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1040ez online 4. 1040ez online   Reporting Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Information Returns Schedule D and Form 8949Long and Short Term Net Gain or Loss Treatment of Capital Losses Capital Gains Tax Rates Form 4797Mark-to-market election. 1040ez online Introduction This chapter explains how to report capital gains and losses and ordinary gains and losses from sales, exchanges, and other dispositions of property. 1040ez online Although this discussion refers to Schedule D (Form 1040) and Form 8949, many of the rules discussed here also apply to taxpayers other than individuals. 1040ez online However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. 1040ez online Topics - This chapter discusses: Information returns Schedule D (Form 1040) Form 4797 Form 8949 Useful Items - You may want to see: Publication 550 Investment Income and Expenses 537 Installment Sales Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1099-B Proceeds From Broker and Barter Exchange Transactions 1099-S Proceeds From Real Estate Transactions 4684 Casualties and Thefts 4797 Sales of Business Property 6252 Installment Sale Income 6781 Gains and Losses from Section 1256 Contracts and Straddles 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. 1040ez online Information Returns If you sell or exchange certain assets, you should receive an information return showing the proceeds of the sale. 1040ez online This information is also provided to the IRS. 1040ez online Form 1099-B. 1040ez online   If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a substitute statement from the broker. 1040ez online Use the Form 1099-B or a substitute statement to complete Form 8949 and/or Schedule D. 1040ez online Whether or not you receive 1099-B, you must report all taxable sales of stock, bonds, commodities, etc. 1040ez online on Form 8949 and/or Schedule D, as applicable. 1040ez online For more information on figuring gains and losses from these transactions, see chapter 4 in Publication 550. 1040ez online For information on reporting the gains and losses, see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). 1040ez online Form 1099-S. 1040ez online   An information return must be provided on certain real estate transactions. 1040ez online Generally, the person responsible for closing the transaction (the “real estate reporting person”) must report on Form 1099-S sales or exchanges of the following types of property. 1040ez online Land (improved or unimproved), including air space. 1040ez online An inherently permanent structure, including any residential, commercial, or industrial building. 1040ez online A condominium unit and its related fixtures and common elements (including land). 1040ez online Stock in a cooperative housing corporation. 1040ez online If you sold or exchanged any of the above types of property, the “real estate reporting person” must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S. 1040ez online The “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property. 1040ez online   For more information see chapter 4 in Publication 550. 1040ez online Also, see the Instructions for Form 8949. 1040ez online Schedule D and Form 8949 Form 8949. 1040ez online   Individuals, corporations, and partnerships, use Form 8949 to report the following. 1040ez online    Sales or exchanges of capital assets, including stocks, bonds, etc. 1040ez online , and real estate (if not reported on another form or schedule such as Form 4684, 4797, 6252, 6781, or 8824). 1040ez online Include these transactions even if you did not receive a Form 1099-B or 1099-S. 1040ez online Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit. 1040ez online Nonbusiness bad debts. 1040ez online   Individuals, If you are filing a joint return, complete as many copies of Form 8949 as you need to report all of your and your spouse's transactions. 1040ez online You and your spouse may list your transactions on separate forms or you may combine them. 1040ez online However, you must include on your Schedule D the totals from all Forms 8949 for both you and your spouse. 1040ez online    Corporations and electing large partnerships also use Form 8949 to report their share of gain or loss from a partnership, S Corporation, estate or trust. 1040ez online   Business entities meeting certain criteria, may have an exception to some of the normal requirements for completing Form 8949. 1040ez online See the Instructions for Form 8949. 1040ez online Schedule D. 1040ez online    Use Schedule D (Form 1040) to figure the overall gain or loss from transactions reported on Form 8949, and to report certain transactions you do not have to report on Form 8949. 1040ez online Before completing Schedule D, you may have to complete other forms as shown below. 1040ez online    Complete all applicable lines of Form 8949 before completing lines 1b, 2, 3, 8b, 9, or 10 of your applicable Schedule D. 1040ez online Enter on Schedule D the combined totals from all your Forms 8949. 1040ez online For a sale, exchange, or involuntary conversion of business property, complete Form 4797 (discussed later). 1040ez online For a like-kind exchange, complete Form 8824. 1040ez online See Reporting the exchange under Like-Kind Exchanges in chapter 1. 1040ez online For an installment sale, complete Form 6252. 1040ez online See Publication 537. 1040ez online For an involuntary conversion due to casualty or theft, complete Form 4684. 1040ez online See Publication 547, Casualties, Disasters, and Thefts. 1040ez online For a disposition of an interest in, or property used in, an activity to which the at-risk rules apply, complete Form 6198, At-Risk Limitations. 1040ez online See Publication 925, Passive Activity and At-Risk Rules. 1040ez online For a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. 1040ez online See Publication 925. 1040ez online For gains and losses from section 1256 contracts and straddles, complete Form 6781. 1040ez online See Publication 550. 1040ez online Personal-use property. 1040ez online   Report gain on the sale or exchange of property held for personal use (such as your home) on Form 8949 and Schedule D (Form 1040), as applicable. 1040ez online Loss from the sale or exchange of property held for personal use is not deductible. 1040ez online But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Form 8949 and Schedule D, even though the loss is not deductible. 1040ez online See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the transaction. 1040ez online Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. 1040ez online The time you own an asset before disposing of it is the holding period. 1040ez online If you received a Form 1099-B, (or substitute statement) box 1c may help you determine whether the gain or loss is short-term or long-term. 1040ez online If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. 1040ez online Report it in Part I of Form 8949 and/or Schedule D, as applicable. 1040ez online If you hold a capital asset longer than 1 year, the gain or loss from its disposition is long term. 1040ez online Report it in Part II of Form 8949 and/or Schedule D, as applicable. 1040ez online   Table 4-1. 1040ez online Do I Have a Short-Term or Long-Term Gain or Loss? IF you hold the property. 1040ez online . 1040ez online . 1040ez online  THEN you have a. 1040ez online . 1040ez online . 1040ez online 1 year or less, Short-term capital gain or  loss. 1040ez online More than 1 year, Long-term capital gain or  loss. 1040ez online These distinctions are essential to correctly arrive at your net capital gain or loss. 1040ez online Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income. 1040ez online See Capital Gains Tax Rates, later. 1040ez online Holding period. 1040ez online   To figure if you held property longer than 1 year, start counting on the day following the day you acquired the property. 1040ez online The day you disposed of the property is part of your holding period. 1040ez online Example. 1040ez online If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 1040ez online If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. 1040ez online Patent property. 1040ez online   If you dispose of patent property, you generally are considered to have held the property longer than 1 year, no matter how long you actually held it. 1040ez online For more information, see Patents in chapter 2. 1040ez online Inherited property. 1040ez online   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 1040ez online Installment sale. 1040ez online   The gain from an installment sale of an asset qualifying for long-term capital gain treatment in the year of sale continues to be long term in later tax years. 1040ez online If it is short term in the year of sale, it continues to be short term when payments are received in later tax years. 1040ez online    The date the installment payment is received determines the capital gains rate that should be applied not the date the asset was sold under an installment contract. 1040ez online Nontaxable exchange. 1040ez online   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. 1040ez online That is, it begins on the same day as your holding period for the old property. 1040ez online Example. 1040ez online You bought machinery on December 4, 2012. 1040ez online On June 4, 2013, you traded this machinery for other machinery in a nontaxable exchange. 1040ez online On December 5, 2013, you sold the machinery you got in the exchange. 1040ez online Your holding period for this machinery began on December 5, 2012. 1040ez online Therefore, you held it longer than 1 year. 1040ez online Corporate liquidation. 1040ez online   The holding period for property you receive in a liquidation generally starts on the day after you receive it if gain or loss is recognized. 1040ez online Profit-sharing plan. 1040ez online   The holding period of common stock withdrawn from a qualified contributory profit-sharing plan begins on the day following the day the plan trustee delivered the stock to the transfer agent with instructions to reissue the stock in your name. 1040ez online Gift. 1040ez online   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. 1040ez online For more information on basis, see Publication 551, Basis of Assets. 1040ez online Real property. 1040ez online   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership. 1040ez online   However, taking possession of real property under an option agreement is not enough to start the holding period. 1040ez online The holding period cannot start until there is an actual contract of sale. 1040ez online The holding period of the seller cannot end before that time. 1040ez online Repossession. 1040ez online   If you sell real property but keep a security interest in it and then later repossess it, your holding period for a later sale includes the period you held the property before the original sale, as well as the period after the repossession. 1040ez online Your holding period does not include the time between the original sale and the repossession. 1040ez online That is, it does not include the period during which the first buyer held the property. 1040ez online Nonbusiness bad debts. 1040ez online   Nonbusiness bad debts are short-term capital losses. 1040ez online For information on nonbusiness bad debts, see chapter 4 of Publication 550. 1040ez online    Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. 1040ez online Net short-term capital gain or loss. 1040ez online   Combine your short-term capital gains and losses, including your share of short-term capital gains or losses from partnerships, S corporations, and fiduciaries and any short-term capital loss carryover. 1040ez online Do this by adding all your short-term capital gains. 1040ez online Then add all your short-term capital losses. 1040ez online Subtract the lesser total from the other. 1040ez online The result is your net short-term capital gain or loss. 1040ez online Net long-term capital gain or loss. 1040ez online   Follow the same steps to combine your long-term capital gains and losses. 1040ez online Include the following items. 1040ez online Net section 1231 gain from Part I, Form 4797, after any adjustment for nonrecaptured section 1231 losses from prior tax years. 1040ez online Capital gain distributions from regulated investment companies (mutual funds) and real estate investment trusts. 1040ez online Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries. 1040ez online Any long-term capital loss carryover. 1040ez online The result from combining these items with other long-term capital gains and losses is your net long-term capital gain or loss. 1040ez online Net gain. 1040ez online   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 1040ez online Different tax rates may apply to the part that is a net capital gain. 1040ez online See Capital Gains Tax Rates, later. 1040ez online Net loss. 1040ez online   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 1040ez online But there are limits on how much loss you can deduct and when you can deduct it. 1040ez online See Treatment of Capital Losses, next. 1040ez online    Treatment of Capital Losses If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. 1040ez online The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). 1040ez online Table 4-2. 1040ez online Holding Period for Different Types of Acquisitions Type of acquisition: When your holding period starts: Stocks and bonds bought on a securities market Day after trading date you bought security. 1040ez online Ends on trading date you sold security. 1040ez online U. 1040ez online S. 1040ez online Treasury notes and bonds If bought at auction, day after notification of bid acceptance. 1040ez online If bought through subscription, day after subscription was submitted. 1040ez online Nontaxable exchanges Day after date you acquired old property. 1040ez online Gift If your basis is giver's adjusted basis, same day as giver's holding period began. 1040ez online If your basis is FMV, day after date of gift. 1040ez online Real property bought Generally, day after date you received title to the property. 1040ez online Real property repossessed Day after date you originally received title to the property, but does not include time between the original sale and date of repossession. 1040ez online Capital loss carryover. 1040ez online   Generally, you have a capital loss carryover if either of the following situations applies to you. 1040ez online Your net loss is more than the yearly limit. 1040ez online Your taxable income without your deduction for exemptions is less than zero. 1040ez online If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carryover to 2014. 1040ez online Example. 1040ez online Bob and Gloria Sampson sold property in 2013. 1040ez online The sale resulted in a capital loss of $7,000. 1040ez online The Sampsons had no other capital transactions. 1040ez online On their joint 2013 return, the Sampsons deduct $3,000, the yearly limit. 1040ez online They had taxable income of $2,000. 1040ez online The unused part of the loss, $4,000 ($7,000 − $3,000), is carried over to 2014. 1040ez online If the Sampsons' capital loss had been $2,000, it would not have been more than the yearly limit. 1040ez online Their capital loss deduction would have been $2,000. 1040ez online They would have no carryover to 2014. 1040ez online Short-term and long-term losses. 1040ez online   When you carry over a loss, it retains its original character as either long term or short term. 1040ez online A short-term loss you carry over to the next tax year is added to short-term losses occurring in that year. 1040ez online A long-term loss you carry over to the next tax year is added to long-term losses occurring in that year. 1040ez online A long-term capital loss you carry over to the next year reduces that year's long-term gains before its short-term gains. 1040ez online   If you have both short-term and long-term losses, your short-term losses are used first against your allowable capital loss deduction. 1040ez online If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the limit. 1040ez online To figure your capital loss carryover from 2013 to 2014 use the Capital Loss Carryover Worksheet in the 2013 Instructions for Schedule D (Form 1040). 1040ez online Joint and separate returns. 1040ez online   On a joint return, the capital gains and losses of spouses are figured as the gains and losses of an individual. 1040ez online If you are married and filing a separate return, your yearly capital loss deduction is limited to $1,500. 1040ez online Neither you nor your spouse can deduct any part of the other's loss. 1040ez online   If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. 1040ez online However, if you and your spouse once filed jointly and are now filing separately, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss. 1040ez online Death of taxpayer. 1040ez online   Capital losses cannot be carried over after a taxpayer's death. 1040ez online They are deductible only on the final income tax return filed on the decedent's behalf. 1040ez online The yearly limit discussed earlier still applies in this situation. 1040ez online Even if the loss is greater than the limit, the decedent's estate cannot deduct the difference or carry it over to following years. 1040ez online Corporations. 1040ez online   A corporation can deduct capital losses only up to the amount of its capital gains. 1040ez online In other words, if a corporation has a net capital loss, it cannot be deducted in the current tax year. 1040ez online It must be carried to other tax years and deducted from capital gains occurring in those years. 1040ez online For more information, see Publication 542. 1040ez online Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 1040ez online These lower rates are called the maximum capital gains rates. 1040ez online The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 1040ez online For 2013, the maximum tax rates for individuals are 0%, 15%, 20%, 25%, and 28%. 1040ez online Also, individuals, use the Qualified Dividends and Capital Gain Worksheet in the Instructions for Form 1040, or the Schedule D Tax Computation Worksheet in the Instructions for Schedule D (Form 1040) (whichever applies) to figure your tax if you have qualified dividends or net capital gain. 1040ez online For more information, see chapter 4 of Publication 550. 1040ez online Also see the Instructions for Schedule D (Form 1040). 1040ez online Unrecaptured section 1250 gain. 1040ez online   Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. 1040ez online Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as ordinary income. 1040ez online Use the worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. 1040ez online For more information about section 1250 property and net section 1231 gain, see chapter 3. 1040ez online Form 4797 Use Form 4797 to report: The sale or exchange of: Property used in your trade or business; Depreciable and amortizable property; Oil, gas, geothermal, or other mineral properties; and Section 126 property. 1040ez online The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. 1040ez online The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business). 1040ez online The disposition of capital assets not reported on Schedule D. 1040ez online The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations. 1040ez online The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less. 1040ez online Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f). 1040ez online You can use Form 4797 with Form 1040, 1065, 1120, or 1120S. 1040ez online Section 1231 gains and losses. 1040ez online   Show any section 1231 gains and losses in Part I. 1040ez online Carry a net gain to Schedule D (Form 1040) as a long-term capital gain. 1040ez online Carry a net loss to Part II of Form 4797 as an ordinary loss. 1040ez online   If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain in Part II. 1040ez online Report any remaining gain on Schedule D (Form 1040). 1040ez online See Section 1231 Gains and Losses in chapter 3. 1040ez online Ordinary gains and losses. 1040ez online   Show any ordinary gains and losses in Part II. 1040ez online This includes a net loss or a recapture of losses from prior years figured in Part I of Form 4797. 1040ez online It also includes ordinary gain figured in Part III. 1040ez online Mark-to-market election. 1040ez online   If you made a mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D (Form 1040). 1040ez online See the Instructions for Form 4797. 1040ez online Also see Special Rules for Traders in Securities, in chapter 4 of Publication 550. 1040ez online Ordinary income from depreciation. 1040ez online   Figure the ordinary income from depreciation on personal property and additional depreciation on real property (as discussed in chapter 3) in Part III. 1040ez online Carry the ordinary income to Part II of Form 4797 as an ordinary gain. 1040ez online Carry any remaining gain to Part I as section 1231 gain, unless it is from a casualty or theft. 1040ez online Carry any remaining gain from a casualty or theft to Form 4684. 1040ez online Prev  Up  Next   Home   More Online Publications
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Foreign Electronic Payments

International taxpayers who do not have a U.S. bank account may follow the instructions below to transfer funds from their foreign bank account directly to the Internal Revenue Service for payment of their individual or business tax liabilities.

Caution: Although this method of payment is available to anyone with a foreign bank account (which includes many types of financial institutions), it can be costly.  Please consider other options, including paying by credit card, to avoid the high cost of international wire transfer.  For more information on how to use the Electronic Federal Tax Payment System (EFTPS) or other U.S. based payment methods, please visit the Make a Payment site.

Note: Payments of U.S. tax must be remitted to the U.S. Internal Revenue Service (IRS) in U.S. dollars.

International Wire Transfer
In order to complete an international wire transfer through your foreign bank, you will need to complete the Same-Day Taxpayer Payment Worksheet (PDF 265KB) with the proper Tax Type Code and tax period (year and/or quarter) so that the funds will be properly applied to your IRS tax liability.  After you have completed the worksheet, take it to your bank to request international wiring.

Your foreign bank must have a banking relationship with a U.S. bank, although the U.S. bank does not have to be an affiliate or otherwise related to the foreign bank.  Small local banks may not be able to affect an international wire transfer but most large banks can.  If your bank is able to transfer money to the U.S., it will ask you to complete an application for international wiring.  You will need the Routing Transit Number (RTN), also known as the American Banking Association (ABA), number for the “Destination Bank”, sometimes referred to by banks as “Beneficiary’s Bank”.

To complete a wire transfer you will need the following information:

  • A completed Same-Day Taxpayer Worksheet
  • IRS account number – 20092900IRS (optional)
  • IRS account RTN/ABA Number – 091036164 US TREAS SINGLE TX

Note - Please complete the Same Day Taxpayer Worksheet PRIOR to going to your bank.  The information from the worksheet will be needed to complete the wiring application required by the bank.

The financial institution may charge you a fee for the wiring service.  If your foreign bank needs assistance, they may contact the Federal Tax Payment Service Customer Service at 314-425-1810 (Not toll free).  If you have questions regarding international wiring, please contact your local office internationally for assistance.

For more information on electronic payment options, download the Publication 966, Electronic Choices to Pay All Your Federal Taxes (PDF 796 KB).

 

Foreign Electronic Payments – Tax Type Code

Tax Type Codes for Individuals:

Form Number Form Name & Type of Payment 5-Digit Tax Type Code

1040

US Individual Income Tax Return  

Payment for amended return

10400

Extension filed

10402

Advance payment of deficiency

10404

Estimated tax payment

10406

Subsequent Payment (on return or IRS Notice)

10407

 

Tax Type Codes for Businesses:

Form Number Form Name (Type of Payment) 5-Digit Tax Type Code
720

Quarterly Excise Tax Return

Deposit

 

72005

Payment due on return or IRS notice

72007

940

Employer’s Annual Unemployment Tax (FUTA)

Deposit

 

09405

Payment due on return or IRS notice

09407

941

Employer’s Quarterly Employment Tax (FICA)

Deposit

 

94105

Payment due on return or IRS notice

94107

Deficiency assessed by IRS

94104

944

Employer’s Annual Employment Tax

Deposit

 

94405

Payment due on return or IRS notice

94407

945

Withheld Federal Income Tax

Deposit

 

09455

Payment due on return or IRS notice

09457

990T

Exempt Organization Business Income Tax

Deposit

 

99046

Payment with return or IRS notice

99047

Payment due on extension

99042

1041

Fiduciary Income Tax Return

Payment due on return or IRS notice

 

10417

Estimated return payment

10416

Payment on extension

10412

1042

Annual Withholding Tax Return for U.S. Source Income for 
Foreign Persons

Deposit


 

10425

Payment due on return or IRS Notice

10427

1120

US Corporate Income Tax

Deposit

 

11206

Payment due on return or IRS Notice

11207

Payment due on extension

11202

Amended return

11200

2290 Heavy Vehicle Use Tax

22907

8804 Annual Return of Partnership Withholding Tax (Section 1446)

88047

8489 Civil Penalty

84894

 

References/Related Topics

Page Last Reviewed or Updated: 24-Oct-2013

The 1040ez Online

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