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