Line C

If you use the cash method, check the box for “Cash.” Complete Schedule F (Form 1040), Parts I and II. In most cases, report income in the year in which you actually or constructively received it and deduct expenses in the year you paid them. However, if the payment of an expenditure creates an intangible asset (such as a prepaid expense) having a useful life that extends beyond the earlier of 12 months after the creation of the benefit or the end of the next tax year, it may not be deductible or may be deductible only in part for the year of the payment. See chapter 2 of Pub. 225.

If you use the accrual method, check the box for “Accrual.” Complete Schedule F (Form 1040), Part I, line 9; Part II; and Part III. Generally, report income in the year in which you earned it and deduct expenses in the year you incurred them, even if you didn’t pay them in that year. Accrual-basis taxpayers are put on a cash basis for deducting business expenses owed to a related cash-basis taxpayer. Other rules determine the timing of deductions based on economic performance. See Pub. 538, Accounting Periods and Methods.

Farming syndicates. Farming syndicates can’t use the cash method of accounting. A farming syndicate may be a partnership, an LLC, an S corporation, or any other enterprise other than a C corporation if:

• The interests in the business have at any time been offered for sale in a way that would require registration with any federal or state agency, or

• More than 35% of the losses during any tax year are allocable to limited partners or limited entrepreneurs. A limited partner is one who can lose only the amount invested or required to be invested in the partnership. A limited entrepreneur is a person who doesn’t take any active part in managing the business.