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Www irs gov efile com Publication 544 - Additional Material Table of Contents Tax Publications for Business TaxpayersSee How To Get Tax Help for a variety of ways to get publications, including by computer, phone, and mail. Www irs gov efile com General Guides 1 Your Rights as a Taxpayer 17 Your Federal Income Tax (For Individuals) 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) 509 Tax Calendars 910 IRS Guide to Free Tax Services Employer's Guides 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits 51 (Circular A), Agricultural Employer's Tax Guide 80 (Circular SS), Federal Tax Guide For Employers in the U. Www irs gov efile com S. Www irs gov efile com Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands 926 Household Employer's Tax Guide Specialized Publications 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car Expenses 505 Tax Withholding and Estimated Tax 510 Excise Taxes (Including Fuel Tax Credits and Refunds) 515 Withholding of Tax on Nonresident Aliens and Foreign Entities 517 Social Security and Other Information for Members of the Clergy and Religious Workers 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 537 Installment Sales 538 Accounting Periods and Methods 541 Partnerships 542 Corporations 544 Sales and Other Dispositions of Assets 551 Basis of Assets 556 Examination of Returns, Appeal Rights, and Claims for Refund 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) 561 Determining the Value of Donated Property 583 Starting a Business and Keeping Records 587 Business Use of Your Home (Including Use by Daycare Providers) 594 What You Should Know About The IRS Collection Process 595 Capital Construction Fund for Commercial Fishermen 597 Information on the United States-Canada Income Tax Treaty 598 Tax on Unrelated Business Income of Exempt Organizations 686 Certification for Reduced Tax Rates in Tax Treaty Countries 901 U. Www irs gov efile com S. Www irs gov efile com Tax Treaties 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property 947 Practice Before the IRS and Power of Attorney 1544 Reporting Cash Payments of Over $10,000 (Received in a Trade or Business) 1546 Taxpayer Advocate Service - Your Voice at the IRS Spanish Language Publications 1SP Derechos del Contribuyente 179 (Circular PR), Guía Contributiva Federal Para Patronos Puertorriqueños 579SP Cómo Preparar la Declaración de Impuesto Federal 594SP Qué es lo Debemos Saber Sobre El Proceso de Cobro del IRS 850 English-Spanish Glossary of Words and Phrases Used in Publications Issued by the Internal Revenue Service 1544SP Informe de Pagos en Efectivo en Exceso de $10,000 (Recibidos en una Ocupación o Negocio) Commonly Used Tax FormsSee How To Get Tax Help for a variety of ways to get forms, including by computer, phone, and mail. Www irs gov efile com Form Number and Form Title W-2 Wage and Tax Statement W-4 Employee's Withholding Allowance Certificate 940 Employer's Annual Federal Unemployment (FUTA) Tax Return 941 Employer's QUARTERLY Federal Tax Return 944 Employer's ANNUAL Federal Tax Return 1040 U. Www irs gov efile com S. Www irs gov efile com Individual Income Tax Return Sch. Www irs gov efile com A & B Itemized Deductions & Interest and Ordinary Dividends Sch. Www irs gov efile com C Profit or Loss From Business Sch. Www irs gov efile com C-EZ Net Profit From Business Sch. Www irs gov efile com D Capital Gains and Losses Sch. Www irs gov efile com E Supplemental Income and Loss Sch. Www irs gov efile com F Profit or Loss From Farming Sch. Www irs gov efile com H Household Employment Taxes Sch. Www irs gov efile com J Income Averaging for Farmers and Fishermen Sch. Www irs gov efile com R Credit for the Elderly or the Disabled Sch. Www irs gov efile com SE Self-Employment Tax 1040-ES Estimated Tax for Individuals 1040X Amended U. Www irs gov efile com S. Www irs gov efile com Individual Income Tax Return 1065 U. Www irs gov efile com S. Www irs gov efile com Return of Partnership Income Sch. Www irs gov efile com D Capital Gains and Losses Sch. Www irs gov efile com K-1 Partner's Share of Income, Deductions, Credits, etc. Www irs gov efile com 1120 U. Www irs gov efile com S. Www irs gov efile com Corporation Income Tax Return Sch. Www irs gov efile com D Capital Gains and Losses 1120S U. Www irs gov efile com S. Www irs gov efile com Income Tax Return for an S Corporation Sch. Www irs gov efile com D Capital Gains and Losses and Built-In Gains Sch. Www irs gov efile com K-1 Shareholder's Share of Income, Deductions, Credits, etc. Www irs gov efile com 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts 2441 Child and Dependent Care Expenses 2848 Power of Attorney and Declaration of Representative 3800 General Business Credit 3903 Moving Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property 4868 Application for Automatic Extension of Time To File U. Www irs gov efile com S. Www irs gov efile com Individual Income Tax Return 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 6252 Installment Sale Income 7004 Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns 8283 Noncash Charitable Contributions 8300 Report of Cash Payments Over $10,000 Received in a Trade or Business 8582 Passive Activity Loss Limitations 8606 Nondeductible IRAs 8822 Change of Address 8829 Expenses for Business Use of Your Home 8949 Sales and Other Dispositions of Capital Assets Prev  Up  Next   Home   More Online Publications
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Understanding Your CP123 Notice

We made changes to your excise tax return because we believe there was a miscalculation. As a result of these changes, you have a balance due of less than $1.


What you need to do

  • Read the notice carefully.
  • Compare the figures on the notice with your railroad retirement tax return.
  • Contact us within 30 days of the date of your notice if you disagree with the changes we made.
  • Correct the copy of your railroad retirement tax return that you kept for your records if you agree with our changes.
  • You don’t have to pay if you owe less than $1.

You may want to

  • Download copies of the following materials (if they weren’t included with your notice).
  • Call 1-800-829-FORM to have forms and publications mailed to you.

 


Answers to Common Questions

Q. How can I find out what caused my tax return to change?

A. You can contact us at the number listed on your notice for specific information about your tax return.

Q. What should I do if I disagree with the changes you made?

A. If you disagree, contact us at the toll-free number listed on the top right corner of your notice or respond in writing within 30 days of the date of the notice. If your response provides additional information that justifies a reversal of the change, we’ll reverse the change we made to your account. If you agree with the change, update your records. No further action is required.

 


Tips for next year

Review your return for accuracy before mailing it to us.

Page Last Reviewed or Updated: 23-Jan-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Www Irs Gov Efile Com

Www irs gov efile com Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. Www irs gov efile com More information. Www irs gov efile com Exception—Community Income. Www irs gov efile com Exception—Qualified joint venture. Www irs gov efile com More information. Www irs gov efile com More information. Www irs gov efile com Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. Www irs gov efile com Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. Www irs gov efile com Table 1 can help you learn what those responsibilities are. Www irs gov efile com Ask yourself each question listed in the table, then see the related discussion to find the answer. Www irs gov efile com In addition to knowing about federal taxes, you need to make some basic business decisions. Www irs gov efile com Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. Www irs gov efile com For information on how to contact the SBA, see How to Get More Information, later. Www irs gov efile com Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. Www irs gov efile com When beginning a business, you must decide which form of business to use. Www irs gov efile com Legal and tax considerations enter into this decision. Www irs gov efile com Only tax considerations are discussed in this publication. Www irs gov efile com Your form of business determines which income tax return form you have to file. Www irs gov efile com See Table 2 to find out which form you have to file. Www irs gov efile com Sole proprietorships. Www irs gov efile com   A sole proprietorship is an unincorporated business that is owned by one individual. Www irs gov efile com It is the simplest form of business organization to start and maintain. Www irs gov efile com The business has no existence apart from you, the owner. Www irs gov efile com Its liabilities are your personal liabilities. Www irs gov efile com You undertake the risks of the business for all assets owned, whether or not used in the business. Www irs gov efile com You include the income and expenses of the business on your personal tax return. Www irs gov efile com More information. Www irs gov efile com   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. Www irs gov efile com If you are a farmer, see Publication 225, Farmer's Tax Guide. Www irs gov efile com Partnerships. Www irs gov efile com   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Www irs gov efile com Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Www irs gov efile com   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. Www irs gov efile com , from its operations, but it does not pay income tax. Www irs gov efile com Instead, it “passes through” any profits or losses to its partners. Www irs gov efile com Each partner includes his or her share of the partnership's items on his or her tax return. Www irs gov efile com More information. Www irs gov efile com   For more information on partnerships, see Publication 541, Partnerships. Www irs gov efile com Husband and wife business. Www irs gov efile com   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Www irs gov efile com Do not use Schedule C or C-EZ. Www irs gov efile com Instead, file Form 1065, U. Www irs gov efile com S. Www irs gov efile com Return of Partnership Income. Www irs gov efile com For more information, see Publication 541, Partnerships. Www irs gov efile com Exception—Community Income. Www irs gov efile com   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Www irs gov efile com S. Www irs gov efile com possession, you can treat the business either as a sole proprietorship or a partnership. Www irs gov efile com The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Www irs gov efile com A change in your reporting position will be treated as a conversion of the entity. Www irs gov efile com Exception—Qualified joint venture. Www irs gov efile com   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Www irs gov efile com Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Www irs gov efile com For an explanation of "material participation," see the Instructions for Schedule C, line G. Www irs gov efile com   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Www irs gov efile com Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Www irs gov efile com For more information, see Qualified Joint Venture in the Instructions for Schedule SE. Www irs gov efile com Corporations. Www irs gov efile com   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. Www irs gov efile com A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. Www irs gov efile com A corporation can also take special deductions. Www irs gov efile com   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 efile com However, shareholders cannot deduct any loss of the corporation. Www irs gov efile com More information. Www irs gov efile com   For more information on corporations, see Publication 542, Corporations. Www irs gov efile com S corporations. Www irs gov efile com   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Www irs gov efile com Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Www irs gov efile com On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. Www irs gov efile com More information. Www irs gov efile com   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 efile com S. Www irs gov efile com Income Tax Return for an S Corporation. Www irs gov efile com Limited liability company. Www irs gov efile com   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Www irs gov efile com The members of an LLC are not personally liable for its debts. Www irs gov efile com An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. Www irs gov efile com 7701-3. Www irs gov efile com For more information, see the instructions for Form 8832, Entity Classification Election. Www irs gov efile com Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. Www irs gov efile com The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). Www irs gov efile com An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. Www irs gov efile com An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. Www irs gov efile com You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. Www irs gov efile com You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. Www irs gov efile com This includes returns or documents filed to report the following information. Www irs gov efile com Interest, dividends, royalties, etc. Www irs gov efile com , paid to you. Www irs gov efile com Any amount paid to you as a dependent care provider. Www irs gov efile com Certain other amounts paid to you that total $600 or more for the year. Www irs gov efile com If you do not furnish your identification number as required, you may be subject to penalties. Www irs gov efile com See Penalties, later. Www irs gov efile com Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. Www irs gov efile com If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. Www irs gov efile com Applying for an EIN. Www irs gov efile com   You may apply for an EIN: Online—Click on the EIN link at www. Www irs gov efile com irs. Www irs gov efile com gov/businesses/small. Www irs gov efile com The EIN is issued immediately once the application information is validated. Www irs gov efile com By telephone at 1-800-829-4933. Www irs gov efile com By mailing or faxing Form SS-4, Application for Employer Identification Number. Www irs gov efile com When to apply. Www irs gov efile com   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. Www irs gov efile com If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. Www irs gov efile com If you apply by telephone or through the IRS website, you can get an EIN immediately. Www irs gov efile com If you apply by fax, you can get an EIN within 4 business days. Www irs gov efile com   If you do not receive your EIN by the time a return is due, file your return anyway. Www irs gov efile com Write “Applied for” and the date you applied for the number in the space for the EIN. Www irs gov efile com Do not use your social security number as a substitute for an EIN on your tax returns. Www irs gov efile com More than one EIN. Www irs gov efile com   You should have only one EIN. Www irs gov efile com If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. Www irs gov efile com 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 efile com The IRS will tell you which number to use. Www irs gov efile com More information. Www irs gov efile com   For more information about EINs, see Publication 1635, Understanding Your EIN. Www irs gov efile com Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). Www irs gov efile com The forms used to report these payments must include the payee's identification number. Www irs gov efile com Employee. Www irs gov efile com   If you have employees, you must get an SSN from each of them. Www irs gov efile com Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Www irs gov efile com 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 efile com This may occur, for example, if the employee's name has changed due to marriage or divorce. Www irs gov efile com   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. Www irs gov efile com This form is available at SSA offices or by calling 1-800-772-1213. Www irs gov efile com It is also available from the SSA website at www. Www irs gov efile com ssa. Www irs gov efile com gov. Www irs gov efile com Other payee. Www irs gov efile com   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. Www irs gov efile com If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. Www irs gov efile com   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Www irs gov efile com This form is available from IRS offices or by calling 1-800-829-3676. Www irs gov efile com It is also available from the IRS website at IRS. Www irs gov efile com gov. Www irs gov efile com    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 efile com For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Www irs gov efile com Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. Www irs gov efile com A tax year is usually 12 consecutive months. Www irs gov efile com There are two kinds of tax years. Www irs gov efile com Calendar tax year. Www irs gov efile com A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Www irs gov efile com Fiscal tax year. Www irs gov efile com A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Www irs gov efile com A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Www irs gov efile com If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Www irs gov efile com You must use a calendar tax year if: You keep no books. Www irs gov efile com You have no annual accounting period. Www irs gov efile com Your present tax year does not qualify as a fiscal year. Www irs gov efile com You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. Www irs gov efile com For more information, see Publication 538, Accounting Periods and Methods. Www irs gov efile com First-time filer. Www irs gov efile com   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 efile com You adopt a tax year by filing your first income tax return using that tax year. Www irs gov efile com You have not adopted a tax year if you merely did any of the following. Www irs gov efile com Filed an application for an extension of time to file an income tax return. Www irs gov efile com Filed an application for an employer identification number. Www irs gov efile com Paid estimated taxes for that tax year. Www irs gov efile com Changing your tax year. Www irs gov efile com   Once you have adopted your tax year, you may have to get IRS approval to change it. Www irs gov efile com To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. Www irs gov efile com You may have to pay a fee. Www irs gov efile com For more information, see Publication 538. Www irs gov efile com Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. Www irs gov efile com You choose an accounting method for your business when you file your first income tax return. Www irs gov efile com There are two basic accounting methods. Www irs gov efile com Cash method. Www irs gov efile com Under the cash method, you report income in the tax year you receive it. Www irs gov efile com You usually deduct or capitalize expenses in the tax year you pay them. Www irs gov efile com Accrual method. Www irs gov efile com Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. Www irs gov efile com You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. Www irs gov efile com For other methods, see Publication 538. Www irs gov efile com If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Www irs gov efile com Inventories include goods held for sale in the normal course of business. Www irs gov efile com They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Www irs gov efile com Inventories are explained in Publication 538. Www irs gov efile com Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. Www irs gov efile com For more information, see Publication 538. Www irs gov efile com You must use the same accounting method to figure your taxable income and to keep your books. Www irs gov efile com Also, you must use an accounting method that clearly shows your income. Www irs gov efile com In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. Www irs gov efile com 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 efile com More than one business. Www irs gov efile com   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. Www irs gov efile com You must keep a complete and separate set of books and records for each business. Www irs gov efile com Changing your method of accounting. Www irs gov efile com   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Www irs gov efile com A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. Www irs gov efile com For examples of changes that require approval and information on how to get approval for the change, see Publication 538. Www irs gov efile com Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. Www irs gov efile com The following are the four general kinds of business taxes. Www irs gov efile com Income tax. Www irs gov efile com Self-employment tax. Www irs gov efile com Employment taxes. Www irs gov efile com Excise taxes. Www irs gov efile com See Table 2 for the forms you file to report these taxes. Www irs gov efile com You may want to get Publication 509. Www irs gov efile com It has tax calendars that tell you when to file returns and make tax payments. Www irs gov efile com Income Tax All businesses except partnerships must file an annual income tax return. Www irs gov efile com Partnerships file an information return. Www irs gov efile com Which form you use depends on how your business is organized. Www irs gov efile com See Table 2 to find out which return you have to file. Www irs gov efile com The federal income tax is a pay-as-you-go tax. Www irs gov efile com You must pay the tax as you earn or receive income during the year. Www irs gov efile com An employee usually has income tax withheld from his or her pay. Www irs gov efile com If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Www irs gov efile com If you are not required to make estimated tax payments, you may pay any tax due when you file your return. Www irs gov efile com Table 2. Www irs gov efile com Which Forms Must I File? IF you are a. Www irs gov efile com . Www irs gov efile com . Www irs gov efile com   THEN you may be liable for. Www irs gov efile com . Www irs gov efile com . Www irs gov efile com   Use Form. Www irs gov efile com . Www irs gov efile com . Www irs gov efile com Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. Www irs gov efile com 2 Various other schedules may be needed. Www irs gov efile com Estimated tax. Www irs gov efile com   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 efile com Sole proprietors, partners, and S corporation shareholders. Www irs gov efile com   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Www irs gov efile com Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Www irs gov efile com For more information, see Publication 505, Tax Withholding and Estimated Tax. Www irs gov efile com Corporations. Www irs gov efile com   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Www irs gov efile com Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. Www irs gov efile com You must deposit the payments as explained later under Depositing Taxes. Www irs gov efile com For more information, see Publication 542. Www irs gov efile com 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 efile com Your payments of SE tax contribute to your coverage under the social security system. Www irs gov efile com Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Www irs gov efile com You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Www irs gov efile com Your net earnings from self-employment were $400 or more. Www irs gov efile com You had church employee income of $108. Www irs gov efile com 28 or more. Www irs gov efile com Use Schedule SE (Form 1040) to figure your SE tax. Www irs gov efile com For more information, see Publication 334, Tax Guide for Small Business. Www irs gov efile com You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. Www irs gov efile com The Social Security Administration (SSA) time limit for posting self-employment income. Www irs gov efile com   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Www irs gov efile com If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. Www irs gov efile com The SSA will not change its records to increase your self-employment income. Www irs gov efile com Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. Www irs gov efile com Employment taxes include the following. Www irs gov efile com Social security and Medicare taxes. Www irs gov efile com Federal income tax withholding. Www irs gov efile com Federal unemployment (FUTA) tax. Www irs gov efile com If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. Www irs gov efile com If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. Www irs gov efile com These publications explain your tax responsibilities as an employer. Www irs gov efile com 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 efile com That publication has information to help you determine whether an individual is an employee or an independent contractor. Www irs gov efile com 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 efile com An independent contractor is someone who is self-employed. Www irs gov efile com Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. Www irs gov efile com Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. Www irs gov efile com To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. Www irs gov efile com Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Www irs gov efile com Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Www irs gov efile com Medicare tax pays for benefits under the hospital insurance part of FICA. Www irs gov efile com You withhold part of these taxes from your employee's wages and you pay a part yourself. Www irs gov efile com To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. Www irs gov efile com Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. Www irs gov efile com (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Www irs gov efile com ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Www irs gov efile com You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. Www irs gov efile com You pay FUTA tax only from your own funds. Www irs gov efile com Employees do not pay this tax or have it withheld from their pay. Www irs gov efile com Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Www irs gov efile com See Publication 15 to find out if you can use this form. Www irs gov efile com Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. Www irs gov efile com Form I-9. Www irs gov efile com   You must verify that each new employee is legally eligible to work in the United States. Www irs gov efile com Both you and the employee must complete the U. Www irs gov efile com S. Www irs gov efile com Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Www irs gov efile com You can get the form from USCIS offices or from the USCIS website at www. Www irs gov efile com uscis. Www irs gov efile com gov. Www irs gov efile com Call the USCIS at 1-800-375-5283 for more information about your responsibilities. Www irs gov efile com Form W-4. Www irs gov efile com   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. Www irs gov efile com You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. Www irs gov efile com For more information, see Publication 15. Www irs gov efile com Employees claiming more than 10 withholding allowances. Www irs gov efile com   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. Www irs gov efile com See section 16 of Publication 15. Www irs gov efile com Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. Www irs gov efile com You must also send copies to the Social Security Administration. Www irs gov efile com See Information Returns, later, for more information on Form W-2. Www irs gov efile com Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Www irs gov efile com Manufacture or sell certain products. Www irs gov efile com Operate certain kinds of businesses. Www irs gov efile com Use various kinds of equipment, facilities, or products. Www irs gov efile com Receive payment for certain services. Www irs gov efile com For more information on excise taxes, see Publication 510, Excise Taxes. Www irs gov efile com Form 720. Www irs gov efile com   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 efile com Environmental taxes. Www irs gov efile com Communications and air transportation taxes. Www irs gov efile com Fuel taxes. Www irs gov efile com Tax on the first retail sale of heavy trucks, trailers, and tractors. Www irs gov efile com Manufacturers taxes on the sale or use of a variety of different articles. Www irs gov efile com Form 2290. Www irs gov efile com   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. Www irs gov efile com The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Www irs gov efile com Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Www irs gov efile com For more information, see the instructions for Form 2290. Www irs gov efile com Form 730. Www irs gov efile com   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Www irs gov efile com Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. Www irs gov efile com Form 11-C. Www irs gov efile com   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. Www irs gov efile com Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Www irs gov efile com Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). Www irs gov efile com Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Www irs gov efile com Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. Www irs gov efile com 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 efile com The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Www irs gov efile com You must give a copy of each information return you are required to file to the recipient or payer. Www irs gov efile com 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 efile com For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Www irs gov efile com Form 1099-MISC. Www irs gov efile com   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. Www irs gov efile com These payments include the following items. Www irs gov efile com Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. Www irs gov efile com Rent payments of $600 or more, other than rents paid to real estate agents. Www irs gov efile com Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Www irs gov efile com Royalty payments of $10 or more. Www irs gov efile com Payments to certain crew members by operators of fishing boats. Www irs gov efile com You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Www irs gov efile com Form W-2. Www irs gov efile com   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. Www irs gov efile com For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. Www irs gov efile com Form 8300. Www irs gov efile com   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. Www irs gov efile com Cash includes U. Www irs gov efile com S. Www irs gov efile com and foreign coin and currency. Www irs gov efile com It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Www irs gov efile com For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Www irs gov efile com Penalties The law provides penalties for not filing returns or paying taxes as required. Www irs gov efile com Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. Www irs gov efile com Failure to file tax returns. Www irs gov efile com   If you do not file your tax return by the due date, you may have to pay a penalty. Www irs gov efile com The penalty is based on the tax not paid by the due date. Www irs gov efile com See your tax return instructions for more information about this penalty. Www irs gov efile com Failure to pay tax. Www irs gov efile com   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. Www irs gov efile com For more information, see your tax return instructions. Www irs gov efile com Failure to withhold, deposit, or pay taxes. Www irs gov efile com   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. Www irs gov efile com You may also be subject to penalties if you deposit the taxes late. Www irs gov efile com For more information, see Publication 15. Www irs gov efile com Failure to follow information reporting requirements. Www irs gov efile com   The following penalties apply if you are required to file information returns. Www irs gov efile com For more information, see the General Instructions for Certain Information Returns. Www irs gov efile com Failure to file information returns. Www irs gov efile com A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. Www irs gov efile com Failure to furnish correct payee statements. Www irs gov efile com A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. Www irs gov efile com Waiver of penalty. Www irs gov efile com   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. Www irs gov efile com   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. Www irs gov efile com (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. Www irs gov efile com ) Failure to supply taxpayer identification number. Www irs gov efile com   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. Www irs gov efile com You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. Www irs gov efile com Business Expenses You can deduct business expenses on your income tax return. Www irs gov efile com These are the current operating costs of running your business. Www irs gov efile com To be deductible, a business expense must be both ordinary and necessary. Www irs gov efile com An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Www irs gov efile com A necessary expense is one that is helpful and appropriate for your business, trade, or profession. Www irs gov efile com An expense does not have to be indispensable to be considered necessary. Www irs gov efile com The following are brief explanations of some expenses that are of interest to people starting a business. Www irs gov efile com There are many other expenses that you may be able to deduct. Www irs gov efile com See your form instructions and Publication 535, Business Expenses. Www irs gov efile com Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. Www irs gov efile com Your business start-up costs will depend on the type of business you are starting. Www irs gov efile com They may include costs for advertising, travel, surveys, and training. Www irs gov efile com These costs are generally capital expenses. Www irs gov efile com You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Www irs gov efile com You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Www irs gov efile com The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Www irs gov efile com Any remaining cost must be amortized. Www irs gov efile com For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. Www irs gov efile com Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Www irs gov efile com You must spread the cost over more than one tax year and deduct part of it each year. Www irs gov efile com This method of deducting the cost of business property is called depreciation. Www irs gov efile com Business property you must depreciate includes the following items. Www irs gov efile com Office furniture. Www irs gov efile com Buildings. Www irs gov efile com Machinery and equipment. Www irs gov efile com You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Www irs gov efile com This deduction is known as the “section 179 deduction. Www irs gov efile com ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. Www irs gov efile com Depreciation must be taken in the year it is allowable. Www irs gov efile com Allowable depreciation not taken in a prior year cannot be taken in the current year. Www irs gov efile com 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 efile com S. Www irs gov efile com Individual Income Tax Return, or by changing your accounting method. Www irs gov efile com For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. Www irs gov efile com 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 efile com Even then, your deduction may be limited. Www irs gov efile com To qualify to claim expenses for business use of your home, you must meet both the following tests. Www irs gov efile com Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. Www irs gov efile com Exclusive use. Www irs gov efile com   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 efile com The area used for business can be a room or other separately identifiable space. Www irs gov efile com The space does not need to be marked off by a permanent partition. Www irs gov efile com   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Www irs gov efile com Exceptions to exclusive use. Www irs gov efile com   You do not have to meet the exclusive use test if either of the following applies. Www irs gov efile com You use part of your home for the storage of inventory or product samples. Www irs gov efile com You use part of your home as a daycare facility. Www irs gov efile com For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Www irs gov efile com Principal place of business. Www irs gov efile com   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 efile com You use it exclusively and regularly for administrative or management activities of your trade or business. Www irs gov efile com You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Www irs gov efile com   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Www irs gov efile com The relative importance of the activities performed at each location. Www irs gov efile com If the relative importance factor does not determine your principal place of business, the time spent at each location. Www irs gov efile com    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 efile com However, for other ways to qualify to deduct home office expenses, see Publication 587. Www irs gov efile com Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Www irs gov efile com If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. Www irs gov efile com More information. Www irs gov efile com   For more information about business use of your home, see Publication 587. Www irs gov efile com Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. Www irs gov efile com You generally can deduct either your actual expenses or the standard mileage rate. Www irs gov efile com Actual expenses. Www irs gov efile com   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Www irs gov efile com You can divide your expenses based on the miles driven for each purpose. Www irs gov efile com Example. Www irs gov efile com You are the sole proprietor of a flower shop. Www irs gov efile com You drove your van 20,000 miles during the year. Www irs gov efile com 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. Www irs gov efile com You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Www irs gov efile com Standard mileage rate. Www irs gov efile com   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Www irs gov efile com You can use the standard mileage rate for a vehicle you own or lease. Www irs gov efile com The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. Www irs gov efile com It is announced annually by the IRS. Www irs gov efile com To figure your deduction, multiply your business miles by the standard mileage rate for the year. Www irs gov efile com    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. Www irs gov efile com 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 efile com Choosing the standard mileage rate. Www irs gov efile com   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Www irs gov efile com In later years, you can choose to use either the standard mileage rate or actual expenses. Www irs gov efile com   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Www irs gov efile com Additional information. Www irs gov efile com   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Www irs gov efile com Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. Www irs gov efile com It also explains how long you must keep your records for federal tax purposes. Www irs gov efile com A sample recordkeeping system is illustrated at the end of this part. Www irs gov efile com Why Keep Records? Everyone in business must keep records. Www irs gov efile com Good records will help you do the following. Www irs gov efile com Monitor the progress of your business. Www irs gov efile com   You need good records to monitor the progress of your business. Www irs gov efile com Records can show whether your business is improving, which items are selling, or what changes you need to make. Www irs gov efile com Good records can increase the likelihood of business success. Www irs gov efile com Prepare your financial statements. Www irs gov efile com   You need good records to prepare accurate financial statements. Www irs gov efile com These include income (profit and loss) statements and balance sheets. Www irs gov efile com These statements can help you in dealing with your bank or creditors and help you manage your business. Www irs gov efile com An income statement shows the income and expenses of the business for a given period of time. Www irs gov efile com A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Www irs gov efile com Identify source of receipts. Www irs gov efile com   You will receive money or property from many sources. Www irs gov efile com Your records can identify the source of your receipts. Www irs gov efile com You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. Www irs gov efile com Keep track of deductible expenses. Www irs gov efile com   You may forget expenses when you prepare your tax return unless you record them when they occur. Www irs gov efile com Prepare your tax returns. Www irs gov efile com   You need good records to prepare your tax returns. Www irs gov efile com These records must support the income, expenses, and credits you report. Www irs gov efile com Generally, these are the same records you use to monitor your business and prepare your financial statements. Www irs gov efile com Support items reported on tax returns. Www irs gov efile com   You must keep your business records available at all times for inspection by the IRS. Www irs gov efile com If the IRS examines any of your tax returns, you may be asked to explain the items reported. Www irs gov efile com A complete set of records will speed up the examination. Www irs gov efile com Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Www irs gov efile com You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Www irs gov efile com The business you are in affects the type of records you need to keep for federal tax purposes. Www irs gov efile com You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Www irs gov efile com See Accounting Method, earlier. Www irs gov efile com If you are in more than one business, you should keep a complete and separate set of records for each business. Www irs gov efile com A corporation should keep minutes of board of directors' meetings. Www irs gov efile com Your recordkeeping system should include a summary of your business transactions. Www irs gov efile com This summary is ordinarily made in your books (for example, accounting journals and ledgers). Www irs gov efile com Your books must show your gross income, as well as your deductions and credits. Www irs gov efile com For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. Www irs gov efile com In addition, you must keep supporting documents, explained later. Www irs gov efile com Electronic records. Www irs gov efile com   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 efile com When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Www irs gov efile com An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Www irs gov efile com The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Www irs gov efile com All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Www irs gov efile com Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Www irs gov efile com   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Www irs gov efile com You still have the responsibility of retaining any other books and records that are required to be retained. Www irs gov efile com   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Www irs gov efile com This test is not considered an examination and the results must be shared with you. Www irs gov efile com If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Www irs gov efile com If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. Www irs gov efile com For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. Www irs gov efile com Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Www irs gov efile com Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Www irs gov efile com These documents contain information you need to record in your books. Www irs gov efile com It is important to keep these documents because they support the entries in your books and on your tax return. Www irs gov efile com Keep them in an orderly fashion and in a safe place. Www irs gov efile com For instance, organize them by year and type of income or expense. Www irs gov efile com Gross receipts. Www irs gov efile com   Gross receipts are the income you receive from your business. Www irs gov efile com You should keep supporting documents that show the amounts and sources of your gross receipts. Www irs gov efile com Documents that show gross receipts include the following. Www irs gov efile com Cash register tapes. Www irs gov efile com Bank deposit slips. Www irs gov efile com Receipt books. Www irs gov efile com Invoices. Www irs gov efile com Credit card charge slips. Www irs gov efile com Forms 1099-MISC. Www irs gov efile com Purchases. Www irs gov efile com   Purchases are the items you buy and resell to customers. Www irs gov efile com 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 efile com Your supporting documents should show the amount paid and that the amount was for purchases. Www irs gov efile com Documents for purchases include the following. Www irs gov efile com Canceled checks. Www irs gov efile com Cash register tape receipts. Www irs gov efile com Credit card sales slips. Www irs gov efile com Invoices. Www irs gov efile com These records will help you determine the value of your inventory at the end of the year. Www irs gov efile com See Publication 538 for information on methods for valuing inventory. Www irs gov efile com Expenses. Www irs gov efile com   Expenses are the costs you incur (other than purchases) to carry on your business. Www irs gov efile com Your supporting documents should show the amount paid and that the amount was for a business expense. Www irs gov efile com Documents for expenses include the following. Www irs gov efile com Canceled checks. Www irs gov efile com Cash register tapes. Www irs gov efile com Account statements. Www irs gov efile com Credit card sales slips. Www irs gov efile com Invoices. Www irs gov efile com Petty cash slips for small cash payments. Www irs gov efile com    A petty cash fund allows you to make small payments without having to write checks for small amounts. Www irs gov efile com Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. Www irs gov efile com Travel, transportation, entertainment, and gift expenses. Www irs gov efile com   Specific recordkeeping rules apply to these expenses. Www irs gov efile com For more information, see Publication 463. Www irs gov efile com Employment taxes. Www irs gov efile com   There are specific employment tax records you must keep. Www irs gov efile com For a list, see Publication 15. Www irs gov efile com Assets. Www irs gov efile com   Assets are the property, such as machinery and furniture you own and use in your business. Www irs gov efile com You must keep records to verify certain information about your business assets. Www irs gov efile com You need records to figure the annual depreciation and the gain or loss when you sell the assets. Www irs gov efile com Your records should show the following information. Www irs gov efile com When and how you acquired the asset. Www irs gov efile com Purchase price. Www irs gov efile com Cost of any improvements. Www irs gov efile com Section 179 deduction taken. Www irs gov efile com Deductions taken for depreciation. Www irs gov efile com Deductions taken for casualty losses, such as losses resulting from fires or storms. Www irs gov efile com How you used the asset. Www irs gov efile com When and how you disposed of the asset. Www irs gov efile com Selling price. Www irs gov efile com Expenses of sale. Www irs gov efile com   The following documents may show this information. Www irs gov efile com Purchase and sales invoices. Www irs gov efile com Real estate closing statements. Www irs gov efile com Canceled checks. Www irs gov efile com What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Www irs gov efile com These include account statements prepared for the financial institution by a third party. Www irs gov efile com These account statements must be highly legible. Www irs gov efile com The following table lists acceptable account statements. Www irs gov efile com  IF payment is by. Www irs gov efile com . Www irs gov efile com . Www irs gov efile com THEN the statement must show the. Www irs gov efile com . Www irs gov efile com . Www irs gov efile com Check Check number. Www irs gov efile com Amount. Www irs gov efile com Payee's name. Www irs gov efile com Date the check amount was posted to the account by the financial institution. Www irs gov efile com Electronic funds transfer Amount transferred. Www irs gov efile com Payee's name. Www irs gov efile com Date the transfer was posted to the account by the financial institution. Www irs gov efile com Credit card Amount charged. Www irs gov efile com Payee's name. Www irs gov efile com Transaction date. Www irs gov efile com    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Www irs gov efile com 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 efile com Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. Www irs gov efile com (Your business transactions are shown on the supporting documents just discussed. Www irs gov efile com ) Business transactions are ordinarily summarized in books called journals and ledgers. Www irs gov efile com You can buy them at your local stationery or office supply store. Www irs gov efile com A journal is a book where you record each business transaction shown on your supporting documents. Www irs gov efile com You may have to keep separate journals for transactions that occur frequently. Www irs gov efile com A ledger is a book that contains the totals from all of your journals. Www irs gov efile com It is organized into different accounts. Www irs gov efile com Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. Www irs gov efile com For example, a recordkeeping system for a small business might include the following items. Www irs gov efile com Business checkbook. Www irs gov efile com Daily summary of cash receipts. Www irs gov efile com Monthly summary of cash receipts. Www irs gov efile com Check disbursements journal. Www irs gov efile com Depreciation worksheet. Www irs gov efile com Employee compensation record. Www irs gov efile com The business checkbook is explained next. Www irs gov efile com The other items are illustrated later under Sample Record System. Www irs gov efile com The system you use to record business transactions will be more effective if you follow good recordkeeping practices. Www irs gov efile com For example, record expenses when they occur, and identify the source of recorded receipts. Www irs gov efile com Generally, it is best to record transactions on a daily basis. Www irs gov efile com Business checkbook. Www irs gov efile com   One of the first things you should do when you start a business is open a business checking account. Www irs gov efile com You should keep your business account separate from your personal checking account. Www irs gov efile com   The business checkbook is your basic source of information for recording your business expenses. Www irs gov efile com You should deposit all daily receipts in your business checking account. Www irs gov efile com You should check your account for errors by reconciling it. Www irs gov efile com See Reconciling the checking account, later. Www irs gov efile com   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. Www irs gov efile com You should also note on the deposit slip the source of the deposit and keep copies of all slips. Www irs gov efile com   You should make all payments by check to document business expenses. Www irs gov efile com Write checks payable to yourself only when making withdrawals from your business for personal use. Www irs gov efile com Avoid writing checks payable to cash. Www irs gov efile com 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 efile com If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Www irs gov efile com    Use the business account for business purposes only. Www irs gov efile com Indicate the source of deposits and the type of expense in the checkbook. Www irs gov efile com Reconciling the checking account. Www irs gov efile com   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. Www irs gov efile com The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. Www irs gov efile com   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. Www irs gov efile com    You should reconcile your checking account each month. Www irs gov efile com     Before you reconcile your monthly bank statement, check your own figures. Www irs gov efile com Begin with the balance shown in your checkbook at the end of the previous month. Www irs gov efile com To this balance, add the total cash deposited during the month and subtract the total cash disbursements. Www irs gov efile com   After checking your figures, the result should agree with your checkbook balance at the end of the month. Www irs gov efile com If the result does not agree, you may have made an error in recording a check or deposit. Www irs gov efile com You can find the error by doing the following. Www irs gov efile com Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. Www irs gov efile com If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. Www irs gov efile com Adding the deposit amounts in your checkbook. Www irs gov efile com Compare that total with the monthly total in your cash receipt book, if you have one. Www irs gov efile com If the totals do not agree, check the individual amounts to find any errors. Www irs gov efile com   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. Www irs gov efile com   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 efile com Many banks print a reconciliation worksheet on the back of the statement. Www irs gov efile com   To reconcile your account, follow these steps. Www irs gov efile com Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Www irs gov efile com Note all differences in the dollar amounts. Www irs gov efile com Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Www irs gov efile com Note all differences in the dollar amounts. Www irs gov efile com Mark the check number in the checkbook as having cleared the bank. Www irs gov efile com After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Www irs gov efile com Prepare a bank reconciliation. Www irs gov efile com One is illustrated later under Sample Record System. Www irs gov efile com Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. Www irs gov efile com At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. Www irs gov efile com If you still have differences, check the previous steps to find the errors. Www irs gov efile com   Table 3. Www irs gov efile com Period of Limitations IF you. Www irs gov efile com . Www irs gov efile com . Www irs gov efile com   THEN the period is. Www irs gov efile com . Www irs gov efile com . Www irs gov efile com 1. Www irs gov efile com Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. Www irs gov efile com Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. Www irs gov efile com File a fraudulent return   Not limited 4. Www irs gov efile com Do not file a return   Not limited 5. Www irs gov efile com File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. Www irs gov efile com File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. Www irs gov efile com The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. Www irs gov efile com You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Www irs gov efile com Single-entry. Www irs gov efile com   A single-entry system is based on the income statement (profit or loss statement). Www irs gov efile com It can be a simple and practical system if you are starting a small business. Www irs gov efile com The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. Www irs gov efile com Double-entry. Www irs gov efile com   A double-entry bookkeeping system uses journals and ledgers. Www irs gov efile com Transactions are first entered in a journal and then posted to ledger accounts. Www irs gov efile com 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 efile com You close income and expense accounts at the end of each tax year. Www irs gov efile com You keep asset, liability, and net worth accounts open on a permanent basis. Www irs gov efile com   In the double-entry system, each account has a left side for debits and a right side for credits. Www irs gov efile com 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 efile com   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. Www irs gov efile com If the amounts do not balance, you have made an error and you must find and correct it. Www irs gov efile com   An example of a journal entry exhibiting a payment of rent in October is shown next. Www irs gov efile com General Journal Date Description of Entry Debit  Credit Oct. Www irs gov efile com 5 Rent expense 780. Www irs gov efile com 00     Cash   780. Www irs gov efile com 00                 Computerized System There are computer software packages you can use for recordkeeping. Www irs gov efile com They can be purchased in many retail stores. Www irs gov efile com These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. Www irs gov efile com If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. Www irs gov efile com To meet this qualification, the machine-sensible records must reconcile with your books and return. Www irs gov efile com These records must provide enough detail to identify the underlying source documents. Www irs gov efile com You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. Www irs gov efile com This documentation must be sufficiently detailed to show all of the following items. Www irs gov efile com Functions being performed as the data flows through the system. Www irs gov efile com Controls used to ensure accurate and reliable processing. Www irs gov efile com Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. Www irs gov efile com Charts of accounts and detailed account descriptions. Www irs gov efile com See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. Www irs gov efile com How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Www irs gov efile com Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. Www irs gov efile com The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. Www irs gov efile com Table 3 contains the periods of limitations that apply to income tax returns. Www irs gov efile com Unless otherwise stated, the years refer to the period after the return was filed. Www irs gov efile com Returns filed before the due date are treated as filed on the due date. Www irs gov efile com Keep copies of your filed tax returns. Www irs gov efile com They help in preparing future tax returns and making computations if you file an amended return. Www irs gov efile com Employment taxes. Www irs gov efile com   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Www irs gov efile com For more information about recordkeeping for employment taxes, see Publication 15. Www irs gov efile com Assets. Www irs gov efile com   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Www irs gov efile com You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. Www irs gov efile com   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. Www irs gov efile com You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Www irs gov efile com Records for nontax purposes. Www irs gov efile com   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Www irs gov efile com For example, your insurance company or creditors may require you to keep them longer than the IRS does. Www irs gov efile com Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. Www irs gov efile com Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. Www irs gov efile com These sample records should not be viewed as a recommendation of how to keep your records. Www irs gov efile com They are intended only to show how one business keeps its records. Www irs gov efile com 1. Www irs gov efile com Daily Summary of Cash Receipts This summary is a record of cash sales for the day. Www irs gov efile com It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. Www irs gov efile com Henry takes the cash sales entry from his cash register tape. Www irs gov efile com If he had no cash register, he would simply total his cash sale slips and any other cash received that day. Www irs gov efile com He carries the total receipts shown in this summary for January 3 ($267. Www irs gov efile com 80), including cash sales ($263. Www irs gov efile com 60) and sales tax ($4. Www irs gov efile com 20), to the Monthly Summary of Cash Receipts. Www irs gov efile com Petty cash fund. Www irs gov efile com   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Www irs gov efile com Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. Www irs gov efile com He sets up a fixed amount ($50) in his petty cash fund. Www irs gov efile com 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 efile com When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. Www irs gov efile com (See the Check Disbursements Journal entry for check number 92. Www irs gov efile com ) This restores the fund to its fixed amount of $50. Www irs gov efile com He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. Www irs gov efile com 2. Www irs gov efile com Monthly Summary of Cash Receipts This shows the income activity for the month. Www irs gov efile com Henry carries the total monthly net sales shown in this summary for January ($4,865. Www irs gov efile com 05) to his Annual Summary. Www irs gov efile com To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. Www irs gov efile com He cannot take a deduction for sales tax turned over to the state because he only collected the tax. Www irs gov efile com He does not include the tax in his income. Www irs gov efile com 3. Www irs gov efile com Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. Www irs gov efile com All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. Www irs gov efile com Frequent expenses have their own headings across the sheet. Www irs gov efile com 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 efile com 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 efile com Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. Www irs gov efile com If he did, he would record them in the journal, even though he could not deduct them as business expenses. Www irs gov efile com Henry carries the January total of expenses for materials ($1,083. Www irs gov efile com 50) to the Annual Summary. Www irs gov efile com Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. Www irs gov efile com , in the appropriate columns of that summary. Www irs gov efile com 4. Www irs gov efile com Employee Compensation Record This record shows the following information. Www irs gov efile com The number of hours Henry's employee worked in a pay period. Www irs gov efile com The employee's total pay for the period. Www irs gov efile com The deductions Henry withheld in figuring the employee's net pay. Www irs gov efile com The monthly gross payroll. Www irs gov efile com Henry carries the January gross payroll ($520) to the Annual Summary. Www irs gov efile com 5. Www irs gov efile com 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 efile com He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. Www irs gov efile com He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. Www irs gov efile com As in the journal, he keeps each major expense in a separate column. Www irs gov efile com Henry carries the cash receipts total shown in the annual summary ($47,440. Www irs gov efile com 9