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1040x Form And Instructions

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1040x Form And Instructions

1040x form and instructions 30. 1040x form and instructions   How To Figure Your Tax Table of Contents Introduction Figuring Your Tax Alternative Minimum Tax (AMT) Tax Figured by IRSFiling the Return Introduction After you have figured your income and deductions as explained in Parts One through Five, your next step is to figure your tax. 1040x form and instructions This chapter discusses: The general steps you take to figure your tax, An additional tax you may have to pay called the alternative minimum tax (AMT), and The conditions you must meet if you want the IRS to figure your tax. 1040x form and instructions Figuring Your Tax Your income tax is based on your taxable income. 1040x form and instructions After you figure your income tax and AMT, if any, subtract your tax credits and add any other taxes you may owe. 1040x form and instructions The result is your total tax. 1040x form and instructions Compare your total tax with your total payments to determine whether you are entitled to a refund or if you must make a payment. 1040x form and instructions This section provides a general outline of how to figure your tax. 1040x form and instructions You can find step-by-step directions in the Instructions for Forms 1040EZ, 1040A, and 1040. 1040x form and instructions If you are unsure of which tax form you should file, see Which Form Should I Use? in chapter 1. 1040x form and instructions Tax. 1040x form and instructions   Most taxpayers use either the Tax Table or the Tax Computation Worksheet to figure their income tax. 1040x form and instructions However, there are special methods if your income includes any of the following items. 1040x form and instructions A net capital gain. 1040x form and instructions (See chapter 16. 1040x form and instructions ) Qualified dividends taxed at the same rates as a net capital gain. 1040x form and instructions (See chapters 8 and 16. 1040x form and instructions ) Lump-sum distributions. 1040x form and instructions (See chapter 10. 1040x form and instructions ) Farming or fishing income. 1040x form and instructions (See Schedule J (Form 1040), Income Averaging for Farmers and Fishermen. 1040x form and instructions ) Unearned income over $2,000 for certain children. 1040x form and instructions (See chapter 31. 1040x form and instructions ) Parents' election to report child's interest and dividends. 1040x form and instructions (See chapter 31. 1040x form and instructions ) Foreign earned income exclusion or the housing exclusion. 1040x form and instructions (See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, and the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. 1040x form and instructions ) Credits. 1040x form and instructions   After you figure your income tax and any AMT (discussed later), determine if you are eligible for any tax credits. 1040x form and instructions Eligibility information for these tax credits is discussed in chapters 32 through 37 and your form instructions. 1040x form and instructions The following table lists the credits you may be able to subtract from your tax and shows where you can find more information on each credit. 1040x form and instructions CREDITS For information on: See  chapter: Adoption 37 Alternative motor vehicle 37 Alternative fuel vehicle refueling  property 37 Child and dependent care 32 Child tax 34 Credit to holders of tax credit  bonds 37 Education 35 Elderly or disabled 33 Electric vehicle 37 Foreign tax 37 Mortgage interest 37 Prior year minimum tax 37 Residential energy 37 Retirement savings contributions 37   Some credits (such as the earned income credit) are not listed because they are treated as payments. 1040x form and instructions See Payments , later. 1040x form and instructions   There are other credits that are not discussed in this publication. 1040x form and instructions These include the following credits. 1040x form and instructions General business credit, which is made up of several separate business-related credits. 1040x form and instructions These generally are reported on Form 3800, General Business Credit, and are discussed in chapter 4 of Publication 334, Tax Guide for Small Business. 1040x form and instructions Renewable electricity, refined coal, and Indian coal production credit for electricity and refined coal produced at facilities placed in service after October 22, 2004 (after October 2, 2008, for electricity produced from marine and hydrokinetic renewables), and Indian coal produced at facilities placed in service after August 8, 2005. 1040x form and instructions See Form 8835, Part II. 1040x form and instructions Work opportunity credit. 1040x form and instructions See Form 5884. 1040x form and instructions Credit for employer social security and Medicare taxes paid on certain employee tips. 1040x form and instructions See Form 8846. 1040x form and instructions Other taxes. 1040x form and instructions   After you subtract your tax credits, determine whether there are any other taxes you must pay. 1040x form and instructions This chapter does not explain these other taxes. 1040x form and instructions You can find that information in other chapters of this publication and your form instructions. 1040x form and instructions See the following table for other taxes you may need to add to your income tax. 1040x form and instructions OTHER TAXES For information on: See  chapter: Additional taxes on qualified retirement plans and IRAs 10, 17 Household employment taxes 32 Recapture of an education credit 35 Social security and Medicare tax on wages 5 Social security and Medicare tax on tips 6 Uncollected social security and Medicare tax on tips 6   You also may have to pay AMT (discussed later in this chapter). 1040x form and instructions   There are other taxes that are not discussed in this publication. 1040x form and instructions These include the following items. 1040x form and instructions Self-employment tax. 1040x form and instructions You must figure this tax if either of the following applies to you (or your spouse if you file a joint return). 1040x form and instructions Your net earnings from self-employment from other than church employee income were $400 or more. 1040x form and instructions The term “net earnings from self-employment” may include certain nonemployee compensation and other amounts reported to you on Form 1099-MISC, Miscellaneous Income. 1040x form and instructions If you received a Form 1099-MISC, see the Instructions for Recipient on the back. 1040x form and instructions Also see the Instructions for Schedule SE (Form 1040), Self-Employment Tax; and Publication 334, Tax Guide for Small Business. 1040x form and instructions You had church employee income of $108. 1040x form and instructions 28 or more. 1040x form and instructions Additional Medicare Tax. 1040x form and instructions Beginning in 2013, you may be subject to a 0. 1040x form and instructions 9% Additional Medicare Tax that applies to Medicare wages, Railroad Retirement Act compensation, and self-employment income over a threshold based on your filing status. 1040x form and instructions For more information, see the Instructions for Form 1040, line 60 and Form 8959. 1040x form and instructions Net Investment Income Tax (NIIT). 1040x form and instructions Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). 1040x form and instructions NIIT is a 3. 1040x form and instructions 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income over a threshold amount. 1040x form and instructions For more information, see the Instructions for Form 1040, line 60 and Form 8960. 1040x form and instructions Recapture taxes. 1040x form and instructions You may have to pay these taxes if you previously claimed an investment credit, a low-income housing credit, a new markets credit, a qualified plug-in electric drive motor vehicle credit, an alternative motor vehicle credit, a credit for employer-provided child care facilities, an Indian employment credit, or other credits listed in the instructions for Form 1040, line 60. 1040x form and instructions For more information, see the instructions for Form 1040, line 60. 1040x form and instructions Section 72(m)(5) excess benefits tax. 1040x form and instructions If you are (or were) a 5% owner of a business and you received a distribution that exceeds the benefits provided for you under the qualified pension or annuity plan formula, you may have to pay this additional tax. 1040x form and instructions See Tax on Excess Benefits in chapter 4 of Publication 560, Retirement Plans for Small Business. 1040x form and instructions Uncollected social security and Medicare tax on group-term life insurance. 1040x form and instructions If your former employer provides you with more than $50,000 of group-term life insurance coverage, you must pay the employee part of social security and Medicare taxes on those premiums. 1040x form and instructions The amount should be shown in box 12 of your Form W-2 with codes M and N. 1040x form and instructions Tax on golden parachute payments. 1040x form and instructions This tax applies if you received an “excess parachute payment” (EPP) due to a change in a corporation's ownership or control. 1040x form and instructions The amount should be shown in box 12 of your Form W-2 with code K. 1040x form and instructions See the instructions for Form 1040, line 60. 1040x form and instructions Tax on accumulation distribution of trusts. 1040x form and instructions This applies if you are the beneficiary of a trust that accumulated its income instead of distributing it currently. 1040x form and instructions See Form 4970 and its instructions. 1040x form and instructions Additional tax on HSAs or MSAs. 1040x form and instructions If amounts contributed to, or distributed from, your health savings account or medical savings account do not meet the rules for these accounts, you may have to pay additional taxes. 1040x form and instructions See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans; Form 8853, Archer MSAs and Long-Term Care Insurance Contracts; Form 8889, Health Savings Accounts (HSAs); and Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. 1040x form and instructions Additional tax on Coverdell ESAs. 1040x form and instructions This applies if amounts contributed to, or distributed from, your Coverdell ESA do not meet the rules for these accounts. 1040x form and instructions See Publication 970, Tax Benefits for Education, and Form 5329. 1040x form and instructions Additional tax on qualified tuition programs. 1040x form and instructions This applies to amounts distributed from qualified tuition programs that do not meet the rules for these accounts. 1040x form and instructions See Publication 970 and Form 5329. 1040x form and instructions Excise tax on insider stock compensation from an expatriated corporation. 1040x form and instructions You may owe a 15% excise tax on the value of nonstatutory stock options and certain other stock-based compensation held by you or a member of your family from an expatriated corporation or its expanded affiliated group in which you were an officer, director, or more-than-10% owner. 1040x form and instructions For more information, see the instructions for Form 1040, line 60. 1040x form and instructions Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements. 1040x form and instructions This income should be shown in Form W-2, box 12, with code Z, or in Form 1099-MISC, box 15b. 1040x form and instructions For more information, see the instructions for Form 1040, line 60. 1040x form and instructions Interest on the tax due on installment income from the sale of certain residential lots and timeshares. 1040x form and instructions For more information, see the instructions for Form 1040, line 60. 1040x form and instructions Interest on the deferred tax on gain from certain installment sales with a sales price over $150,000. 1040x form and instructions For more information, see the instructions for Form 1040, line 60. 1040x form and instructions Repayment of first-time homebuyer credit. 1040x form and instructions For more information, see Form 5405, Repayment of the First-Time Homebuyer Credit, and its instructions. 1040x form and instructions Also see the instructions for Form 1040, line 59b. 1040x form and instructions Payments. 1040x form and instructions   After you determine your total tax, figure the total payments you have already made for the year. 1040x form and instructions Include credits that are treated as payments. 1040x form and instructions This chapter does not explain these payments and credits. 1040x form and instructions You can find that information in other chapters of this publication and your form instructions. 1040x form and instructions See the following table for amounts you can include in your total payments. 1040x form and instructions PAYMENTS For information on: See  chapter: Child tax credit (additional) 34 Earned income credit 36 Estimated tax paid 4 Excess social security   and RRTA tax withheld 37 Federal income tax withheld 4 Health coverage tax credit 37 Credit for tax on   undistributed capital gain 37 Tax paid with extension 1   Another credit that is treated as a payment is the credit for federal excise tax paid on fuels. 1040x form and instructions This credit is for persons who have a nontaxable use of certain fuels, such as diesel fuel and kerosene. 1040x form and instructions It is claimed on Form 1040, line 70. 1040x form and instructions See Form 4136, Credit for Federal Tax Paid on Fuels. 1040x form and instructions Refund or balance due. 1040x form and instructions   To determine whether you are entitled to a refund or whether you must make a payment, compare your total payments with your total tax. 1040x form and instructions If you are entitled to a refund, see your form instructions for information on having it directly deposited into one or more of your accounts, or to purchase U. 1040x form and instructions S. 1040x form and instructions savings bonds instead of receiving a paper check. 1040x form and instructions Alternative Minimum Tax (AMT) This section briefly discusses an additional tax you may have to pay. 1040x form and instructions The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. 1040x form and instructions Taxpayers who benefit from this special treatment may have to pay at least a minimum amount of tax through an additional tax called AMT. 1040x form and instructions You may have to pay the AMT if your taxable income for regular tax purposes, combined with certain adjustments and tax preference items, is more than a certain amount. 1040x form and instructions See Form 6251, Alternative Minimum Tax — Individuals. 1040x form and instructions Adjustments and tax preference items. 1040x form and instructions   The more common adjustments and tax preference items include: Addition of personal exemptions, Addition of the standard deduction (if claimed), Addition of itemized deductions claimed for state and local taxes, certain interest, most miscellaneous deductions, and part of medical expenses, Subtraction of any refund of state and local taxes included in gross income, Changes to accelerated depreciation of certain property, Difference between gain or loss on the sale of property reported for regular tax purposes and AMT purposes, Addition of certain income from incentive stock options, Change in certain passive activity loss deductions, Addition of certain depletion that is more than the adjusted basis of the property, Addition of part of the deduction for certain intangible drilling costs, and Addition of tax-exempt interest on certain private activity bonds. 1040x form and instructions More information. 1040x form and instructions   For more information about the AMT, see the instructions for Form 6251. 1040x form and instructions Tax Figured by IRS If you file by April 15, 2014, you can have the IRS figure your tax for you on Form 1040EZ, Form 1040A, or Form 1040. 1040x form and instructions If the IRS figures your tax and you paid too much, you will receive a refund. 1040x form and instructions If you did not pay enough, you will receive a bill for the balance. 1040x form and instructions To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later. 1040x form and instructions The IRS can also figure the credit for the elderly or the disabled and the earned income credit for you. 1040x form and instructions When the IRS cannot figure your tax. 1040x form and instructions   The IRS cannot figure your tax for you if any of the following apply. 1040x form and instructions You want your refund directly deposited into your accounts. 1040x form and instructions You want any part of your refund applied to your 2014 estimated tax. 1040x form and instructions You had income for the year from sources other than wages, salaries, tips, interest, dividends, taxable social security benefits, unemployment compensation, IRA distributions, pensions, and annuities. 1040x form and instructions Your taxable income is $100,000 or more. 1040x form and instructions You itemize deductions. 1040x form and instructions You file any of the following forms. 1040x form and instructions Form 2555, Foreign Earned Income. 1040x form and instructions Form 2555-EZ, Foreign Earned Income Exclusion. 1040x form and instructions Form 4137, Social Security and Medicare Tax on Unreported Tip Income. 1040x form and instructions Form 4970, Tax on Accumulation Distribution of Trusts. 1040x form and instructions Form 4972, Tax on Lump-Sum Distributions. 1040x form and instructions Form 6198, At-Risk Limitations. 1040x form and instructions Form 6251, Alternative Minimum Tax—Individuals. 1040x form and instructions Form 8606, Nondeductible IRAs. 1040x form and instructions Form 8615, Tax for Certain Children Who Have Unearned Income. 1040x form and instructions Form 8814, Parents' Election To Report Child's Interest and Dividends. 1040x form and instructions Form 8839, Qualified Adoption Expenses. 1040x form and instructions Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. 1040x form and instructions Form 8889, Health Savings Accounts (HSAs). 1040x form and instructions Form 8919, Uncollected Social Security and Medicare Tax on Wages. 1040x form and instructions Filing the Return After you complete the line entries for the tax form you are filing, fill in your name and address. 1040x form and instructions Enter your social security number in the space provided. 1040x form and instructions If you are married, enter the social security numbers of you and your spouse even if you file separately. 1040x form and instructions Sign and date your return and enter your occupation(s). 1040x form and instructions If you are filing a joint return, both you and your spouse must sign it. 1040x form and instructions Enter your daytime phone number in the space provided. 1040x form and instructions This may help speed the processing of your return if we have a question that can be answered over the phone. 1040x form and instructions If you are filing a joint return, you may enter either your or your spouse's daytime phone number. 1040x form and instructions If you want to allow a friend, family member, or any other person you choose to discuss your 2013 tax return with the IRS, check the “Yes” box in the “Third party designee” area on your return. 1040x form and instructions Also enter the designee's name, phone number, and any five digits the designee chooses as his or her personal identification number (PIN). 1040x form and instructions If you check the “Yes” box, you, and your spouse if filing a joint return, are authorizing the IRS to call the designee to answer any questions that may arise during the processing of your return. 1040x form and instructions Fill in and attach any schedules and forms asked for on the lines you completed to your paper return. 1040x form and instructions Attach a copy of each of your Forms W-2 to your paper return. 1040x form and instructions Also attach to your paper return any Form 1099-R you received that has withholding tax in box 4. 1040x form and instructions Mail your return to the Internal Revenue Service Center for the area where you live. 1040x form and instructions A list of Service Center addresses is in the instructions for your tax return. 1040x form and instructions Form 1040EZ Line Entries Read lines 1 through 8b and fill in the lines that apply to you. 1040x form and instructions Do not complete lines 9 through 12. 1040x form and instructions If you are filing a joint return, use the space to the left of line 6 to separately show your taxable income and your spouse's taxable income. 1040x form and instructions Payments. 1040x form and instructions   Enter any federal income tax withheld on line 7. 1040x form and instructions Federal income tax withheld is shown on Form W-2, box 2, or Form 1099, box 4. 1040x form and instructions Earned income credit. 1040x form and instructions   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. 1040x form and instructions Enter “EIC” in the space to the left of line 8a. 1040x form and instructions Enter the nontaxable combat pay you elect to include in earned income on line 8b. 1040x form and instructions   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. 1040x form and instructions For details, see the Form 1040EZ Instructions. 1040x form and instructions Form 1040A Line Entries Read lines 1 through 27 and fill in the lines that apply to you. 1040x form and instructions If you are filing a joint return, use the space to the left of the entry space for line 27 to separately show your taxable income and your spouse's taxable income. 1040x form and instructions Do not complete line 28. 1040x form and instructions Complete lines 29 through 33 and 36 through 40 if they apply to you. 1040x form and instructions However, do not fill in lines 30 and 38a if you want the IRS to figure the credits shown on those lines. 1040x form and instructions Also, enter any write-in information that applies to you in the space to the left of line 41. 1040x form and instructions Do not complete lines 34, 35, and 42 through 46. 1040x form and instructions Payments. 1040x form and instructions   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 36. 1040x form and instructions Enter any estimated tax payments you made on line 37. 1040x form and instructions Credit for child and dependent care expenses. 1040x form and instructions   If you can take this credit, as discussed in chapter 32, complete Form 2441, Child and Dependent Care Expenses, and attach it to your return. 1040x form and instructions Enter the amount of the credit on line 29. 1040x form and instructions The IRS will not figure this credit. 1040x form and instructions Credit for the elderly or the disabled. 1040x form and instructions   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. 1040x form and instructions Enter “CFE” in the space to the left of line 30 and attach Schedule R (Form 1040A or 1040), Credit for the Elderly or the Disabled, to your paper return. 1040x form and instructions On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. 1040x form and instructions Complete Part II and Part III, lines 11 and 13, if they apply. 1040x form and instructions Earned income credit. 1040x form and instructions   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. 1040x form and instructions Enter “EIC” to the left of the entry space for line 38a. 1040x form and instructions Enter the nontaxable combat pay you elect to include in earned income on line 38b. 1040x form and instructions    If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. 1040x form and instructions If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. 1040x form and instructions   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. 1040x form and instructions For details, see the Form 1040A Instructions. 1040x form and instructions Form 1040 Line Entries Read lines 1 through 43 and fill in the lines that apply to you. 1040x form and instructions Do not complete line 44. 1040x form and instructions If you are filing a joint return, use the space under the words “Adjusted Gross Income” on the front of your return to separately show your taxable income and your spouse's taxable income. 1040x form and instructions Read lines 45 through 71. 1040x form and instructions Fill in the lines that apply to you, but do not fill in lines 54, 61, and 72. 1040x form and instructions Also, do not complete line 55 and lines 73 through 77. 1040x form and instructions Do not fill in line 53, box “c,” if you are completing Schedule R (Form 1040A or 1040), or line 64a if you want the IRS to figure the credits shown on those lines. 1040x form and instructions Payments. 1040x form and instructions   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 62. 1040x form and instructions Enter any estimated tax payments you made on line 63. 1040x form and instructions Credit for child and dependent care expenses. 1040x form and instructions   If you can take this credit, as discussed in chapter 32, complete Form 2441 and attach it to your paper return. 1040x form and instructions Enter the amount of the credit on line 48. 1040x form and instructions The IRS will not figure this credit. 1040x form and instructions Credit for the elderly or the disabled. 1040x form and instructions   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. 1040x form and instructions Enter “CFE” on the line next to line 53, check box “c,” and attach Schedule R (Form 1040A or 1040) to your paper return. 1040x form and instructions On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. 1040x form and instructions Complete Part II and Part III, lines 11 and 13, if they apply. 1040x form and instructions Earned income credit. 1040x form and instructions   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. 1040x form and instructions Enter “EIC” on the dotted line next to Form 1040, line 64a. 1040x form and instructions Enter the nontaxable combat pay you elect to include in earned income on line 64b. 1040x form and instructions   If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. 1040x form and instructions If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. 1040x form and instructions   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. 1040x form and instructions For details, see the Form 1040 Instructions. 1040x form and instructions Prev  Up  Next   Home   More Online Publications
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The 1040x Form And Instructions

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