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2012 Tax

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2012 Tax

2012 tax Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. 2012 tax More information. 2012 tax Exception—Community Income. 2012 tax Exception—Qualified joint venture. 2012 tax More information. 2012 tax More information. 2012 tax 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. 2012 tax 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. 2012 tax Table 1 can help you learn what those responsibilities are. 2012 tax Ask yourself each question listed in the table, then see the related discussion to find the answer. 2012 tax In addition to knowing about federal taxes, you need to make some basic business decisions. 2012 tax 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. 2012 tax For information on how to contact the SBA, see How to Get More Information, later. 2012 tax Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. 2012 tax When beginning a business, you must decide which form of business to use. 2012 tax Legal and tax considerations enter into this decision. 2012 tax Only tax considerations are discussed in this publication. 2012 tax Your form of business determines which income tax return form you have to file. 2012 tax See Table 2 to find out which form you have to file. 2012 tax Sole proprietorships. 2012 tax   A sole proprietorship is an unincorporated business that is owned by one individual. 2012 tax It is the simplest form of business organization to start and maintain. 2012 tax The business has no existence apart from you, the owner. 2012 tax Its liabilities are your personal liabilities. 2012 tax You undertake the risks of the business for all assets owned, whether or not used in the business. 2012 tax You include the income and expenses of the business on your personal tax return. 2012 tax More information. 2012 tax   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. 2012 tax If you are a farmer, see Publication 225, Farmer's Tax Guide. 2012 tax Partnerships. 2012 tax   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. 2012 tax Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. 2012 tax   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. 2012 tax , from its operations, but it does not pay income tax. 2012 tax Instead, it “passes through” any profits or losses to its partners. 2012 tax Each partner includes his or her share of the partnership's items on his or her tax return. 2012 tax More information. 2012 tax   For more information on partnerships, see Publication 541, Partnerships. 2012 tax Husband and wife business. 2012 tax   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. 2012 tax Do not use Schedule C or C-EZ. 2012 tax Instead, file Form 1065, U. 2012 tax S. 2012 tax Return of Partnership Income. 2012 tax For more information, see Publication 541, Partnerships. 2012 tax Exception—Community Income. 2012 tax   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. 2012 tax S. 2012 tax possession, you can treat the business either as a sole proprietorship or a partnership. 2012 tax The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2012 tax A change in your reporting position will be treated as a conversion of the entity. 2012 tax Exception—Qualified joint venture. 2012 tax   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. 2012 tax 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. 2012 tax For an explanation of "material participation," see the Instructions for Schedule C, line G. 2012 tax   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. 2012 tax Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. 2012 tax For more information, see Qualified Joint Venture in the Instructions for Schedule SE. 2012 tax Corporations. 2012 tax   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. 2012 tax A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. 2012 tax A corporation can also take special deductions. 2012 tax   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. 2012 tax However, shareholders cannot deduct any loss of the corporation. 2012 tax More information. 2012 tax   For more information on corporations, see Publication 542, Corporations. 2012 tax S corporations. 2012 tax   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. 2012 tax Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. 2012 tax 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. 2012 tax More information. 2012 tax   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. 2012 tax S. 2012 tax Income Tax Return for an S Corporation. 2012 tax Limited liability company. 2012 tax   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2012 tax The members of an LLC are not personally liable for its debts. 2012 tax 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. 2012 tax 7701-3. 2012 tax For more information, see the instructions for Form 8832, Entity Classification Election. 2012 tax Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. 2012 tax The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). 2012 tax An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. 2012 tax An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. 2012 tax You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. 2012 tax You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. 2012 tax This includes returns or documents filed to report the following information. 2012 tax Interest, dividends, royalties, etc. 2012 tax , paid to you. 2012 tax Any amount paid to you as a dependent care provider. 2012 tax Certain other amounts paid to you that total $600 or more for the year. 2012 tax If you do not furnish your identification number as required, you may be subject to penalties. 2012 tax See Penalties, later. 2012 tax Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. 2012 tax 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. 2012 tax Applying for an EIN. 2012 tax   You may apply for an EIN: Online—Click on the EIN link at www. 2012 tax irs. 2012 tax gov/businesses/small. 2012 tax The EIN is issued immediately once the application information is validated. 2012 tax By telephone at 1-800-829-4933. 2012 tax By mailing or faxing Form SS-4, Application for Employer Identification Number. 2012 tax When to apply. 2012 tax   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. 2012 tax If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. 2012 tax If you apply by telephone or through the IRS website, you can get an EIN immediately. 2012 tax If you apply by fax, you can get an EIN within 4 business days. 2012 tax   If you do not receive your EIN by the time a return is due, file your return anyway. 2012 tax Write “Applied for” and the date you applied for the number in the space for the EIN. 2012 tax Do not use your social security number as a substitute for an EIN on your tax returns. 2012 tax More than one EIN. 2012 tax   You should have only one EIN. 2012 tax 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. 2012 tax Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. 2012 tax The IRS will tell you which number to use. 2012 tax More information. 2012 tax   For more information about EINs, see Publication 1635, Understanding Your EIN. 2012 tax 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). 2012 tax The forms used to report these payments must include the payee's identification number. 2012 tax Employee. 2012 tax   If you have employees, you must get an SSN from each of them. 2012 tax Record the name and SSN of each employee exactly as they are shown on the employee's social security card. 2012 tax If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. 2012 tax This may occur, for example, if the employee's name has changed due to marriage or divorce. 2012 tax   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. 2012 tax This form is available at SSA offices or by calling 1-800-772-1213. 2012 tax It is also available from the SSA website at www. 2012 tax ssa. 2012 tax gov. 2012 tax Other payee. 2012 tax   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. 2012 tax If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. 2012 tax   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. 2012 tax This form is available from IRS offices or by calling 1-800-829-3676. 2012 tax It is also available from the IRS website at IRS. 2012 tax gov. 2012 tax    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. 2012 tax For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. 2012 tax Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. 2012 tax A tax year is usually 12 consecutive months. 2012 tax There are two kinds of tax years. 2012 tax Calendar tax year. 2012 tax A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. 2012 tax Fiscal tax year. 2012 tax A fiscal tax year is 12 consecutive months ending on the last day of any month except December. 2012 tax 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. 2012 tax 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. 2012 tax You must use a calendar tax year if: You keep no books. 2012 tax You have no annual accounting period. 2012 tax Your present tax year does not qualify as a fiscal year. 2012 tax You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. 2012 tax For more information, see Publication 538, Accounting Periods and Methods. 2012 tax First-time filer. 2012 tax   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. 2012 tax You adopt a tax year by filing your first income tax return using that tax year. 2012 tax You have not adopted a tax year if you merely did any of the following. 2012 tax Filed an application for an extension of time to file an income tax return. 2012 tax Filed an application for an employer identification number. 2012 tax Paid estimated taxes for that tax year. 2012 tax Changing your tax year. 2012 tax   Once you have adopted your tax year, you may have to get IRS approval to change it. 2012 tax To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. 2012 tax You may have to pay a fee. 2012 tax For more information, see Publication 538. 2012 tax Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. 2012 tax You choose an accounting method for your business when you file your first income tax return. 2012 tax There are two basic accounting methods. 2012 tax Cash method. 2012 tax Under the cash method, you report income in the tax year you receive it. 2012 tax You usually deduct or capitalize expenses in the tax year you pay them. 2012 tax Accrual method. 2012 tax 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. 2012 tax You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. 2012 tax For other methods, see Publication 538. 2012 tax If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. 2012 tax Inventories include goods held for sale in the normal course of business. 2012 tax They also include raw materials and supplies that will physically become a part of merchandise intended for sale. 2012 tax Inventories are explained in Publication 538. 2012 tax 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. 2012 tax For more information, see Publication 538. 2012 tax You must use the same accounting method to figure your taxable income and to keep your books. 2012 tax Also, you must use an accounting method that clearly shows your income. 2012 tax In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. 2012 tax An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. 2012 tax More than one business. 2012 tax   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. 2012 tax You must keep a complete and separate set of books and records for each business. 2012 tax Changing your method of accounting. 2012 tax   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. 2012 tax 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. 2012 tax For examples of changes that require approval and information on how to get approval for the change, see Publication 538. 2012 tax Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. 2012 tax The following are the four general kinds of business taxes. 2012 tax Income tax. 2012 tax Self-employment tax. 2012 tax Employment taxes. 2012 tax Excise taxes. 2012 tax See Table 2 for the forms you file to report these taxes. 2012 tax You may want to get Publication 509. 2012 tax It has tax calendars that tell you when to file returns and make tax payments. 2012 tax Income Tax All businesses except partnerships must file an annual income tax return. 2012 tax Partnerships file an information return. 2012 tax Which form you use depends on how your business is organized. 2012 tax See Table 2 to find out which return you have to file. 2012 tax The federal income tax is a pay-as-you-go tax. 2012 tax You must pay the tax as you earn or receive income during the year. 2012 tax An employee usually has income tax withheld from his or her pay. 2012 tax If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. 2012 tax If you are not required to make estimated tax payments, you may pay any tax due when you file your return. 2012 tax Table 2. 2012 tax Which Forms Must I File? IF you are a. 2012 tax . 2012 tax . 2012 tax   THEN you may be liable for. 2012 tax . 2012 tax . 2012 tax   Use Form. 2012 tax . 2012 tax . 2012 tax 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. 2012 tax 2 Various other schedules may be needed. 2012 tax Estimated tax. 2012 tax   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. 2012 tax Sole proprietors, partners, and S corporation shareholders. 2012 tax   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. 2012 tax Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. 2012 tax For more information, see Publication 505, Tax Withholding and Estimated Tax. 2012 tax Corporations. 2012 tax   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. 2012 tax Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. 2012 tax You must deposit the payments as explained later under Depositing Taxes. 2012 tax For more information, see Publication 542. 2012 tax Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. 2012 tax Your payments of SE tax contribute to your coverage under the social security system. 2012 tax Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. 2012 tax You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. 2012 tax Your net earnings from self-employment were $400 or more. 2012 tax You had church employee income of $108. 2012 tax 28 or more. 2012 tax Use Schedule SE (Form 1040) to figure your SE tax. 2012 tax For more information, see Publication 334, Tax Guide for Small Business. 2012 tax You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. 2012 tax The Social Security Administration (SSA) time limit for posting self-employment income. 2012 tax   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. 2012 tax 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. 2012 tax The SSA will not change its records to increase your self-employment income. 2012 tax 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. 2012 tax Employment taxes include the following. 2012 tax Social security and Medicare taxes. 2012 tax Federal income tax withholding. 2012 tax Federal unemployment (FUTA) tax. 2012 tax If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. 2012 tax If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. 2012 tax These publications explain your tax responsibilities as an employer. 2012 tax If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. 2012 tax That publication has information to help you determine whether an individual is an employee or an independent contractor. 2012 tax If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. 2012 tax An independent contractor is someone who is self-employed. 2012 tax Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. 2012 tax Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. 2012 tax 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. 2012 tax Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). 2012 tax Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. 2012 tax Medicare tax pays for benefits under the hospital insurance part of FICA. 2012 tax You withhold part of these taxes from your employee's wages and you pay a part yourself. 2012 tax To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. 2012 tax 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. 2012 tax (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. 2012 tax ) 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. 2012 tax You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. 2012 tax You pay FUTA tax only from your own funds. 2012 tax Employees do not pay this tax or have it withheld from their pay. 2012 tax Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. 2012 tax See Publication 15 to find out if you can use this form. 2012 tax Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. 2012 tax Form I-9. 2012 tax   You must verify that each new employee is legally eligible to work in the United States. 2012 tax Both you and the employee must complete the U. 2012 tax S. 2012 tax Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. 2012 tax You can get the form from USCIS offices or from the USCIS website at www. 2012 tax uscis. 2012 tax gov. 2012 tax Call the USCIS at 1-800-375-5283 for more information about your responsibilities. 2012 tax Form W-4. 2012 tax   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. 2012 tax 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. 2012 tax For more information, see Publication 15. 2012 tax Employees claiming more than 10 withholding allowances. 2012 tax   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. 2012 tax See section 16 of Publication 15. 2012 tax 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. 2012 tax You must also send copies to the Social Security Administration. 2012 tax See Information Returns, later, for more information on Form W-2. 2012 tax 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. 2012 tax Manufacture or sell certain products. 2012 tax Operate certain kinds of businesses. 2012 tax Use various kinds of equipment, facilities, or products. 2012 tax Receive payment for certain services. 2012 tax For more information on excise taxes, see Publication 510, Excise Taxes. 2012 tax Form 720. 2012 tax   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. 2012 tax Environmental taxes. 2012 tax Communications and air transportation taxes. 2012 tax Fuel taxes. 2012 tax Tax on the first retail sale of heavy trucks, trailers, and tractors. 2012 tax Manufacturers taxes on the sale or use of a variety of different articles. 2012 tax Form 2290. 2012 tax   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. 2012 tax The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. 2012 tax Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. 2012 tax For more information, see the instructions for Form 2290. 2012 tax Form 730. 2012 tax   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. 2012 tax Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. 2012 tax Form 11-C. 2012 tax   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. 2012 tax Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. 2012 tax Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). 2012 tax Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. 2012 tax Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. 2012 tax Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. 2012 tax 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. 2012 tax You must give a copy of each information return you are required to file to the recipient or payer. 2012 tax In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. 2012 tax For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. 2012 tax Form 1099-MISC. 2012 tax   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. 2012 tax These payments include the following items. 2012 tax 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. 2012 tax Rent payments of $600 or more, other than rents paid to real estate agents. 2012 tax Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. 2012 tax Royalty payments of $10 or more. 2012 tax Payments to certain crew members by operators of fishing boats. 2012 tax 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. 2012 tax Form W-2. 2012 tax   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. 2012 tax For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. 2012 tax Form 8300. 2012 tax   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. 2012 tax Cash includes U. 2012 tax S. 2012 tax and foreign coin and currency. 2012 tax It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. 2012 tax For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). 2012 tax Penalties The law provides penalties for not filing returns or paying taxes as required. 2012 tax Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. 2012 tax Failure to file tax returns. 2012 tax   If you do not file your tax return by the due date, you may have to pay a penalty. 2012 tax The penalty is based on the tax not paid by the due date. 2012 tax See your tax return instructions for more information about this penalty. 2012 tax Failure to pay tax. 2012 tax   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. 2012 tax For more information, see your tax return instructions. 2012 tax Failure to withhold, deposit, or pay taxes. 2012 tax   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. 2012 tax You may also be subject to penalties if you deposit the taxes late. 2012 tax For more information, see Publication 15. 2012 tax Failure to follow information reporting requirements. 2012 tax   The following penalties apply if you are required to file information returns. 2012 tax For more information, see the General Instructions for Certain Information Returns. 2012 tax Failure to file information returns. 2012 tax 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. 2012 tax Failure to furnish correct payee statements. 2012 tax 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. 2012 tax Waiver of penalty. 2012 tax   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. 2012 tax   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. 2012 tax (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. 2012 tax ) Failure to supply taxpayer identification number. 2012 tax   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. 2012 tax 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. 2012 tax Business Expenses You can deduct business expenses on your income tax return. 2012 tax These are the current operating costs of running your business. 2012 tax To be deductible, a business expense must be both ordinary and necessary. 2012 tax An ordinary expense is one that is common and accepted in your field of business, trade, or profession. 2012 tax A necessary expense is one that is helpful and appropriate for your business, trade, or profession. 2012 tax An expense does not have to be indispensable to be considered necessary. 2012 tax The following are brief explanations of some expenses that are of interest to people starting a business. 2012 tax There are many other expenses that you may be able to deduct. 2012 tax See your form instructions and Publication 535, Business Expenses. 2012 tax Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. 2012 tax Your business start-up costs will depend on the type of business you are starting. 2012 tax They may include costs for advertising, travel, surveys, and training. 2012 tax These costs are generally capital expenses. 2012 tax You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). 2012 tax 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. 2012 tax The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. 2012 tax Any remaining cost must be amortized. 2012 tax For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. 2012 tax 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. 2012 tax You must spread the cost over more than one tax year and deduct part of it each year. 2012 tax This method of deducting the cost of business property is called depreciation. 2012 tax Business property you must depreciate includes the following items. 2012 tax Office furniture. 2012 tax Buildings. 2012 tax Machinery and equipment. 2012 tax You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. 2012 tax This deduction is known as the “section 179 deduction. 2012 tax ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. 2012 tax Depreciation must be taken in the year it is allowable. 2012 tax Allowable depreciation not taken in a prior year cannot be taken in the current year. 2012 tax If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. 2012 tax S. 2012 tax Individual Income Tax Return, or by changing your accounting method. 2012 tax For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. 2012 tax Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. 2012 tax Even then, your deduction may be limited. 2012 tax To qualify to claim expenses for business use of your home, you must meet both the following tests. 2012 tax 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. 2012 tax Exclusive use. 2012 tax   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 2012 tax The area used for business can be a room or other separately identifiable space. 2012 tax The space does not need to be marked off by a permanent partition. 2012 tax   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. 2012 tax Exceptions to exclusive use. 2012 tax   You do not have to meet the exclusive use test if either of the following applies. 2012 tax You use part of your home for the storage of inventory or product samples. 2012 tax You use part of your home as a daycare facility. 2012 tax For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). 2012 tax Principal place of business. 2012 tax   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. 2012 tax You use it exclusively and regularly for administrative or management activities of your trade or business. 2012 tax You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2012 tax   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. 2012 tax The relative importance of the activities performed at each location. 2012 tax If the relative importance factor does not determine your principal place of business, the time spent at each location. 2012 tax    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 2012 tax However, for other ways to qualify to deduct home office expenses, see Publication 587. 2012 tax 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. 2012 tax If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. 2012 tax More information. 2012 tax   For more information about business use of your home, see Publication 587. 2012 tax Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. 2012 tax You generally can deduct either your actual expenses or the standard mileage rate. 2012 tax Actual expenses. 2012 tax   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. 2012 tax You can divide your expenses based on the miles driven for each purpose. 2012 tax Example. 2012 tax You are the sole proprietor of a flower shop. 2012 tax You drove your van 20,000 miles during the year. 2012 tax 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. 2012 tax You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. 2012 tax Standard mileage rate. 2012 tax   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. 2012 tax You can use the standard mileage rate for a vehicle you own or lease. 2012 tax The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. 2012 tax It is announced annually by the IRS. 2012 tax To figure your deduction, multiply your business miles by the standard mileage rate for the year. 2012 tax    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. 2012 tax However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. 2012 tax Choosing the standard mileage rate. 2012 tax   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. 2012 tax In later years, you can choose to use either the standard mileage rate or actual expenses. 2012 tax   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). 2012 tax Additional information. 2012 tax   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 2012 tax Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. 2012 tax It also explains how long you must keep your records for federal tax purposes. 2012 tax A sample recordkeeping system is illustrated at the end of this part. 2012 tax Why Keep Records? Everyone in business must keep records. 2012 tax Good records will help you do the following. 2012 tax Monitor the progress of your business. 2012 tax   You need good records to monitor the progress of your business. 2012 tax Records can show whether your business is improving, which items are selling, or what changes you need to make. 2012 tax Good records can increase the likelihood of business success. 2012 tax Prepare your financial statements. 2012 tax   You need good records to prepare accurate financial statements. 2012 tax These include income (profit and loss) statements and balance sheets. 2012 tax These statements can help you in dealing with your bank or creditors and help you manage your business. 2012 tax An income statement shows the income and expenses of the business for a given period of time. 2012 tax A balance sheet shows the assets, liabilities, and your equity in the business on a given date. 2012 tax Identify source of receipts. 2012 tax   You will receive money or property from many sources. 2012 tax Your records can identify the source of your receipts. 2012 tax You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. 2012 tax Keep track of deductible expenses. 2012 tax   You may forget expenses when you prepare your tax return unless you record them when they occur. 2012 tax Prepare your tax returns. 2012 tax   You need good records to prepare your tax returns. 2012 tax These records must support the income, expenses, and credits you report. 2012 tax Generally, these are the same records you use to monitor your business and prepare your financial statements. 2012 tax Support items reported on tax returns. 2012 tax   You must keep your business records available at all times for inspection by the IRS. 2012 tax If the IRS examines any of your tax returns, you may be asked to explain the items reported. 2012 tax A complete set of records will speed up the examination. 2012 tax Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. 2012 tax You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. 2012 tax The business you are in affects the type of records you need to keep for federal tax purposes. 2012 tax You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. 2012 tax See Accounting Method, earlier. 2012 tax If you are in more than one business, you should keep a complete and separate set of records for each business. 2012 tax A corporation should keep minutes of board of directors' meetings. 2012 tax Your recordkeeping system should include a summary of your business transactions. 2012 tax This summary is ordinarily made in your books (for example, accounting journals and ledgers). 2012 tax Your books must show your gross income, as well as your deductions and credits. 2012 tax For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. 2012 tax In addition, you must keep supporting documents, explained later. 2012 tax Electronic records. 2012 tax   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. 2012 tax 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. 2012 tax 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. 2012 tax The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. 2012 tax All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. 2012 tax Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. 2012 tax   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. 2012 tax You still have the responsibility of retaining any other books and records that are required to be retained. 2012 tax   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. 2012 tax This test is not considered an examination and the results must be shared with you. 2012 tax If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. 2012 tax 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. 2012 tax For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. 2012 tax Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. 2012 tax Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. 2012 tax These documents contain information you need to record in your books. 2012 tax It is important to keep these documents because they support the entries in your books and on your tax return. 2012 tax Keep them in an orderly fashion and in a safe place. 2012 tax For instance, organize them by year and type of income or expense. 2012 tax Gross receipts. 2012 tax   Gross receipts are the income you receive from your business. 2012 tax You should keep supporting documents that show the amounts and sources of your gross receipts. 2012 tax Documents that show gross receipts include the following. 2012 tax Cash register tapes. 2012 tax Bank deposit slips. 2012 tax Receipt books. 2012 tax Invoices. 2012 tax Credit card charge slips. 2012 tax Forms 1099-MISC. 2012 tax Purchases. 2012 tax   Purchases are the items you buy and resell to customers. 2012 tax If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. 2012 tax Your supporting documents should show the amount paid and that the amount was for purchases. 2012 tax Documents for purchases include the following. 2012 tax Canceled checks. 2012 tax Cash register tape receipts. 2012 tax Credit card sales slips. 2012 tax Invoices. 2012 tax These records will help you determine the value of your inventory at the end of the year. 2012 tax See Publication 538 for information on methods for valuing inventory. 2012 tax Expenses. 2012 tax   Expenses are the costs you incur (other than purchases) to carry on your business. 2012 tax Your supporting documents should show the amount paid and that the amount was for a business expense. 2012 tax Documents for expenses include the following. 2012 tax Canceled checks. 2012 tax Cash register tapes. 2012 tax Account statements. 2012 tax Credit card sales slips. 2012 tax Invoices. 2012 tax Petty cash slips for small cash payments. 2012 tax    A petty cash fund allows you to make small payments without having to write checks for small amounts. 2012 tax 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. 2012 tax Travel, transportation, entertainment, and gift expenses. 2012 tax   Specific recordkeeping rules apply to these expenses. 2012 tax For more information, see Publication 463. 2012 tax Employment taxes. 2012 tax   There are specific employment tax records you must keep. 2012 tax For a list, see Publication 15. 2012 tax Assets. 2012 tax   Assets are the property, such as machinery and furniture you own and use in your business. 2012 tax You must keep records to verify certain information about your business assets. 2012 tax You need records to figure the annual depreciation and the gain or loss when you sell the assets. 2012 tax Your records should show the following information. 2012 tax When and how you acquired the asset. 2012 tax Purchase price. 2012 tax Cost of any improvements. 2012 tax Section 179 deduction taken. 2012 tax Deductions taken for depreciation. 2012 tax Deductions taken for casualty losses, such as losses resulting from fires or storms. 2012 tax How you used the asset. 2012 tax When and how you disposed of the asset. 2012 tax Selling price. 2012 tax Expenses of sale. 2012 tax   The following documents may show this information. 2012 tax Purchase and sales invoices. 2012 tax Real estate closing statements. 2012 tax Canceled checks. 2012 tax 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. 2012 tax These include account statements prepared for the financial institution by a third party. 2012 tax These account statements must be highly legible. 2012 tax The following table lists acceptable account statements. 2012 tax  IF payment is by. 2012 tax . 2012 tax . 2012 tax THEN the statement must show the. 2012 tax . 2012 tax . 2012 tax Check Check number. 2012 tax Amount. 2012 tax Payee's name. 2012 tax Date the check amount was posted to the account by the financial institution. 2012 tax Electronic funds transfer Amount transferred. 2012 tax Payee's name. 2012 tax Date the transfer was posted to the account by the financial institution. 2012 tax Credit card Amount charged. 2012 tax Payee's name. 2012 tax Transaction date. 2012 tax    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. 2012 tax You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. 2012 tax Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. 2012 tax (Your business transactions are shown on the supporting documents just discussed. 2012 tax ) Business transactions are ordinarily summarized in books called journals and ledgers. 2012 tax You can buy them at your local stationery or office supply store. 2012 tax A journal is a book where you record each business transaction shown on your supporting documents. 2012 tax You may have to keep separate journals for transactions that occur frequently. 2012 tax A ledger is a book that contains the totals from all of your journals. 2012 tax It is organized into different accounts. 2012 tax Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. 2012 tax For example, a recordkeeping system for a small business might include the following items. 2012 tax Business checkbook. 2012 tax Daily summary of cash receipts. 2012 tax Monthly summary of cash receipts. 2012 tax Check disbursements journal. 2012 tax Depreciation worksheet. 2012 tax Employee compensation record. 2012 tax The business checkbook is explained next. 2012 tax The other items are illustrated later under Sample Record System. 2012 tax The system you use to record business transactions will be more effective if you follow good recordkeeping practices. 2012 tax For example, record expenses when they occur, and identify the source of recorded receipts. 2012 tax Generally, it is best to record transactions on a daily basis. 2012 tax Business checkbook. 2012 tax   One of the first things you should do when you start a business is open a business checking account. 2012 tax You should keep your business account separate from your personal checking account. 2012 tax   The business checkbook is your basic source of information for recording your business expenses. 2012 tax You should deposit all daily receipts in your business checking account. 2012 tax You should check your account for errors by reconciling it. 2012 tax See Reconciling the checking account, later. 2012 tax   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. 2012 tax You should also note on the deposit slip the source of the deposit and keep copies of all slips. 2012 tax   You should make all payments by check to document business expenses. 2012 tax Write checks payable to yourself only when making withdrawals from your business for personal use. 2012 tax Avoid writing checks payable to cash. 2012 tax If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. 2012 tax If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. 2012 tax    Use the business account for business purposes only. 2012 tax Indicate the source of deposits and the type of expense in the checkbook. 2012 tax Reconciling the checking account. 2012 tax   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. 2012 tax 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. 2012 tax   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. 2012 tax    You should reconcile your checking account each month. 2012 tax     Before you reconcile your monthly bank statement, check your own figures. 2012 tax Begin with the balance shown in your checkbook at the end of the previous month. 2012 tax To this balance, add the total cash deposited during the month and subtract the total cash disbursements. 2012 tax   After checking your figures, the result should agree with your checkbook balance at the end of the month. 2012 tax If the result does not agree, you may have made an error in recording a check or deposit. 2012 tax You can find the error by doing the following. 2012 tax 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. 2012 tax 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. 2012 tax Adding the deposit amounts in your checkbook. 2012 tax Compare that total with the monthly total in your cash receipt book, if you have one. 2012 tax If the totals do not agree, check the individual amounts to find any errors. 2012 tax   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. 2012 tax   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. 2012 tax Many banks print a reconciliation worksheet on the back of the statement. 2012 tax   To reconcile your account, follow these steps. 2012 tax Compare the deposits listed on the bank statement with the deposits shown in your checkbook. 2012 tax Note all differences in the dollar amounts. 2012 tax Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. 2012 tax Note all differences in the dollar amounts. 2012 tax Mark the check number in the checkbook as having cleared the bank. 2012 tax After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. 2012 tax Prepare a bank reconciliation. 2012 tax One is illustrated later under Sample Record System. 2012 tax Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. 2012 tax At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. 2012 tax If you still have differences, check the previous steps to find the errors. 2012 tax   Table 3. 2012 tax Period of Limitations IF you. 2012 tax . 2012 tax . 2012 tax   THEN the period is. 2012 tax . 2012 tax . 2012 tax 1. 2012 tax Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. 2012 tax 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. 2012 tax File a fraudulent return   Not limited 4. 2012 tax Do not file a return   Not limited 5. 2012 tax File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. 2012 tax 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. 2012 tax The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. 2012 tax You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. 2012 tax Single-entry. 2012 tax   A single-entry system is based on the income statement (profit or loss statement). 2012 tax It can be a simple and practical system if you are starting a small business. 2012 tax 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. 2012 tax Double-entry. 2012 tax   A double-entry bookkeeping system uses journals and ledgers. 2012 tax Transactions are first entered in a journal and then posted to ledger accounts. 2012 tax These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). 2012 tax You close income and expense accounts at the end of each tax year. 2012 tax You keep asset, liability, and net worth accounts open on a permanent basis. 2012 tax   In the double-entry system, each account has a left side for debits and a right side for credits. 2012 tax It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. 2012 tax   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. 2012 tax If the amounts do not balance, you have made an error and you must find and correct it. 2012 tax   An example of a journal entry exhibiting a payment of rent in October is shown next. 2012 tax General Journal Date Description of Entry Debit  Credit Oct. 2012 tax 5 Rent expense 780. 2012 tax 00     Cash   780. 2012 tax 00                 Computerized System There are computer software packages you can use for recordkeeping. 2012 tax They can be purchased in many retail stores. 2012 tax These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. 2012 tax 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. 2012 tax To meet this qualification, the machine-sensible records must reconcile with your books and return. 2012 tax These records must provide enough detail to identify the underlying source documents. 2012 tax You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. 2012 tax This documentation must be sufficiently detailed to show all of the following items. 2012 tax Functions being performed as the data flows through the system. 2012 tax Controls used to ensure accurate and reliable processing. 2012 tax Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. 2012 tax Charts of accounts and detailed account descriptions. 2012 tax See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. 2012 tax 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. 2012 tax 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. 2012 tax 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. 2012 tax Table 3 contains the periods of limitations that apply to income tax returns. 2012 tax Unless otherwise stated, the years refer to the period after the return was filed. 2012 tax Returns filed before the due date are treated as filed on the due date. 2012 tax Keep copies of your filed tax returns. 2012 tax They help in preparing future tax returns and making computations if you file an amended return. 2012 tax Employment taxes. 2012 tax   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. 2012 tax For more information about recordkeeping for employment taxes, see Publication 15. 2012 tax Assets. 2012 tax   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. 2012 tax 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. 2012 tax   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. 2012 tax 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. 2012 tax Records for nontax purposes. 2012 tax   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. 2012 tax For example, your insurance company or creditors may require you to keep them longer than the IRS does. 2012 tax 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. 2012 tax Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. 2012 tax These sample records should not be viewed as a recommendation of how to keep your records. 2012 tax They are intended only to show how one business keeps its records. 2012 tax 1. 2012 tax Daily Summary of Cash Receipts This summary is a record of cash sales for the day. 2012 tax 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. 2012 tax Henry takes the cash sales entry from his cash register tape. 2012 tax If he had no cash register, he would simply total his cash sale slips and any other cash received that day. 2012 tax He carries the total receipts shown in this summary for January 3 ($267. 2012 tax 80), including cash sales ($263. 2012 tax 60) and sales tax ($4. 2012 tax 20), to the Monthly Summary of Cash Receipts. 2012 tax Petty cash fund. 2012 tax   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. 2012 tax 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. 2012 tax He sets up a fixed amount ($50) in his petty cash fund. 2012 tax The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. 2012 tax 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. 2012 tax (See the Check Disbursements Journal entry for check number 92. 2012 tax ) This restores the fund to its fixed amount of $50. 2012 tax He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. 2012 tax 2. 2012 tax Monthly Summary of Cash Receipts This shows the income activity for the month. 2012 tax Henry carries the total monthly net sales shown in this summary for January ($4,865. 2012 tax 05) to his Annual Summary. 2012 tax 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. 2012 tax He cannot take a deduction for sales tax turned over to the state because he only collected the tax. 2012 tax He does not include the tax in his income. 2012 tax 3. 2012 tax Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. 2012 tax All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. 2012 tax Frequent expenses have their own headings across the sheet. 2012 tax He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. 2012 tax Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. 2012 tax Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. 2012 tax If he did, he would record them in the journal, even though he could not deduct them as business expenses. 2012 tax Henry carries the January total of expenses for materials ($1,083. 2012 tax 50) to the Annual Summary. 2012 tax Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. 2012 tax , in the appropriate columns of that summary. 2012 tax 4. 2012 tax Employee Compensation Record This record shows the following information. 2012 tax The number of hours Henry's employee worked in a pay period. 2012 tax The employee's total pay for the period. 2012 tax The deductions Henry withheld in figuring the employee's net pay. 2012 tax The monthly gross payroll. 2012 tax Henry carries the January gross payroll ($520) to the Annual Summary. 2012 tax 5. 2012 tax Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. 2012 tax He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. 2012 tax He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. 2012 tax As in the journal, he keeps each major expense in a separate column. 2012 tax Henry carries the cash receipts total shown in the annual summary ($47,440. 2012 tax 9
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Letter 3217C Frequently Asked Questions (FAQs)

What is the letter telling me?

This letter is telling you we have accepted your oral or written request to pay what you owe IRS in installments. It provides you with a specific dollar amount to pay each month and when your payment is due. It also provides the address that your payments should be mailed to. Included is the dollar amount for the fee we charge to establish an agreement. The amount varies depending on the type of agreement that is established. The letter also provides instructions on how to apply for the Low Income Fee Reduction (if you qualify).

What do I have to do?

The letter contains your payment due date. You should mail your payment to us 5 days prior to the due date. It tells you what items you need to put on your check so it can be correctly identified and applied to your account.

How much time do I have?

The letter is usually mailed 4 to 6 weeks before your first payment is due.

What happens if I don't take any action?

If you fail to make your payments the IRS can begin enforcement action by placing a levy on your bank account or wages or file a lien on personal property.

Who should I contact?

If you are unable to make your monthly payment, you should contact IRS as soon as possible. Expeditious contact prior to your payment due date may temporarily stop enforcement actions. The person who answers the phone will assist you.

Page Last Reviewed or Updated: 03-Feb-2014

The 2012 Tax

2012 tax 7. 2012 tax   Figuring Gross Profit Table of Contents Introduction Items To Check Testing Gross Profit AccuracyExample. 2012 tax Additions to Gross Profit Introduction After you have figured the gross receipts from your business (chapter 5) and the cost of goods sold (chapter 6), you are ready to figure your gross profit. 2012 tax You must determine gross profit before you can deduct any business expenses. 2012 tax These expenses are discussed in chapter 8. 2012 tax If you are filing Schedule C-EZ, your gross profit is your gross receipts plus certain other amounts, explained later under Additions to Gross Profit. 2012 tax Businesses that sell products. 2012 tax   If you are filing Schedule C, figure your gross profit by first figuring your net receipts. 2012 tax Figure net receipts (line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). 2012 tax Returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off the actual sales price. 2012 tax   Next, subtract the cost of goods sold (line 4) from net receipts (line 3). 2012 tax The result is the gross profit from your business. 2012 tax Businesses that sell services. 2012 tax   You do not have to figure the cost of goods sold if the sale of merchandise is not an income-producing factor for your business. 2012 tax Your gross profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). 2012 tax Most professions and businesses that sell services rather than products can figure gross profit directly from net receipts in this way. 2012 tax Illustration. 2012 tax   This illustration of the gross profit section of the income statement of a retail business shows how gross profit is figured. 2012 tax Income Statement Year Ended December 31, 2013 Gross receipts $400,000 Minus: Returns and allowances 14,940 Net receipts $385,060 Minus: Cost of goods sold 288,140 Gross profit $96,920   The cost of goods sold for this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900   Minus: Items withdrawn for personal use 2,650 283,250 Goods available for sale $321,095 Minus: Inventory at end of year 32,955 Cost of goods sold $288,140 Items To Check Consider the following items before figuring your gross profit. 2012 tax Gross receipts. 2012 tax   At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. 2012 tax You may find it helpful to use cash registers to keep track of receipts. 2012 tax You should also use a proper invoicing system and keep a separate bank account for your business. 2012 tax Sales tax collected. 2012 tax   Check to make sure your records show the correct sales tax collected. 2012 tax   If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts. 2012 tax   If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income. 2012 tax Inventory at beginning of year. 2012 tax   Compare this figure with last year's ending inventory. 2012 tax The two amounts should usually be the same. 2012 tax Purchases. 2012 tax   If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc. 2012 tax ) be sure to remove them from the cost of goods sold. 2012 tax For details on how to adjust cost of goods sold, see Merchandise withdrawn from sale in chapter 6. 2012 tax Inventory at end of year. 2012 tax   Check to make sure your procedures for taking inventory are adequate. 2012 tax These procedures should ensure all items have been included in inventory and proper pricing techniques have been used. 2012 tax   Use inventory forms and adding machine tapes as the only evidence for your inventory. 2012 tax Inventory forms are available at office supply stores. 2012 tax These forms have columns for recording the description, quantity, unit price, and value of each inventory item. 2012 tax Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. 2012 tax These forms will help satisfy you that the total inventory is accurate. 2012 tax They will also provide you with a permanent record to support its validity. 2012 tax   Inventories are discussed in chapter 2. 2012 tax Testing Gross Profit Accuracy If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure. 2012 tax First, divide gross profit by net receipts. 2012 tax The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price. 2012 tax Next, compare this percentage to your markup policy. 2012 tax Little or no difference between these two percentages shows that your gross profit figure is accurate. 2012 tax A large difference between these percentages may show that you did not accurately figure sales, purchases, inventory, or other items of cost. 2012 tax You should determine the reason for the difference. 2012 tax Example. 2012 tax   Joe Able operates a retail business. 2012 tax On the average, he marks up his merchandise so that he will realize a gross profit of 331/3% on its sales. 2012 tax The net receipts (gross receipts minus returns and allowances) shown on his income statement is $300,000. 2012 tax His cost of goods sold is $200,000. 2012 tax This results in a gross profit of $100,000 ($300,000 − $200,000). 2012 tax To test the accuracy of this year's results, Joe divides gross profit ($100,000) by net receipts ($300,000). 2012 tax The resulting 331/3% confirms his markup percentage of 331/3%. 2012 tax Additions to Gross Profit If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. 2012 tax The result is gross business income. 2012 tax If you use Schedule C-EZ, include the income on line 1 of the schedule. 2012 tax Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts. 2012 tax Prev  Up  Next   Home   More Online Publications