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Myfreetaxs 5. Myfreetaxs   Figuring Your Tax Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tax Year Identification NumberF-1 and M-1 visa holders. Myfreetaxs J-1 visa holders. Myfreetaxs Filing StatusResident Aliens Nonresident Aliens Reporting Your Income DeductionsResident Aliens Nonresident Aliens ExemptionsResident Aliens Nonresident Aliens Itemized DeductionsResident Aliens Nonresident Aliens Tax Credits and PaymentsResident Aliens Nonresident Aliens Bona Fide Residents of American Samoa or Puerto Rico Introduction After you have determined your alien status, the source of your income, and if and how that income is taxed in the United States, your next step is to figure your tax. Myfreetaxs The information in this chapter is not as comprehensive for resident aliens as it is for nonresident aliens. Myfreetaxs Resident aliens should get publications, forms, and instructions for U. Myfreetaxs S. Myfreetaxs citizens, because the information for filing returns for resident aliens is generally the same as for U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs If you are both a nonresident alien and a resident alien in the same tax year, see chapter 6 for a discussion of dual-status aliens. Myfreetaxs Topics - This chapter discusses: Identification numbers, Filing status, Deductions, Exemptions, Tax credits and payments, and Special rules for bona fide residents of American Samoa and Puerto Rico. Myfreetaxs Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 501 Exemptions, Standard Deduction, and Filing Information 521 Moving Expenses 526 Charitable Contributions 535 Business Expenses 597 Information on the United States–Canada Income Tax Treaty Form (and Instructions) W-7 Application for IRS Individual Taxpayer Identification Number 1040 U. Myfreetaxs S. Myfreetaxs Individual Income Tax Return 1040NR U. Myfreetaxs S. Myfreetaxs Nonresident Alien Income Tax Return 1040NR-EZ U. Myfreetaxs S. Myfreetaxs Income Tax Return for Certain Nonresident Aliens With No Dependents 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3903 Moving Expenses 4563 Exclusion of Income for Bona Fide Residents of American Samoa 8959 Additional Medicare Tax See chapter 12 for information about getting these publications and forms. Myfreetaxs Tax Year You must figure your income and file a tax return on the basis of an annual accounting period called a tax year. Myfreetaxs If you have not previously established a fiscal tax year, your tax year is the calendar year. Myfreetaxs A calendar year is 12 consecutive months ending on December 31. Myfreetaxs If you have previously established a regular fiscal year (12 consecutive months ending on the last day of a month other than December or a 52–53 week year) and are considered to be a U. Myfreetaxs S. Myfreetaxs resident for any calendar year, you will be treated as a U. Myfreetaxs S. Myfreetaxs resident for any part of your fiscal year that falls within that calendar year. Myfreetaxs Identification Number A taxpayer identification number must be furnished on returns, statements, and other tax-related documents. Myfreetaxs For an individual, this is a social security number (SSN). Myfreetaxs If you do not have and are not eligible to get an SSN, you must apply for an individual taxpayer identification number (ITIN). Myfreetaxs An employer identification number (EIN) is required if you are engaged in a trade or business as a sole proprietor and have employees or a qualified retirement plan. Myfreetaxs You must furnish a taxpayer identification number if you are: An alien who has income effectively connected with the conduct of a U. Myfreetaxs S. Myfreetaxs trade or business at any time during the year, An alien who has a U. Myfreetaxs S. Myfreetaxs office or place of business at any time during the year, A nonresident alien spouse treated as a resident, as discussed in chapter 1, or Any other alien who files a tax return, an amended return, or a refund claim (but not information returns). Myfreetaxs Social security number (SSN). Myfreetaxs   Generally, you can get an SSN if you have been lawfully admitted to the United States for permanent residence or under other immigration categories that authorize U. Myfreetaxs S. Myfreetaxs employment. Myfreetaxs   To apply for this number, get Form SS-5, Application for a Social Security Card, from your local Social Security Administration (SSA) office or call the SSA at 1-800-772-1213. Myfreetaxs You can also download Form SS-5 from the SSA's website at www. Myfreetaxs socialsecurity. Myfreetaxs gov/ssnumber/ss5. Myfreetaxs htm. Myfreetaxs You must visit an SSA office in person and submit your Form SS-5 along with original documentation showing your age, identity, immigration status, and authority to work in the United States. Myfreetaxs Generally, you will receive your card about 2 weeks after the SSA has all of the necessary information. Myfreetaxs F-1 and M-1 visa holders. Myfreetaxs    If you are an F-1 or M-1 student, you must also show your Form I-20. Myfreetaxs For more information, see SSA Publication 05-10181, International Students and Social Security Numbers, available online at www. Myfreetaxs socialsecurity. Myfreetaxs gov/pubs/10181. Myfreetaxs html. Myfreetaxs J-1 visa holders. Myfreetaxs   If you are a J-1 exchange visitor, you will also need to show your Form DS-2019. Myfreetaxs For more information, see SSA Publication 05-10107, Foreign Workers and Social Security Numbers, available online at www. Myfreetaxs socialsecurity. Myfreetaxs gov/pubs/10107. Myfreetaxs html. Myfreetaxs Individual taxpayer identification number (ITIN). Myfreetaxs   If you do not have and are not eligible to get an SSN, you must apply for an ITIN. Myfreetaxs For details on how to do so, see Form W-7 and its instructions. Myfreetaxs Allow 6 to 10 weeks for the IRS to notify you of your ITIN. Myfreetaxs If you already have an ITIN, enter it wherever an SSN is required on your tax return. Myfreetaxs   An ITIN is for tax use only. Myfreetaxs It does not entitle you to social security benefits or change your employment or immigration status under U. Myfreetaxs S. Myfreetaxs law. Myfreetaxs   In addition to those aliens who are required to furnish a taxpayer identification number and are not eligible for an SSN, a Form W-7 must be filed for: Alien individuals who are claimed as dependents and are not eligible for an SSN, and Alien spouses who are claimed as exemptions and are not eligible for an SSN. Myfreetaxs Employer identification number (EIN). Myfreetaxs   An individual may use an SSN (or ITIN) for individual taxes and an EIN for business taxes. Myfreetaxs To apply for an EIN, file Form SS-4, Application for Employer Identification Number, with the IRS. Myfreetaxs Filing Status The amount of your tax depends on your filing status. Myfreetaxs Your filing status is important in determining whether you can take certain deductions and credits. Myfreetaxs The rules for determining your filing status are different for resident aliens and nonresident aliens. Myfreetaxs Resident Aliens Resident aliens can use the same filing statuses available to U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs See your form instructions or Publication 501 for more information on filing status. Myfreetaxs Married filing jointly. Myfreetaxs   Generally, you can file as married filing jointly only if both you and your spouse were resident aliens for the entire tax year, or if you make one of the choices discussed in chapter 1 to treat your spouse as a resident alien for the entire tax year. Myfreetaxs Qualifying widow(er). Myfreetaxs   If your spouse died in 2011 or 2012, you did not remarry before the end of 2013, and you have a dependent child living with you, you may qualify to file as a qualifying widow(er) and use the joint return tax rates. Myfreetaxs This applies only if you could have filed a joint return with your spouse for the year your spouse died. Myfreetaxs Head of household. Myfreetaxs   You can qualify as head of household if you are unmarried or considered unmarried on the last day of the year and you pay more than half the cost of keeping up a home for you and a qualifying person. Myfreetaxs You must be a resident alien for the entire tax year. Myfreetaxs   You are considered unmarried for this purpose if your spouse was a nonresident alien at any time during the year and you do not make one of the choices discussed in chapter 1 to treat your spouse as a resident alien for the entire tax year. Myfreetaxs Note. Myfreetaxs   Even if you are considered unmarried for head of household purposes because you are married to a nonresident alien, you may still be considered married for purposes of the earned income credit. Myfreetaxs In that case, you will not be entitled to the credit. Myfreetaxs See Publication 596 for more information. Myfreetaxs Nonresident Aliens If you are a nonresident alien filing Form 1040NR, you may be able to use one of the filing statuses discussed later. Myfreetaxs If you are filing Form 1040NR-EZ, you can only claim “Single nonresident alien” or “Married nonresident alien” as your filing status. Myfreetaxs Married nonresident alien. Myfreetaxs   Married nonresident aliens who are not married to U. Myfreetaxs S. Myfreetaxs citizens or residents generally must use the Tax Table column or the Tax Computation Worksheet for married filing separate returns when determining the tax on income effectively connected with a U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs Exceptions. Myfreetaxs   Married nonresident aliens normally cannot use the Tax Table column or the Tax Computation Worksheet for single individuals. Myfreetaxs However, you may be able to file as single if you lived apart from your spouse during the last 6 months of the year and you are a married resident of Canada, Mexico, South Korea, or are a married U. Myfreetaxs S. Myfreetaxs national. Myfreetaxs See the instructions for Form 1040NR or Form 1040NR-EZ to see if you qualify. Myfreetaxs U. Myfreetaxs S. Myfreetaxs national is defined later in this section under Qualifying widow(er) . Myfreetaxs   A nonresident alien generally cannot file as married filing jointly. Myfreetaxs However, a nonresident alien who is married to a U. Myfreetaxs S. Myfreetaxs citizen or resident can choose to be treated as a resident and file a joint return on Form 1040, Form 1040A, or Form 1040EZ. Myfreetaxs For information on these choices, see chapter 1. Myfreetaxs If you do not make the choice to file jointly, file Form 1040NR or Form 1040NR-EZ and use the Tax Table column or the Tax Computation Worksheet for married individuals filing separately. Myfreetaxs Qualifying widow(er). Myfreetaxs   You may be eligible to file as a qualifying widow(er) and use the joint return tax rates if all of the following conditions apply. Myfreetaxs You were a resident of Canada, Mexico, or South Korea, or a U. Myfreetaxs S. Myfreetaxs national (defined later). Myfreetaxs Your spouse died in 2011 or 2012 and you did not remarry before the end of 2013. Myfreetaxs You have a dependent child living with you. Myfreetaxs See the instructions for Form 1040NR for the rules for filing as a qualifying widow(er) with a dependent child. Myfreetaxs   A U. Myfreetaxs S. Myfreetaxs national is an individual who, although not a U. Myfreetaxs S. Myfreetaxs citizen, owes his or her allegiance to the United States. Myfreetaxs U. Myfreetaxs S. Myfreetaxs nationals include American Samoans and Northern Mariana Islanders who chose to become U. Myfreetaxs S. Myfreetaxs nationals instead of U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs Head of household. Myfreetaxs   You cannot file as head of household if you are a nonresident alien at any time during the tax year. Myfreetaxs However, if you are married, your spouse can qualify as a head of household if: Your spouse is a resident alien or U. Myfreetaxs S. Myfreetaxs citizen for the entire tax year, You do not choose to be treated as a resident alien, and Your spouse meets the other requirements for this filing status, as discussed earlier under Resident Aliens . Myfreetaxs Note. Myfreetaxs   Even if your spouse is considered unmarried for head of household purposes because you are a nonresident alien, your spouse may still be considered married for purposes of the earned income credit. Myfreetaxs In that case, your spouse will not be entitled to the credit. Myfreetaxs See Publication 596 for more information. Myfreetaxs Estates and trusts. Myfreetaxs   A nonresident alien estate or trust using Form 1040NR must use Tax Rate Schedule W in the Form 1040NR instructions when determining the tax on income effectively connected with a U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs Special rules for aliens from certain U. Myfreetaxs S. Myfreetaxs possessions. Myfreetaxs   A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico for the entire tax year and who is temporarily working in the United States should read Bona Fide Residents of American Samoa or Puerto Rico, at the end of this chapter, for information about special rules. Myfreetaxs Reporting Your Income You must report each item of income that is taxable according to the rules in chapters 2, 3, and 4. Myfreetaxs For resident aliens, this includes income from sources both within and outside the United States. Myfreetaxs For nonresident aliens, this includes both income that is effectively connected with a trade or business in the United States (subject to graduated tax rates) and income from U. Myfreetaxs S. Myfreetaxs sources that is not effectively connected (subject to a flat 30% tax rate or lower tax treaty rate). Myfreetaxs Deductions Resident and nonresident aliens can claim similar deductions on their U. Myfreetaxs S. Myfreetaxs tax returns. Myfreetaxs However, nonresident aliens generally can claim only deductions related to income that is effectively connected with their U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs Resident Aliens You can claim the same deductions allowed to U. Myfreetaxs S. Myfreetaxs citizens if you are a resident alien for the entire tax year. Myfreetaxs While the discussion that follows contains some of the same general rules and guidelines that apply to you, it is specifically directed toward nonresident aliens. Myfreetaxs You should get Form 1040 and instructions for more information on how to claim your allowable deductions. Myfreetaxs Nonresident Aliens You can claim deductions to figure your effectively connected taxable income. Myfreetaxs You generally cannot claim deductions related to income that is not connected with your U. Myfreetaxs S. Myfreetaxs business activities. Myfreetaxs Except for personal exemptions, and certain itemized deductions, discussed later, you can claim deductions only to the extent they are connected with your effectively connected income. Myfreetaxs Ordinary and necessary business expenses. Myfreetaxs   You can deduct all ordinary and necessary expenses in the operation of your U. Myfreetaxs S. Myfreetaxs trade or business to the extent they relate to income effectively connected with that trade or business. Myfreetaxs The deduction for travel expenses while in the United States is discussed under Itemized Deductions, later. Myfreetaxs For information about other business expenses, see Publication 535. Myfreetaxs Losses. Myfreetaxs   You can deduct losses resulting from transactions that you entered into for profit and that you were not reimbursed for by insurance, etc. Myfreetaxs to the extent that they relate to income that is effectively connected with a trade or business in the United States. Myfreetaxs Educator expenses. Myfreetaxs   If you were an eligible educator in 2013, you can deduct as an adjustment to income up to $250 in unreimbursed qualified expenses you paid or incurred during 2013 for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment, and other equipment and materials used in the classroom. Myfreetaxs For more information, see your tax form instructions. Myfreetaxs Individual retirement arrangement (IRA). Myfreetaxs   If you made contributions to a traditional IRA for 2013, you may be able to take an IRA deduction. Myfreetaxs But you must have taxable compensation effectively connected with a U. Myfreetaxs S. Myfreetaxs trade or business to do so. Myfreetaxs A Form 5498 should be sent to you by May 31, 2014, that shows all contributions to your traditional IRA for 2013. Myfreetaxs If you were covered by a retirement plan (qualified pension, profit-sharing (including 401(k)), annuity, SEP, SIMPLE, etc. Myfreetaxs ) at work or through self-employment, your IRA deduction may be reduced or eliminated. Myfreetaxs But you can still make contributions to a traditional IRA even if you cannot deduct them. Myfreetaxs If you made nondeductible contributions to a traditional IRA for 2013, you must report them on Form 8606, Nondeductible IRAs. Myfreetaxs   For more information, see Publication 590, Individual Retirement Arrangements (IRAs). Myfreetaxs Moving expenses. Myfreetaxs   If you are a nonresident alien temporarily in the United States earning taxable income for performing personal services, you can deduct moving expenses to the United States if you meet both of the following tests. Myfreetaxs You are a full-time employee for at least 39 weeks during the 12 months right after you move, or if you are self-employed, you work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months right after you move. Myfreetaxs Your new job location is at least 50 miles farther (by the shortest commonly traveled route) from your former home than your former job location was. Myfreetaxs If you had no former job location, the new job location must be at least 50 miles from your former home. Myfreetaxs   You cannot deduct the moving expense you have when returning to your home abroad or moving to a foreign job site. Myfreetaxs   Figure your deductible moving expenses to the United States on Form 3903, and deduct them on line 26 of Form 1040NR. Myfreetaxs   For more information on the moving expense deduction, see Publication 521. Myfreetaxs Reimbursements. Myfreetaxs   If your employer reimbursed you for allowable moving expenses under an accountable plan, your employer should have excluded these reimbursements from your income. Myfreetaxs You can only deduct allowable moving expenses that were not reimbursed by your employer or that were reimbursed but the reimbursement was included in your income. Myfreetaxs For more information, see Publication 521. Myfreetaxs Moving expense or travel expense. Myfreetaxs   If you deduct moving expenses to the United States, you cannot also deduct travel expenses (discussed later under Itemized Deductions) while temporarily away from your tax home in a foreign country. Myfreetaxs Moving expenses are based on a change in your principal place of business while travel expenses are based on your temporary absence from your principal place of business. Myfreetaxs Self-employed SEP, SIMPLE, and qualified retirement plans. Myfreetaxs   If you are self-employed, you may be able to deduct contributions to a SEP, SIMPLE, or qualified retirement plan that provides retirement benefits for yourself and your common-law employees, if any. Myfreetaxs To make deductible contributions for yourself, you must have net earnings from self-employment that are effectively connected with your U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs   Get Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), for further information. Myfreetaxs Penalty on early withdrawal of savings. Myfreetaxs   You must include in income all effectively connected interest income you receive or that is credited to your account during the year. Myfreetaxs Do not reduce it by any penalty you must pay on an early withdrawal from a time savings account. Myfreetaxs However, if the interest income is effectively connected with your U. Myfreetaxs S. Myfreetaxs trade or business during the year, you can deduct on line 30 of Form 1040NR the amount of the early withdrawal penalty that the banking institution charged. Myfreetaxs Student loan interest expense. Myfreetaxs   If you paid interest on a student loan in 2013, you may be able to deduct up to $2,500 of the interest you paid. Myfreetaxs Generally, you can claim the deduction if all the following requirements are met. Myfreetaxs Your filing status is any filing status except married filing separately. Myfreetaxs Your modified adjusted gross income is less than $75,000. Myfreetaxs No one else is claiming an exemption for you on his or her 2013 tax return. Myfreetaxs You paid interest on a loan taken out only to pay tuition and other qualified higher education expenses for yourself, your spouse, someone who was your dependent when the loan was taken out, or someone you could have claimed as a dependent for the year the loan was taken out except that: The person filed a joint return, The person had gross income that was equal to or more than the exemption amount for that year ($3,900 for 2013), or You could be claimed as a dependent on someone else's return. Myfreetaxs The loan is not from a related person or a person who borrowed the proceeds under a qualified employer plan or a contract purchased under such a plan. Myfreetaxs The education expenses were paid or incurred within a reasonable period of time before or after the loan was taken out. Myfreetaxs The person for whom the expenses were paid or incurred was an eligible student. Myfreetaxs Use the worksheet in the Form 1040NR or Form 1040NR-EZ instructions to figure the deduction. Myfreetaxs For more information, see Publication 970, Tax Benefits for Education. Myfreetaxs Exemptions Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Myfreetaxs S. Myfreetaxs tax return. Myfreetaxs Resident Aliens You can claim personal exemptions and exemptions for dependents according to the dependency rules for U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs You can claim an exemption for your spouse on a separate return if your spouse had no gross income for U. Myfreetaxs S. Myfreetaxs tax purposes and was not the dependent of another taxpayer. Myfreetaxs You can claim this exemption even if your spouse has not been a resident alien for a full tax year or is an alien who has not come to the United States. Myfreetaxs You can claim an exemption for each person who qualifies as a dependent according to the rules for U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs The dependent must be a citizen or national (defined earlier) of the United States or be a resident of the United States, Canada, or Mexico for some part of the calendar year in which your tax year begins. Myfreetaxs Get Publication 501 for more information. Myfreetaxs Your spouse and each dependent for whom you claim an exemption must have either an SSN or an ITIN. Myfreetaxs See Identification Number, earlier. Myfreetaxs Nonresident Aliens Generally, if you are a nonresident alien engaged in a trade or business in the United States, you can claim only one personal exemption ($3,900 for 2013). Myfreetaxs You may be able to claim an exemption for a spouse and a dependent if you are described in any of the following discussions. Myfreetaxs Your spouse and each dependent for whom you claim an exemption must have either an SSN or an ITIN. Myfreetaxs See Identification Number, earlier. Myfreetaxs Residents of Mexico or Canada or U. Myfreetaxs S. Myfreetaxs nationals. Myfreetaxs   If you are a resident of Mexico or Canada or a national of the United States (defined earlier), you can also claim a personal exemption for your spouse if your spouse had no gross income for U. Myfreetaxs S. Myfreetaxs tax purposes and cannot be claimed as the dependent on another U. Myfreetaxs S. Myfreetaxs taxpayer's return. Myfreetaxs In addition, you can claim exemptions for your dependents who meet certain tests. Myfreetaxs Residents of Mexico, Canada, or nationals of the United States must use the same rules as U. Myfreetaxs S. Myfreetaxs citizens to determine who is a dependent and for which dependents exemptions can be claimed. Myfreetaxs See Publication 501 for these rules. Myfreetaxs For purposes of these rules, dependents who are U. Myfreetaxs S. Myfreetaxs nationals meet the citizenship test discussed in Publication 501. Myfreetaxs Residents of South Korea. Myfreetaxs   Nonresident aliens who are residents of South Korea may be able to claim exemptions for a spouse and children. Myfreetaxs The income tax treaty with South Korea imposes two additional requirements on South Korean residents: The spouse and all children claimed must live with the alien in the United States at some time during the tax year, and The additional deduction for the exemptions must be prorated based on the ratio of the alien's U. Myfreetaxs S. Myfreetaxs source gross income effectively connected with a U. Myfreetaxs S. Myfreetaxs trade or business for the tax year to the alien's entire income from all sources during the tax year. Myfreetaxs Example. Myfreetaxs Mr. Myfreetaxs Park, a nonresident alien who is a resident of South Korea, lives temporarily in the United States with his wife and two children. Myfreetaxs During the tax year he receives U. Myfreetaxs S. Myfreetaxs compensation of $18,000. Myfreetaxs He also receives $6,000 of income from sources outside the United States that is not effectively connected with his U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs Thus, his total income for the year is $24,000. Myfreetaxs Mr. Myfreetaxs Park meets all requirements for claiming exemptions for his spouse and two children. Myfreetaxs The additional deduction for 2013 is $8,775 figured as follows: $18,000 $24,000 × $11,700* = $8,775               *3 × $3,900 = $11,700   Students and business apprentices from India. Myfreetaxs   Students and business apprentices who are eligible for the benefits of Article 21(2) of the United States–India Income Tax Treaty may be able to claim exemptions for their spouse and dependents. Myfreetaxs   You can claim an exemption for your spouse if he or she had no gross income during the year and cannot be claimed as a dependent on another U. Myfreetaxs S. Myfreetaxs taxpayer's return. Myfreetaxs   You can claim exemptions for each of your dependents not admitted to the United States on “F-2,” “J-2,” or “M-2” visas if they meet the same rules that apply to U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs See Publication 501 for these rules. Myfreetaxs   List your spouse and dependents on line 7c of Form 1040NR. Myfreetaxs Enter the total on the appropriate line to the right of line 7c. Myfreetaxs Itemized Deductions Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Myfreetaxs However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs Resident Aliens You can claim the same itemized deductions as U. Myfreetaxs S. Myfreetaxs citizens, using Schedule A of Form 1040. Myfreetaxs These deductions include certain medical and dental expenses, state and local income taxes, real estate taxes, interest you paid on a home mortgage, charitable contributions, casualty and theft losses, and miscellaneous deductions. Myfreetaxs If you do not itemize your deductions, you can claim the standard deduction for your particular filing status. Myfreetaxs For further information, see Form 1040 and instructions. Myfreetaxs Nonresident Aliens You can deduct certain itemized deductions if you receive income effectively connected with your U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs These deductions include state and local income taxes, charitable contributions to U. Myfreetaxs S. Myfreetaxs organizations, casualty and theft losses, and miscellaneous deductions. Myfreetaxs Use Schedule A of Form 1040NR to claim itemized deductions. Myfreetaxs If you are filing Form 1040NR-EZ, you can only claim a deduction for state or local income taxes. Myfreetaxs If you are claiming any other itemized deduction, you must file Form 1040NR. Myfreetaxs Standard deduction. Myfreetaxs   Nonresident aliens cannot claim the standard deduction. Myfreetaxs However, see Students and business apprentices from India , next. Myfreetaxs Students and business apprentices from India. Myfreetaxs   A special rule applies to students and business apprentices who are eligible for the benefits of Article 21(2) of the United States–India Income Tax Treaty. Myfreetaxs You can claim the standard deduction provided you do not claim itemized deductions. Myfreetaxs   Use Worksheet 5-1 to figure your standard deduction. Myfreetaxs If you are married and your spouse files a return and itemizes deductions, you cannot take the standard deduction. Myfreetaxs State and local income taxes. Myfreetaxs   You can deduct state and local income taxes you paid on income that is effectively connected with a trade or business in the United States. Myfreetaxs If you received a refund or rebate in 2013 of taxes you paid in an earlier year, do not reduce your deduction by that amount. Myfreetaxs Instead, you must include the refund or rebate in income if you deducted the taxes in the earlier year and the deduction reduced your tax. Myfreetaxs See Recoveries in Publication 525 for details on how to figure the amount to include in income. Myfreetaxs Charitable contributions. Myfreetaxs   You can deduct your charitable contributions or gifts to qualified organizations subject to certain limits. Myfreetaxs Qualified organizations include organizations that are religious, charitable, educational, scientific, or literary in nature, or that work to prevent cruelty to children or animals. Myfreetaxs Certain organizations that promote national or international amateur sports competition are also qualified organizations. Myfreetaxs Foreign organizations. Myfreetaxs   Contributions made directly to a foreign organization are not deductible. Myfreetaxs However, you can deduct contributions to a U. Myfreetaxs S. Myfreetaxs organization that transfers funds to a charitable foreign organization if the U. Myfreetaxs S. Myfreetaxs organization controls the use of the funds or if the foreign organization is only an administrative arm of the U. Myfreetaxs S. Myfreetaxs organization. Myfreetaxs   For more information about organizations that qualify to receive charitable contributions, see Publication 526, Charitable Contributions. Myfreetaxs Worksheet 5-1. Myfreetaxs 2013 Standard Deduction Worksheet for Students and Business Apprentices From India Caution. Myfreetaxs If you are married filing a separate return and your spouse itemizes deductions, do not complete this worksheet. Myfreetaxs You cannot take the standard deduction even if you were born before January 2, 1949, or are blind. Myfreetaxs 1 Enter the amount shown below for your filing status. Myfreetaxs           Single or married filing separately—$6,100 Qualifying widow(er)—$12,200 1. Myfreetaxs           2 Can you be claimed as a dependent on someone else's U. Myfreetaxs S. Myfreetaxs income tax return?  No. Myfreetaxs Enter the amount from line 1 on line 4. Myfreetaxs Skip line 3 and go to line 5. Myfreetaxs   Yes. Myfreetaxs Go to line 3. Myfreetaxs         3 Is your earned income* more than $650?           Yes. Myfreetaxs Add $350 to your earned income. Myfreetaxs Enter the total. Myfreetaxs           No. Myfreetaxs Enter $1,000 3. Myfreetaxs       4 Enter the smaller of line 1 or line 3 4. Myfreetaxs   5 If born before January 2, 1949, OR blind, enter $1,200 ($1,500 if single). Myfreetaxs If born before January 2, 1949, AND blind, enter $2,400 ($3,000 if single). Myfreetaxs Otherwise, enter -0- 5. Myfreetaxs   6 Add lines 4 and 5. Myfreetaxs Enter the total here and on Form 1040NR, line 38 (or Form 1040NR-EZ, line 11). Myfreetaxs Print “Standard Deduction Allowed Under U. Myfreetaxs S. Myfreetaxs –India Income Tax Treaty” in the space to the left of these lines. Myfreetaxs This is your standard deduction for 2013. Myfreetaxs 6. Myfreetaxs   *Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Myfreetaxs It also includes any amount received as a scholarship that you must include in your income. Myfreetaxs Generally, your earned income is the total of the amount(s) you reported on Form 1040NR, lines 8,12,13, and 19, minus amounts on lines 27 and 31 (or Form 1040NR-EZ, lines 3 and 5, minus any amount on line 8). Myfreetaxs Contributions from which you benefit. Myfreetaxs   If you receive a benefit as a result of making a contribution to a qualified organization, you can deduct only the amount of your contribution that is more than the value of the benefit you receive. Myfreetaxs   If you pay more than the fair market value to a qualified organization for merchandise, goods, or services, the amount you pay that is more than the value of the item can be a charitable contribution. Myfreetaxs For the excess amount to qualify, you must pay it with the intent to make a charitable contribution. Myfreetaxs Cash contributions. Myfreetaxs   You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written record from the charity. Myfreetaxs The written record must include the name of the charity, date of the contribution, and the amount of the contribution. Myfreetaxs   You may deduct a cash contribution of $250 or more only if you have a written statement from the charitable organization showing: The amount of any money contributed, Whether the organization gave you any goods or services in return for your contribution, and A description and estimate of the value of any goods or services described in (2). Myfreetaxs If you received only intangible religious benefits, the organization must state this, but it does not have to describe or value the benefit. Myfreetaxs Noncash contributions. Myfreetaxs   For contributions not made in cash, the records you must keep depend on the amount of your deduction. Myfreetaxs See Publication 526 for details. Myfreetaxs For example, if you make a noncash contribution and the amount of your deduction is more than $500, you must complete and attach to your tax return Form 8283, Noncash Charitable Contributions. Myfreetaxs If you deduct more than $500 for a contribution of a motor vehicle, boat, or airplane, you must also attach a statement from the charitable organization to your return. Myfreetaxs If your total deduction is over $5,000, you also may have to get appraisals of the values of the property. Myfreetaxs If the donated property is valued at more than $5,000, you must obtain a qualified appraisal. Myfreetaxs You generally must attach to your tax return an appraisal of any property if your deduction for the property is more than $500,000. Myfreetaxs See Form 8283 and its instructions for details. Myfreetaxs Contributions of appreciated property. Myfreetaxs   If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. Myfreetaxs However, if you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction. Myfreetaxs Your basis in the property is generally what you paid for it. Myfreetaxs If you need more information about basis, get Publication 551, Basis of Assets. Myfreetaxs   Different rules apply to figuring your deduction, depending on whether the property is: Ordinary income property, or Capital gain property. Myfreetaxs For information about these rules, see Publication 526. Myfreetaxs Limit. Myfreetaxs   The amount you can deduct in a tax year is limited in the same way it is for a citizen or resident of the United States. Myfreetaxs For a discussion of limits on charitable contributions and other information, get Publication 526. Myfreetaxs Casualty and theft losses. Myfreetaxs   You can deduct your loss from fire, storm, shipwreck, or other casualty, or theft of property even though your property is not connected with a U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs The property can be personal use property or income-producing property not connected with a U. Myfreetaxs S. Myfreetaxs trade or business. Myfreetaxs The property must be located in the United States at the time of the casualty or theft. Myfreetaxs You can deduct theft losses only in the year in which you discover the loss. Myfreetaxs   The amount of the loss is the fair market value of the property immediately before the casualty or theft less its fair market value immediately after the casualty or theft (but not more than its cost or adjusted basis) less any insurance or other reimbursement. Myfreetaxs The fair market value of property immediately after a theft is considered zero, because you no longer have the property. Myfreetaxs   If your property is covered by insurance, you should file a timely insurance claim for reimbursement. Myfreetaxs If you do not, you cannot deduct this loss as a casualty or theft loss. Myfreetaxs   Figure your deductible casualty and theft losses on Form 4684, Casualties and Thefts. Myfreetaxs Losses from personal use property. Myfreetaxs    You cannot deduct the first $100 of each casualty or theft loss to property held for personal use. Myfreetaxs You can deduct only the total of these losses for the year (reduced by the $100 limit) that is more than 10% of your adjusted gross income (line 37, Form 1040NR) for the year. Myfreetaxs Losses from income-producing property. Myfreetaxs   These losses are not subject to the limitations that apply to personal use property. Myfreetaxs Use Section B of Form 4684 to figure your deduction for these losses. Myfreetaxs Job expenses and other miscellaneous deductions. Myfreetaxs   You can deduct job expenses, such as allowable unreimbursed travel expenses (discussed next), and other miscellaneous deductions. Myfreetaxs Generally, the allowable deductions must be related to effectively connected income. Myfreetaxs Deductible expenses include: Union dues, Safety equipment and small tools needed for your job, Dues to professional organizations, Subscriptions to professional journals, Tax return preparation fees, and Casualty and theft losses of property used in performing services as an employee (employee property). Myfreetaxs   Most miscellaneous itemized deductions are deductible only if they are more than 2% of your adjusted gross income (line 37, Form 1040NR). Myfreetaxs For more information on miscellaneous deductions, see the instructions for Form 1040NR. Myfreetaxs Travel expenses. Myfreetaxs   You may be able to deduct your ordinary and necessary travel expenses while you are temporarily performing personal services in the United States. Myfreetaxs Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less. Myfreetaxs You must be able to show you were present in the United States on an activity that required your temporary absence from your regular place of work. Myfreetaxs   For example, if you have established a “tax home” through regular employment in a foreign country, and intend to return to similar employment in the same country at the end of your temporary stay in the United States, you can deduct reasonable travel expenses you paid. Myfreetaxs You cannot deduct travel expenses for other members of your family or party. Myfreetaxs Deductible travel expenses. Myfreetaxs   If you qualify, you can deduct your expenses for: Transportation—airfare, local transportation, including train, bus, etc. Myfreetaxs , Lodging—rent paid, utilities (do not include telephone), hotel or motel room expenses, and Meal expenses—actual expenses allowed if you keep records of the amounts, or, if you do not wish to keep detailed records, you are generally allowed a standard meal allowance amount depending on the date and area of your travel. Myfreetaxs You generally can deduct only 50% of unreimbursed meal expenses. Myfreetaxs The standard meal allowance rates for high-cost areas are available at www. Myfreetaxs gsa. Myfreetaxs gov/perdiem. Myfreetaxs The rates for other areas are in Publication 463. Myfreetaxs   Use Form 2106 or 2106-EZ to figure your allowable expenses that you claim on line 7 of Schedule A (Form 1040NR). Myfreetaxs Expenses allocable to U. Myfreetaxs S. Myfreetaxs tax-exempt income. Myfreetaxs   You cannot deduct an expense, or part of an expense, that is allocable to U. Myfreetaxs S. Myfreetaxs tax-exempt income, including income exempt by tax treaty. Myfreetaxs Example. Myfreetaxs Irina Oak, a citizen of Poland, resided in the United States for part of the year to acquire business experience from a U. Myfreetaxs S. Myfreetaxs company. Myfreetaxs During her stay in the United States, she received a salary of $8,000 from her Polish employer. Myfreetaxs She received no other U. Myfreetaxs S. Myfreetaxs source income. Myfreetaxs She spent $3,000 on travel expenses, of which $1,000 were for meals. Myfreetaxs None of these expenses were reimbursed. Myfreetaxs Under the tax treaty with Poland, $5,000 of her salary is exempt from U. Myfreetaxs S. Myfreetaxs income tax. Myfreetaxs In filling out Form 2106-EZ, she must reduce her deductible meal expenses by half ($500). Myfreetaxs She must reduce the remaining $2,500 of travel expenses by 62. Myfreetaxs 5% ($1,563) because 62. Myfreetaxs 5% ($5,000 ÷ $8,000) of her salary is exempt from tax. Myfreetaxs She enters the remaining total of $937 on line 7 of Schedule A (Form 1040NR). Myfreetaxs She completes the remaining lines according to the instructions for Schedule A. Myfreetaxs More information. Myfreetaxs   For more information about deductible expenses, reimbursements, and recordkeeping, get Publication 463. Myfreetaxs Tax Credits and Payments This discussion covers tax credits and payments for resident aliens, followed by a discussion of the credits and payments for nonresident aliens. Myfreetaxs Resident Aliens Resident aliens generally claim tax credits and report tax payments, including withholding, using the same rules that apply to U. Myfreetaxs S. Myfreetaxs citizens. Myfreetaxs The following items are some of the credits you may be able to claim. Myfreetaxs Foreign tax credit. Myfreetaxs   You can claim a credit, subject to certain limits, for income tax you paid or accrued to a foreign country on foreign source income. Myfreetaxs You cannot claim a credit for taxes paid or accrued on excluded foreign earned income. Myfreetaxs To claim a credit for income taxes paid or accrued to a foreign country, you generally will file Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), with your Form 1040. Myfreetaxs   For more information, get Publication 514, Foreign Tax Credit for Individuals. Myfreetaxs Child and dependent care credit. Myfreetaxs   You may be able to take this credit if you pay someone to care for your qualifying child who is under age 13, or your disabled dependent or disabled spouse, so that you can work or look for work. Myfreetaxs Generally, you must be able to claim an exemption for your dependent. Myfreetaxs   For more information, get Publication 503, Child and Dependent Care Expenses, and Form 2441, Child and Dependent Care Expenses. Myfreetaxs Credit for the elderly or the disabled. Myfreetaxs   You may qualify for this credit if you are 65 or older or if you retired on permanent and total disability. Myfreetaxs For more information on this credit, get Publication 524, Credit for the Elderly or the Disabled, and Schedule R (Form 1040A or 1040). Myfreetaxs Education credits. Myfreetaxs   You may qualify for these credits if you paid qualified education expenses for yourself, your spouse, or your dependent. Myfreetaxs There are two education credits: the American Opportunity Credit and the lifetime learning credit. Myfreetaxs You cannot claim these credits if you are married filing separately. Myfreetaxs Use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), to figure the credit. Myfreetaxs For more information, see Publication 970. Myfreetaxs Retirement savings contributions credit. Myfreetaxs   You may qualify for this credit (also known as the saver's credit) if you made eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA) in 2013. Myfreetaxs You cannot claim this credit if: You were born after January 1, 1996, You were a full-time student, Your exemption is claimed by someone else on his or her 2013 tax return, or Your adjusted gross income is more than: $59,000, if your filing status is married filing jointly, $44,250, if your filing status is head of household, or $29,500, if your filing status is single, married filing separately, or qualifying widow(er). Myfreetaxs Use Form 8880, Credit for Qualified Retirement Savings Contributions, to figure the credit. Myfreetaxs For more information, see Publication 590. Myfreetaxs Child tax credit. Myfreetaxs   You may be able to take this credit if you have a qualifying child. Myfreetaxs   A qualifying child for purposes of the child tax credit is a child who: Was under age 17 at the end of 2013. Myfreetaxs Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). Myfreetaxs Is a U. Myfreetaxs S. Myfreetaxs citizen, a U. Myfreetaxs S. Myfreetaxs national, or a resident alien. Myfreetaxs Did not provide over half of his or her own support for 2013. Myfreetaxs Lived with you more than half of 2013. Myfreetaxs Temporary absences, such as for school, vacation, or medical care, count as time lived in the home. Myfreetaxs Is claimed as a dependent on your return. Myfreetaxs An adopted child is always treated as your own child. Myfreetaxs An adopted child includes a child lawfully placed with you for legal adoption. Myfreetaxs   See your form instructions for additional details. Myfreetaxs Adoption credit. Myfreetaxs   You may qualify to take a tax credit of up to $12,970 for qualifying expenses paid to adopt an eligible child. Myfreetaxs This amount may be allowed for the adoption of a child with special needs regardless of whether you have qualifying expenses. Myfreetaxs To claim the adoption credit, file Form 8839, Qualified Adoption Expenses, with your Form 1040. Myfreetaxs Earned income credit. Myfreetaxs   You may qualify for an earned income credit of up to $3,250 if a child lived with you in the United States and your earned income and adjusted gross income were each less than $37,870 ($43,210 if married filing jointly). Myfreetaxs If two children lived with you in the United States and your earned income and adjusted gross income were each less than $43,038 ($48,378 if married filing jointly), your credit could be as much as $5,372. Myfreetaxs If three or more children lived with you in the United States and your earned income and adjusted gross income were each less than $46,227 ($51,567 if married filing jointly), your credit could be as much as $6,044. Myfreetaxs If you do not have a qualifying child and your earned income and adjusted gross income were each less than $14,340 ($19,680 if married filing jointly), your credit could be as much as $487. Myfreetaxs You cannot claim the earned income credit if your filing status is married filing separately. Myfreetaxs    You and your spouse (if filing a joint return) and any qualifying child must have valid SSNs to claim this credit. Myfreetaxs You cannot claim the credit using an ITIN. Myfreetaxs If a social security card has a legend that says Not Valid for Employment and the number was issued so that you (or your spouse or your qualifying child) could receive a federally funded benefit, you cannot claim the earned income credit. Myfreetaxs An example of a federally funded benefit is Medicaid. Myfreetaxs If a card has this legend and the individual's immigration status has changed so that the individual is now a U. Myfreetaxs S. Myfreetaxs citizen or lawful permanent resident, ask the SSA to issue a new social security card without the legend. Myfreetaxs Other information. Myfreetaxs   There are other eligibility rules that are not discussed here. Myfreetaxs For more information, get Publication 596, Earned Income Credit. Myfreetaxs Nonresident Aliens You can claim some of the same credits that resident aliens can claim. Myfreetaxs You can also report certain taxes you paid, are considered to have paid, or that were withheld from your income. Myfreetaxs Credits Credits are allowed only if you receive effectively connected income. Myfreetaxs You may be able to claim some of the following credits. Myfreetaxs Foreign tax credit. Myfreetaxs   If you receive foreign source income that is effectively connected with a trade or business in the United States, you can claim a credit for any income taxes paid or accrued to any foreign country or U. Myfreetaxs S. Myfreetaxs possession on that income. Myfreetaxs   If you do not have foreign source income effectively connected with a U. Myfreetaxs S. Myfreetaxs trade or business, you cannot claim credits against your U. Myfreetaxs S. Myfreetaxs tax for taxes paid or accrued to a foreign country or U. Myfreetaxs S. Myfreetaxs possession. Myfreetaxs   You cannot take any credit for taxes imposed by a foreign country or U. Myfreetaxs S. Myfreetaxs possession on your U. Myfreetaxs S. Myfreetaxs source income if those taxes were imposed only because you are a citizen or resident of the foreign country or possession. Myfreetaxs   If you claim a foreign tax credit, you generally will have to attach to your return a Form 1116. Myfreetaxs See Publication 514 for more information. Myfreetaxs Child and dependent care credit. Myfreetaxs   You may qualify for this credit if you pay someone to care for your qualifying child who is under age 13, or your disabled dependent or disabled spouse, so that you can work or look for work. Myfreetaxs Generally, you must be able to claim an exemption for your dependent. Myfreetaxs   Married nonresident aliens can claim the credit only if they choose to file a joint return with a U. Myfreetaxs S. Myfreetaxs citizen or resident spouse as discussed in chapter 1, or if they qualify as certain married individuals living apart (see Joint Return Test in Publication 503). Myfreetaxs   The amount of your child and dependent care expense that qualifies for the credit in any tax year cannot be more than your earned income from the United States for that tax year. Myfreetaxs Earned income generally means wages, salaries, and professional fees for personal services performed. Myfreetaxs   For more information, get Publication 503. Myfreetaxs Education credits. Myfreetaxs   If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Myfreetaxs However, if you are married and choose to file a joint return with a U. Myfreetaxs S. Myfreetaxs citizen or resident spouse as discussed in chapter 1, you may be eligible for these credits. Myfreetaxs Retirement savings contributions credit. Myfreetaxs   You may qualify for this credit (also known as the saver's credit) if you made eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA) in 2013. Myfreetaxs You cannot claim this credit if: You were born after January 1, 1996, You were a full-time student, Your exemption is claimed by someone else on his or her 2013 tax return, or Your adjusted gross income is more than $29,500. Myfreetaxs Use Form 8880 to figure the credit. Myfreetaxs For more information, see Publication 590. Myfreetaxs Child tax credit. Myfreetaxs   You may be able to take this credit if you have a qualifying child. Myfreetaxs   A qualifying child for purposes of the child tax credit is a child who: Was under age 17 at the end of 2013. Myfreetaxs Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). Myfreetaxs Is a U. Myfreetaxs S. Myfreetaxs citizen, a U. Myfreetaxs S. Myfreetaxs national, or a resident alien. Myfreetaxs Did not provide over half of his or her own support for 2013. Myfreetaxs Lived with you more than half of 2013. Myfreetaxs Temporary absences, such as for school, vacation, or medical care, count as time lived in the home. Myfreetaxs Is claimed as a dependent on your return. Myfreetaxs An adopted child is always treated as your own child. Myfreetaxs An adopted child includes a child lawfully placed with you for legal adoption. Myfreetaxs   See your form instructions for additional details. Myfreetaxs Adoption credit. Myfreetaxs   You may qualify to take a tax credit of up to $12,970 for qualifying expenses paid to adopt an eligible child. Myfreetaxs This amount may be allowed for the adoption of a child with special needs regardless of whether you have qualifying expenses. Myfreetaxs To claim the adoption credit, file Form 8839 with your Form 1040NR. Myfreetaxs   Married nonresident aliens can claim the credit only if they choose to file a joint return with a U. Myfreetaxs S. Myfreetaxs citizen or resident spouse as discussed in chapter 1, or if they qualify as certain married individuals living apart (see Married Persons Not Filing Jointly in the Form 8839 instructions). Myfreetaxs Credit for prior year minimum tax. Myfreetaxs   If you paid alternative minimum tax in a prior year, get Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts, to see if you qualify for this credit. Myfreetaxs Earned income credit. Myfreetaxs   If you are a nonresident alien for any part of the tax year, you generally cannot get the earned income credit. Myfreetaxs However, if you are married and choose to file a joint return with a U. Myfreetaxs S. Myfreetaxs citizen or resident spouse as discussed in chapter 1, you may be eligible for the credit. Myfreetaxs    You, your spouse, and any qualifying child must have valid SSNs to claim this credit. Myfreetaxs You cannot claim the credit using an ITIN. Myfreetaxs If a social security card has a legend that says Not Valid for Employment and the number was issued so that you (or your spouse or your qualifying child) could receive a federally funded benefit, you cannot claim the earned income credit. Myfreetaxs An example of a federally funded benefit is Medicaid. Myfreetaxs If a card has this legend and the individual's immigration status has changed so that the individual is now a U. Myfreetaxs S. Myfreetaxs citizen or lawful permanent resident, ask the SSA to issue a new social security card without the legend. Myfreetaxs   See Publication 596 for more information on the credit. Myfreetaxs Tax Withheld You can claim the tax withheld during the year as a payment against your U. Myfreetaxs S. Myfreetaxs tax. Myfreetaxs You claim it on line 61 of Form 1040NR or on line 18 of Form 1040NR-EZ. Myfreetaxs The tax withheld reduces any tax you owe with Form 1040NR or Form 1040NR-EZ. Myfreetaxs Withholding from wages. Myfreetaxs   Any federal income tax withheld from your wages during the tax year while you were a nonresident alien is allowed as a payment against your U. Myfreetaxs S. Myfreetaxs income tax liability for the same year. Myfreetaxs You can claim the income tax withheld whether or not you were engaged in a trade or business in the United States during the year, and whether or not the wages (or any other income) were connected with a trade or business in the United States. Myfreetaxs Excess social security tax withheld. Myfreetaxs   If you have two or more employers, you may be able to claim a credit against your U. Myfreetaxs S. Myfreetaxs income tax liability for social security tax withheld in excess of the maximum required. Myfreetaxs See Social Security and Medicare Taxes in chapter 8 for more information. Myfreetaxs Additional Medicare Tax. Myfreetaxs   Your employer is responsible for withholding the 0. Myfreetaxs 9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays to you in excess of $200,000 in 2013. Myfreetaxs If you do not owe Additional Medicare Tax, you can claim a credit for any withheld Additional Medicare Tax against the total tax liability shown on your tax return by filing Form 8959. Myfreetaxs Tax paid on undistributed long-term capital gains. Myfreetaxs   If you are a shareholder in a mutual fund (or other regulated investment company) or real estate investment trust, you can claim a credit for your share of any taxes paid by the company on its undistributed long-term capital gains. Myfreetaxs You will receive information on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, which you must attach to your return. Myfreetaxs Tax withheld at the source. Myfreetaxs   You can claim as a payment any tax withheld at the source on investment and other fixed or determinable annual or periodic income paid to you. Myfreetaxs Fixed or determinable income includes interest, dividend, rental, and royalty income that you do not claim to be effectively connected income. Myfreetaxs Wage or salary payments can be fixed or determinable income to you, but usually are subject to withholding as discussed above. Myfreetaxs Taxes on fixed or determinable income are withheld at a 30% rate or at a lower treaty rate. Myfreetaxs Tax withheld on partnership income. Myfreetaxs   If you are a foreign partner in a partnership, the partnership will withhold tax on your share of effectively connected taxable income from the partnership. Myfreetaxs The partnership will give you a statement on Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, showing the tax withheld. Myfreetaxs A partnership that is publicly traded may withhold on your actual distributions of effectively connected income. Myfreetaxs In this case, the partnership will give you a statement on Form 1042-S. Myfreetaxs Claim the tax withheld as a payment on line 61b or 61d of Form 1040NR, as appropriate. Myfreetaxs Claiming tax withheld on your return. Myfreetaxs   When you fill out your tax return, take extra care to enter the correct amount of any tax withheld shown on your information documents. Myfreetaxs The following table lists some of the more common information documents and shows where to find the amount of tax withheld. Myfreetaxs Form number Location  of tax  withheld RRB-1042S Box 12 SSA-1042S Box 9 W-2 Box 2 W-2c Box 2 1042-S Box 9 8805 Line 10 8288-A Box 2 Bona Fide Residents of American Samoa or Puerto Rico If you are a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico for the entire tax year, you generally are taxed the same as resident aliens. Myfreetaxs You should file Form 1040 and report all income from sources both in and outside the United States. Myfreetaxs However, you can exclude the income discussed in the following paragraphs. Myfreetaxs For tax purposes other than reporting income, however, you will be treated as a nonresident alien. Myfreetaxs For example, you are not allowed the standard deduction, you cannot file a joint return, and you are not allowed a deduction for a dependent unless that person is a citizen or national of the United States. Myfreetaxs There are also limits on what deductions and credits are allowed. Myfreetaxs See Nonresident Aliens under Deductions , Itemized Deductions , and Tax Credits and Payments in this chapter. Myfreetaxs Residents of Puerto Rico. Myfreetaxs   If you are a bona fide resident of Puerto Rico for the entire year, you can exclude from gross income all income from sources in Puerto Rico (other than amounts for services performed as an employee of the United States or any of its agencies). Myfreetaxs   If you report income on a calendar year basis and you do not have wages subject to withholding, file your return and pay your tax by June 15. Myfreetaxs You must also make your first payment of estimated tax by June 15. Myfreetaxs You cannot file a joint income tax return or make joint payments of estimated tax. Myfreetaxs However, if you are married to a U. Myfreetaxs S. Myfreetaxs citizen or resident, see Nonresident Spouse Treated as a Resident in chapter 1. Myfreetaxs   If you earn wages subject to withholding, your U. Myfreetaxs S. Myfreetaxs income tax return is due by April 15. Myfreetaxs Your first payment of estimated tax is also due by April 15. Myfreetaxs For information on withholding and estimated tax, see chapter 8 . Myfreetaxs Residents of American Samoa. Myfreetaxs   If you are a bona fide resident of American Samoa for the entire year, you can exclude from gross income all income from sources in American Samoa (other than amounts for services performed as an employee of the U. Myfreetaxs S. Myfreetaxs government or any of its agencies). Myfreetaxs An employee of the American Samoan government is not considered an employee of the U. Myfreetaxs S. Myfreetaxs government or any of its agencies for purposes of the exclusion. Myfreetaxs For more information about this exclusion, get Form 4563 and Publication 570, Tax Guide for Individuals With Income From U. Myfreetaxs S. Myfreetaxs Possessions. Myfreetaxs Prev  Up  Next   Home   More Online Publications
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Awards and Recognitions

USA.gov (formerly FirstGov.gov) has won many awards, and has been widely recognized for its information and services since it launched in 2000.


Awards by Date


September 2012

July 2011

August 2010

June 2009

March 2009

  • USA.gov Director winner, Fed 100
  • Government Information Technology Executive Council (GITEC) Project Management Excellence Award for outstanding project management in Collaborative Government/Web 2.0 Vision.

January 2008

  • Government Customer Support Excellence Award Finalist

January 2009

August 2008

May 2008

April 2008

November 2007

  • President's Quality Award – Office of Personnel Management

October 2007

  • Vignette Village 2007 Excellence Award - Vignette Corporation

September 2007

  • WebAward - Web Marketing Association

August 2007

July 2007

February 2007

  • Top Ten Most Useful Sites for Web-Based Research - XooxleAnswers

September 2006

August 2006

  • #1 in Overall Federal Agency E-Government Performance, Taubman Center for Public Policy at Brown University

July 2006

April 2006

March 2006

  • Showcase of Excellence Award Winner - Federal Leadership Councils at FOSE
  • Stockholm Challenge Award Finalist 2006

January 2006

  • Favorite Places on the Web - Chicago Sun Times
  • Hot Sites - USATODAY.com
  • Website of the Day - kdsk.com

December 2005

  • #1 in Global E-Government Readiness - United Nations Global E-Government Readiness Report 2005

September 2005

  • Web Content Managers Best Practices Award for FirstGov en español (now GobiernoUSA.gov)

June 2005

  • Webby Worthy Award - International Academy of Digital Arts and Sciences

April 2005

  • PC Magazine's Top 100 Classic Sites
  • Kim Komando Cool Site of the Day

January 2005

  • Favorite Website - The Atlanta Journal-Constitution

September 2004

  • IRMCO Team Award Finalist
  • #1 in Overall Federal e-Government - Taubman Center for Public Policy at Brown University

August 2004

  • Kim Komando Cool Site of the Day

May 2004

  • Top Site of the Day - widders.com

April 2004

  • Forbes.com Best of the Web, Expatriate Resources
  • PC Magazine's Top 100 Classic Sites

March 2004

  • FirstGov (now USA.gov) Director winner, Fed 100

February 2004

January 2004

  • Site of the Day - Charlotte Observer (North Carolina)

December 2003

  • "EContent 100" - EContent Magazine
  • Finalist, World Summit Award - United Nations International Telecommunications Union

November 2003

  • #1 in Web-Quality & E-Government Readiness - United Nations "World Public Sector Report 2003 - E-Government at the Crossroads"
  • Cool Site of the Day - coolsiteoftheday.com
  • Top Three Government Sites - WABC TV, New York

October 2003

  • 101 Most Incredibly Useful Sites - PC Magazine

September 2003

  • #1 in Overall Federal e-Government - Taubman Center for Public Policy at Brown University

August 2003

  • Site of the Day - Charlotte Observer (North Carolina)
  • Site of the Week - Post-Standard (Syracuse, NY)

May 2003

  • Innovations in American Government Award Winner

March 2003

  • Innovations in American Government Award Finalist
  • PC Magazine's Top 100 Classic Sites

November 2002

  • Innovations in American Government Award Semi-Finalist

July 2002

  • Public Access to Government Information Award - American Association Law Libraries
  • Yahoo! Internet Life Magazine's 50 Most Incredibly Useful Sites

June 2002

  • Best New Government Website - Women's World Magazine
  • Pioneer Award, E-Gov

February 2002

  • Hot Site - USA Today.com

January 2002

  • Excellence.Gov Award Finalist

December 2001

  • Grace Hopper Government Technology Leadership Award

November 2001

  • Federal Line - FederalNewsRadio.com

October 2001

  • Hot Site - USA Today.com
  • Pick of the Week - Yahoo!

August 2001

  • Innovations in American Government Award Finalist

July 2001

  • Hot Site - USA Today.com

June 2001

  • Intergovernmental Solutions Award
  • Site of the Week - The Washington Times
  • Top 100 Sites of the Day - The Legendinc.com
  • Web Map: News You Can Use - USNews.com

May 2001

  • #1 in 100 Top Government Sites - 100.com
  • Golden Web Award (2001-2002)

April 2001

  • Innovations in American Government Award Semi-Finalist
  • Pioneer Award, E-Gov
  • Site of the Day - The Wall Street Journal Classroom Edition
  • Top 100 Sites for Small Business - Entrepreneur Magazine

March 2001

  • Azimuth Award (awarded to Dave Barram and Eric Brewer)
  • FOSE and Chief Information Officers Council of Excellence Award
  • Site of the Month - Chief Executives' Forum (Belfast, Ireland)
  • Site of the Month - Research Data Management Service, University of Delaware
  • Site of the Month - The CyberSkeptic's Guide to Internet Research
  • Site of the Week - Web Watch
  • Site of the Week - Worksupport.com

February 2001

  • Recognized among "40 Great Web Sites," Reader's Digest, New Choices Magazine
  • Cool Website of the Day - "Topical" Tipworld
  • Site of the Day - Canton Public Library (Canton, Michigan)
  • Site of the Month - Internet Resources for Nonprofits
  • Site of the Week - Legal Engine

January 2001

  • Government Computer News Award
  • Hot Site of the Year - USA Today
  • Interesting Worldwide Website - Computer Times
  • Site of the Day - New York Times
  • Vice President's Hammer Award for Reinventing Government

December 2000

  • Site of the Day - E-mazing

November 2000

  • Site of the Month - King County Library (Washington State)

October 2000

  • A - Education World
  • Site of the Week - RefDesk.com
  • Site of the Day - Kathy Schrock's Guide for Educators
  • Site of the Day - Mountain Home School District 193 (Mountain Home, Idaho)
  • Site of the Month - New York State Library
  • Site of the Week - Boston Bar Association
  • Site of the Week - Fort Smith, Arkansas Public Library

September 2000

  • Site of the Day - Alpha-Pro Net
  • Site of the Week - University of Texas Southwestern Medical Library

Awards by Title

  • #1 Federal Government Website - Comparing Technology Innovation in the Private and Public Sectors, Brookings Institution
  • #1 in 100 Top Government Sites - 100.com
  • #1 in About.com's Top 20 Essential U.S. Government Websites
  • #1 in Global E-Government Readiness - United Nations Global E-Government Readiness Report 2005
  • #1 in Overall Federal Agency E-Government Performance, Taubman Center for Public Policy at Brown University (2003, 2004, 2006, 2007)
  • #1 in Web-Quality & E-Government Readiness - United Nations "World Public Sector Report 2003 - E-Government at the Crossroads"
  • 25 Websites We Can't Live Without, Time Magazine
  • 101 Most Incredibly Useful Sites - PC Magazine
  • A - Education World
  • Arroba de oro, ("the golden @") Finalist
  • Azimuth Award
  • Best Government Web Sites: USA.gov - Government Computer News
  • Best New Government Website - Women's World Magazine
  • Best of the Web - Forbes.com
  • Cool Site of the Day - coolsiteoftheday.com
  • Cool Site of the Day - Kim Komando
  • Cool Website of the Day - "Topical" Tipworld
  • "EContent 100" - EContent MagazineExcellence.Gov
  • Excellence.Gov
  • Excellent rating for GovGab.gov blog by blogged.com
  • Fed 100
  • Favorite Places on the Web - Chicago Sun-Times
  • Favorite Website - The Atlanta Journal-Constitution
  • Federal Line - FederalNewsRadio.com
  • FOSE and Chief Information Officers Council of Excellence Award
  • Golden Web Award
  • Government Computer News Award
  • Government Customer Support Excellence Award Finalist
  • Grace Hopper Government Technology Leadership Award
  • Hot Site - USA Today.com
  • Hot Site of the Year - USA Today.com
  • Innovations in American Government Award Winner (2002)
  • Intergovernmental Solutions Award
  • Interesting Worldwide Website - Computer Times
  • IRMCO Team Award Finalist
  • Link You Can't Live Without - WUSA9.com
  • Model of Collaboration - Center for Technology in Government at University at Albany, SUNY
  • Most Effective Federal Web Site at Using Interactive Features to Engage the Public - Brookings Institution
  • Outstanding Federal Civilian Marketing Program, GovMark Council
  • PC Magazine's Top 100 Classic Sites
  • Pick of the Week - Yahoo!
  • Pioneer Award, E-Gov
  • Pioneer Award - Federal Computer Week
  • President's Quality Award – Office of Personnel Management
  • Project Management Excellence in Collaborative Government/Web 2.0 Vision, Government Information Technology Executive Council (GITEC)
  • Public Access to Government Information Award - American Association Law Libraries
  • Recognized among "40 Great Web Sites," Reader's Digest, New Choices Magazine
  • Showcase of Excellence Award Winner - Federal Leadership Councils at FOSE
  • Site of the Day - Alpha-Pro Net
  • Site of the Day - Canton Public Library (Canton, Michigan)
  • Site of the Day - Charlotte Observer (North Carolina)
  • Site of the Day - E-mazing
  • Site of the Day - Entertainment Weekly
  • Site of the Day - Kathy Schrock's Guide for Educators
  • Site of the Day - Mountain Home School District 193 (Mountain Home, Idaho)
  • Site of the Day - The New York Times
  • Site of the Day - The Wall Street Journal Classroom Edition
  • Site of the Month - Chief Executives' Forum (Belfast, Ireland)
  • Site of the Month - Internet Resources for Nonprofits
  • Site of the Month - King County Library (Washington State)
  • Site of the Month - New York State Library
  • Site of the Month - Research Data Management Service, University of Delaware
  • Site of the Month - The CyberSkeptic's Guide to Internet Research
  • Site of the Week - Boston Bar Association
  • Site of the Week - Fort Smith, Arkansas Public Library
  • Site of the Week - Legal Engine
  • Site of the Week - Post-Standard (Syracuse, NY)
  • Site of the Week - RefDesk.com
  • Site of the Week - The Washington Times
  • Site of the Week - University of Texas Southwestern Medical Library
  • Site of the Week - Web Watch
  • Site of the Week - Worksupport.com
  • Stockholm Challenge Award Finalist 2006
  • The 50 Most-Mentioned Agencies on Twitter
  • "The Best of..." - Money Magazine
  • Top 100 Sites for Small Business - Entrepreneur Magazine
  • Top 100 Sites of the Day - The Legendinc.com
  • Top 100 Websites, WEB100.com
  • Top Government Blog, Juggle.com
  • Top Site of the Day - widders.com
  • Top Ten Most Useful Sites for Web-Based Research - XooxleAnswers
  • Top Three Government Sites - WABC TV, New York
  • U.S. Government Web Sites You Didn't Know You Could Use, lifehacker.com
  • Vice President's Hammer Award for Reinventing Government
  • Vignette Village 2007 Excellence Award - Vignette Corporation
  • WebAward - Web Marketing Association
  • Website of the Day - kdsk.com
  • Web Content Managers Best Practices Award for FirstGov en español (now GobiernoUSA.gov)
  • Web Map: News You Can Use - USNews.com
  • Webby Awards Official Honoree - International Academy of Digital Arts and Sciences
  • Webby Worthy Award - International Academy of Digital Arts and Sciences
  • World Summit Award Finalist - United Nations International Telecommunications Union
  • Yahoo! Internet Life Magazine's 50 Most Incredibly Useful Sites

The Myfreetaxs

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