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2012 Irs Forms

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2012 Irs Forms

2012 irs forms Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. 2012 irs forms Property not disposed of or abandoned. 2012 irs forms Special rule for normal retirements from item accounts. 2012 irs forms Abandoned property. 2012 irs forms Single item accounts. 2012 irs forms Multiple property account. 2012 irs forms Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. 2012 irs forms If your property qualified for MACRS, you must depreciate it under MACRS. 2012 irs forms See Publication 946. 2012 irs forms However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. 2012 irs forms Also, you can elect to exclude certain property from being depreciated under MACRS. 2012 irs forms Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. 2012 irs forms Intangible property. 2012 irs forms   You cannot depreciate intangible property under ACRS or MACRS. 2012 irs forms You depreciate intangible property using any other reasonable method, usually, the straight line method. 2012 irs forms Note. 2012 irs forms The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. 2012 irs forms For more information, see chapter 12 of Publication 535. 2012 irs forms Public utility property. 2012 irs forms   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. 2012 irs forms This type of property is subject to depreciation under a special rule. 2012 irs forms Videocassettes. 2012 irs forms   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. 2012 irs forms You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. 2012 irs forms The straight line method, salvage value, and useful life are discussed later under Methods To Use. 2012 irs forms You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. 2012 irs forms How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. 2012 irs forms These methods are straight line and declining balance. 2012 irs forms To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. 2012 irs forms They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. 2012 irs forms The amount of the deduction in any year also depends on which method of depreciation you choose. 2012 irs forms Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. 2012 irs forms The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. 2012 irs forms Your original basis is usually the purchase price. 2012 irs forms However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. 2012 irs forms Adjusted basis. 2012 irs forms   Events will often change the basis of property. 2012 irs forms When this occurs, the changed basis is called the adjusted basis. 2012 irs forms Some events, such as improvements you make, increase basis. 2012 irs forms Events such as deducting casualty losses and depreciation decrease basis. 2012 irs forms If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. 2012 irs forms   Publication 551 explains how to figure basis for property acquired in different ways. 2012 irs forms It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. 2012 irs forms Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. 2012 irs forms It is the length of time over which you will make yearly depreciation deductions of your basis in the property. 2012 irs forms It is how long it will continue to be useful to you, not how long the property will last. 2012 irs forms Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. 2012 irs forms The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. 2012 irs forms Consider all these factors before you arrive at a useful life for your property. 2012 irs forms The useful life of the same type of property varies from user to user. 2012 irs forms When you determine the useful life of your property, keep in mind your own experience with similar property. 2012 irs forms You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. 2012 irs forms Change in useful life. 2012 irs forms   You base your estimate of useful life on certain facts. 2012 irs forms If these facts change significantly, you can adjust your estimate of the remaining useful life. 2012 irs forms However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. 2012 irs forms Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. 2012 irs forms You generally cannot depreciate property below a reasonable salvage value. 2012 irs forms Determining salvage value. 2012 irs forms   Salvage value is the estimated value of property at the end of its useful life. 2012 irs forms It is what you expect to get for the property if you sell it after you can no longer use it productively. 2012 irs forms You must estimate the salvage value of a piece of property when you first acquire it. 2012 irs forms   Salvage value is affected both by how you use the property and how long you use it. 2012 irs forms If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. 2012 irs forms However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. 2012 irs forms Changing salvage value. 2012 irs forms   Once you determine the salvage value for property, you should not change it merely because prices have changed. 2012 irs forms However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. 2012 irs forms When you redetermine the salvage value, take into account the facts that exist at the time. 2012 irs forms Net salvage. 2012 irs forms   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. 2012 irs forms You can choose either salvage value or net salvage when you figure depreciation. 2012 irs forms You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. 2012 irs forms However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. 2012 irs forms Your salvage value can never be less than zero. 2012 irs forms Ten percent rule. 2012 irs forms   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. 2012 irs forms You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. 2012 irs forms If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. 2012 irs forms Methods To Use Two methods of depreciation are the straight line and declining balance methods. 2012 irs forms If ACRS or MACRS does not apply, you can use one of these methods. 2012 irs forms The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. 2012 irs forms Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. 2012 irs forms One of these methods was the straight line method. 2012 irs forms This method was also used for intangible property. 2012 irs forms It lets you deduct the same amount of depreciation each year. 2012 irs forms To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. 2012 irs forms Subtract the salvage value, if any, from the adjusted basis. 2012 irs forms The balance is the total amount of depreciation you can take over the useful life of the property. 2012 irs forms Divide the balance by the number of years remaining in the useful life. 2012 irs forms This gives you the amount of your yearly depreciation deduction. 2012 irs forms Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. 2012 irs forms If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. 2012 irs forms Example. 2012 irs forms In April 1994, Frank bought a franchise for $5,600. 2012 irs forms It expires in 10 years. 2012 irs forms This property is intangible property that cannot be depreciated under MACRS. 2012 irs forms Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. 2012 irs forms He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). 2012 irs forms He must prorate the $560 for his 9 months of use in 1994. 2012 irs forms This gives him a deduction of $420 ($560 ÷ 9/12). 2012 irs forms In 1995, Frank can deduct $560 for the full year. 2012 irs forms Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. 2012 irs forms The rate cannot be more than twice the straight line rate. 2012 irs forms Rate of depreciation. 2012 irs forms   Under this method, you must determine your declining balance rate of depreciation. 2012 irs forms The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. 2012 irs forms (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. 2012 irs forms ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. 2012 irs forms Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. 2012 irs forms Depreciation deductions. 2012 irs forms   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. 2012 irs forms This gives you the amount of your deduction. 2012 irs forms For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). 2012 irs forms To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. 2012 irs forms Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). 2012 irs forms Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). 2012 irs forms Your depreciation deduction for the second year is $1,600. 2012 irs forms   As you can see from this example, your adjusted basis in the property gets smaller each year. 2012 irs forms Also, under this method, deductions are larger in the earlier years and smaller in the later years. 2012 irs forms You can make a change to the straight line method without consent. 2012 irs forms Salvage value. 2012 irs forms   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. 2012 irs forms However, you cannot depreciate the property below its reasonable salvage value. 2012 irs forms Determine salvage value using the rules discussed earlier, including the special 10% rule. 2012 irs forms Example. 2012 irs forms If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. 2012 irs forms But if your estimate of salvage value was $900, you can only deduct $100. 2012 irs forms This is because $100 is the amount that would lower your adjusted basis to equal salvage value. 2012 irs forms Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. 2012 irs forms You can group the videocassettes by title for making this projection. 2012 irs forms You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. 2012 irs forms The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. 2012 irs forms For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. 2012 irs forms How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. 2012 irs forms If you change your method of depreciation, it is generally a change in your method of accounting. 2012 irs forms You must get IRS consent before making the change. 2012 irs forms However, you do not need permission for certain changes in your method of depreciation. 2012 irs forms The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. 2012 irs forms For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. 2012 irs forms Change to the straight line method. 2012 irs forms   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. 2012 irs forms However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. 2012 irs forms When the change is made, figure depreciation based on your adjusted basis in the property at that time. 2012 irs forms Your adjusted basis takes into account all previous depreciation deductions. 2012 irs forms Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. 2012 irs forms   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. 2012 irs forms You cannot make the change on an amended return filed after the due date of the original return (including extensions). 2012 irs forms   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. 2012 irs forms   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. 2012 irs forms Changes that require permission. 2012 irs forms   For most other changes in method of depreciation, you must get permission from the IRS. 2012 irs forms To request a change in method of depreciation, file Form 3115. 2012 irs forms File the application within the first 180 days of the tax year the change is to become effective. 2012 irs forms In most cases, there is a user fee that must accompany Form 3115. 2012 irs forms See the instructions for Form 3115 to determine if a fee is required. 2012 irs forms Changes granted automatically. 2012 irs forms   The IRS automatically approves certain changes of a method of depreciation. 2012 irs forms But, you must file Form 3115 for these automatic changes. 2012 irs forms   However, IRS can deny permission if Form 3115 is not filed on time. 2012 irs forms For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. 2012 irs forms B. 2012 irs forms 420. 2012 irs forms Changes for which approval is not automatic. 2012 irs forms   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. 2012 irs forms   You must request and receive permission for these changes. 2012 irs forms To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. 2012 irs forms Change from an improper method. 2012 irs forms   If the IRS disallows the method you are using, you do not need permission to change to a proper method. 2012 irs forms You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. 2012 irs forms If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. 2012 irs forms However, you must file the amended return before the filing date for the next tax year. 2012 irs forms Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. 2012 irs forms You can do this by selling, exchanging, or abandoning the item of property. 2012 irs forms You can also withdraw it from use without disposing of it. 2012 irs forms For example, you could place it in a supplies or scrap account. 2012 irs forms Retirements can be either normal or abnormal depending on all facts and circumstances. 2012 irs forms The rules discussed next do not apply to MACRS and ACRS property. 2012 irs forms Normal retirement. 2012 irs forms   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. 2012 irs forms A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. 2012 irs forms Abnormal retirement. 2012 irs forms   A retirement can be abnormal if you withdraw the property early or under other circumstances. 2012 irs forms For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. 2012 irs forms Gain or loss on retirement. 2012 irs forms   There are special rules for figuring the gain or loss on retirement of property. 2012 irs forms The gain or loss will depend on several factors. 2012 irs forms These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. 2012 irs forms A single property account contains only one item of property. 2012 irs forms A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. 2012 irs forms Sale or exchange. 2012 irs forms   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. 2012 irs forms See Publication 544. 2012 irs forms Property not disposed of or abandoned. 2012 irs forms   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. 2012 irs forms You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. 2012 irs forms However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. 2012 irs forms   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. 2012 irs forms Special rule for normal retirements from item accounts. 2012 irs forms   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. 2012 irs forms However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. 2012 irs forms   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. 2012 irs forms Abandoned property. 2012 irs forms   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. 2012 irs forms However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. 2012 irs forms Basis of property retired. 2012 irs forms   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. 2012 irs forms Single item accounts. 2012 irs forms   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. 2012 irs forms This is generally the cost or other basis of the item of property less depreciation. 2012 irs forms See Publication 551. 2012 irs forms Multiple property account. 2012 irs forms   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. 2012 irs forms If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. 2012 irs forms   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. 2012 irs forms The method of depreciation used for the multiple property account is used. 2012 irs forms You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. 2012 irs forms Prev  Up  Next   Home   More Online Publications
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The 2012 Irs Forms

2012 irs forms Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. 2012 irs forms More information. 2012 irs forms Exception—Community Income. 2012 irs forms Exception—Qualified joint venture. 2012 irs forms More information. 2012 irs forms More information. 2012 irs forms Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. 2012 irs forms Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. 2012 irs forms Table 1 can help you learn what those responsibilities are. 2012 irs forms Ask yourself each question listed in the table, then see the related discussion to find the answer. 2012 irs forms In addition to knowing about federal taxes, you need to make some basic business decisions. 2012 irs forms Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. 2012 irs forms For information on how to contact the SBA, see How to Get More Information, later. 2012 irs forms Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. 2012 irs forms When beginning a business, you must decide which form of business to use. 2012 irs forms Legal and tax considerations enter into this decision. 2012 irs forms Only tax considerations are discussed in this publication. 2012 irs forms Your form of business determines which income tax return form you have to file. 2012 irs forms See Table 2 to find out which form you have to file. 2012 irs forms Sole proprietorships. 2012 irs forms   A sole proprietorship is an unincorporated business that is owned by one individual. 2012 irs forms It is the simplest form of business organization to start and maintain. 2012 irs forms The business has no existence apart from you, the owner. 2012 irs forms Its liabilities are your personal liabilities. 2012 irs forms You undertake the risks of the business for all assets owned, whether or not used in the business. 2012 irs forms You include the income and expenses of the business on your personal tax return. 2012 irs forms More information. 2012 irs forms   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. 2012 irs forms If you are a farmer, see Publication 225, Farmer's Tax Guide. 2012 irs forms Partnerships. 2012 irs forms   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. 2012 irs forms Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. 2012 irs forms   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. 2012 irs forms , from its operations, but it does not pay income tax. 2012 irs forms Instead, it “passes through” any profits or losses to its partners. 2012 irs forms Each partner includes his or her share of the partnership's items on his or her tax return. 2012 irs forms More information. 2012 irs forms   For more information on partnerships, see Publication 541, Partnerships. 2012 irs forms Husband and wife business. 2012 irs forms   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. 2012 irs forms Do not use Schedule C or C-EZ. 2012 irs forms Instead, file Form 1065, U. 2012 irs forms S. 2012 irs forms Return of Partnership Income. 2012 irs forms For more information, see Publication 541, Partnerships. 2012 irs forms Exception—Community Income. 2012 irs forms   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. 2012 irs forms S. 2012 irs forms possession, you can treat the business either as a sole proprietorship or a partnership. 2012 irs forms The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2012 irs forms A change in your reporting position will be treated as a conversion of the entity. 2012 irs forms Exception—Qualified joint venture. 2012 irs forms   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 qualified joint venture instead of a partnership for the tax year. 2012 irs forms 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. 2012 irs forms For an explanation of "material participation," see the Instructions for Schedule C, line G. 2012 irs forms   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. 2012 irs forms Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. 2012 irs forms For more information, see Qualified Joint Venture in the Instructions for Schedule SE. 2012 irs forms Corporations. 2012 irs forms   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. 2012 irs forms A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. 2012 irs forms A corporation can also take special deductions. 2012 irs forms   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. 2012 irs forms However, shareholders cannot deduct any loss of the corporation. 2012 irs forms More information. 2012 irs forms   For more information on corporations, see Publication 542, Corporations. 2012 irs forms S corporations. 2012 irs forms   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. 2012 irs forms Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. 2012 irs forms On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. 2012 irs forms More information. 2012 irs forms   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. 2012 irs forms S. 2012 irs forms Income Tax Return for an S Corporation. 2012 irs forms Limited liability company. 2012 irs forms   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2012 irs forms The members of an LLC are not personally liable for its debts. 2012 irs forms An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. 2012 irs forms 7701-3. 2012 irs forms For more information, see the instructions for Form 8832, Entity Classification Election. 2012 irs forms Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. 2012 irs forms The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). 2012 irs forms An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. 2012 irs forms An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. 2012 irs forms You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. 2012 irs forms You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. 2012 irs forms This includes returns or documents filed to report the following information. 2012 irs forms Interest, dividends, royalties, etc. 2012 irs forms , paid to you. 2012 irs forms Any amount paid to you as a dependent care provider. 2012 irs forms Certain other amounts paid to you that total $600 or more for the year. 2012 irs forms If you do not furnish your identification number as required, you may be subject to penalties. 2012 irs forms See Penalties, later. 2012 irs forms Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. 2012 irs forms If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. 2012 irs forms Applying for an EIN. 2012 irs forms   You may apply for an EIN: Online—Click on the EIN link at www. 2012 irs forms irs. 2012 irs forms gov/businesses/small. 2012 irs forms The EIN is issued immediately once the application information is validated. 2012 irs forms By telephone at 1-800-829-4933. 2012 irs forms By mailing or faxing Form SS-4, Application for Employer Identification Number. 2012 irs forms When to apply. 2012 irs forms   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. 2012 irs forms If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. 2012 irs forms If you apply by telephone or through the IRS website, you can get an EIN immediately. 2012 irs forms If you apply by fax, you can get an EIN within 4 business days. 2012 irs forms   If you do not receive your EIN by the time a return is due, file your return anyway. 2012 irs forms Write “Applied for” and the date you applied for the number in the space for the EIN. 2012 irs forms Do not use your social security number as a substitute for an EIN on your tax returns. 2012 irs forms More than one EIN. 2012 irs forms   You should have only one EIN. 2012 irs forms If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. 2012 irs forms Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. 2012 irs forms The IRS will tell you which number to use. 2012 irs forms More information. 2012 irs forms   For more information about EINs, see Publication 1635, Understanding Your EIN. 2012 irs forms Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). 2012 irs forms The forms used to report these payments must include the payee's identification number. 2012 irs forms Employee. 2012 irs forms   If you have employees, you must get an SSN from each of them. 2012 irs forms Record the name and SSN of each employee exactly as they are shown on the employee's social security card. 2012 irs forms If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. 2012 irs forms This may occur, for example, if the employee's name has changed due to marriage or divorce. 2012 irs forms   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. 2012 irs forms This form is available at SSA offices or by calling 1-800-772-1213. 2012 irs forms It is also available from the SSA website at www. 2012 irs forms ssa. 2012 irs forms gov. 2012 irs forms Other payee. 2012 irs forms   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. 2012 irs forms If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. 2012 irs forms   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. 2012 irs forms This form is available from IRS offices or by calling 1-800-829-3676. 2012 irs forms It is also available from the IRS website at IRS. 2012 irs forms gov. 2012 irs forms    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. 2012 irs forms For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. 2012 irs forms Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. 2012 irs forms A tax year is usually 12 consecutive months. 2012 irs forms There are two kinds of tax years. 2012 irs forms Calendar tax year. 2012 irs forms A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. 2012 irs forms Fiscal tax year. 2012 irs forms A fiscal tax year is 12 consecutive months ending on the last day of any month except December. 2012 irs forms 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. 2012 irs forms If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. 2012 irs forms You must use a calendar tax year if: You keep no books. 2012 irs forms You have no annual accounting period. 2012 irs forms Your present tax year does not qualify as a fiscal year. 2012 irs forms You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. 2012 irs forms For more information, see Publication 538, Accounting Periods and Methods. 2012 irs forms First-time filer. 2012 irs forms   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. 2012 irs forms You adopt a tax year by filing your first income tax return using that tax year. 2012 irs forms You have not adopted a tax year if you merely did any of the following. 2012 irs forms Filed an application for an extension of time to file an income tax return. 2012 irs forms Filed an application for an employer identification number. 2012 irs forms Paid estimated taxes for that tax year. 2012 irs forms Changing your tax year. 2012 irs forms   Once you have adopted your tax year, you may have to get IRS approval to change it. 2012 irs forms To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. 2012 irs forms You may have to pay a fee. 2012 irs forms For more information, see Publication 538. 2012 irs forms Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. 2012 irs forms You choose an accounting method for your business when you file your first income tax return. 2012 irs forms There are two basic accounting methods. 2012 irs forms Cash method. 2012 irs forms Under the cash method, you report income in the tax year you receive it. 2012 irs forms You usually deduct or capitalize expenses in the tax year you pay them. 2012 irs forms Accrual method. 2012 irs forms Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. 2012 irs forms You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. 2012 irs forms For other methods, see Publication 538. 2012 irs forms If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. 2012 irs forms Inventories include goods held for sale in the normal course of business. 2012 irs forms They also include raw materials and supplies that will physically become a part of merchandise intended for sale. 2012 irs forms Inventories are explained in Publication 538. 2012 irs forms Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. 2012 irs forms For more information, see Publication 538. 2012 irs forms You must use the same accounting method to figure your taxable income and to keep your books. 2012 irs forms Also, you must use an accounting method that clearly shows your income. 2012 irs forms In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. 2012 irs forms An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. 2012 irs forms More than one business. 2012 irs forms   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. 2012 irs forms You must keep a complete and separate set of books and records for each business. 2012 irs forms Changing your method of accounting. 2012 irs forms   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. 2012 irs forms A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. 2012 irs forms For examples of changes that require approval and information on how to get approval for the change, see Publication 538. 2012 irs forms Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. 2012 irs forms The following are the four general kinds of business taxes. 2012 irs forms Income tax. 2012 irs forms Self-employment tax. 2012 irs forms Employment taxes. 2012 irs forms Excise taxes. 2012 irs forms See Table 2 for the forms you file to report these taxes. 2012 irs forms You may want to get Publication 509. 2012 irs forms It has tax calendars that tell you when to file returns and make tax payments. 2012 irs forms Income Tax All businesses except partnerships must file an annual income tax return. 2012 irs forms Partnerships file an information return. 2012 irs forms Which form you use depends on how your business is organized. 2012 irs forms See Table 2 to find out which return you have to file. 2012 irs forms The federal income tax is a pay-as-you-go tax. 2012 irs forms You must pay the tax as you earn or receive income during the year. 2012 irs forms An employee usually has income tax withheld from his or her pay. 2012 irs forms If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. 2012 irs forms If you are not required to make estimated tax payments, you may pay any tax due when you file your return. 2012 irs forms Table 2. 2012 irs forms Which Forms Must I File? IF you are a. 2012 irs forms . 2012 irs forms . 2012 irs forms   THEN you may be liable for. 2012 irs forms . 2012 irs forms . 2012 irs forms   Use Form. 2012 irs forms . 2012 irs forms . 2012 irs forms Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. 2012 irs forms 2 Various other schedules may be needed. 2012 irs forms Estimated tax. 2012 irs forms   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. 2012 irs forms Sole proprietors, partners, and S corporation shareholders. 2012 irs forms   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. 2012 irs forms Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. 2012 irs forms For more information, see Publication 505, Tax Withholding and Estimated Tax. 2012 irs forms Corporations. 2012 irs forms   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. 2012 irs forms Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. 2012 irs forms You must deposit the payments as explained later under Depositing Taxes. 2012 irs forms For more information, see Publication 542. 2012 irs forms Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. 2012 irs forms Your payments of SE tax contribute to your coverage under the social security system. 2012 irs forms Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. 2012 irs forms You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. 2012 irs forms Your net earnings from self-employment were $400 or more. 2012 irs forms You had church employee income of $108. 2012 irs forms 28 or more. 2012 irs forms Use Schedule SE (Form 1040) to figure your SE tax. 2012 irs forms For more information, see Publication 334, Tax Guide for Small Business. 2012 irs forms You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. 2012 irs forms The Social Security Administration (SSA) time limit for posting self-employment income. 2012 irs forms   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. 2012 irs forms If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. 2012 irs forms The SSA will not change its records to increase your self-employment income. 2012 irs forms Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. 2012 irs forms Employment taxes include the following. 2012 irs forms Social security and Medicare taxes. 2012 irs forms Federal income tax withholding. 2012 irs forms Federal unemployment (FUTA) tax. 2012 irs forms If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. 2012 irs forms If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. 2012 irs forms These publications explain your tax responsibilities as an employer. 2012 irs forms If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. 2012 irs forms That publication has information to help you determine whether an individual is an employee or an independent contractor. 2012 irs forms If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. 2012 irs forms An independent contractor is someone who is self-employed. 2012 irs forms Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. 2012 irs forms Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. 2012 irs forms To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. 2012 irs forms Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). 2012 irs forms Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. 2012 irs forms Medicare tax pays for benefits under the hospital insurance part of FICA. 2012 irs forms You withhold part of these taxes from your employee's wages and you pay a part yourself. 2012 irs forms To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. 2012 irs forms Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. 2012 irs forms (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. 2012 irs forms ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. 2012 irs forms You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. 2012 irs forms You pay FUTA tax only from your own funds. 2012 irs forms Employees do not pay this tax or have it withheld from their pay. 2012 irs forms Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. 2012 irs forms See Publication 15 to find out if you can use this form. 2012 irs forms Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. 2012 irs forms Form I-9. 2012 irs forms   You must verify that each new employee is legally eligible to work in the United States. 2012 irs forms Both you and the employee must complete the U. 2012 irs forms S. 2012 irs forms Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. 2012 irs forms You can get the form from USCIS offices or from the USCIS website at www. 2012 irs forms uscis. 2012 irs forms gov. 2012 irs forms Call the USCIS at 1-800-375-5283 for more information about your responsibilities. 2012 irs forms Form W-4. 2012 irs forms   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. 2012 irs forms You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. 2012 irs forms For more information, see Publication 15. 2012 irs forms Employees claiming more than 10 withholding allowances. 2012 irs forms   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. 2012 irs forms See section 16 of Publication 15. 2012 irs forms Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. 2012 irs forms You must also send copies to the Social Security Administration. 2012 irs forms See Information Returns, later, for more information on Form W-2. 2012 irs forms Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. 2012 irs forms Manufacture or sell certain products. 2012 irs forms Operate certain kinds of businesses. 2012 irs forms Use various kinds of equipment, facilities, or products. 2012 irs forms Receive payment for certain services. 2012 irs forms For more information on excise taxes, see Publication 510, Excise Taxes. 2012 irs forms Form 720. 2012 irs forms   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. 2012 irs forms Environmental taxes. 2012 irs forms Communications and air transportation taxes. 2012 irs forms Fuel taxes. 2012 irs forms Tax on the first retail sale of heavy trucks, trailers, and tractors. 2012 irs forms Manufacturers taxes on the sale or use of a variety of different articles. 2012 irs forms Form 2290. 2012 irs forms   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. 2012 irs forms The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. 2012 irs forms Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. 2012 irs forms For more information, see the instructions for Form 2290. 2012 irs forms Form 730. 2012 irs forms   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. 2012 irs forms Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. 2012 irs forms Form 11-C. 2012 irs forms   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. 2012 irs forms Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. 2012 irs forms Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). 2012 irs forms Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. 2012 irs forms Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. 2012 irs forms Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. 2012 irs forms 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. 2012 irs forms You must give a copy of each information return you are required to file to the recipient or payer. 2012 irs forms In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. 2012 irs forms For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. 2012 irs forms Form 1099-MISC. 2012 irs forms   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. 2012 irs forms These payments include the following items. 2012 irs forms Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. 2012 irs forms Rent payments of $600 or more, other than rents paid to real estate agents. 2012 irs forms Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. 2012 irs forms Royalty payments of $10 or more. 2012 irs forms Payments to certain crew members by operators of fishing boats. 2012 irs forms You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. 2012 irs forms Form W-2. 2012 irs forms   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. 2012 irs forms For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. 2012 irs forms Form 8300. 2012 irs forms   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. 2012 irs forms Cash includes U. 2012 irs forms S. 2012 irs forms and foreign coin and currency. 2012 irs forms It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. 2012 irs forms For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). 2012 irs forms Penalties The law provides penalties for not filing returns or paying taxes as required. 2012 irs forms Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. 2012 irs forms Failure to file tax returns. 2012 irs forms   If you do not file your tax return by the due date, you may have to pay a penalty. 2012 irs forms The penalty is based on the tax not paid by the due date. 2012 irs forms See your tax return instructions for more information about this penalty. 2012 irs forms Failure to pay tax. 2012 irs forms   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. 2012 irs forms For more information, see your tax return instructions. 2012 irs forms Failure to withhold, deposit, or pay taxes. 2012 irs forms   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. 2012 irs forms You may also be subject to penalties if you deposit the taxes late. 2012 irs forms For more information, see Publication 15. 2012 irs forms Failure to follow information reporting requirements. 2012 irs forms   The following penalties apply if you are required to file information returns. 2012 irs forms For more information, see the General Instructions for Certain Information Returns. 2012 irs forms Failure to file information returns. 2012 irs forms A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. 2012 irs forms Failure to furnish correct payee statements. 2012 irs forms A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. 2012 irs forms Waiver of penalty. 2012 irs forms   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. 2012 irs forms   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. 2012 irs forms (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. 2012 irs forms ) Failure to supply taxpayer identification number. 2012 irs forms   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. 2012 irs forms You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. 2012 irs forms Business Expenses You can deduct business expenses on your income tax return. 2012 irs forms These are the current operating costs of running your business. 2012 irs forms To be deductible, a business expense must be both ordinary and necessary. 2012 irs forms An ordinary expense is one that is common and accepted in your field of business, trade, or profession. 2012 irs forms A necessary expense is one that is helpful and appropriate for your business, trade, or profession. 2012 irs forms An expense does not have to be indispensable to be considered necessary. 2012 irs forms The following are brief explanations of some expenses that are of interest to people starting a business. 2012 irs forms There are many other expenses that you may be able to deduct. 2012 irs forms See your form instructions and Publication 535, Business Expenses. 2012 irs forms Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. 2012 irs forms Your business start-up costs will depend on the type of business you are starting. 2012 irs forms They may include costs for advertising, travel, surveys, and training. 2012 irs forms These costs are generally capital expenses. 2012 irs forms You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). 2012 irs forms You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. 2012 irs forms The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. 2012 irs forms Any remaining cost must be amortized. 2012 irs forms For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. 2012 irs forms Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. 2012 irs forms You must spread the cost over more than one tax year and deduct part of it each year. 2012 irs forms This method of deducting the cost of business property is called depreciation. 2012 irs forms Business property you must depreciate includes the following items. 2012 irs forms Office furniture. 2012 irs forms Buildings. 2012 irs forms Machinery and equipment. 2012 irs forms You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. 2012 irs forms This deduction is known as the “section 179 deduction. 2012 irs forms ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. 2012 irs forms Depreciation must be taken in the year it is allowable. 2012 irs forms Allowable depreciation not taken in a prior year cannot be taken in the current year. 2012 irs forms If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. 2012 irs forms S. 2012 irs forms Individual Income Tax Return, or by changing your accounting method. 2012 irs forms For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. 2012 irs forms Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. 2012 irs forms Even then, your deduction may be limited. 2012 irs forms To qualify to claim expenses for business use of your home, you must meet both the following tests. 2012 irs forms Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. 2012 irs forms Exclusive use. 2012 irs forms   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 2012 irs forms The area used for business can be a room or other separately identifiable space. 2012 irs forms The space does not need to be marked off by a permanent partition. 2012 irs forms   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. 2012 irs forms Exceptions to exclusive use. 2012 irs forms   You do not have to meet the exclusive use test if either of the following applies. 2012 irs forms You use part of your home for the storage of inventory or product samples. 2012 irs forms You use part of your home as a daycare facility. 2012 irs forms For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). 2012 irs forms Principal place of business. 2012 irs forms   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. 2012 irs forms You use it exclusively and regularly for administrative or management activities of your trade or business. 2012 irs forms You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2012 irs forms   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. 2012 irs forms The relative importance of the activities performed at each location. 2012 irs forms If the relative importance factor does not determine your principal place of business, the time spent at each location. 2012 irs forms    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 2012 irs forms However, for other ways to qualify to deduct home office expenses, see Publication 587. 2012 irs forms Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. 2012 irs forms If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. 2012 irs forms More information. 2012 irs forms   For more information about business use of your home, see Publication 587. 2012 irs forms Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. 2012 irs forms You generally can deduct either your actual expenses or the standard mileage rate. 2012 irs forms Actual expenses. 2012 irs forms   If you deduct actual expenses, you can deduct the cost 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. 2012 irs forms You can divide your expenses based on the miles driven for each purpose. 2012 irs forms Example. 2012 irs forms You are the sole proprietor of a flower shop. 2012 irs forms You drove your van 20,000 miles during the year. 2012 irs forms 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. 2012 irs forms You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. 2012 irs forms Standard mileage rate. 2012 irs forms   Instead of figuring actual expenses, 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. 2012 irs forms You can use the standard mileage rate for a vehicle you own or lease. 2012 irs forms The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. 2012 irs forms It is announced annually by the IRS. 2012 irs forms To figure your deduction, multiply your business miles by the standard mileage rate for the year. 2012 irs forms    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. 2012 irs forms However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. 2012 irs forms Choosing the standard mileage rate. 2012 irs forms   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. 2012 irs forms In later years, you can choose to use either the standard mileage rate or actual expenses. 2012 irs forms   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). 2012 irs forms Additional information. 2012 irs forms   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 2012 irs forms Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. 2012 irs forms It also explains how long you must keep your records for federal tax purposes. 2012 irs forms A sample recordkeeping system is illustrated at the end of this part. 2012 irs forms Why Keep Records? Everyone in business must keep records. 2012 irs forms Good records will help you do the following. 2012 irs forms Monitor the progress of your business. 2012 irs forms   You need good records to monitor the progress of your business. 2012 irs forms Records can show whether your business is improving, which items are selling, or what changes you need to make. 2012 irs forms Good records can increase the likelihood of business success. 2012 irs forms Prepare your financial statements. 2012 irs forms   You need good records to prepare accurate financial statements. 2012 irs forms These include income (profit and loss) statements and balance sheets. 2012 irs forms These statements can help you in dealing with your bank or creditors and help you manage your business. 2012 irs forms An income statement shows the income and expenses of the business for a given period of time. 2012 irs forms A balance sheet shows the assets, liabilities, and your equity in the business on a given date. 2012 irs forms Identify source of receipts. 2012 irs forms   You will receive money or property from many sources. 2012 irs forms Your records can identify the source of your receipts. 2012 irs forms You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. 2012 irs forms Keep track of deductible expenses. 2012 irs forms   You may forget expenses when you prepare your tax return unless you record them when they occur. 2012 irs forms Prepare your tax returns. 2012 irs forms   You need good records to prepare your tax returns. 2012 irs forms These records must support the income, expenses, and credits you report. 2012 irs forms Generally, these are the same records you use to monitor your business and prepare your financial statements. 2012 irs forms Support items reported on tax returns. 2012 irs forms   You must keep your business records available at all times for inspection by the IRS. 2012 irs forms If the IRS examines any of your tax returns, you may be asked to explain the items reported. 2012 irs forms A complete set of records will speed up the examination. 2012 irs forms Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. 2012 irs forms You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. 2012 irs forms The business you are in affects the type of records you need to keep for federal tax purposes. 2012 irs forms You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. 2012 irs forms See Accounting Method, earlier. 2012 irs forms If you are in more than one business, you should keep a complete and separate set of records for each business. 2012 irs forms A corporation should keep minutes of board of directors' meetings. 2012 irs forms Your recordkeeping system should include a summary of your business transactions. 2012 irs forms This summary is ordinarily made in your books (for example, accounting journals and ledgers). 2012 irs forms Your books must show your gross income, as well as your deductions and credits. 2012 irs forms For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. 2012 irs forms In addition, you must keep supporting documents, explained later. 2012 irs forms Electronic records. 2012 irs forms   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. 2012 irs forms When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. 2012 irs forms An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. 2012 irs forms The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. 2012 irs forms All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. 2012 irs forms Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. 2012 irs forms   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. 2012 irs forms You still have the responsibility of retaining any other books and records that are required to be retained. 2012 irs forms   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. 2012 irs forms This test is not considered an examination and the results must be shared with you. 2012 irs forms If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. 2012 irs forms If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. 2012 irs forms For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. 2012 irs forms Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. 2012 irs forms Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. 2012 irs forms These documents contain information you need to record in your books. 2012 irs forms It is important to keep these documents because they support the entries in your books and on your tax return. 2012 irs forms Keep them in an orderly fashion and in a safe place. 2012 irs forms For instance, organize them by year and type of income or expense. 2012 irs forms Gross receipts. 2012 irs forms   Gross receipts are the income you receive from your business. 2012 irs forms You should keep supporting documents that show the amounts and sources of your gross receipts. 2012 irs forms Documents that show gross receipts include the following. 2012 irs forms Cash register tapes. 2012 irs forms Bank deposit slips. 2012 irs forms Receipt books. 2012 irs forms Invoices. 2012 irs forms Credit card charge slips. 2012 irs forms Forms 1099-MISC. 2012 irs forms Purchases. 2012 irs forms   Purchases are the items you buy and resell to customers. 2012 irs forms If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. 2012 irs forms Your supporting documents should show the amount paid and that the amount was for purchases. 2012 irs forms Documents for purchases include the following. 2012 irs forms Canceled checks. 2012 irs forms Cash register tape receipts. 2012 irs forms Credit card sales slips. 2012 irs forms Invoices. 2012 irs forms These records will help you determine the value of your inventory at the end of the year. 2012 irs forms See Publication 538 for information on methods for valuing inventory. 2012 irs forms Expenses. 2012 irs forms   Expenses are the costs you incur (other than purchases) to carry on your business. 2012 irs forms Your supporting documents should show the amount paid and that the amount was for a business expense. 2012 irs forms Documents for expenses include the following. 2012 irs forms Canceled checks. 2012 irs forms Cash register tapes. 2012 irs forms Account statements. 2012 irs forms Credit card sales slips. 2012 irs forms Invoices. 2012 irs forms Petty cash slips for small cash payments. 2012 irs forms    A petty cash fund allows you to make small payments without having to write checks for small amounts. 2012 irs forms Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. 2012 irs forms Travel, transportation, entertainment, and gift expenses. 2012 irs forms   Specific recordkeeping rules apply to these expenses. 2012 irs forms For more information, see Publication 463. 2012 irs forms Employment taxes. 2012 irs forms   There are specific employment tax records you must keep. 2012 irs forms For a list, see Publication 15. 2012 irs forms Assets. 2012 irs forms   Assets are the property, such as machinery and furniture you own and use in your business. 2012 irs forms You must keep records to verify certain information about your business assets. 2012 irs forms You need records to figure the annual depreciation and the gain or loss when you sell the assets. 2012 irs forms Your records should show the following information. 2012 irs forms When and how you acquired the asset. 2012 irs forms Purchase price. 2012 irs forms Cost of any improvements. 2012 irs forms Section 179 deduction taken. 2012 irs forms Deductions taken for depreciation. 2012 irs forms Deductions taken for casualty losses, such as losses resulting from fires or storms. 2012 irs forms How you used the asset. 2012 irs forms When and how you disposed of the asset. 2012 irs forms Selling price. 2012 irs forms Expenses of sale. 2012 irs forms   The following documents may show this information. 2012 irs forms Purchase and sales invoices. 2012 irs forms Real estate closing statements. 2012 irs forms Canceled checks. 2012 irs forms What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. 2012 irs forms These include account statements prepared for the financial institution by a third party. 2012 irs forms These account statements must be highly legible. 2012 irs forms The following table lists acceptable account statements. 2012 irs forms  IF payment is by. 2012 irs forms . 2012 irs forms . 2012 irs forms THEN the statement must show the. 2012 irs forms . 2012 irs forms . 2012 irs forms Check Check number. 2012 irs forms Amount. 2012 irs forms Payee's name. 2012 irs forms Date the check amount was posted to the account by the financial institution. 2012 irs forms Electronic funds transfer Amount transferred. 2012 irs forms Payee's name. 2012 irs forms Date the transfer was posted to the account by the financial institution. 2012 irs forms Credit card Amount charged. 2012 irs forms Payee's name. 2012 irs forms Transaction date. 2012 irs forms    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. 2012 irs forms You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. 2012 irs forms Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. 2012 irs forms (Your business transactions are shown on the supporting documents just discussed. 2012 irs forms ) Business transactions are ordinarily summarized in books called journals and ledgers. 2012 irs forms You can buy them at your local stationery or office supply store. 2012 irs forms A journal is a book where you record each business transaction shown on your supporting documents. 2012 irs forms You may have to keep separate journals for transactions that occur frequently. 2012 irs forms A ledger is a book that contains the totals from all of your journals. 2012 irs forms It is organized into different accounts. 2012 irs forms Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. 2012 irs forms For example, a recordkeeping system for a small business might include the following items. 2012 irs forms Business checkbook. 2012 irs forms Daily summary of cash receipts. 2012 irs forms Monthly summary of cash receipts. 2012 irs forms Check disbursements journal. 2012 irs forms Depreciation worksheet. 2012 irs forms Employee compensation record. 2012 irs forms The business checkbook is explained next. 2012 irs forms The other items are illustrated later under Sample Record System. 2012 irs forms The system you use to record business transactions will be more effective if you follow good recordkeeping practices. 2012 irs forms For example, record expenses when they occur, and identify the source of recorded receipts. 2012 irs forms Generally, it is best to record transactions on a daily basis. 2012 irs forms Business checkbook. 2012 irs forms   One of the first things you should do when you start a business is open a business checking account. 2012 irs forms You should keep your business account separate from your personal checking account. 2012 irs forms   The business checkbook is your basic source of information for recording your business expenses. 2012 irs forms You should deposit all daily receipts in your business checking account. 2012 irs forms You should check your account for errors by reconciling it. 2012 irs forms See Reconciling the checking account, later. 2012 irs forms   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. 2012 irs forms You should also note on the deposit slip the source of the deposit and keep copies of all slips. 2012 irs forms   You should make all payments by check to document business expenses. 2012 irs forms Write checks payable to yourself only when making withdrawals from your business for personal use. 2012 irs forms Avoid writing checks payable to cash. 2012 irs forms If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. 2012 irs forms If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. 2012 irs forms    Use the business account for business purposes only. 2012 irs forms Indicate the source of deposits and the type of expense in the checkbook. 2012 irs forms Reconciling the checking account. 2012 irs forms   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. 2012 irs forms The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. 2012 irs forms   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. 2012 irs forms    You should reconcile your checking account each month. 2012 irs forms     Before you reconcile your monthly bank statement, check your own figures. 2012 irs forms Begin with the balance shown in your checkbook at the end of the previous month. 2012 irs forms To this balance, add the total cash deposited during the month and subtract the total cash disbursements. 2012 irs forms   After checking your figures, the result should agree with your checkbook balance at the end of the month. 2012 irs forms If the result does not agree, you may have made an error in recording a check or deposit. 2012 irs forms You can find the error by doing the following. 2012 irs forms Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. 2012 irs forms If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. 2012 irs forms Adding the deposit amounts in your checkbook. 2012 irs forms Compare that total with the monthly total in your cash receipt book, if you have one. 2012 irs forms If the totals do not agree, check the individual amounts to find any errors. 2012 irs forms   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. 2012 irs forms   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. 2012 irs forms Many banks print a reconciliation worksheet on the back of the statement. 2012 irs forms   To reconcile your account, follow these steps. 2012 irs forms Compare the deposits listed on the bank statement with the deposits shown in your checkbook. 2012 irs forms Note all differences in the dollar amounts. 2012 irs forms Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. 2012 irs forms Note all differences in the dollar amounts. 2012 irs forms Mark the check number in the checkbook as having cleared the bank. 2012 irs forms After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. 2012 irs forms Prepare a bank reconciliation. 2012 irs forms One is illustrated later under Sample Record System. 2012 irs forms Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. 2012 irs forms At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. 2012 irs forms If you still have differences, check the previous steps to find the errors. 2012 irs forms   Table 3. 2012 irs forms Period of Limitations IF you. 2012 irs forms . 2012 irs forms . 2012 irs forms   THEN the period is. 2012 irs forms . 2012 irs forms . 2012 irs forms 1. 2012 irs forms Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. 2012 irs forms Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. 2012 irs forms File a fraudulent return   Not limited 4. 2012 irs forms Do not file a return   Not limited 5. 2012 irs forms File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. 2012 irs forms File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. 2012 irs forms The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. 2012 irs forms You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. 2012 irs forms Single-entry. 2012 irs forms   A single-entry system is based on the income statement (profit or loss statement). 2012 irs forms It can be a simple and practical system if you are starting a small business. 2012 irs forms The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. 2012 irs forms Double-entry. 2012 irs forms   A double-entry bookkeeping system uses journals and ledgers. 2012 irs forms Transactions are first entered in a journal and then posted to ledger accounts. 2012 irs forms These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). 2012 irs forms You close income and expense accounts at the end of each tax year. 2012 irs forms You keep asset, liability, and net worth accounts open on a permanent basis. 2012 irs forms   In the double-entry system, each account has a left side for debits and a right side for credits. 2012 irs forms It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. 2012 irs forms   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. 2012 irs forms If the amounts do not balance, you have made an error and you must find and correct it. 2012 irs forms   An example of a journal entry exhibiting a payment of rent in October is shown next. 2012 irs forms General Journal Date Description of Entry Debit  Credit Oct. 2012 irs forms 5 Rent expense 780. 2012 irs forms 00     Cash   780. 2012 irs forms 00                 Computerized System There are computer software packages you can use for recordkeeping. 2012 irs forms They can be purchased in many retail stores. 2012 irs forms These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. 2012 irs forms If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. 2012 irs forms To meet this qualification, the machine-sensible records must reconcile with your books and return. 2012 irs forms These records must provide enough detail to identify the underlying source documents. 2012 irs forms You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. 2012 irs forms This documentation must be sufficiently detailed to show all of the following items. 2012 irs forms Functions being performed as the data flows through the system. 2012 irs forms Controls used to ensure accurate and reliable processing. 2012 irs forms Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. 2012 irs forms Charts of accounts and detailed account descriptions. 2012 irs forms See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. 2012 irs forms How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. 2012 irs forms Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. 2012 irs forms The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. 2012 irs forms Table 3 contains the periods of limitations that apply to income tax returns. 2012 irs forms Unless otherwise stated, the years refer to the period after the return was filed. 2012 irs forms Returns filed before the due date are treated as filed on the due date. 2012 irs forms Keep copies of your filed tax returns. 2012 irs forms They help in preparing future tax returns and making computations if you file an amended return. 2012 irs forms Employment taxes. 2012 irs forms   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. 2012 irs forms For more information about recordkeeping for employment taxes, see Publication 15. 2012 irs forms Assets. 2012 irs forms   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. 2012 irs forms You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. 2012 irs forms   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. 2012 irs forms You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. 2012 irs forms Records for nontax purposes. 2012 irs forms   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. 2012 irs forms For example, your insurance company or creditors may require you to keep them longer than the IRS does. 2012 irs forms Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. 2012 irs forms Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. 2012 irs forms These sample records should not be viewed as a recommendation of how to keep your records. 2012 irs forms They are intended only to show how one business keeps its records. 2012 irs forms 1. 2012 irs forms Daily Summary of Cash Receipts This summary is a record of cash sales for the day. 2012 irs forms It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. 2012 irs forms Henry takes the cash sales entry from his cash register tape. 2012 irs forms If he had no cash register, he would simply total his cash sale slips and any other cash received that day. 2012 irs forms He carries the total receipts shown in this summary for January 3 ($267. 2012 irs forms 80), including cash sales ($263. 2012 irs forms 60) and sales tax ($4. 2012 irs forms 20), to the Monthly Summary of Cash Receipts. 2012 irs forms Petty cash fund. 2012 irs forms   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. 2012 irs forms Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. 2012 irs forms He sets up a fixed amount ($50) in his petty cash fund. 2012 irs forms The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. 2012 irs forms When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. 2012 irs forms (See the Check Disbursements Journal entry for check number 92. 2012 irs forms ) This restores the fund to its fixed amount of $50. 2012 irs forms He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. 2012 irs forms 2. 2012 irs forms Monthly Summary of Cash Receipts This shows the income activity for the month. 2012 irs forms Henry carries the total monthly net sales shown in this summary for January ($4,865. 2012 irs forms 05) to his Annual Summary. 2012 irs forms To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. 2012 irs forms He cannot take a deduction for sales tax turned over to the state because he only collected the tax. 2012 irs forms He does not include the tax in his income. 2012 irs forms 3. 2012 irs forms Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. 2012 irs forms All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. 2012 irs forms Frequent expenses have their own headings across the sheet. 2012 irs forms He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. 2012 irs forms Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. 2012 irs forms Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. 2012 irs forms If he did, he would record them in the journal, even though he could not deduct them as business expenses. 2012 irs forms Henry carries the January total of expenses for materials ($1,083. 2012 irs forms 50) to the Annual Summary. 2012 irs forms Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. 2012 irs forms , in the appropriate columns of that summary. 2012 irs forms 4. 2012 irs forms Employee Compensation Record This record shows the following information. 2012 irs forms The number of hours Henry's employee worked in a pay period. 2012 irs forms The employee's total pay for the period. 2012 irs forms The deductions Henry withheld in figuring the employee's net pay. 2012 irs forms The monthly gross payroll. 2012 irs forms Henry carries the January gross payroll ($520) to the Annual Summary. 2012 irs forms 5. 2012 irs forms Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. 2012 irs forms He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. 2012 irs forms He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. 2012 irs forms As in the journal, he keeps each major expense in a separate column. 2012 irs forms Henry carries the cash receipts total shown in the annual summary ($47,440. 2012 irs forms 9