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1042ezIrs Form 1040ez InstructionsWww.irs.gov/form1040xFiling 2006 TaxesFiling Tax ReturnDo Unemployed People File TaxesState ReturnsFree 2010 Tax Software2005 Tax Return Software FreeE FileFree File H&r BlockFree Tax Filing For 2012Amend State Tax ReturnSenior Tax RebateWhere Can I Get A 2012 Tax FormFile State Returns For FreeFederal Tax Form 1040ezE File State Taxes FreeMi 1040xHow To Fill Out Tax Form 1040xWww Myfreetaxes Com SpringfieldmoIrs Form1040ezState ReturnsSelf Employment TaxWhen Can I File My 2011 TaxesForm 1040sTax Preparation SoftwareFile 2006 TaxesHow To File State Taxes For FreeHow To File Tax AmendmentHand R Block TaxesFree EfileIrs Form 1040ez Tax Tables1040x Electronic FilingH&r Block E FileIrs Form1040File My State Taxes Online FreeE File Form 1040x1040 Tax FormIrs Amended Tax Return2011 Irs Forms And Publications
1042ez1042ez Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. 1042ez More information. 1042ez Exception—Community Income. 1042ez Exception—Qualified joint venture. 1042ez More information. 1042ez More information. 1042ez 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. 1042ez 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. 1042ez Table 1 can help you learn what those responsibilities are. 1042ez Ask yourself each question listed in the table, then see the related discussion to find the answer. 1042ez In addition to knowing about federal taxes, you need to make some basic business decisions. 1042ez 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. 1042ez For information on how to contact the SBA, see How to Get More Information, later. 1042ez Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. 1042ez When beginning a business, you must decide which form of business to use. 1042ez Legal and tax considerations enter into this decision. 1042ez Only tax considerations are discussed in this publication. 1042ez Your form of business determines which income tax return form you have to file. 1042ez See Table 2 to find out which form you have to file. 1042ez Sole proprietorships. 1042ez A sole proprietorship is an unincorporated business that is owned by one individual. 1042ez It is the simplest form of business organization to start and maintain. 1042ez The business has no existence apart from you, the owner. 1042ez Its liabilities are your personal liabilities. 1042ez You undertake the risks of the business for all assets owned, whether or not used in the business. 1042ez You include the income and expenses of the business on your personal tax return. 1042ez More information. 1042ez For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. 1042ez If you are a farmer, see Publication 225, Farmer's Tax Guide. 1042ez Partnerships. 1042ez A partnership is the relationship existing between two or more persons who join to carry on a trade or business. 1042ez Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. 1042ez A partnership must file an annual information return to report the income, deductions, gains, losses, etc. 1042ez , from its operations, but it does not pay income tax. 1042ez Instead, it “passes through” any profits or losses to its partners. 1042ez Each partner includes his or her share of the partnership's items on his or her tax return. 1042ez More information. 1042ez For more information on partnerships, see Publication 541, Partnerships. 1042ez Husband and wife business. 1042ez 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. 1042ez Do not use Schedule C or C-EZ. 1042ez Instead, file Form 1065, U. 1042ez S. 1042ez Return of Partnership Income. 1042ez For more information, see Publication 541, Partnerships. 1042ez Exception—Community Income. 1042ez 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. 1042ez S. 1042ez possession, you can treat the business either as a sole proprietorship or a partnership. 1042ez The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 1042ez A change in your reporting position will be treated as a conversion of the entity. 1042ez Exception—Qualified joint venture. 1042ez 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. 1042ez 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. 1042ez For an explanation of "material participation," see the Instructions for Schedule C, line G. 1042ez 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. 1042ez Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. 1042ez For more information, see Qualified Joint Venture in the Instructions for Schedule SE. 1042ez Corporations. 1042ez In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. 1042ez A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. 1042ez A corporation can also take special deductions. 1042ez The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. 1042ez However, shareholders cannot deduct any loss of the corporation. 1042ez More information. 1042ez For more information on corporations, see Publication 542, Corporations. 1042ez S corporations. 1042ez 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. 1042ez Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. 1042ez 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. 1042ez More information. 1042ez For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. 1042ez S. 1042ez Income Tax Return for an S Corporation. 1042ez Limited liability company. 1042ez A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 1042ez The members of an LLC are not personally liable for its debts. 1042ez 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. 1042ez 7701-3. 1042ez For more information, see the instructions for Form 8832, Entity Classification Election. 1042ez Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. 1042ez The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). 1042ez An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. 1042ez An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. 1042ez You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. 1042ez You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. 1042ez This includes returns or documents filed to report the following information. 1042ez Interest, dividends, royalties, etc. 1042ez , paid to you. 1042ez Any amount paid to you as a dependent care provider. 1042ez Certain other amounts paid to you that total $600 or more for the year. 1042ez If you do not furnish your identification number as required, you may be subject to penalties. 1042ez See Penalties, later. 1042ez Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. 1042ez 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. 1042ez Applying for an EIN. 1042ez You may apply for an EIN: Online—Click on the EIN link at www. 1042ez irs. 1042ez gov/businesses/small. 1042ez The EIN is issued immediately once the application information is validated. 1042ez By telephone at 1-800-829-4933. 1042ez By mailing or faxing Form SS-4, Application for Employer Identification Number. 1042ez When to apply. 1042ez 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. 1042ez If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. 1042ez If you apply by telephone or through the IRS website, you can get an EIN immediately. 1042ez If you apply by fax, you can get an EIN within 4 business days. 1042ez If you do not receive your EIN by the time a return is due, file your return anyway. 1042ez Write “Applied for” and the date you applied for the number in the space for the EIN. 1042ez Do not use your social security number as a substitute for an EIN on your tax returns. 1042ez More than one EIN. 1042ez You should have only one EIN. 1042ez 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. 1042ez Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. 1042ez The IRS will tell you which number to use. 1042ez More information. 1042ez For more information about EINs, see Publication 1635, Understanding Your EIN. 1042ez 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). 1042ez The forms used to report these payments must include the payee's identification number. 1042ez Employee. 1042ez If you have employees, you must get an SSN from each of them. 1042ez Record the name and SSN of each employee exactly as they are shown on the employee's social security card. 1042ez If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. 1042ez This may occur, for example, if the employee's name has changed due to marriage or divorce. 1042ez 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. 1042ez This form is available at SSA offices or by calling 1-800-772-1213. 1042ez It is also available from the SSA website at www. 1042ez ssa. 1042ez gov. 1042ez Other payee. 1042ez 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. 1042ez If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. 1042ez To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. 1042ez This form is available from IRS offices or by calling 1-800-829-3676. 1042ez It is also available from the IRS website at IRS. 1042ez gov. 1042ez If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. 1042ez For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. 1042ez Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. 1042ez A tax year is usually 12 consecutive months. 1042ez There are two kinds of tax years. 1042ez Calendar tax year. 1042ez A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. 1042ez Fiscal tax year. 1042ez A fiscal tax year is 12 consecutive months ending on the last day of any month except December. 1042ez 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. 1042ez 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. 1042ez You must use a calendar tax year if: You keep no books. 1042ez You have no annual accounting period. 1042ez Your present tax year does not qualify as a fiscal year. 1042ez You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. 1042ez For more information, see Publication 538, Accounting Periods and Methods. 1042ez First-time filer. 1042ez If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. 1042ez You adopt a tax year by filing your first income tax return using that tax year. 1042ez You have not adopted a tax year if you merely did any of the following. 1042ez Filed an application for an extension of time to file an income tax return. 1042ez Filed an application for an employer identification number. 1042ez Paid estimated taxes for that tax year. 1042ez Changing your tax year. 1042ez Once you have adopted your tax year, you may have to get IRS approval to change it. 1042ez To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. 1042ez You may have to pay a fee. 1042ez For more information, see Publication 538. 1042ez Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. 1042ez You choose an accounting method for your business when you file your first income tax return. 1042ez There are two basic accounting methods. 1042ez Cash method. 1042ez Under the cash method, you report income in the tax year you receive it. 1042ez You usually deduct or capitalize expenses in the tax year you pay them. 1042ez Accrual method. 1042ez 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. 1042ez You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. 1042ez For other methods, see Publication 538. 1042ez If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. 1042ez Inventories include goods held for sale in the normal course of business. 1042ez They also include raw materials and supplies that will physically become a part of merchandise intended for sale. 1042ez Inventories are explained in Publication 538. 1042ez 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. 1042ez For more information, see Publication 538. 1042ez You must use the same accounting method to figure your taxable income and to keep your books. 1042ez Also, you must use an accounting method that clearly shows your income. 1042ez In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. 1042ez An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. 1042ez More than one business. 1042ez 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. 1042ez You must keep a complete and separate set of books and records for each business. 1042ez Changing your method of accounting. 1042ez Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. 1042ez 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. 1042ez For examples of changes that require approval and information on how to get approval for the change, see Publication 538. 1042ez Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. 1042ez The following are the four general kinds of business taxes. 1042ez Income tax. 1042ez Self-employment tax. 1042ez Employment taxes. 1042ez Excise taxes. 1042ez See Table 2 for the forms you file to report these taxes. 1042ez You may want to get Publication 509. 1042ez It has tax calendars that tell you when to file returns and make tax payments. 1042ez Income Tax All businesses except partnerships must file an annual income tax return. 1042ez Partnerships file an information return. 1042ez Which form you use depends on how your business is organized. 1042ez See Table 2 to find out which return you have to file. 1042ez The federal income tax is a pay-as-you-go tax. 1042ez You must pay the tax as you earn or receive income during the year. 1042ez An employee usually has income tax withheld from his or her pay. 1042ez If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. 1042ez If you are not required to make estimated tax payments, you may pay any tax due when you file your return. 1042ez Table 2. 1042ez Which Forms Must I File? IF you are a. 1042ez . 1042ez . 1042ez THEN you may be liable for. 1042ez . 1042ez . 1042ez Use Form. 1042ez . 1042ez . 1042ez 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. 1042ez 2 Various other schedules may be needed. 1042ez Estimated tax. 1042ez Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. 1042ez Sole proprietors, partners, and S corporation shareholders. 1042ez You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. 1042ez Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. 1042ez For more information, see Publication 505, Tax Withholding and Estimated Tax. 1042ez Corporations. 1042ez 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. 1042ez Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. 1042ez You must deposit the payments as explained later under Depositing Taxes. 1042ez For more information, see Publication 542. 1042ez Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. 1042ez Your payments of SE tax contribute to your coverage under the social security system. 1042ez Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. 1042ez You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. 1042ez Your net earnings from self-employment were $400 or more. 1042ez You had church employee income of $108. 1042ez 28 or more. 1042ez Use Schedule SE (Form 1040) to figure your SE tax. 1042ez For more information, see Publication 334, Tax Guide for Small Business. 1042ez You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. 1042ez The Social Security Administration (SSA) time limit for posting self-employment income. 1042ez 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. 1042ez 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. 1042ez The SSA will not change its records to increase your self-employment income. 1042ez 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. 1042ez Employment taxes include the following. 1042ez Social security and Medicare taxes. 1042ez Federal income tax withholding. 1042ez Federal unemployment (FUTA) tax. 1042ez If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. 1042ez If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. 1042ez These publications explain your tax responsibilities as an employer. 1042ez If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. 1042ez That publication has information to help you determine whether an individual is an employee or an independent contractor. 1042ez If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. 1042ez An independent contractor is someone who is self-employed. 1042ez Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. 1042ez Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. 1042ez 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. 1042ez Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). 1042ez Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. 1042ez Medicare tax pays for benefits under the hospital insurance part of FICA. 1042ez You withhold part of these taxes from your employee's wages and you pay a part yourself. 1042ez To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. 1042ez 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. 1042ez (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. 1042ez ) 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. 1042ez You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. 1042ez You pay FUTA tax only from your own funds. 1042ez Employees do not pay this tax or have it withheld from their pay. 1042ez Which form do I file? Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. 1042ez See Publication 15 to find out if you can use this form. 1042ez Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. 1042ez Form I-9. 1042ez You must verify that each new employee is legally eligible to work in the United States. 1042ez Both you and the employee must complete the U. 1042ez S. 1042ez Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. 1042ez You can get the form from USCIS offices or from the USCIS website at www. 1042ez uscis. 1042ez gov. 1042ez Call the USCIS at 1-800-375-5283 for more information about your responsibilities. 1042ez Form W-4. 1042ez Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. 1042ez 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. 1042ez For more information, see Publication 15. 1042ez Employees claiming more than 10 withholding allowances. 1042ez An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. 1042ez See section 16 of Publication 15. 1042ez 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. 1042ez You must also send copies to the Social Security Administration. 1042ez See Information Returns, later, for more information on Form W-2. 1042ez 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. 1042ez Manufacture or sell certain products. 1042ez Operate certain kinds of businesses. 1042ez Use various kinds of equipment, facilities, or products. 1042ez Receive payment for certain services. 1042ez For more information on excise taxes, see Publication 510, Excise Taxes. 1042ez Form 720. 1042ez The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. 1042ez Environmental taxes. 1042ez Communications and air transportation taxes. 1042ez Fuel taxes. 1042ez Tax on the first retail sale of heavy trucks, trailers, and tractors. 1042ez Manufacturers taxes on the sale or use of a variety of different articles. 1042ez Form 2290. 1042ez There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. 1042ez The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. 1042ez Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. 1042ez For more information, see the instructions for Form 2290. 1042ez Form 730. 1042ez 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. 1042ez Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. 1042ez Form 11-C. 1042ez 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. 1042ez Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. 1042ez Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). 1042ez Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. 1042ez Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. 1042ez Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. 1042ez 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. 1042ez You must give a copy of each information return you are required to file to the recipient or payer. 1042ez In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. 1042ez For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. 1042ez Form 1099-MISC. 1042ez Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. 1042ez These payments include the following items. 1042ez 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. 1042ez Rent payments of $600 or more, other than rents paid to real estate agents. 1042ez Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. 1042ez Royalty payments of $10 or more. 1042ez Payments to certain crew members by operators of fishing boats. 1042ez 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. 1042ez Form W-2. 1042ez 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. 1042ez For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. 1042ez Form 8300. 1042ez 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. 1042ez Cash includes U. 1042ez S. 1042ez and foreign coin and currency. 1042ez It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. 1042ez For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). 1042ez Penalties The law provides penalties for not filing returns or paying taxes as required. 1042ez Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. 1042ez Failure to file tax returns. 1042ez If you do not file your tax return by the due date, you may have to pay a penalty. 1042ez The penalty is based on the tax not paid by the due date. 1042ez See your tax return instructions for more information about this penalty. 1042ez Failure to pay tax. 1042ez 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. 1042ez For more information, see your tax return instructions. 1042ez Failure to withhold, deposit, or pay taxes. 1042ez 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. 1042ez You may also be subject to penalties if you deposit the taxes late. 1042ez For more information, see Publication 15. 1042ez Failure to follow information reporting requirements. 1042ez The following penalties apply if you are required to file information returns. 1042ez For more information, see the General Instructions for Certain Information Returns. 1042ez Failure to file information returns. 1042ez 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. 1042ez Failure to furnish correct payee statements. 1042ez 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. 1042ez Waiver of penalty. 1042ez These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. 1042ez 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. 1042ez (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. 1042ez ) Failure to supply taxpayer identification number. 1042ez 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. 1042ez 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. 1042ez Business Expenses You can deduct business expenses on your income tax return. 1042ez These are the current operating costs of running your business. 1042ez To be deductible, a business expense must be both ordinary and necessary. 1042ez An ordinary expense is one that is common and accepted in your field of business, trade, or profession. 1042ez A necessary expense is one that is helpful and appropriate for your business, trade, or profession. 1042ez An expense does not have to be indispensable to be considered necessary. 1042ez The following are brief explanations of some expenses that are of interest to people starting a business. 1042ez There are many other expenses that you may be able to deduct. 1042ez See your form instructions and Publication 535, Business Expenses. 1042ez Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. 1042ez Your business start-up costs will depend on the type of business you are starting. 1042ez They may include costs for advertising, travel, surveys, and training. 1042ez These costs are generally capital expenses. 1042ez You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). 1042ez 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. 1042ez The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. 1042ez Any remaining cost must be amortized. 1042ez For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. 1042ez 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. 1042ez You must spread the cost over more than one tax year and deduct part of it each year. 1042ez This method of deducting the cost of business property is called depreciation. 1042ez Business property you must depreciate includes the following items. 1042ez Office furniture. 1042ez Buildings. 1042ez Machinery and equipment. 1042ez You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. 1042ez This deduction is known as the “section 179 deduction. 1042ez ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. 1042ez Depreciation must be taken in the year it is allowable. 1042ez Allowable depreciation not taken in a prior year cannot be taken in the current year. 1042ez If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. 1042ez S. 1042ez Individual Income Tax Return, or by changing your accounting method. 1042ez For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. 1042ez Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. 1042ez Even then, your deduction may be limited. 1042ez To qualify to claim expenses for business use of your home, you must meet both the following tests. 1042ez 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. 1042ez Exclusive use. 1042ez To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 1042ez The area used for business can be a room or other separately identifiable space. 1042ez The space does not need to be marked off by a permanent partition. 1042ez 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. 1042ez Exceptions to exclusive use. 1042ez You do not have to meet the exclusive use test if either of the following applies. 1042ez You use part of your home for the storage of inventory or product samples. 1042ez You use part of your home as a daycare facility. 1042ez For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). 1042ez Principal place of business. 1042ez Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. 1042ez You use it exclusively and regularly for administrative or management activities of your trade or business. 1042ez You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 1042ez 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. 1042ez The relative importance of the activities performed at each location. 1042ez If the relative importance factor does not determine your principal place of business, the time spent at each location. 1042ez If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 1042ez However, for other ways to qualify to deduct home office expenses, see Publication 587. 1042ez 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. 1042ez If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. 1042ez More information. 1042ez For more information about business use of your home, see Publication 587. 1042ez Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. 1042ez You generally can deduct either your actual expenses or the standard mileage rate. 1042ez Actual expenses. 1042ez 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. 1042ez You can divide your expenses based on the miles driven for each purpose. 1042ez Example. 1042ez You are the sole proprietor of a flower shop. 1042ez You drove your van 20,000 miles during the year. 1042ez 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. 1042ez You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. 1042ez Standard mileage rate. 1042ez 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. 1042ez You can use the standard mileage rate for a vehicle you own or lease. 1042ez The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. 1042ez It is announced annually by the IRS. 1042ez To figure your deduction, multiply your business miles by the standard mileage rate for the year. 1042ez Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. 1042ez However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. 1042ez Choosing the standard mileage rate. 1042ez 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. 1042ez In later years, you can choose to use either the standard mileage rate or actual expenses. 1042ez 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). 1042ez Additional information. 1042ez For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 1042ez Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. 1042ez It also explains how long you must keep your records for federal tax purposes. 1042ez A sample recordkeeping system is illustrated at the end of this part. 1042ez Why Keep Records? Everyone in business must keep records. 1042ez Good records will help you do the following. 1042ez Monitor the progress of your business. 1042ez You need good records to monitor the progress of your business. 1042ez Records can show whether your business is improving, which items are selling, or what changes you need to make. 1042ez Good records can increase the likelihood of business success. 1042ez Prepare your financial statements. 1042ez You need good records to prepare accurate financial statements. 1042ez These include income (profit and loss) statements and balance sheets. 1042ez These statements can help you in dealing with your bank or creditors and help you manage your business. 1042ez An income statement shows the income and expenses of the business for a given period of time. 1042ez A balance sheet shows the assets, liabilities, and your equity in the business on a given date. 1042ez Identify source of receipts. 1042ez You will receive money or property from many sources. 1042ez Your records can identify the source of your receipts. 1042ez You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. 1042ez Keep track of deductible expenses. 1042ez You may forget expenses when you prepare your tax return unless you record them when they occur. 1042ez Prepare your tax returns. 1042ez You need good records to prepare your tax returns. 1042ez These records must support the income, expenses, and credits you report. 1042ez Generally, these are the same records you use to monitor your business and prepare your financial statements. 1042ez Support items reported on tax returns. 1042ez You must keep your business records available at all times for inspection by the IRS. 1042ez If the IRS examines any of your tax returns, you may be asked to explain the items reported. 1042ez A complete set of records will speed up the examination. 1042ez Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. 1042ez You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. 1042ez The business you are in affects the type of records you need to keep for federal tax purposes. 1042ez You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. 1042ez See Accounting Method, earlier. 1042ez If you are in more than one business, you should keep a complete and separate set of records for each business. 1042ez A corporation should keep minutes of board of directors' meetings. 1042ez Your recordkeeping system should include a summary of your business transactions. 1042ez This summary is ordinarily made in your books (for example, accounting journals and ledgers). 1042ez Your books must show your gross income, as well as your deductions and credits. 1042ez For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. 1042ez In addition, you must keep supporting documents, explained later. 1042ez Electronic records. 1042ez All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. 1042ez 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. 1042ez 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. 1042ez The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. 1042ez All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. 1042ez Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. 1042ez 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. 1042ez You still have the responsibility of retaining any other books and records that are required to be retained. 1042ez The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. 1042ez This test is not considered an examination and the results must be shared with you. 1042ez If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. 1042ez 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. 1042ez For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. 1042ez Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. 1042ez Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. 1042ez These documents contain information you need to record in your books. 1042ez It is important to keep these documents because they support the entries in your books and on your tax return. 1042ez Keep them in an orderly fashion and in a safe place. 1042ez For instance, organize them by year and type of income or expense. 1042ez Gross receipts. 1042ez Gross receipts are the income you receive from your business. 1042ez You should keep supporting documents that show the amounts and sources of your gross receipts. 1042ez Documents that show gross receipts include the following. 1042ez Cash register tapes. 1042ez Bank deposit slips. 1042ez Receipt books. 1042ez Invoices. 1042ez Credit card charge slips. 1042ez Forms 1099-MISC. 1042ez Purchases. 1042ez Purchases are the items you buy and resell to customers. 1042ez If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. 1042ez Your supporting documents should show the amount paid and that the amount was for purchases. 1042ez Documents for purchases include the following. 1042ez Canceled checks. 1042ez Cash register tape receipts. 1042ez Credit card sales slips. 1042ez Invoices. 1042ez These records will help you determine the value of your inventory at the end of the year. 1042ez See Publication 538 for information on methods for valuing inventory. 1042ez Expenses. 1042ez Expenses are the costs you incur (other than purchases) to carry on your business. 1042ez Your supporting documents should show the amount paid and that the amount was for a business expense. 1042ez Documents for expenses include the following. 1042ez Canceled checks. 1042ez Cash register tapes. 1042ez Account statements. 1042ez Credit card sales slips. 1042ez Invoices. 1042ez Petty cash slips for small cash payments. 1042ez A petty cash fund allows you to make small payments without having to write checks for small amounts. 1042ez 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. 1042ez Travel, transportation, entertainment, and gift expenses. 1042ez Specific recordkeeping rules apply to these expenses. 1042ez For more information, see Publication 463. 1042ez Employment taxes. 1042ez There are specific employment tax records you must keep. 1042ez For a list, see Publication 15. 1042ez Assets. 1042ez Assets are the property, such as machinery and furniture you own and use in your business. 1042ez You must keep records to verify certain information about your business assets. 1042ez You need records to figure the annual depreciation and the gain or loss when you sell the assets. 1042ez Your records should show the following information. 1042ez When and how you acquired the asset. 1042ez Purchase price. 1042ez Cost of any improvements. 1042ez Section 179 deduction taken. 1042ez Deductions taken for depreciation. 1042ez Deductions taken for casualty losses, such as losses resulting from fires or storms. 1042ez How you used the asset. 1042ez When and how you disposed of the asset. 1042ez Selling price. 1042ez Expenses of sale. 1042ez The following documents may show this information. 1042ez Purchase and sales invoices. 1042ez Real estate closing statements. 1042ez Canceled checks. 1042ez 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. 1042ez These include account statements prepared for the financial institution by a third party. 1042ez These account statements must be highly legible. 1042ez The following table lists acceptable account statements. 1042ez IF payment is by. 1042ez . 1042ez . 1042ez THEN the statement must show the. 1042ez . 1042ez . 1042ez Check Check number. 1042ez Amount. 1042ez Payee's name. 1042ez Date the check amount was posted to the account by the financial institution. 1042ez Electronic funds transfer Amount transferred. 1042ez Payee's name. 1042ez Date the transfer was posted to the account by the financial institution. 1042ez Credit card Amount charged. 1042ez Payee's name. 1042ez Transaction date. 1042ez Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. 1042ez You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. 1042ez Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. 1042ez (Your business transactions are shown on the supporting documents just discussed. 1042ez ) Business transactions are ordinarily summarized in books called journals and ledgers. 1042ez You can buy them at your local stationery or office supply store. 1042ez A journal is a book where you record each business transaction shown on your supporting documents. 1042ez You may have to keep separate journals for transactions that occur frequently. 1042ez A ledger is a book that contains the totals from all of your journals. 1042ez It is organized into different accounts. 1042ez Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. 1042ez For example, a recordkeeping system for a small business might include the following items. 1042ez Business checkbook. 1042ez Daily summary of cash receipts. 1042ez Monthly summary of cash receipts. 1042ez Check disbursements journal. 1042ez Depreciation worksheet. 1042ez Employee compensation record. 1042ez The business checkbook is explained next. 1042ez The other items are illustrated later under Sample Record System. 1042ez The system you use to record business transactions will be more effective if you follow good recordkeeping practices. 1042ez For example, record expenses when they occur, and identify the source of recorded receipts. 1042ez Generally, it is best to record transactions on a daily basis. 1042ez Business checkbook. 1042ez One of the first things you should do when you start a business is open a business checking account. 1042ez You should keep your business account separate from your personal checking account. 1042ez The business checkbook is your basic source of information for recording your business expenses. 1042ez You should deposit all daily receipts in your business checking account. 1042ez You should check your account for errors by reconciling it. 1042ez See Reconciling the checking account, later. 1042ez Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. 1042ez You should also note on the deposit slip the source of the deposit and keep copies of all slips. 1042ez You should make all payments by check to document business expenses. 1042ez Write checks payable to yourself only when making withdrawals from your business for personal use. 1042ez Avoid writing checks payable to cash. 1042ez If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. 1042ez If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. 1042ez Use the business account for business purposes only. 1042ez Indicate the source of deposits and the type of expense in the checkbook. 1042ez Reconciling the checking account. 1042ez When you receive your bank statement, make sure the statement, your checkbook, and your books agree. 1042ez 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. 1042ez 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. 1042ez You should reconcile your checking account each month. 1042ez Before you reconcile your monthly bank statement, check your own figures. 1042ez Begin with the balance shown in your checkbook at the end of the previous month. 1042ez To this balance, add the total cash deposited during the month and subtract the total cash disbursements. 1042ez After checking your figures, the result should agree with your checkbook balance at the end of the month. 1042ez If the result does not agree, you may have made an error in recording a check or deposit. 1042ez You can find the error by doing the following. 1042ez 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. 1042ez 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. 1042ez Adding the deposit amounts in your checkbook. 1042ez Compare that total with the monthly total in your cash receipt book, if you have one. 1042ez If the totals do not agree, check the individual amounts to find any errors. 1042ez If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. 1042ez When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. 1042ez Many banks print a reconciliation worksheet on the back of the statement. 1042ez To reconcile your account, follow these steps. 1042ez Compare the deposits listed on the bank statement with the deposits shown in your checkbook. 1042ez Note all differences in the dollar amounts. 1042ez Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. 1042ez Note all differences in the dollar amounts. 1042ez Mark the check number in the checkbook as having cleared the bank. 1042ez After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. 1042ez Prepare a bank reconciliation. 1042ez One is illustrated later under Sample Record System. 1042ez Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. 1042ez At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. 1042ez If you still have differences, check the previous steps to find the errors. 1042ez Table 3. 1042ez Period of Limitations IF you. 1042ez . 1042ez . 1042ez THEN the period is. 1042ez . 1042ez . 1042ez 1. 1042ez Owe additional tax and situations (2), (3), and (4), below, do not apply to you 3 years 2. 1042ez 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. 1042ez File a fraudulent return Not limited 4. 1042ez Do not file a return Not limited 5. 1042ez File a claim for credit or refund after you filed your return Later of: 3 years or 2 years after tax was paid 6. 1042ez 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. 1042ez The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. 1042ez You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. 1042ez Single-entry. 1042ez A single-entry system is based on the income statement (profit or loss statement). 1042ez It can be a simple and practical system if you are starting a small business. 1042ez 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. 1042ez Double-entry. 1042ez A double-entry bookkeeping system uses journals and ledgers. 1042ez Transactions are first entered in a journal and then posted to ledger accounts. 1042ez These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). 1042ez You close income and expense accounts at the end of each tax year. 1042ez You keep asset, liability, and net worth accounts open on a permanent basis. 1042ez In the double-entry system, each account has a left side for debits and a right side for credits. 1042ez It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. 1042ez Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. 1042ez If the amounts do not balance, you have made an error and you must find and correct it. 1042ez An example of a journal entry exhibiting a payment of rent in October is shown next. 1042ez General Journal Date Description of Entry Debit Credit Oct. 1042ez 5 Rent expense 780. 1042ez 00 Cash 780. 1042ez 00 Computerized System There are computer software packages you can use for recordkeeping. 1042ez They can be purchased in many retail stores. 1042ez These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. 1042ez 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. 1042ez To meet this qualification, the machine-sensible records must reconcile with your books and return. 1042ez These records must provide enough detail to identify the underlying source documents. 1042ez You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. 1042ez This documentation must be sufficiently detailed to show all of the following items. 1042ez Functions being performed as the data flows through the system. 1042ez Controls used to ensure accurate and reliable processing. 1042ez Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. 1042ez Charts of accounts and detailed account descriptions. 1042ez See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. 1042ez 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. 1042ez 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. 1042ez 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. 1042ez Table 3 contains the periods of limitations that apply to income tax returns. 1042ez Unless otherwise stated, the years refer to the period after the return was filed. 1042ez Returns filed before the due date are treated as filed on the due date. 1042ez Keep copies of your filed tax returns. 1042ez They help in preparing future tax returns and making computations if you file an amended return. 1042ez Employment taxes. 1042ez 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. 1042ez For more information about recordkeeping for employment taxes, see Publication 15. 1042ez Assets. 1042ez 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. 1042ez 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. 1042ez 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. 1042ez 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. 1042ez Records for nontax purposes. 1042ez 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. 1042ez For example, your insurance company or creditors may require you to keep them longer than the IRS does. 1042ez 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. 1042ez Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. 1042ez These sample records should not be viewed as a recommendation of how to keep your records. 1042ez They are intended only to show how one business keeps its records. 1042ez 1. 1042ez Daily Summary of Cash Receipts This summary is a record of cash sales for the day. 1042ez 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. 1042ez Henry takes the cash sales entry from his cash register tape. 1042ez If he had no cash register, he would simply total his cash sale slips and any other cash received that day. 1042ez He carries the total receipts shown in this summary for January 3 ($267. 1042ez 80), including cash sales ($263. 1042ez 60) and sales tax ($4. 1042ez 20), to the Monthly Summary of Cash Receipts. 1042ez Petty cash fund. 1042ez Henry uses a petty cash fund to make small payments without having to write checks for small amounts. 1042ez 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. 1042ez He sets up a fixed amount ($50) in his petty cash fund. 1042ez The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. 1042ez 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. 1042ez (See the Check Disbursements Journal entry for check number 92. 1042ez ) This restores the fund to its fixed amount of $50. 1042ez He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. 1042ez 2. 1042ez Monthly Summary of Cash Receipts This shows the income activity for the month. 1042ez Henry carries the total monthly net sales shown in this summary for January ($4,865. 1042ez 05) to his Annual Summary. 1042ez 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. 1042ez He cannot take a deduction for sales tax turned over to the state because he only collected the tax. 1042ez He does not include the tax in his income. 1042ez 3. 1042ez Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. 1042ez All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. 1042ez Frequent expenses have their own headings across the sheet. 1042ez He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. 1042ez Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. 1042ez Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. 1042ez If he did, he would record them in the journal, even though he could not deduct them as business expenses. 1042ez Henry carries the January total of expenses for materials ($1,083. 1042ez 50) to the Annual Summary. 1042ez Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. 1042ez , in the appropriate columns of that summary. 1042ez 4. 1042ez Employee Compensation Record This record shows the following information. 1042ez The number of hours Henry's employee worked in a pay period. 1042ez The employee's total pay for the period. 1042ez The deductions Henry withheld in figuring the employee's net pay. 1042ez The monthly gross payroll. 1042ez Henry carries the January gross payroll ($520) to the Annual Summary. 1042ez 5. 1042ez Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. 1042ez He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. 1042ez He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. 1042ez As in the journal, he keeps each major expense in a separate column. 1042ez Henry carries the cash receipts total shown in the annual summary ($47,440. 1042ez 9
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