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Free tax com Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. Free tax com More information. Free tax com Exception—Community Income. Free tax com Exception—Qualified joint venture. Free tax com More information. Free tax com More information. Free tax com 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. Free tax com 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. Free tax com Table 1 can help you learn what those responsibilities are. Free tax com Ask yourself each question listed in the table, then see the related discussion to find the answer. Free tax com In addition to knowing about federal taxes, you need to make some basic business decisions. Free tax com 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. Free tax com For information on how to contact the SBA, see How to Get More Information, later. Free tax com Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. Free tax com When beginning a business, you must decide which form of business to use. Free tax com Legal and tax considerations enter into this decision. Free tax com Only tax considerations are discussed in this publication. Free tax com Your form of business determines which income tax return form you have to file. Free tax com See Table 2 to find out which form you have to file. Free tax com Sole proprietorships. Free tax com   A sole proprietorship is an unincorporated business that is owned by one individual. Free tax com It is the simplest form of business organization to start and maintain. Free tax com The business has no existence apart from you, the owner. Free tax com Its liabilities are your personal liabilities. Free tax com You undertake the risks of the business for all assets owned, whether or not used in the business. Free tax com You include the income and expenses of the business on your personal tax return. Free tax com More information. Free tax com   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. Free tax com If you are a farmer, see Publication 225, Farmer's Tax Guide. Free tax com Partnerships. Free tax com   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Free tax com Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Free tax com   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. Free tax com , from its operations, but it does not pay income tax. Free tax com Instead, it “passes through” any profits or losses to its partners. Free tax com Each partner includes his or her share of the partnership's items on his or her tax return. Free tax com More information. Free tax com   For more information on partnerships, see Publication 541, Partnerships. Free tax com Husband and wife business. Free tax com   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. Free tax com Do not use Schedule C or C-EZ. Free tax com Instead, file Form 1065, U. Free tax com S. Free tax com Return of Partnership Income. Free tax com For more information, see Publication 541, Partnerships. Free tax com Exception—Community Income. Free tax com   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. Free tax com S. Free tax com possession, you can treat the business either as a sole proprietorship or a partnership. Free tax com The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Free tax com A change in your reporting position will be treated as a conversion of the entity. Free tax com Exception—Qualified joint venture. Free tax com   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. Free tax com 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. Free tax com For an explanation of "material participation," see the Instructions for Schedule C, line G. Free tax com   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. Free tax com Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Free tax com For more information, see Qualified Joint Venture in the Instructions for Schedule SE. Free tax com Corporations. Free tax com   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. Free tax com A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. Free tax com A corporation can also take special deductions. Free tax com   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. Free tax com However, shareholders cannot deduct any loss of the corporation. Free tax com More information. Free tax com   For more information on corporations, see Publication 542, Corporations. Free tax com S corporations. Free tax com   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. Free tax com Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Free tax com 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. Free tax com More information. Free tax com   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. Free tax com S. Free tax com Income Tax Return for an S Corporation. Free tax com Limited liability company. Free tax com   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Free tax com The members of an LLC are not personally liable for its debts. Free tax com 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. Free tax com 7701-3. Free tax com For more information, see the instructions for Form 8832, Entity Classification Election. Free tax com Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. Free tax com The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). Free tax com An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. Free tax com An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. Free tax com You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. Free tax com You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. Free tax com This includes returns or documents filed to report the following information. Free tax com Interest, dividends, royalties, etc. Free tax com , paid to you. Free tax com Any amount paid to you as a dependent care provider. Free tax com Certain other amounts paid to you that total $600 or more for the year. Free tax com If you do not furnish your identification number as required, you may be subject to penalties. Free tax com See Penalties, later. Free tax com Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. Free tax com 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. Free tax com Applying for an EIN. Free tax com   You may apply for an EIN: Online—Click on the EIN link at www. Free tax com irs. Free tax com gov/businesses/small. Free tax com The EIN is issued immediately once the application information is validated. Free tax com By telephone at 1-800-829-4933. Free tax com By mailing or faxing Form SS-4, Application for Employer Identification Number. Free tax com When to apply. Free tax com   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. Free tax com If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. Free tax com If you apply by telephone or through the IRS website, you can get an EIN immediately. Free tax com If you apply by fax, you can get an EIN within 4 business days. Free tax com   If you do not receive your EIN by the time a return is due, file your return anyway. Free tax com Write “Applied for” and the date you applied for the number in the space for the EIN. Free tax com Do not use your social security number as a substitute for an EIN on your tax returns. Free tax com More than one EIN. Free tax com   You should have only one EIN. Free tax com 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. Free tax com Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Free tax com The IRS will tell you which number to use. Free tax com More information. Free tax com   For more information about EINs, see Publication 1635, Understanding Your EIN. Free tax com 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). Free tax com The forms used to report these payments must include the payee's identification number. Free tax com Employee. Free tax com   If you have employees, you must get an SSN from each of them. Free tax com Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Free tax com If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Free tax com This may occur, for example, if the employee's name has changed due to marriage or divorce. Free tax com   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. Free tax com This form is available at SSA offices or by calling 1-800-772-1213. Free tax com It is also available from the SSA website at www. Free tax com ssa. Free tax com gov. Free tax com Other payee. Free tax com   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. Free tax com If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. Free tax com   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Free tax com This form is available from IRS offices or by calling 1-800-829-3676. Free tax com It is also available from the IRS website at IRS. Free tax com gov. Free tax com    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. Free tax com For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Free tax com Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. Free tax com A tax year is usually 12 consecutive months. Free tax com There are two kinds of tax years. Free tax com Calendar tax year. Free tax com A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Free tax com Fiscal tax year. Free tax com A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Free tax com 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. Free tax com 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. Free tax com You must use a calendar tax year if: You keep no books. Free tax com You have no annual accounting period. Free tax com Your present tax year does not qualify as a fiscal year. Free tax com You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. Free tax com For more information, see Publication 538, Accounting Periods and Methods. Free tax com First-time filer. Free tax com   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. Free tax com You adopt a tax year by filing your first income tax return using that tax year. Free tax com You have not adopted a tax year if you merely did any of the following. Free tax com Filed an application for an extension of time to file an income tax return. Free tax com Filed an application for an employer identification number. Free tax com Paid estimated taxes for that tax year. Free tax com Changing your tax year. Free tax com   Once you have adopted your tax year, you may have to get IRS approval to change it. Free tax com To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free tax com You may have to pay a fee. Free tax com For more information, see Publication 538. Free tax com Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. Free tax com You choose an accounting method for your business when you file your first income tax return. Free tax com There are two basic accounting methods. Free tax com Cash method. Free tax com Under the cash method, you report income in the tax year you receive it. Free tax com You usually deduct or capitalize expenses in the tax year you pay them. Free tax com Accrual method. Free tax com 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. Free tax com You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. Free tax com For other methods, see Publication 538. Free tax com If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Free tax com Inventories include goods held for sale in the normal course of business. Free tax com They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Free tax com Inventories are explained in Publication 538. Free tax com 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. Free tax com For more information, see Publication 538. Free tax com You must use the same accounting method to figure your taxable income and to keep your books. Free tax com Also, you must use an accounting method that clearly shows your income. Free tax com In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. Free tax com An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. Free tax com More than one business. Free tax com   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. Free tax com You must keep a complete and separate set of books and records for each business. Free tax com Changing your method of accounting. Free tax com   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Free tax com 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. Free tax com For examples of changes that require approval and information on how to get approval for the change, see Publication 538. Free tax com Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. Free tax com The following are the four general kinds of business taxes. Free tax com Income tax. Free tax com Self-employment tax. Free tax com Employment taxes. Free tax com Excise taxes. Free tax com See Table 2 for the forms you file to report these taxes. Free tax com You may want to get Publication 509. Free tax com It has tax calendars that tell you when to file returns and make tax payments. Free tax com Income Tax All businesses except partnerships must file an annual income tax return. Free tax com Partnerships file an information return. Free tax com Which form you use depends on how your business is organized. Free tax com See Table 2 to find out which return you have to file. Free tax com The federal income tax is a pay-as-you-go tax. Free tax com You must pay the tax as you earn or receive income during the year. Free tax com An employee usually has income tax withheld from his or her pay. Free tax com If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Free tax com If you are not required to make estimated tax payments, you may pay any tax due when you file your return. Free tax com Table 2. Free tax com Which Forms Must I File? IF you are a. Free tax com . Free tax com . Free tax com   THEN you may be liable for. Free tax com . Free tax com . Free tax com   Use Form. Free tax com . Free tax com . Free tax com 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. Free tax com 2 Various other schedules may be needed. Free tax com Estimated tax. Free tax com   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. Free tax com Sole proprietors, partners, and S corporation shareholders. Free tax com   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Free tax com Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Free tax com For more information, see Publication 505, Tax Withholding and Estimated Tax. Free tax com Corporations. Free tax com   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. Free tax com Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. Free tax com You must deposit the payments as explained later under Depositing Taxes. Free tax com For more information, see Publication 542. Free tax com Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Free tax com Your payments of SE tax contribute to your coverage under the social security system. Free tax com Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Free tax com You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Free tax com Your net earnings from self-employment were $400 or more. Free tax com You had church employee income of $108. Free tax com 28 or more. Free tax com Use Schedule SE (Form 1040) to figure your SE tax. Free tax com For more information, see Publication 334, Tax Guide for Small Business. Free tax com You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. Free tax com The Social Security Administration (SSA) time limit for posting self-employment income. Free tax com   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. Free tax com 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. Free tax com The SSA will not change its records to increase your self-employment income. Free tax com 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. Free tax com Employment taxes include the following. Free tax com Social security and Medicare taxes. Free tax com Federal income tax withholding. Free tax com Federal unemployment (FUTA) tax. Free tax com If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. Free tax com If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. Free tax com These publications explain your tax responsibilities as an employer. Free tax com If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Free tax com That publication has information to help you determine whether an individual is an employee or an independent contractor. Free tax com If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. Free tax com An independent contractor is someone who is self-employed. Free tax com Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. Free tax com Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. Free tax com 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. Free tax com Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Free tax com Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Free tax com Medicare tax pays for benefits under the hospital insurance part of FICA. Free tax com You withhold part of these taxes from your employee's wages and you pay a part yourself. Free tax com To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. Free tax com 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. Free tax com (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Free tax com ) 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. Free tax com You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. Free tax com You pay FUTA tax only from your own funds. Free tax com Employees do not pay this tax or have it withheld from their pay. Free tax com Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Free tax com See Publication 15 to find out if you can use this form. Free tax com Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. Free tax com Form I-9. Free tax com   You must verify that each new employee is legally eligible to work in the United States. Free tax com Both you and the employee must complete the U. Free tax com S. Free tax com Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Free tax com You can get the form from USCIS offices or from the USCIS website at www. Free tax com uscis. Free tax com gov. Free tax com Call the USCIS at 1-800-375-5283 for more information about your responsibilities. Free tax com Form W-4. Free tax com   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. Free tax com 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. Free tax com For more information, see Publication 15. Free tax com Employees claiming more than 10 withholding allowances. Free tax com   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. Free tax com See section 16 of Publication 15. Free tax com 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. Free tax com You must also send copies to the Social Security Administration. Free tax com See Information Returns, later, for more information on Form W-2. Free tax com 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. Free tax com Manufacture or sell certain products. Free tax com Operate certain kinds of businesses. Free tax com Use various kinds of equipment, facilities, or products. Free tax com Receive payment for certain services. Free tax com For more information on excise taxes, see Publication 510, Excise Taxes. Free tax com Form 720. Free tax com   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Free tax com Environmental taxes. Free tax com Communications and air transportation taxes. Free tax com Fuel taxes. Free tax com Tax on the first retail sale of heavy trucks, trailers, and tractors. Free tax com Manufacturers taxes on the sale or use of a variety of different articles. Free tax com Form 2290. Free tax com   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. Free tax com The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Free tax com Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Free tax com For more information, see the instructions for Form 2290. Free tax com Form 730. Free tax com   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. Free tax com Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. Free tax com Form 11-C. Free tax com   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. Free tax com Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Free tax com Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). Free tax com Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Free tax com Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. Free tax com Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Free tax com 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. Free tax com You must give a copy of each information return you are required to file to the recipient or payer. Free tax com In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Free tax com For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Free tax com Form 1099-MISC. Free tax com   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. Free tax com These payments include the following items. Free tax com 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. Free tax com Rent payments of $600 or more, other than rents paid to real estate agents. Free tax com Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Free tax com Royalty payments of $10 or more. Free tax com Payments to certain crew members by operators of fishing boats. Free tax com 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. Free tax com Form W-2. Free tax com   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. Free tax com For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. Free tax com Form 8300. Free tax com   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. Free tax com Cash includes U. Free tax com S. Free tax com and foreign coin and currency. Free tax com It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Free tax com For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Free tax com Penalties The law provides penalties for not filing returns or paying taxes as required. Free tax com Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. Free tax com Failure to file tax returns. Free tax com   If you do not file your tax return by the due date, you may have to pay a penalty. Free tax com The penalty is based on the tax not paid by the due date. Free tax com See your tax return instructions for more information about this penalty. Free tax com Failure to pay tax. Free tax com   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. Free tax com For more information, see your tax return instructions. Free tax com Failure to withhold, deposit, or pay taxes. Free tax com   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. Free tax com You may also be subject to penalties if you deposit the taxes late. Free tax com For more information, see Publication 15. Free tax com Failure to follow information reporting requirements. Free tax com   The following penalties apply if you are required to file information returns. Free tax com For more information, see the General Instructions for Certain Information Returns. Free tax com Failure to file information returns. Free tax com 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. Free tax com Failure to furnish correct payee statements. Free tax com 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. Free tax com Waiver of penalty. Free tax com   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. Free tax com   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. Free tax com (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. Free tax com ) Failure to supply taxpayer identification number. Free tax com   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. Free tax com 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. Free tax com Business Expenses You can deduct business expenses on your income tax return. Free tax com These are the current operating costs of running your business. Free tax com To be deductible, a business expense must be both ordinary and necessary. Free tax com An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Free tax com A necessary expense is one that is helpful and appropriate for your business, trade, or profession. Free tax com An expense does not have to be indispensable to be considered necessary. Free tax com The following are brief explanations of some expenses that are of interest to people starting a business. Free tax com There are many other expenses that you may be able to deduct. Free tax com See your form instructions and Publication 535, Business Expenses. Free tax com Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. Free tax com Your business start-up costs will depend on the type of business you are starting. Free tax com They may include costs for advertising, travel, surveys, and training. Free tax com These costs are generally capital expenses. Free tax com You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Free tax com 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. Free tax com The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Free tax com Any remaining cost must be amortized. Free tax com For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. Free tax com 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. Free tax com You must spread the cost over more than one tax year and deduct part of it each year. Free tax com This method of deducting the cost of business property is called depreciation. Free tax com Business property you must depreciate includes the following items. Free tax com Office furniture. Free tax com Buildings. Free tax com Machinery and equipment. Free tax com You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Free tax com This deduction is known as the “section 179 deduction. Free tax com ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. Free tax com Depreciation must be taken in the year it is allowable. Free tax com Allowable depreciation not taken in a prior year cannot be taken in the current year. Free tax com If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. Free tax com S. Free tax com Individual Income Tax Return, or by changing your accounting method. Free tax com For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. Free tax com Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. Free tax com Even then, your deduction may be limited. Free tax com To qualify to claim expenses for business use of your home, you must meet both the following tests. Free tax com 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. Free tax com Exclusive use. Free tax com   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Free tax com The area used for business can be a room or other separately identifiable space. Free tax com The space does not need to be marked off by a permanent partition. Free tax com   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. Free tax com Exceptions to exclusive use. Free tax com   You do not have to meet the exclusive use test if either of the following applies. Free tax com You use part of your home for the storage of inventory or product samples. Free tax com You use part of your home as a daycare facility. Free tax com For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Free tax com Principal place of business. Free tax com   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Free tax com You use it exclusively and regularly for administrative or management activities of your trade or business. Free tax com You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Free tax com   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. Free tax com The relative importance of the activities performed at each location. Free tax com If the relative importance factor does not determine your principal place of business, the time spent at each location. Free tax com    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Free tax com However, for other ways to qualify to deduct home office expenses, see Publication 587. Free tax com 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. Free tax com If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. Free tax com More information. Free tax com   For more information about business use of your home, see Publication 587. Free tax com Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. Free tax com You generally can deduct either your actual expenses or the standard mileage rate. Free tax com Actual expenses. Free tax com   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. Free tax com You can divide your expenses based on the miles driven for each purpose. Free tax com Example. Free tax com You are the sole proprietor of a flower shop. Free tax com You drove your van 20,000 miles during the year. Free tax com 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. Free tax com You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Free tax com Standard mileage rate. Free tax com   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. Free tax com You can use the standard mileage rate for a vehicle you own or lease. Free tax com The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. Free tax com It is announced annually by the IRS. Free tax com To figure your deduction, multiply your business miles by the standard mileage rate for the year. Free tax com    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. Free tax com However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. Free tax com Choosing the standard mileage rate. Free tax com   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. Free tax com In later years, you can choose to use either the standard mileage rate or actual expenses. Free tax com   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). Free tax com Additional information. Free tax com   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Free tax com Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. Free tax com It also explains how long you must keep your records for federal tax purposes. Free tax com A sample recordkeeping system is illustrated at the end of this part. Free tax com Why Keep Records? Everyone in business must keep records. Free tax com Good records will help you do the following. Free tax com Monitor the progress of your business. Free tax com   You need good records to monitor the progress of your business. Free tax com Records can show whether your business is improving, which items are selling, or what changes you need to make. Free tax com Good records can increase the likelihood of business success. Free tax com Prepare your financial statements. Free tax com   You need good records to prepare accurate financial statements. Free tax com These include income (profit and loss) statements and balance sheets. Free tax com These statements can help you in dealing with your bank or creditors and help you manage your business. Free tax com An income statement shows the income and expenses of the business for a given period of time. Free tax com A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Free tax com Identify source of receipts. Free tax com   You will receive money or property from many sources. Free tax com Your records can identify the source of your receipts. Free tax com You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. Free tax com Keep track of deductible expenses. Free tax com   You may forget expenses when you prepare your tax return unless you record them when they occur. Free tax com Prepare your tax returns. Free tax com   You need good records to prepare your tax returns. Free tax com These records must support the income, expenses, and credits you report. Free tax com Generally, these are the same records you use to monitor your business and prepare your financial statements. Free tax com Support items reported on tax returns. Free tax com   You must keep your business records available at all times for inspection by the IRS. Free tax com If the IRS examines any of your tax returns, you may be asked to explain the items reported. Free tax com A complete set of records will speed up the examination. Free tax com Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Free tax com You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Free tax com The business you are in affects the type of records you need to keep for federal tax purposes. Free tax com You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Free tax com See Accounting Method, earlier. Free tax com If you are in more than one business, you should keep a complete and separate set of records for each business. Free tax com A corporation should keep minutes of board of directors' meetings. Free tax com Your recordkeeping system should include a summary of your business transactions. Free tax com This summary is ordinarily made in your books (for example, accounting journals and ledgers). Free tax com Your books must show your gross income, as well as your deductions and credits. Free tax com For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. Free tax com In addition, you must keep supporting documents, explained later. Free tax com Electronic records. Free tax com   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Free tax com 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. Free tax com 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. Free tax com The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Free tax com All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Free tax com Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Free tax com   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. Free tax com You still have the responsibility of retaining any other books and records that are required to be retained. Free tax com   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Free tax com This test is not considered an examination and the results must be shared with you. Free tax com If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Free tax com 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. Free tax com For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. Free tax com Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Free tax com Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Free tax com These documents contain information you need to record in your books. Free tax com It is important to keep these documents because they support the entries in your books and on your tax return. Free tax com Keep them in an orderly fashion and in a safe place. Free tax com For instance, organize them by year and type of income or expense. Free tax com Gross receipts. Free tax com   Gross receipts are the income you receive from your business. Free tax com You should keep supporting documents that show the amounts and sources of your gross receipts. Free tax com Documents that show gross receipts include the following. Free tax com Cash register tapes. Free tax com Bank deposit slips. Free tax com Receipt books. Free tax com Invoices. Free tax com Credit card charge slips. Free tax com Forms 1099-MISC. Free tax com Purchases. Free tax com   Purchases are the items you buy and resell to customers. Free tax com If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Free tax com Your supporting documents should show the amount paid and that the amount was for purchases. Free tax com Documents for purchases include the following. Free tax com Canceled checks. Free tax com Cash register tape receipts. Free tax com Credit card sales slips. Free tax com Invoices. Free tax com These records will help you determine the value of your inventory at the end of the year. Free tax com See Publication 538 for information on methods for valuing inventory. Free tax com Expenses. Free tax com   Expenses are the costs you incur (other than purchases) to carry on your business. Free tax com Your supporting documents should show the amount paid and that the amount was for a business expense. Free tax com Documents for expenses include the following. Free tax com Canceled checks. Free tax com Cash register tapes. Free tax com Account statements. Free tax com Credit card sales slips. Free tax com Invoices. Free tax com Petty cash slips for small cash payments. Free tax com    A petty cash fund allows you to make small payments without having to write checks for small amounts. Free tax com 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. Free tax com Travel, transportation, entertainment, and gift expenses. Free tax com   Specific recordkeeping rules apply to these expenses. Free tax com For more information, see Publication 463. Free tax com Employment taxes. Free tax com   There are specific employment tax records you must keep. Free tax com For a list, see Publication 15. Free tax com Assets. Free tax com   Assets are the property, such as machinery and furniture you own and use in your business. Free tax com You must keep records to verify certain information about your business assets. Free tax com You need records to figure the annual depreciation and the gain or loss when you sell the assets. Free tax com Your records should show the following information. Free tax com When and how you acquired the asset. Free tax com Purchase price. Free tax com Cost of any improvements. Free tax com Section 179 deduction taken. Free tax com Deductions taken for depreciation. Free tax com Deductions taken for casualty losses, such as losses resulting from fires or storms. Free tax com How you used the asset. Free tax com When and how you disposed of the asset. Free tax com Selling price. Free tax com Expenses of sale. Free tax com   The following documents may show this information. Free tax com Purchase and sales invoices. Free tax com Real estate closing statements. Free tax com Canceled checks. Free tax com 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. Free tax com These include account statements prepared for the financial institution by a third party. Free tax com These account statements must be highly legible. Free tax com The following table lists acceptable account statements. Free tax com  IF payment is by. Free tax com . Free tax com . Free tax com THEN the statement must show the. Free tax com . Free tax com . Free tax com Check Check number. Free tax com Amount. Free tax com Payee's name. Free tax com Date the check amount was posted to the account by the financial institution. Free tax com Electronic funds transfer Amount transferred. Free tax com Payee's name. Free tax com Date the transfer was posted to the account by the financial institution. Free tax com Credit card Amount charged. Free tax com Payee's name. Free tax com Transaction date. Free tax com    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Free tax com You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Free tax com Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. Free tax com (Your business transactions are shown on the supporting documents just discussed. Free tax com ) Business transactions are ordinarily summarized in books called journals and ledgers. Free tax com You can buy them at your local stationery or office supply store. Free tax com A journal is a book where you record each business transaction shown on your supporting documents. Free tax com You may have to keep separate journals for transactions that occur frequently. Free tax com A ledger is a book that contains the totals from all of your journals. Free tax com It is organized into different accounts. Free tax com Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. Free tax com For example, a recordkeeping system for a small business might include the following items. Free tax com Business checkbook. Free tax com Daily summary of cash receipts. Free tax com Monthly summary of cash receipts. Free tax com Check disbursements journal. Free tax com Depreciation worksheet. Free tax com Employee compensation record. Free tax com The business checkbook is explained next. Free tax com The other items are illustrated later under Sample Record System. Free tax com The system you use to record business transactions will be more effective if you follow good recordkeeping practices. Free tax com For example, record expenses when they occur, and identify the source of recorded receipts. Free tax com Generally, it is best to record transactions on a daily basis. Free tax com Business checkbook. Free tax com   One of the first things you should do when you start a business is open a business checking account. Free tax com You should keep your business account separate from your personal checking account. Free tax com   The business checkbook is your basic source of information for recording your business expenses. Free tax com You should deposit all daily receipts in your business checking account. Free tax com You should check your account for errors by reconciling it. Free tax com See Reconciling the checking account, later. Free tax com   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. Free tax com You should also note on the deposit slip the source of the deposit and keep copies of all slips. Free tax com   You should make all payments by check to document business expenses. Free tax com Write checks payable to yourself only when making withdrawals from your business for personal use. Free tax com Avoid writing checks payable to cash. Free tax com If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. Free tax com If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Free tax com    Use the business account for business purposes only. Free tax com Indicate the source of deposits and the type of expense in the checkbook. Free tax com Reconciling the checking account. Free tax com   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. Free tax com 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. Free tax com   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. Free tax com    You should reconcile your checking account each month. Free tax com     Before you reconcile your monthly bank statement, check your own figures. Free tax com Begin with the balance shown in your checkbook at the end of the previous month. Free tax com To this balance, add the total cash deposited during the month and subtract the total cash disbursements. Free tax com   After checking your figures, the result should agree with your checkbook balance at the end of the month. Free tax com If the result does not agree, you may have made an error in recording a check or deposit. Free tax com You can find the error by doing the following. Free tax com 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. Free tax com 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. Free tax com Adding the deposit amounts in your checkbook. Free tax com Compare that total with the monthly total in your cash receipt book, if you have one. Free tax com If the totals do not agree, check the individual amounts to find any errors. Free tax com   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. Free tax com   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Free tax com Many banks print a reconciliation worksheet on the back of the statement. Free tax com   To reconcile your account, follow these steps. Free tax com Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Free tax com Note all differences in the dollar amounts. Free tax com Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Free tax com Note all differences in the dollar amounts. Free tax com Mark the check number in the checkbook as having cleared the bank. Free tax com After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Free tax com Prepare a bank reconciliation. Free tax com One is illustrated later under Sample Record System. Free tax com Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. Free tax com At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. Free tax com If you still have differences, check the previous steps to find the errors. Free tax com   Table 3. Free tax com Period of Limitations IF you. Free tax com . Free tax com . Free tax com   THEN the period is. Free tax com . Free tax com . Free tax com 1. Free tax com Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. Free tax com 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. Free tax com File a fraudulent return   Not limited 4. Free tax com Do not file a return   Not limited 5. Free tax com File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. Free tax com 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. Free tax com The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. Free tax com You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Free tax com Single-entry. Free tax com   A single-entry system is based on the income statement (profit or loss statement). Free tax com It can be a simple and practical system if you are starting a small business. Free tax com 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. Free tax com Double-entry. Free tax com   A double-entry bookkeeping system uses journals and ledgers. Free tax com Transactions are first entered in a journal and then posted to ledger accounts. Free tax com These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). Free tax com You close income and expense accounts at the end of each tax year. Free tax com You keep asset, liability, and net worth accounts open on a permanent basis. Free tax com   In the double-entry system, each account has a left side for debits and a right side for credits. Free tax com It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. Free tax com   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. Free tax com If the amounts do not balance, you have made an error and you must find and correct it. Free tax com   An example of a journal entry exhibiting a payment of rent in October is shown next. Free tax com General Journal Date Description of Entry Debit  Credit Oct. Free tax com 5 Rent expense 780. Free tax com 00     Cash   780. Free tax com 00                 Computerized System There are computer software packages you can use for recordkeeping. Free tax com They can be purchased in many retail stores. Free tax com These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. Free tax com 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. Free tax com To meet this qualification, the machine-sensible records must reconcile with your books and return. Free tax com These records must provide enough detail to identify the underlying source documents. Free tax com You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. Free tax com This documentation must be sufficiently detailed to show all of the following items. Free tax com Functions being performed as the data flows through the system. Free tax com Controls used to ensure accurate and reliable processing. Free tax com Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. Free tax com Charts of accounts and detailed account descriptions. Free tax com See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. Free tax com 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. Free tax com 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. Free tax com 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. Free tax com Table 3 contains the periods of limitations that apply to income tax returns. Free tax com Unless otherwise stated, the years refer to the period after the return was filed. Free tax com Returns filed before the due date are treated as filed on the due date. Free tax com Keep copies of your filed tax returns. Free tax com They help in preparing future tax returns and making computations if you file an amended return. Free tax com Employment taxes. Free tax com   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. Free tax com For more information about recordkeeping for employment taxes, see Publication 15. Free tax com Assets. Free tax com   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. Free tax com 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. Free tax com   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. Free tax com 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. Free tax com Records for nontax purposes. Free tax com   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. Free tax com For example, your insurance company or creditors may require you to keep them longer than the IRS does. Free tax com 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. Free tax com Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. Free tax com These sample records should not be viewed as a recommendation of how to keep your records. Free tax com They are intended only to show how one business keeps its records. Free tax com 1. Free tax com Daily Summary of Cash Receipts This summary is a record of cash sales for the day. Free tax com 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. Free tax com Henry takes the cash sales entry from his cash register tape. Free tax com If he had no cash register, he would simply total his cash sale slips and any other cash received that day. Free tax com He carries the total receipts shown in this summary for January 3 ($267. Free tax com 80), including cash sales ($263. Free tax com 60) and sales tax ($4. Free tax com 20), to the Monthly Summary of Cash Receipts. Free tax com Petty cash fund. Free tax com   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Free tax com 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. Free tax com He sets up a fixed amount ($50) in his petty cash fund. Free tax com The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. Free tax com 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. Free tax com (See the Check Disbursements Journal entry for check number 92. Free tax com ) This restores the fund to its fixed amount of $50. Free tax com He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. Free tax com 2. Free tax com Monthly Summary of Cash Receipts This shows the income activity for the month. Free tax com Henry carries the total monthly net sales shown in this summary for January ($4,865. Free tax com 05) to his Annual Summary. Free tax com 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. Free tax com He cannot take a deduction for sales tax turned over to the state because he only collected the tax. Free tax com He does not include the tax in his income. Free tax com 3. Free tax com Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. Free tax com All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. Free tax com Frequent expenses have their own headings across the sheet. Free tax com He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Free tax com Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. Free tax com Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. Free tax com If he did, he would record them in the journal, even though he could not deduct them as business expenses. Free tax com Henry carries the January total of expenses for materials ($1,083. Free tax com 50) to the Annual Summary. Free tax com Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. Free tax com , in the appropriate columns of that summary. Free tax com 4. Free tax com Employee Compensation Record This record shows the following information. Free tax com The number of hours Henry's employee worked in a pay period. Free tax com The employee's total pay for the period. Free tax com The deductions Henry withheld in figuring the employee's net pay. Free tax com The monthly gross payroll. Free tax com Henry carries the January gross payroll ($520) to the Annual Summary. Free tax com 5. Free tax com Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. Free tax com He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. Free tax com He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. Free tax com As in the journal, he keeps each major expense in a separate column. Free tax com Henry carries the cash receipts total shown in the annual summary ($47,440. Free tax com 9
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Free tax com 10. Free tax com   Indoor Tanning Services Tax Table of Contents The tax on indoor tanning service is 10% of the amount paid for that service. Free tax com The tax is paid by the person paying for the services and is collected by the person receiving payment for the indoor tanning services. Free tax com Definition of indoor tanning services. Free tax com   Indoor tanning service means a service employing any electronic product designed to incorporate one or more ultraviolet lamps and intended for the irradiation of an individual by ultraviolet radiation, with wavelengths in air between 200 and 400 nanometers, to induce skin tanning. Free tax com The term does not include phototherapy service performed by, and on the premises of, a licensed medical professional (such as a dermatologist, psychologist, or registered nurse). Free tax com See regulations section 49. Free tax com 5000B-1 for more information, and special rules for qualified physical fitness facilities, undesignated payment cards, and bundled payments. Free tax com File Form 720. Free tax com   The person receiving the payment for indoor tanning services (collector) must collect and remit the tax and file the return. Free tax com If the tax is not collected for any reason, the collector is liable for the tax. Free tax com The collector is not required to make semimonthly deposits of the tax. Free tax com Prev  Up  Next   Home   More Online Publications