2004 Instructions for Form 1040 (ALL) - Supreme Law Firm

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• Any transaction offered under conditions of confidentiality for which you paid Line F Line G an advisor a minimum fee. Generally, you can use the cash method, If your business activity was not a rental • Any transaction for which you have accrual method, or any other method percontractual protection against disallowance mitted by the Internal Revenue Code. In all participation tests below or the exception activity and you met any of the material of the tax benefits. cases, the method used must clearly reflect for oil and gas applies (explained on page • Any transaction resulting in a loss of income. Unless you are a qualifying tax- C-3), check the “Yes” box. Otherwise, at least $2 million in any single tax year or payer or a qualifying small business tax- check the “No” box. If you check the “No” $4 million in any combination of tax years. payer, you must use the accrual method for box, this business is a passive activity. If (At least $50,000 for a single tax year if the sales and purchases of inventory items. See you have a loss from this business, see loss arose from a foreign currency transac- the Part III instructions on page C-6 for the Limit on losses on page C-3. If you have a tion defined in section 988(c)(1), whether definition of a qualifying taxpayer and a profit from this business activity but have or not the loss flows through from an S qualifying small business taxpayer. Special current year losses from other passive ac- corporation or partnership.) rules apply to long-term contracts. See secpassive activity losses, see the Instructions tivities or you have prior year unallowed • Any transaction resulting in a tion 460 for details. book-tax difference of more than $10 milfor Form 8582. lion on a gross basis. If you use the cash method, show all Material participation. Participation, for • Any transaction resulting in a tax items of taxable income actually or con- purposes of the seven material participation credit of more than $250,000, if you held structively received during the year (in tests listed below, generally includes any the asset generating the credit for 45 days cash, property, or services). Income is con- work you did in connection with an activity or less. structively received when it is credited to if you owned an interest in the activity at your account or set aside for you to use. the time you did the work. The capacity in See the Instructions for Form 8886 for Also, show amounts actually paid during which you did the work does not matter. more details and exceptions. the year for deductible expenses. However, However, work is not treated as partici- if the payment of an expenditure creates an pation if it is work that an owner would not Additional Information asset having a useful life that extends suband one of your main reasons for doing the customarily do in the same type of activity See Pub. 334 for more information for stantially beyond the close of the year, it small businesses. may not be deductible or may be deductible work was to avoid the disallowance of only in part for the year of the payment. See losses or credits from the activity under the Pub. 535. passive activity rules. Work you did as an investor in an activ- Specific Instructions If you use the accrual method, report ity is not treated as participation unless you income when you earn it and deduct ex- were directly involved in the day-to-day Filers of Form 1041. Do not complete the penses when you incur them even if you do management or operations of the activity. block labeled “Social security number not pay them during the tax year. Work done as an investor includes: (SSN).” Instead, enter your employer iden- Accrual-basis taxpayers are put on a cash tification number (EIN) on line D. • Studying and reviewing financial basis for deducting business expenses statements or reports on the activity, owed to a related cash-basis taxpayer. • Preparing or compiling summaries or Other rules determine the timing of deduc- analyses of the finances or operations of the Line A tions based on economic performance. See activity for your own use, and Describe the business or professional activ- Pub. 538. • Monitoring the finances or operations ity that provided your principal source of To change your accounting method, you of the activity in a nonmanagerial capacity. income reported on line 1. If you owned more than one business, you must complete generally must file Form 3115. You may Participation by your spouse during the a separate Schedule C for each business. also have to make an adjustment to prevent tax year in an activity you own can be Give the general field or activity and the amounts of income or expense from being counted as your participation in the activtype of product or service. If your general duplicated or omitted. This is called a sec- ity. This applies even if your spouse did not field or activity is wholesale or retail trade, tion 481(a) adjustment. own an interest in the activity and whether or services connected with production servor not you and your spouse file a joint re- ices (mining, construction, or manufacturmethod of accounting and choose to ac- For purposes of the passive activity Example. You change to the cash turn. ing), also give the type of customer or client. For example, “wholesale sale of count for inventoriable items in the same rules, you materially participated in the op- hardware to retailers” or “appraisal of real manner as materials and supplies that are eration of this trade or business activity estate for lending institutions.” not incidental. You accrued sales in 2003 during 2004 if you met any of the following for which you received payment in 2004. seven tests. You must report those sales in both years as a result of changing your accounting 1. You participated in the activity for Line D method and must make a section 481(a) more than 500 hours during the tax year. You need an employer identification numthe tax year was substantially all of the adjustment to prevent duplication of in- 2. Your participation in the activity for ber (EIN) only if you had a qualified retireparticipation in the activity of all individu- come. ment plan or were required to file an employment, excise, estate, trust, or alcoany interest in the activity) for the tax year. A net negative section 481(a) adjust- als (including individuals who did not own hol, tobacco, and firearms tax return. If you ment is taken into account entirely in the need an EIN, see the Instructions for Form year of the change. A net positive section 3. You participated in the activity for SS-4. If you do not have an EIN, leave line 481(a) adjustment is generally taken into more than 100 hours during the tax year, D blank. Do not enter your SSN. account over a period of 4 years. Include and you participated at least as much as any any net positive section 481(a) adjustments other person for the tax year. This includes on line 6. If the net section 481(a) adjustthe activity. individuals who did not own any interest in ment is negative, report it in Part V. Line E 4. The activity is a significant partici- Enter your business address. Show a street For details on figuring section 481(a) pation activity for the tax year, and you address instead of a box number. Include adjustments, see the Instructions for Form participated in all significant participation the suite or room number, if any. If you 3115, Rev. Proc. 2004-23, 2004-16 I.R.B. activities for more than 500 hours during conducted the business from your home lo- 785, available at www.irs.gov/irb/ the year. An activity is a “significant parcated at the address shown on Form 1040, 2004-16_IRB/ar11.html, and Rev. Proc. ticipation activity” if it involves the conpage 1, you do not have to complete this 2004-57, 2004-38 I.R.B. 498, available at duct of a trade or business, you participated line. www.irs.gov/irb/2004-38_IRB/ar11.html. in the activity for more than 100 hours dur- C-2
ing the tax year, and you did not materially extraterritorial income that is qualifying vehicles used in your business and participate under any of the material par- foreign trade income. Use Form 8873 to clean-fuel vehicle refueling property. For ticipation tests (other than this test 4). figure the extraterritorial income exclusion. details, see Pub. 535. 5. You materially participated in the ac- Report it on Schedule C as explained in the tivity for any 5 of the prior 10 tax years. Instructions for Form 8873. If the business use percentage of any listed property (defined in the instructions 6. The activity is a personal service ac- for line 13 on page C-4) decreased to 50% tivity in which you materially participated or less in 2004, report on this line any refor any 3 prior tax years. A personal service Line 1 capture of excess depreciation, including activity is an activity that involves perform- Enter gross receipts from your trade or any section 179 expense deduction. Use ing personal services in the fields of health, business. Include amounts you received in Form 4797 to figure the recapture. Also, if law, engineering, architecture, accounting, your trade or business that were properly the business use percentage drops to 50% actuarial science, performing arts, consultshown on Forms 1099-MISC. If the total or less on leased listed property (other than ing, or any other trade or business in which amounts that were reported in box 7 of a vehicle), include on this line any inclu- capital is not a material income-producing Forms 1099-MISC are more than the total sion amount. See Pub. 946 to figure the factor. you are reporting on line 1, attach a state- amount. 7. Based on all the facts and circum- ment explaining the difference. stances, you participated in the activity on a regular, continuous, and substantial basis Statutory employees. If you received a during the tax year. But you do not meet Form W-2 and the “Statutory employee” box in box 13 of that form was checked, Part II. Expenses this test if you participated in the activity for 100 hours or less during the tax year. report your income and expenses related to Capitalizing costs of property. If you pro- Your participation in managing the activity that income on Schedule C or C-EZ. Enter duced real or tangible personal property or does not count in determining if you meet your statutory employee income from box acquired property for resale, certain exthis test if any person (except you) (a) re- 1 of Form W-2 on line 1 of Schedule C or penses attributable to the property gener- ceived compensation for performing mansecurity and Medicare tax should have been capitalized. In addition to direct costs, pro- C-EZ and check the box on that line. Social ally must be included in inventory costs or agement services in connection with the activity or (b) spent more hours during the withheld from your earnings; therefore, ducers of inventory property generally tax year than you spent performing manthese earnings. Statutory employees in- costs in their inventory. Purchasers of per- you do not owe self-employment tax on must also include part of certain indirect agement services in connection with the activity (regardless of whether the person clude full-time life insurance agents, cer- sonal property acquired for resale must in- was compensated for the services). tain agent or commission drivers and clude part of certain indirect costs in traveling salespersons, and certain home- inventory only if the average annual gross Rental of personal property. A rental acmillion. Also, you must capitalize part of workers. receipts for the 3 prior tax years exceed $10 tivity (such as long-term equipment leas- If you had both self-employment inthe indirect costs that benefit real or tangiing) is a passive activity even if you come and statutory employee income, you materially participated in the activity. must file two Schedules C. You cannot use ble personal property constructed for use in However, if you met any of the five excep- Schedule C-EZ or combine these amounts a trade or business, or noninventory proptions listed under Rental Activities in the on a single Schedule C. erty produced for sale to customers. Re- Instructions for Form 8582, the rental of the duce the amounts on lines 8 through 26 and property is not treated as a rental activity Installment sales. Generally, the install- Part V by amounts capitalized. For details, and the material participation rules above ment method cannot be used to report in- see Pub. 538. apply. come from the sale of (a) personal property regularly sold under the installment Exception for certain producers. Produc- Exception for oil and gas. If you are filing method, or (b) real property held for resale ers who account for inventoriable items in Schedule C to report income and deduc- to customers. But the installment method the same manner as materials and supplies tions from an oil or gas well in which you can be used to report income from sales of that are not incidental can currently deduct own a working interest directly or through certain residential lots and timeshares if expenditures for direct labor and all indi- an entity that does not limit your liability, you elect to pay interest on the tax due on rect costs that would otherwise be included check the “Yes” box. The activity of own- that income after the year of sale. See secon page C-6 for more details. in inventory costs. See Cost of Goods Sold ing the working interest is not a passive tion 453(l)(2)(B) for details. If you make activity regardless of your participation. this election, include the interest on Form 1040, line 62. Also, enter “453(l)(3)” and Exception for creative property. If you are Limit on losses. If you checked the “No” the amount of the interest on the dotted line an artist, author, or photographer, you may box and you have a loss from this business, to the left of line 62. be exempt from the capitalization rules. you may have to use Form 8582 to figure However, your personal efforts must have your allowable loss, if any, to enter on If you use the installment method, at- created (or reasonably be expected to cretach a schedule to your return. Show sepa- ate) the property. This exception does not Schedule C, line 31. Generally, you can deduct losses from passive activities only rately for 2004 and the 3 preceding years: apply to any expense related to printing, to the extent of income from passive activi- gross sales, cost of goods sold, gross profit, photographic plates, motion picture films, ties. For details, see Pub. 925. percentage of gross profit to gross sales, video tapes, or similar items. These examounts collected, and gross profit on penses are subject to the capitalization amounts collected. rules. For details, see Pub. 538. Line H If you started or acquired this business in Line 6 Line 9 Report on line 6 amounts from finance reserve income, scrap sales, bad debts you recovered, interest (such as on notes and accounts receivable), state gasoline or fuel tax refunds you got in 2004, credit for federal tax paid on gasoline or other fuels claimed on your 2003 Form 1040, prizes and awards related to your trade or busi- 2004, check the box on line H. Also check the box if you are reopening or restarting this business after temporarily closing it, and you did not file a 2003 Schedule C or C-EZ for this business. You can deduct the actual expenses of run- ning your car or truck or take the standard mileage rate. You must use actual expenses if you used your vehicle for hire (such as a taxicab) or you used more than four vehicles simultaneously in your business (such as in fleet operations). You cannot use actual expenses for a leased vehicle if you Part I. Income ness, and other kinds of miscellaneous previously used the standard mileage rate Except as otherwise provided in the Inter- business income. Include amounts you refor that vehicle. nal Revenue Code, gross income includes ceived in your trade or business as shown income from whatever source derived. on Form 1099-PATR. Also, include any You can take the standard mileage rate Gross income, however, does not include recapture of the deduction for clean-fuel for 2004 only if you: C-3
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Note. This booklet does not contain
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What is IRS e-file? It’s the fast
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Tax Return Page Reference Questions
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Quick and Easy Access to Tax Help a
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Topic TeleTax Topics No. Subject No
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Before You Fill In Form 1040 See Ho
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Chart B—For Children and Other De
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Form Item and Box in Which it Shoul
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Line 2 December 31, 2004, you were
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Form 1040—Lines 7 and 8a less tha
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gross income was over $139,500 ($69
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Form 1040—Lines 16a and 16b Age (
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Form 1040—Lines 20a and 20b Socia
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Form 1040—Line 25 IRA Deduction W
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Form 1040—Lines 27 Through 29 for
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Line 35 Include in the total on lin
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Form 1040—Lines 41 and 43 Tax Tab
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2004 Instructions for Form 1040 (ALL) - Supreme Law Firm

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