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2011 1040ez Form

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2011 1040ez Form

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

2011 1040ez form 2. 2011 1040ez form   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. 2011 1040ez form Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. 2011 1040ez form S. 2011 1040ez form or foreign source income. 2011 1040ez form This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. 2011 1040ez form S. 2011 1040ez form Virgin Islands (USVI). 2011 1040ez form Generally, the same rules that apply for determining U. 2011 1040ez form S. 2011 1040ez form source income also apply for determining possession source income. 2011 1040ez form However, there are some important exceptions to these rules. 2011 1040ez form Both the general rules and the exceptions are discussed in this chapter. 2011 1040ez form U. 2011 1040ez form S. 2011 1040ez form income rule. 2011 1040ez form   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. 2011 1040ez form Table 2-1 shows the general rules for determining whether income is from sources within the United States. 2011 1040ez form Table 2-1. 2011 1040ez form General Rules for Determining U. 2011 1040ez form S. 2011 1040ez form Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. 2011 1040ez form Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. 2011 1040ez form For more information, see Regulations section 1. 2011 1040ez form 863-1(b). 2011 1040ez form Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. 2011 1040ez form Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. 2011 1040ez form Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. 2011 1040ez form It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. 2011 1040ez form Services performed wholly within a relevant possession. 2011 1040ez form   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. 2011 1040ez form However, there is an exception for income earned as a member of the U. 2011 1040ez form S. 2011 1040ez form Armed Forces or a civilian spouse. 2011 1040ez form U. 2011 1040ez form S. 2011 1040ez form Armed Forces. 2011 1040ez form   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. 2011 1040ez form However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. 2011 1040ez form Civilian spouse of active duty member of the U. 2011 1040ez form S. 2011 1040ez form Armed Forces. 2011 1040ez form   If you are a bona fide resident of a U. 2011 1040ez form S. 2011 1040ez form possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. 2011 1040ez form Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. 2011 1040ez form S. 2011 1040ez form possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. 2011 1040ez form Services performed partly inside and partly outside a relevant possession. 2011 1040ez form   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. 2011 1040ez form Compensation (other than certain fringe benefits) is sourced on a time basis. 2011 1040ez form Certain fringe benefits (such as housing and education) are sourced on a geographical basis. 2011 1040ez form   Or, you may be permitted to use an alternative basis to determine the source of compensation. 2011 1040ez form See Alternative basis , later. 2011 1040ez form   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. 2011 1040ez form In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. 2011 1040ez form Time basis. 2011 1040ez form   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). 2011 1040ez form Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. 2011 1040ez form The time period for which the income is made does not have to be a year. 2011 1040ez form Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. 2011 1040ez form Example. 2011 1040ez form In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. 2011 1040ez form Your Puerto Rico source income is $60,000, figured as follows. 2011 1040ez form       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. 2011 1040ez form   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. 2011 1040ez form Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. 2011 1040ez form You determine the period to which the income is attributable based on the facts and circumstances of your case. 2011 1040ez form For more information on multi-year compensation, see Treasury Decision (T. 2011 1040ez form D. 2011 1040ez form ) 9212 and Regulations section 1. 2011 1040ez form 861-4, 2005-35 I. 2011 1040ez form R. 2011 1040ez form B. 2011 1040ez form 429, available at www. 2011 1040ez form irs. 2011 1040ez form gov/irb/2005-35_IRB/ar14. 2011 1040ez form html. 2011 1040ez form Certain fringe benefits sourced on a geographical basis. 2011 1040ez form   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. 2011 1040ez form Housing. 2011 1040ez form Education. 2011 1040ez form Local transportation. 2011 1040ez form Tax reimbursement. 2011 1040ez form Hazardous or hardship duty pay. 2011 1040ez form Moving expense reimbursement. 2011 1040ez form For information on determining the source of the fringe benefits listed above, see Regulations section 1. 2011 1040ez form 861-4. 2011 1040ez form Alternative basis. 2011 1040ez form   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. 2011 1040ez form If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. 2011 1040ez form De minimis exception. 2011 1040ez form   There is an exception to the rule for determining the source of income earned in a possession. 2011 1040ez form Generally, you will not have income from a possession if during a tax year you: Are a U. 2011 1040ez form S. 2011 1040ez form citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. 2011 1040ez form This exception began with income earned during your 2008 tax year. 2011 1040ez form Pensions. 2011 1040ez form   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. 2011 1040ez form The contribution portion is sourced according to where services were performed that earned the pension. 2011 1040ez form The investment earnings portion is sourced according to the location of the pension trust. 2011 1040ez form Example. 2011 1040ez form You are a U. 2011 1040ez form S. 2011 1040ez form citizen who worked in Puerto Rico for a U. 2011 1040ez form S. 2011 1040ez form company. 2011 1040ez form All services were performed in Puerto Rico. 2011 1040ez form Upon retirement you remained in Puerto Rico and began receiving your pension from the U. 2011 1040ez form S. 2011 1040ez form pension trust of your employer. 2011 1040ez form Distributions from the U. 2011 1040ez form S. 2011 1040ez form pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. 2011 1040ez form S. 2011 1040ez form source income. 2011 1040ez form Investment Income This category includes such income as interest, dividends, rents, and royalties. 2011 1040ez form Interest income. 2011 1040ez form   The source of interest income is generally determined by the residence of the payer. 2011 1040ez form Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. 2011 1040ez form   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. 2011 1040ez form See Regulations section 1. 2011 1040ez form 937-2(i) for more information. 2011 1040ez form Dividends. 2011 1040ez form   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. 2011 1040ez form There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. 2011 1040ez form For more information, see Regulations section 1. 2011 1040ez form 937-2(g). 2011 1040ez form Rental income. 2011 1040ez form   Rents from property located in a relevant possession are treated as income from sources within that possession. 2011 1040ez form Royalties. 2011 1040ez form   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. 2011 1040ez form   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. 2011 1040ez form Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. 2011 1040ez form The most common situations are discussed below. 2011 1040ez form Real property. 2011 1040ez form   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. 2011 1040ez form The location of the property generally determines the source of income from the sale. 2011 1040ez form For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. 2011 1040ez form If, however, the home you sold was located in the United States, the gain is U. 2011 1040ez form S. 2011 1040ez form source income. 2011 1040ez form Personal property. 2011 1040ez form   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. 2011 1040ez form Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. 2011 1040ez form If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. 2011 1040ez form   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. 2011 1040ez form The rules applying to sales of inventory are discussed below. 2011 1040ez form For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. 2011 1040ez form Inventory. 2011 1040ez form   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. 2011 1040ez form The source of income from the sale of inventory depends on whether the inventory was purchased or produced. 2011 1040ez form Purchased. 2011 1040ez form   Income from the sale of inventory that you purchased is sourced where you sell the property. 2011 1040ez form Generally, this is where title to the property passes to the buyer. 2011 1040ez form Produced. 2011 1040ez form   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. 2011 1040ez form For information on making the allocation, see Regulations section 1. 2011 1040ez form 863-3(f). 2011 1040ez form Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. 2011 1040ez form S. 2011 1040ez form citizen or resident alien prior to becoming a bona fide resident of a possession. 2011 1040ez form You are subject to these special rules if you meet both of the following conditions. 2011 1040ez form For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. 2011 1040ez form For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). 2011 1040ez form If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. 2011 1040ez form Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. 2011 1040ez form S. 2011 1040ez form tax return. 2011 1040ez form (See chapter 3 for additional filing information. 2011 1040ez form ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. 2011 1040ez form These rules apply to dispositions after April 11, 2005. 2011 1040ez form For details, see Regulations section 1. 2011 1040ez form 937-2(f)(1) and Examples 1 and 2 of section 1. 2011 1040ez form 937-2(k). 2011 1040ez form Example 1. 2011 1040ez form In 2007, Cheryl Jones, a U. 2011 1040ez form S. 2011 1040ez form citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. 2011 1040ez form S. 2011 1040ez form corporation listed on the New York Stock Exchange. 2011 1040ez form On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. 2011 1040ez form Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. 2011 1040ez form On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. 2011 1040ez form On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. 2011 1040ez form Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. 2011 1040ez form The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. 2011 1040ez form This existing special rule applies if you are a U. 2011 1040ez form S. 2011 1040ez form citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. 2011 1040ez form S. 2011 1040ez form assets during the 10-year period beginning when you became a bona fide resident. 2011 1040ez form The gain is U. 2011 1040ez form S. 2011 1040ez form source income that generally is subject to U. 2011 1040ez form S. 2011 1040ez form tax if the property is either (1) located in the United States; (2) stock issued by a U. 2011 1040ez form S. 2011 1040ez form corporation or a debt obligation of a U. 2011 1040ez form S. 2011 1040ez form person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). 2011 1040ez form See chapter 3 for filing information. 2011 1040ez form Special election. 2011 1040ez form   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. 2011 1040ez form Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. 2011 1040ez form This election overrides both of the special rules discussed earlier. 2011 1040ez form   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. 2011 1040ez form Marketable securities. 2011 1040ez form   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. 2011 1040ez form Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. 2011 1040ez form S. 2011 1040ez form holding periods. 2011 1040ez form   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. 2011 1040ez form The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. 2011 1040ez form This is your gain (or loss) that is treated as being from sources within the relevant possession. 2011 1040ez form If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. 2011 1040ez form Example 2. 2011 1040ez form Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. 2011 1040ez form S. 2011 1040ez form and possession holding periods. 2011 1040ez form Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. 2011 1040ez form Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). 2011 1040ez form By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 2011 1040ez form Other personal property. 2011 1040ez form   For personal property other than marketable securities, use a time-based allocation. 2011 1040ez form Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. 2011 1040ez form      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. 2011 1040ez form Example 3. 2011 1040ez form In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. 2011 1040ez form On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. 2011 1040ez form On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. 2011 1040ez form She had owned the interest for a total of 1,720 days. 2011 1040ez form Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. 2011 1040ez form The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). 2011 1040ez form By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 2011 1040ez form Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. 2011 1040ez form Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. 2011 1040ez form These rules do not apply to amounts paid as salary or other compensation for services. 2011 1040ez form See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. 2011 1040ez form Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. 2011 1040ez form These circumstances are listed below. 2011 1040ez form You have an office or other fixed place of business in the relevant possession to which the income can be attributed. 2011 1040ez form That office or place of business is a material factor in producing the income. 2011 1040ez form The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. 2011 1040ez form An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. 2011 1040ez form The three kinds of income from sources outside the relevant possession to which these rules apply are the following. 2011 1040ez form Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. 2011 1040ez form Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. 2011 1040ez form Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. 2011 1040ez form Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. 2011 1040ez form Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. 2011 1040ez form Example. 2011 1040ez form Marcy Jackson is a bona fide resident of American Samoa. 2011 1040ez form Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. 2011 1040ez form A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. 2011 1040ez form Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. 2011 1040ez form The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. 2011 1040ez form However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. 2011 1040ez form Prev  Up  Next   Home   More Online Publications