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Past Year Tax

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Past Year Tax

Past year tax Publication 559 - Introductory Material Table of Contents Future Developments Reminders Introduction Useful Items - You may want to see: Future Developments For the latest information about developments affecting Publication 559, such as legislation enacted after we release it, go to www. Past year tax irs. Past year tax gov/pub559. Past year tax Reminders Throughout this publication, section references are to the Internal Revenue Code unless otherwise noted. Past year tax Consistent treatment of estate and trust items. Past year tax  Beneficiaries must generally treat estate items the same way on their individual returns as they are treated on the estate's return. Past year tax Photographs of missing children. Past year tax  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Past year tax Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Past year tax You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Past year tax Introduction This publication is designed to help those in charge (personal representatives) of the property (estate) of an individual who has died (decedent). Past year tax It shows them how to complete and file federal income tax returns and explains their responsibility to pay any taxes due on behalf of the decedent. Past year tax A comprehensive example of the decedent's final tax return, Form 1040, and estate's income tax return, Form 1041, are included in this publication. Past year tax The publication also explains how much money or property a taxpayer can give away during their lifetime or leave to their heirs at their death before any tax will be owed. Past year tax A discussion of Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is included. Past year tax Also included in this publication are the following items: A checklist of the forms you may need and their due dates. Past year tax A worksheet to reconcile amounts reported in the decedent's name on information returns including Forms W-2, 1099-INT, 1099-DIV, etc. Past year tax The worksheet will help you correctly determine the income to report on the decedent's final return and on the return for either the estate or a beneficiary. Past year tax Comments and suggestions. Past year tax   We welcome your comments about this publication and your suggestions for future editions. Past year tax   You can send us comments from http://www. Past year tax irs. Past year tax gov/formspubs. Past year tax Click on “More Information” and then on “Give us Feedback. Past year tax ” Or you can also send your comments to the Internal Revenue Service, Tax Forms and Publications Division, 1111 Constitution Ave. Past year tax NW, IR-6526, Washington, DC 20224. Past year tax Useful Items - You may want to see: Publication 3 Armed Forces' Tax Guide Form (and Instructions) SS-4 Application for Employer Identification Number 56 Notice Concerning Fiduciary Relationship 1040 U. Past year tax S. Past year tax Individual Income Tax Return 1041 U. Past year tax S. Past year tax Income Tax Return for Estates and Trusts 706 United States Estate (and Generation-Skipping Transfer) Tax Return 709 United States Gift (and Generation-Skipping Transfer) Tax Return 1310 Statement of Person Claiming Refund Due a Deceased Taxpayer  See How To Get Tax Help near the end of this publication for information about getting publications and forms. Past year tax Also near the end of this publication is Table A, a checklist of forms and their due dates for the executor, administrator, or personal representative. Past year tax Prev  Up  Next   Home   More Online Publications
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Get the Help You Need

Don't give up if you are not satisfied with the seller's response to your complaint. Once you have given the seller a reasonable amount of time to respond, consider filing a complaint with one or more of these outside organizations.

  • State or local consumer protection offices – These government agencies mediate complaints, conduct investigations, and prosecute offenders of consumer laws.
  • Better Business Bureaus – This network of nonprofit organizations supported by local businesses tries to resolve buyer complaints against sellers. Records are kept on unresolved complaints as a source of information for the seller's future customers. The umbrella organization for the BBBs assists with complaints concerning the truthfulness of national advertising and helps settle disputes with automobile manufacturers through the BBB AUTO LINE program.
  • Trade associations – Companies selling similar products or services often belong to an industry association that will help resolve problems between their members and consumers.
  • National consumer organizations – Some of these organizations assist consumers with complaints. Others may be unable to help individuals but are interested in hearing about problems that may influence their education and advocacy efforts.
  • State regulatory agencies that have jurisdiction over the business – For example, banking, securities, insurance, and utilities are regulated at the state level. State Weights and Measures Offices are concerned with accurate measures and counts of packaged goods. They also check the accuracy of weighing and measuring devices such as supermarket scales, gasoline pumps, taxi meters and rental car odometers.
  • State and local licensing agencies – Doctors, lawyers, home improvement contractors, auto repair shops, debt collectors, and childcare providers are required to register or be licensed. The board or agency that oversees this process may handle complaints and have the authority to take disciplinary action. Your state or local consumer protection office can help you identify the appropriate agency.
  • Media programs – Local newspapers, radio stations, and television stations often have Action Lines or Hotline services that try to resolve consumer complaints they receive. To find these services, check with your local newspapers or broadcast stations.
  • Consumer Product Safety Commission (CPSC) – Report a safety concern or incident with a consumer product at CPSC's website, saferproducts.gov, even if you are able to contact the seller. Your report can help other consumers avoid unsafe products.

Dispute Resolution Programs

Some companies and industries offer programs to address disagreements between buyers and sellers. The auto industry has several of these programs. The National Association of Security Dealers offers a program designed to resolve investment-related disputes. Some small claims courts also offer a dispute resolution program as an alternative to a trial.

Mediation, arbitration, and conciliation are three common types of dispute resolution. During mediation, both sides involved in the dispute meet with a neutral third party and create their own agreement jointly. Arbitration uses a different approach, the third party decides how to settle the problem. Request a copy of the rules of any program before making a decision to participate. You will want to know beforehand if the decision is binding. Some programs do not require both parties to accept the decision. Also ask whether participation in the program place any restrictions on your ability to take other legal action? The American Bar Association publishes a directory of state and local dispute resolution programs.

Beware of Recovery Services

A scam artist has taken your money. Don't be scammed again by a "recovery service" offering to get your money back for you. The service is just trying to take your last dime. There is no charge for filing a complaint with a government agency.

The Past Year Tax

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