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Www Irs Gov E File

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Www Irs Gov E File

Www irs gov e file 18. Www irs gov e file   Alimony Table of Contents IntroductionSpouse or former spouse. Www irs gov e file Divorce or separation instrument. Www irs gov e file Useful Items - You may want to see: General RulesMortgage payments. Www irs gov e file Taxes and insurance. Www irs gov e file Other payments to a third party. Www irs gov e file Instruments Executed After 1984Payments to a third party. Www irs gov e file Exception. Www irs gov e file Substitute payments. Www irs gov e file Specifically designated as child support. Www irs gov e file Contingency relating to your child. Www irs gov e file Clearly associated with a contingency. Www irs gov e file How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule Introduction This chapter discusses the rules that apply if you pay or receive alimony. Www irs gov e file It covers the following topics. Www irs gov e file What payments are alimony. Www irs gov e file What payments are not alimony, such as child support. Www irs gov e file How to deduct alimony you paid. Www irs gov e file How to report alimony you received as income. Www irs gov e file Whether you must recapture the tax benefits of alimony. Www irs gov e file Recapture means adding back in your income all or part of a deduction you took in a prior year. Www irs gov e file Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Www irs gov e file It does not include voluntary payments that are not made under a divorce or separation instrument. Www irs gov e file Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Www irs gov e file Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony. Www irs gov e file To be alimony, a payment must meet certain requirements. Www irs gov e file Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. Www irs gov e file This chapter discusses the rules for payments under instruments executed after 1984. Www irs gov e file If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. Www irs gov e file That was the last year the information on pre-1985 instruments was included in Publication 504. Www irs gov e file Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. Www irs gov e file Definitions. Www irs gov e file   The following definitions apply throughout this chapter. Www irs gov e file Spouse or former spouse. Www irs gov e file   Unless otherwise stated, the term “spouse” includes former spouse. Www irs gov e file Divorce or separation instrument. Www irs gov e file   The term “divorce or separation instrument” means: A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. Www irs gov e file This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). Www irs gov e file Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals General Rules The following rules apply to alimony regardless of when the divorce or separation instrument was executed. Www irs gov e file Payments not alimony. Www irs gov e file   Not all payments under a divorce or separation instrument are alimony. Www irs gov e file Alimony does not include: Child support, Noncash property settlements, Payments that are your spouse's part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer's property, or Use of the payer's property. Www irs gov e file Payments to a third party. Www irs gov e file   Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. Www irs gov e file These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. Www irs gov e file ), taxes, tuition, etc. Www irs gov e file The payments are treated as received by your spouse and then paid to the third party. Www irs gov e file Life insurance premiums. Www irs gov e file   Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. Www irs gov e file Payments for jointly-owned home. Www irs gov e file   If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony. Www irs gov e file Mortgage payments. Www irs gov e file   If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. Www irs gov e file If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Www irs gov e file Your spouse must report one-half of the payments as alimony received. Www irs gov e file If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. Www irs gov e file Taxes and insurance. Www irs gov e file   If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Www irs gov e file Your spouse must report one-half of these payments as alimony received. Www irs gov e file If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. Www irs gov e file    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. Www irs gov e file But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. Www irs gov e file Other payments to a third party. Www irs gov e file   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. Www irs gov e file Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. Www irs gov e file Exception for instruments executed before 1985. Www irs gov e file   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. Www irs gov e file A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. Www irs gov e file A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that: Changes the amount or period of payment, or Adds or deletes any contingency or condition. Www irs gov e file   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. Www irs gov e file irs. Www irs gov e file gov/pub504. Www irs gov e file Example 1. Www irs gov e file In November 1984, you and your former spouse executed a written separation agreement. Www irs gov e file In February 1985, a decree of divorce was substituted for the written separation agreement. Www irs gov e file The decree of divorce did not change the terms for the alimony you pay your former spouse. Www irs gov e file The decree of divorce is treated as executed before 1985. Www irs gov e file Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. Www irs gov e file Example 2. Www irs gov e file Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. Www irs gov e file In this example, the decree of divorce is not treated as executed before 1985. Www irs gov e file The alimony payments are subject to the rules for payments under instruments executed after 1984. Www irs gov e file Alimony requirements. Www irs gov e file   A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. Www irs gov e file The payment is in cash. Www irs gov e file The instrument does not designate the payment as not alimony. Www irs gov e file Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Www irs gov e file There is no liability to make any payment (in cash or property) after the death of the recipient spouse. Www irs gov e file The payment is not treated as child support. Www irs gov e file Each of these requirements is discussed below. Www irs gov e file Cash payment requirement. Www irs gov e file   Only cash payments, including checks and money orders, qualify as alimony. Www irs gov e file The following do not qualify as alimony. Www irs gov e file Transfers of services or property (including a debt instrument of a third party or an annuity contract). Www irs gov e file Execution of a debt instrument by the payer. Www irs gov e file The use of the payer's property. Www irs gov e file Payments to a third party. Www irs gov e file   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. Www irs gov e file See Payments to a third party under General Rules, earlier. Www irs gov e file   Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met. Www irs gov e file The payments are in lieu of payments of alimony directly to your spouse. Www irs gov e file The written request states that both spouses intend the payments to be treated as alimony. Www irs gov e file You receive the written request from your spouse before you file your return for the year you made the payments. Www irs gov e file Payments designated as not alimony. Www irs gov e file   You and your spouse can designate that otherwise qualifying payments are not alimony. Www irs gov e file You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. Www irs gov e file For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). Www irs gov e file If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Www irs gov e file   Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. Www irs gov e file The copy must be attached each year the designation applies. Www irs gov e file Spouses cannot be members of the same household. Www irs gov e file    Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. Www irs gov e file A home you formerly shared is considered one household, even if you physically separate yourselves in the home. Www irs gov e file   You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment. Www irs gov e file Exception. Www irs gov e file   If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made. Www irs gov e file Table 18-1. Www irs gov e file Alimony Requirements (Instruments Executed After 1984) Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. Www irs gov e file Payments are not required by a divorce or separation instrument. Www irs gov e file Payer and recipient spouse do not file a joint return with each other. Www irs gov e file Payer and recipient spouse file a joint return with each other. Www irs gov e file Payment is in cash (including checks or money orders). Www irs gov e file Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. Www irs gov e file Payment is not designated in the instrument as not alimony. Www irs gov e file Payment is designated in the instrument as not alimony. Www irs gov e file Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Www irs gov e file Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Www irs gov e file Payments are not required after death of the recipient spouse. Www irs gov e file Payments are required after death of the recipient spouse. Www irs gov e file Payment is not treated as child support. Www irs gov e file Payment is treated as child support. Www irs gov e file These payments are deductible by the payer and includible in income by the recipient. Www irs gov e file These payments are neither deductible by the payer nor includible in income by the recipient. Www irs gov e file Liability for payments after death of recipient spouse. Www irs gov e file   If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. Www irs gov e file If all of the payments would continue, then none of the payments made before or after the death are alimony. Www irs gov e file   The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law. Www irs gov e file Example. Www irs gov e file You must pay your former spouse $10,000 in cash each year for 10 years. Www irs gov e file Your divorce decree states that the payments will end upon your former spouse's death. Www irs gov e file You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. Www irs gov e file The death of your spouse would not terminate these payments under state law. Www irs gov e file The $10,000 annual payments may qualify as alimony. Www irs gov e file The $20,000 annual payments that do not end upon your former spouse's death are not alimony. Www irs gov e file Substitute payments. Www irs gov e file   If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. Www irs gov e file To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. Www irs gov e file Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. Www irs gov e file Example 1. Www irs gov e file Under your divorce decree, you must pay your former spouse $30,000 annually. Www irs gov e file The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. Www irs gov e file Your former spouse has custody of your minor children. Www irs gov e file The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. Www irs gov e file The trust income and corpus (principal) are to be used for your children's benefit. Www irs gov e file These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. Www irs gov e file Of each of the $30,000 annual payments, $10,000 is not alimony. Www irs gov e file Example 2. Www irs gov e file Under your divorce decree, you must pay your former spouse $30,000 annually. Www irs gov e file The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. Www irs gov e file The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 × 15) and the total amount paid up to that time. Www irs gov e file For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). Www irs gov e file These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. Www irs gov e file None of the annual payments are alimony. Www irs gov e file The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment. Www irs gov e file Child support. Www irs gov e file   A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. Www irs gov e file The amount of child support may vary over time. Www irs gov e file Child support payments are not deductible by the payer and are not taxable to the recipient. Www irs gov e file Specifically designated as child support. Www irs gov e file   A payment will be treated as specifically designated as child support to the extent that the payment is reduced either: On the happening of a contingency relating to your child, or At a time that can be clearly associated with the contingency. Www irs gov e file A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. Www irs gov e file Contingency relating to your child. Www irs gov e file   A contingency relates to your child if it depends on any event relating to that child. Www irs gov e file It does not matter whether the event is certain or likely to occur. Www irs gov e file Events relating to your child include the child's: Becoming employed, Dying, Leaving the household, Leaving school, Marrying, or Reaching a specified age or income level. Www irs gov e file Clearly associated with a contingency. Www irs gov e file   Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations. Www irs gov e file The payments are to be reduced not more than 6 months before or after the date the child will reach 18, 21, or local age of majority. Www irs gov e file The payments are to be reduced on two or more occasions that occur not more than 1 year before or after a different one of your children reaches a certain age from 18 to 24. Www irs gov e file This certain age must be the same for each child, but need not be a whole number of years. Www irs gov e file In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. Www irs gov e file   Either you or the IRS can overcome the presumption in the two situations above. Www irs gov e file This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. Www irs gov e file For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony. Www irs gov e file How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. Www irs gov e file You must file Form 1040. Www irs gov e file You cannot use Form 1040A or Form 1040EZ. Www irs gov e file Enter the amount of alimony you paid on Form 1040, line 31a. Www irs gov e file In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). Www irs gov e file If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. Www irs gov e file Show the SSN or ITIN and amount paid to each other recipient on an attached statement. Www irs gov e file Enter your total payments on line 31a. Www irs gov e file You must provide your spouse's SSN or ITIN. Www irs gov e file If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. Www irs gov e file For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Www irs gov e file How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. Www irs gov e file You cannot use Form 1040A or Form 1040EZ. Www irs gov e file You must give the person who paid the alimony your SSN or ITIN. Www irs gov e file If you do not, you may have to pay a $50 penalty. Www irs gov e file Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. Www irs gov e file If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Www irs gov e file Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. Www irs gov e file The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Www irs gov e file Do not include any time in which payments were being made under temporary support orders. Www irs gov e file The second and third years are the next 2 calendar years, whether or not payments are made during those years. Www irs gov e file The reasons for a reduction or end of alimony payments that can require a recapture include: A change in your divorce or separation instrument, A failure to make timely payments, A reduction in your ability to provide support, or A reduction in your spouse's support needs. Www irs gov e file When to apply the recapture rule. Www irs gov e file   You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. Www irs gov e file   When you figure a decrease in alimony, do not include the following amounts. Www irs gov e file Payments made under a temporary support order. Www irs gov e file Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. Www irs gov e file Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year. Www irs gov e file Figuring the recapture. Www irs gov e file   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. Www irs gov e file Including the recapture in income. Www irs gov e file   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Www irs gov e file Cross out “received” and enter “recapture. Www irs gov e file ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. Www irs gov e file Deducting the recapture. Www irs gov e file   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Www irs gov e file Cross out “paid” and enter “recapture. Www irs gov e file ” In the space provided, enter your spouse's SSN or ITIN. Www irs gov e file Prev  Up  Next   Home   More Online Publications
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HIRE Act: Questions and Answers for Employers

Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, two new tax benefits are available to employers who hire certain previously unemployed workers (“qualified employees”).

The first, referred to as the payroll tax exemption, provides employers with an exemption from the employer’s 6.2 percent share of social security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010 through December 31, 2010.

In addition, for each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for a general business tax credit, referred to as the new hire retention credit, of 6.2 percent of wages paid to the qualified employee over the 52 week period, up to a maximum credit of $1,000.

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The Www Irs Gov E File

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