professional.

• Electronic Federal Tax Payment System: Best option 

for businesses. Enrollment is required.

• Check or Money Order: Mail your payment to the address listed on the notice or instructions.

• Cash: You may be able to pay your taxes with cash at 

a participating retail store.

• Same-Day Wire: You may be able to do same-day 

wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to 

ensure that the electronic payments you make online, by 

phone, or from a mobile device using the IRS2Go app are 

safe and secure. Paying electronically is quick, easy, and 

faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/Payments for 

more information about your options.

• Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once 

you complete the online process, you will receive immediate notification of whether your agreement has 

been approved.

• Use the Offer in Compromise Pre-Qualifier to see if 

you can settle your tax debt for less than the full 

amount you owe. For more information on the Offer in 

Compromise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/Form1040X 

for information and updates.

Checking the status of your amended return. Go to 

IRS.gov/WMAR to track the status of Form 1040-X amended returns.

It can take up to 3 weeks from the date you filed 

your amended return for it to show up in our system, and processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve received. Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

Responding to an IRS notice or letter. You can now 

upload responses to all notices and letters using the 

Document Upload Tool. For notices that require additional 

action, taxpayers will be redirected appropriately on 

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Publication 334 (2023) Chapter 12 How To Get More Information 47
IRS.gov to take further action. To learn more about the 

tool, go to IRS.gov/Upload.

Note. You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may 

not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing 

translations in 2023. You will continue to receive communications, including notices and letters, in English until they 

are translated to your preferred language.

Contacting your local TAC. Keep in mind, many questions can be answered on IRS.gov without visiting a TAC. 

Go to IRS.gov/LetUsHelp for the topics people ask about 

most. If you still need help, TACs provide tax help when a 

tax issue can’t be handled online or by phone. All TACs 

now provide service by appointment, so you’ll know in advance that you can get the service you need without long 

wait times. Before you visit, go to IRS.gov/TACLocator to 

find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, 

under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) 

Is Here To Help You

What Is TAS?

TAS is an independent organization within the IRS that 

helps taxpayers and protects taxpayer rights. TAS strives 

to ensure that every taxpayer is treated fairly and that you 

know and understand your rights under the Taxpayer Bill 

of Rights.

How Can You Learn About Your Taxpayer 

Rights?

The Taxpayer Bill of Rights describes 10 basic rights that 

all taxpayers have when dealing with the IRS. Go to 

TaxpayerAdvocate.IRS.gov to help you understand what 

these rights mean to you and how they apply. These are 

your rights. Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve 

with the IRS. And their service is free. If you qualify for 

their assistance, you will be assigned to one advocate 

who will work with you throughout the process and will do 

everything possible to resolve your issue. TAS can help 

you if:

• Your problem is causing financial difficulty for you, 

your family, or your business;

• You face (or your business is facing) an immediate 

threat of adverse action; or

• You’ve tried repeatedly to contact the IRS but no one 

has responded, or the IRS hasn’t responded by the 

date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia, 

and Puerto Rico. To find your advocate’s number:

• Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

• Download Pub. 1546, The Taxpayer Advocate Service 

Is Your Voice at the IRS, available at IRS.gov/pub/irspdf/p1546.pdf;

• Call the IRS toll free at 800-TAX-FORM 

(800-829-3676) to order a copy of Pub. 1546;

• Check your local directory; or

• Call TAS toll free at 877-777-4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect 

many taxpayers. If you know of one of these broad issues, 

report it to TAS at IRS.gov/SAMS. Be sure to not include 

any personal taxpayer information.

Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level 

and who need to resolve tax problems with the IRS. LITCs 

can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, 

LITCs can provide information about taxpayer rights and 

responsibilities in different languages for individuals who 

speak English as a second language. Services are offered 

for free or a small fee. For more information or to find an 

LITC near you, go to the LITC page at 

TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, 

Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/

p4134.pdf.

Small Business Administration

The Small Business Administration (SBA) offers training 

and educational programs, counseling services, financial 

programs, and contract assistance for small business 

owners. The SBA also has publications and videos on a 

variety of business topics. The following briefly describes 

assistance provided by the SBA.

Small Business Development Centers (SBDCs). 

SBDCs provide counseling, training, and technical services to current and prospective small business owners 

who cannot afford the services of a private consultant. 

Help is available when beginning, improving, or expanding 

a small business.

Service Corps of Retired Executives (SCORE). 

SCORE provides small business counseling and training 

to current and prospective small business owners. 

48 Chapter 12 How To Get More Information Publication 334 (2023)
SCORE is made up of current and former business people 

who offer their expertise and knowledge to help people 

start, manage, and expand a small business. SCORE also 

offers a variety of small business workshops.

Internet. You can visit the SBA website at SBA.gov. 

While visiting the SBA website, you can find a variety of information of interest to small business owners.

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

(800-827-5722) for general information about programs 

available to assist small business owners.

Walk-in. You can walk in to an SBDC to request assistance with your small business. To find the location nearest you, visit the SBA website or call the SBA Answer 

Desk.

Other Federal Agencies

Other federal agencies also publish publications and pamphlets to assist small businesses. Most of these are available from the Superintendent of Documents at the U.S. 

Government Publishing Office. You can get information 

and order these publications and pamphlets in several 

ways.

Internet. You can visit the GPO website at

Catalog.GPO.gov.

Mail. Write to the GPO at the following address.

Superintendent of Documents

U.S. Government Publishing Office

P.O. Box 979050

St. Louis, MO 63197-9000

Phone. Call the GPO toll free at 866-512-1800 or at 

202-512-1800 from the Washington, DC, area.

Publication 334 (2023) Chapter 12 How To Get More Information 49
To help us develop a more useful index, please let us know if you have ideas for index entries.

Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A

Accounting method:

Accrual 14, 31

Automatic procedures 16

Cash 13, 31

Change in 16

Combination 15

Special 16

Accounting periods 12

Accrual method:

Income - general rule 14

Income - special rules 14

Of accounting 14

Adjusted basis 17

Administrator 25

Alternative fuel vehicle refueling 

property credit 18

Appeal rights 44

Appreciation 24

Assistance (See Tax help)

Audits 44

Automobile (See Car expenses)

B

Bad debts 30

Barter income 20

Basis of property 17

Biodiesel and renewable diesel 

fuels credit 18

Biofuel producer credit 19

Bribes 38

Business expenses 30

Business income 20

Business use of your home 37

C

Canceled debt 22

Cancellation of qualified real 

property business debt 23

Capital gain or loss 18

Car expenses 31

Carbon oxide sequestration 

credit 19

Cash discount 26, 28

Cash method:

Expenses 14

Income 13

Charitable contributions 38

Child employed by parent 40

Claim for refund 45

Clean vehicle credit 19

Collection of tax 44

Combination method of 

accounting 15

Condemned property 18

Consignments 24

Construction allowances 24

Cost of goods sold 27

Credit:

Alternative fuel vehicle refueling 

property 18

Biodiesel and renewable diesel 

fuels credit 18

Biofuel producer credit 19

Carbon oxide sequestration 19

Clean vehicle credit 19

Credit for employer differential 

wage payments 19

Credit for increasing research 

activities 19

Disabled access 19

Distilled spirits 19

Employer credit for family and 

medical leave 19

Employer-provided childcare 19

Empowerment zone employment 

credit 19

Energy efficient home credit 19

How to claim 20

Indian coal 19

Investment 19

Low sulfur diesel fuel production 19

Low-income housing 19

New markets 19

Orphan drug 19

Qualified railroad track 

maintenance credit 19

Refined coal 19

Renewable electricity 19

Small employer health insurance 

premiums 19

Small employer pension plan 

startup costs 19

Taxes paid on certain employee 

tips 19

Work opportunity credit 19

Credit for employer differential 

wage payments 19

Credit for increasing research 

activities 19

D

Damages 23

De Minimis Safe Harbor for 

Tangible Property 38

Debt:

Bad 30

Canceled 22

Qualified real property business 23

Refund offset against 7

Definitions 3

Accounting methods 13

Accounting periods 12

Barter 20

Basis 17

Business bad debt 30

Calendar tax year 12

Cash discount 26, 28

Disposition of property 17

Drawing account 28

Fair market value 18

Fiscal tax year 13

Fringe benefit 33

Local transportation expenses 31

Necessary expense 30

Net operating loss 39

Nonbusiness bad debt 31

Ordinary expense 30

Principal place of business 37

Qualified long-term real 

property 24

Qualified real property business 

debt 23

Rent 35

Restricted property 23

Retail space 24

Self-employment (SE) tax 9

Tax home 31

Trade discount 27, 28

Travel expenses 36

Depreciation:

Deduction 32

Listed property 33

Depreciation, recapture 24

Direct seller 25, 26

Disabled access credit 19

Disposition of property:

Business property 16

Installment sale 17, 18

Like-kind exchange 17, 18, 24

Nontaxable exchange 17

Sale of a business 17

Distilled spirits credit 19

Dividend income 22

Donation of inventory 27

Drawing account 28

Due date of return 8

E

e-file 7

Economic injury 23

EFTPS 8

Electronic filing 7

Employee 6

Employee benefit programs 33

Employees' pay 33

Employer identification number 

(EIN) 6

Employment taxes:

About 10

Deduction for 36

50 Publication 334 (2023)
Empowerment zone employment 

credit 19

Energy efficient home credit 19

Entertainment expenses 

(See Travel expenses)

Escrow, payments placed in 27

Estimated tax 8

Examinations (audits) 44

Excise taxes:

About 10

Deduction for 36

Executor 25

Expenses 30

Bad debts 30

Car 31

Depreciation 32

Employees' pay 33

Entertainment 36

Home, business use 37

Insurance 33

Interest 34

Legal and professional fees 35

Meals 36

Nondeductible 38

Other 38

Pension plans 35

Rent 35

Taxes 36

Travel 36

Truck 31

F

Fair market value 18

Filing business taxes 5

Fishing crew member 25, 40

Form:

1040 (tax return) 7, 10

1040-ES (estimated tax) 8, 10

1040-SR (tax return) 7, 10

1040-V (voucher) 7

1099-B (barter) 21

1099-MISC (miscellaneous) 11

1099-NEC (nonemployee 

compensation) 11

1128 (change tax year) 13

2210 (underpayment of estimated 

tax) 9

2290 (excise tax for heavy 

trucks) 11

3115 (change accounting 

method) 16

3468 (investment credit) 19

3800 (general business credit) 18

4562 (depreciation) 33

4684 (casualty and theft) 18

4797 (sale of business 

property) 18, 24

4868 (extension) 8

6251 (alternative minimum tax) 18

6252 (installment sale) 18

720 (excise tax return) 11

8300 (cash payments over 

$10,000) 11

8586 (low-income housing) 19

8594 (asset acquisition) 17

8820 (orphan drug credit) 19

8824 (like-kind exchange) 17, 18

8826 (disabled access credit) 19

8829 (business in home) 38

8835 (renewable electricity, coal 

credit) 19

8846 (credit for social security on 

tip income) 19

8857 (innocent spouse) 44

8874 (new markets credit) 19

8879 (self-selected PIN) 7

8881 (pension plan startup costs 

credit) 19

8882 (employer-provided childcare 

credit) 19

8886 (transaction statement) 5

8896 (low sulfur diesel fuel 

production credit) 19

8906 (distilled spirits credit) 19

8911 (alternative fuel vehicle 

refueling property credit) 18

8933 (carbon oxide sequestration 

credit) 19

8936 (clean vehicle credit) 19

8941 (small employer health 

insurance premiums) 19

8994 (employer credit for paid 

family and medical leave) 19

940 (unemployment tax) 10

941 (quarterly employment tax) 10

944 (annual employment tax) 10

982 (discharge of 

indebtedness) 22

Final 12

Information returns 10

Schedule C (sole proprietor) 10

Schedule SE (self-employment 

tax) 9, 10

SS-4 (application for EIN) 6

SS-5 (application for SSN) 6

W-2 (report wages) 10, 11

W-3 (transmittal of W-2) 10

W-4 (employee withholding) 6

W-7 (application for ITIN) 6

W-9 (request for TIN) 6

When to file 10

Which to file 10

Fringe benefits 33

Fuel taxes 36

G

Gains and losses 23

General business credits 18

Gross profit:

Accuracy 30

Additions to 30

Guidelines for selected 

occupations 25

(See also Occupations, selected)

H

Home, business use of 37

Hotels, boarding houses, and 

apartments 21

Husband and wife business 3

I

Identification numbers 6

Income 24

(See also Not income)

Accounting for your 26

Barter 20

Business 20

Damages 23

Gains and losses 23

Kickbacks 24

Kinds of income 20

Lost income payments 23

Other 23

Paid to a third party 26

Personal property rent 21

Promissory notes 23

Recapture of depreciation 24

Recovery of items previously 

deducted 24

Rental 21

Restricted property 23

Income tax:

About 6

Deduction for 36

How to pay 8

Underpayment penalty 9

Income tax return, who must file 6

Independent contractor 3, 10, 39

Individual taxpayer identification 

number (ITIN) 6

Information returns 11

Information, How to get more 45

Innocent spouse relief 44

Installment sales 17

Insurance:

Expense 33

Nondeductible premiums 34

Prepayment 34

Proceeds 27

Insurance agent:

Former 25

Retired 25

Interest:

Expenses 34

Income 22

Inventories 15

Investment credit 19

K

Kickbacks 24, 38

L

Lease bonus 21

Lease cancellation payments 21

Publication 334 (2023) 51
Legal fees 35

Like-kind exchanges 17, 24

Limited liability company 3

Listed property 24

Lobbying expense 39

Local transportation expenses 31

Lodging 37

Long-term capital gain or loss 18

Lost income payments 23

Low sulfur diesel fuel production 

credit 19

Low-income housing credit 19

M

Meals 37

Methods for figuring net 

earnings 41

Mileage rate for vehicles 31

N

Net operating losses 39

Net profit or loss 39

New markets credit 19

Newspaper carrier or 

distributor 25

Newspaper or magazine vendor 26

Nonbusiness bad debt 31

Nondeductible insurance 

premiums 34

Nonemployee compensation 20

Nontaxable exchanges 17

Not income:

Appreciation 24

Consignments 24

Constructions allowances 24

Exchange of like-kind property 24

Leasehold improvements 24

Loans 25

Sales tax 25

Not-for-profit activities 39

Notary public 26, 40

O

Occupations, selected:

Administrator 25

Direct seller 25, 26

Executor 25

Fishing crew member 25

Insurance agent, former 25

Insurance agent, retired 25

Newspaper carrier or distributor 25

Newspaper or magazine vendor 26

Notary public 26

Public official 26

Real estate agent 26

Securities dealer 26

Securities trader 26

Office in the home 31

(See also Business use of your 

home)

Optional methods, using both 42

Ordinary gain or loss 18

Orphan drug credit 19

P

Parking fees 32

Partners, husband and wife 3

Pay, kinds of 33

Paying:

Business taxes 5

Income tax 8

Payments to third parties 21

Penalties and fines 39

Penalty:

Failure to file Form 8300 12

Failure to file information returns 11

Failure to furnish correct payee 

statements 11

Underpayment of tax 9

Waiver of 11

Pension plans 35

Personal property tax 36

Prepaid expense:

Extends useful life 34

Rent 36

Professional fees 35

Promissory notes 23

Public official 26

Publications (See Tax help)

Punitive damages 24

Q

Qualified railroad track 

maintenance credit 19

Qualified real property business 

debt 23

R

Real estate:

Agent 26

Dealer 21

Rent 21

Taxes 36

Recovery of items previously 

deducted 24

Refund:

Inquiries 7

Offsets against debts 7

Related persons:

Unreasonable rent 35

Renewable electricity, refined coal, 

and Indian coal production 

credit 19

Rent expense 35

Rental income 21

Repayment of income 14

Reportable transaction disclosure 

statement 5

Reporting self-employment tax 43

Restricted property 23

Retirement plans (See Pension 

plans)

S

Salaries 33

Sale of a business 17

Sale of property 17

(See also Disposition of property)

Sales of assets 16

Sales tax 36

Schedule C 7

Schedule SE (Form 1040 or 

1040-SR) 9

Schedule SE, filing requirement 43

SE tax:

About 9

Aliens 40

Child employed by parent 40

Church employee 40

Community property income 41

Deduction for 36

Earning credits 9

Effects of using an optional 

method 41

Farm optional method 42

Fiscal year filer 43

Fishing crew member 40

Gain or loss 41

Government employee 40

Joint return 43

Lost income payments 41

Maximum earnings:

For 2020 9

Subject to 39

Methods for figuring net 

earnings 41

More than one business 40, 43

Nonfarm optional method 41

Notary public 40

Optional methods:

Farm 42

Nonfarm 41

Rate 39

Regular method 41

Residing abroad 40

Special rules and exceptions 40

Tax rate 9

Time limit for posting income 9

Who must pay? 39

Why use an optional method 41

Section 179:

Deduction 33

Property 24

Securities:

Dealer 26

Trader 26

Self-employment tax (See SE tax)

Settlement payments 21

Short-term capital gain or loss 18

Signature, electronic 7

Small Business Administration 48

Small employer health insurance 

premiums credit 19

Social security coverage 9

52 Publication 334 (2023)
Social security number (SSN) 6

Sole proprietor 3, 39

Sport utility vehicle 33

Standard mileage rate 31

Statutory employee 3

SUV 33

T

Tax help 45

Tax home 31, 36

Tax preparation fees 35

Tax refund:

Claim for 45

Offset against debts 7

Tax return:

How to file 7

Who must file 6

Tax year 12

Calendar 12

Change in 13

Fiscal 13

Taxes:

Deduction for 36

Employment 10, 36

Excise 10, 36

Fuel 36

Income 6, 36

Paid on certain employee tips 19

Personal property 36

Real estate 36

Sales 36

Self-employment 9, 36

Third parties, Payments to 21

Tolls 32

Trade discount 27, 28

Trade or business 2

Trailer park owner 21

Transportation expenses 31

Travel expenses 36

U

Underpayment of tax penalty 9

Uniform capitalization rules 16

W

Wages 33

Work opportunity credit 19

Publication 334 (2023) 53