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2012 Amended Tax Return

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2012 Amended Tax Return

2012 amended tax return 5. 2012 amended tax return   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 2012 amended tax return S. 2012 amended tax return PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 2012 amended tax return S. 2012 amended tax return possessions, and How to report deductions. 2012 amended tax return Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 2012 amended tax return Items Related to Excluded Income U. 2012 amended tax return S. 2012 amended tax return citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 2012 amended tax return If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2012 amended tax return This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 2012 amended tax return You can deduct only those expenses connected with earning includible income. 2012 amended tax return These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 2012 amended tax return These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 2012 amended tax return For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 2012 amended tax return If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 2012 amended tax return Example. 2012 amended tax return In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 2012 amended tax return You did not have a housing exclusion. 2012 amended tax return Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 2012 amended tax return In 2013, you received a $12,000 bonus for work you did abroad in 2012. 2012 amended tax return You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 2012 amended tax return Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 2012 amended tax return This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 2012 amended tax return Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 2012 amended tax return S. 2012 amended tax return tax purposes and is not the dependent of another U. 2012 amended tax return S. 2012 amended tax return taxpayer. 2012 amended tax return You also can claim exemptions for individuals who qualify as your dependents. 2012 amended tax return To be your dependent, the individual must be a U. 2012 amended tax return S. 2012 amended tax return citizen, U. 2012 amended tax return S. 2012 amended tax return national, U. 2012 amended tax return S. 2012 amended tax return resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 2012 amended tax return Children. 2012 amended tax return   Children usually are citizens or residents of the same country as their parents. 2012 amended tax return If you were a U. 2012 amended tax return S. 2012 amended tax return citizen when your child was born, your child generally is a U. 2012 amended tax return S. 2012 amended tax return citizen. 2012 amended tax return This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 2012 amended tax return   If you have a legally adopted child who is not a U. 2012 amended tax return S. 2012 amended tax return citizen, U. 2012 amended tax return S. 2012 amended tax return resident, or U. 2012 amended tax return S. 2012 amended tax return national, the child meets the citizen requirement if you are a U. 2012 amended tax return S. 2012 amended tax return citizen or U. 2012 amended tax return S. 2012 amended tax return national and the child lived with you as a member of your household all year. 2012 amended tax return Social security number. 2012 amended tax return   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 2012 amended tax return To get a social security number for a dependent, apply at a Social Security office or U. 2012 amended tax return S. 2012 amended tax return consulate. 2012 amended tax return You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 2012 amended tax return   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 2012 amended tax return Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 2012 amended tax return   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 2012 amended tax return To apply for an ITIN, file Form W-7 with the IRS. 2012 amended tax return It usually takes 6 to 10 weeks to get an ITIN. 2012 amended tax return Enter your dependent's ITIN wherever an SSN is requested on your tax return. 2012 amended tax return More information. 2012 amended tax return   For more information about exemptions, see Publication 501. 2012 amended tax return Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 2012 amended tax return Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 2012 amended tax return You can deduct contributions to a U. 2012 amended tax return S. 2012 amended tax return organization that transfers funds to a charitable foreign organization if the U. 2012 amended tax return S. 2012 amended tax return organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 2012 amended tax return S. 2012 amended tax return organization. 2012 amended tax return Canadian, Mexican, and Israeli charities. 2012 amended tax return   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 2012 amended tax return Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 2012 amended tax return See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 2012 amended tax return Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 2012 amended tax return Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 2012 amended tax return See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 2012 amended tax return Foreign moves. 2012 amended tax return   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 2012 amended tax return A foreign move does not include a move back to the United States or its possessions. 2012 amended tax return Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 2012 amended tax return If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 2012 amended tax return Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 2012 amended tax return Year to which expense is connected. 2012 amended tax return   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 2012 amended tax return It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 2012 amended tax return   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 2012 amended tax return The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 2012 amended tax return The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 2012 amended tax return Amount allocable to excluded income. 2012 amended tax return   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 2012 amended tax return The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 2012 amended tax return Example. 2012 amended tax return On November 1, 2012, you transfer to Monaco. 2012 amended tax return Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 2012 amended tax return In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 2012 amended tax return You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 2012 amended tax return The reimbursement is included in your income. 2012 amended tax return Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 2012 amended tax return Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 2012 amended tax return Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 2012 amended tax return You have no housing exclusion. 2012 amended tax return The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 2012 amended tax return To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 2012 amended tax return The result, $5,562, is your nondeductible amount. 2012 amended tax return    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 2012 amended tax return In the preceding example, this year was 2012. 2012 amended tax return You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 2012 amended tax return Move between foreign countries. 2012 amended tax return   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 2012 amended tax return New place of work in U. 2012 amended tax return S. 2012 amended tax return   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 2012 amended tax return If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 2012 amended tax return Storage expenses. 2012 amended tax return   These expenses are attributable to work you do during the year in which you incur the storage expenses. 2012 amended tax return You cannot deduct the amount allocable to excluded income. 2012 amended tax return Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 2012 amended tax return By then, you should have all the information needed to properly figure the moving expense deduction. 2012 amended tax return See Extensions under When To File and Pay in chapter 1. 2012 amended tax return If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 2012 amended tax return You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 2012 amended tax return Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 2012 amended tax return If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 2012 amended tax return You cannot claim it on the return for the second year. 2012 amended tax return Forms To File Report your moving expenses on Form 3903. 2012 amended tax return Report your moving expense deduction on line 26 of Form 1040. 2012 amended tax return If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 2012 amended tax return For more information about figuring moving expenses, see Publication 521. 2012 amended tax return Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 2012 amended tax return In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 2012 amended tax return Do not reduce your compensation by the foreign housing deduction. 2012 amended tax return If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 2012 amended tax return This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2012 amended tax return Other modifications are also required. 2012 amended tax return For more information on IRAs, see Publication 590. 2012 amended tax return Taxes of Foreign Countries and U. 2012 amended tax return S. 2012 amended tax return Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 2012 amended tax return S. 2012 amended tax return possession. 2012 amended tax return Taken as a deduction, foreign income taxes reduce your taxable income. 2012 amended tax return Taken as a credit, foreign income taxes reduce your tax liability. 2012 amended tax return You must treat all foreign income taxes the same way. 2012 amended tax return If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 2012 amended tax return However, you may be able to deduct other foreign taxes. 2012 amended tax return See Deduction for Other Foreign Taxes, later. 2012 amended tax return There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 2012 amended tax return In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 2012 amended tax return S. 2012 amended tax return tax liability, rather than as a deduction in figuring taxable income. 2012 amended tax return However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 2012 amended tax return S. 2012 amended tax return income is small, a lower final tax may result from deducting the foreign income taxes. 2012 amended tax return In any event, you should figure your tax liability both ways and then use the one that is better for you. 2012 amended tax return You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 2012 amended tax return Foreign income taxes. 2012 amended tax return   These are generally income taxes you pay to any foreign country or possession of the United States. 2012 amended tax return Foreign income taxes on U. 2012 amended tax return S. 2012 amended tax return return. 2012 amended tax return   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 2012 amended tax return These amounts cannot be included as withheld income taxes on Form 1040, line 62. 2012 amended tax return Foreign taxes paid on excluded income. 2012 amended tax return   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 2012 amended tax return Foreign earned income exclusion. 2012 amended tax return Foreign housing exclusion. 2012 amended tax return Possession exclusion. 2012 amended tax return If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 2012 amended tax return   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 2012 amended tax return You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 2012 amended tax return The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 2012 amended tax return The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 2012 amended tax return   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 2012 amended tax return    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 2012 amended tax return Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 2012 amended tax return Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 2012 amended tax return Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 2012 amended tax return The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 2012 amended tax return The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 2012 amended tax return You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 2012 amended tax return Subsidies. 2012 amended tax return   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 2012 amended tax return This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 2012 amended tax return   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2012 amended tax return A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 2012 amended tax return Limit The foreign tax credit is limited to the part of your total U. 2012 amended tax return S. 2012 amended tax return tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 2012 amended tax return The allowable foreign tax credit cannot be more than your actual foreign tax liability. 2012 amended tax return Exemption from limit. 2012 amended tax return   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 2012 amended tax return Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 2012 amended tax return ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 2012 amended tax return Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 2012 amended tax return You elect this procedure. 2012 amended tax return If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 2012 amended tax return Separate limit. 2012 amended tax return   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 2012 amended tax return Figuring the limit. 2012 amended tax return   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 2012 amended tax return Do not take any excluded amount into account. 2012 amended tax return   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 2012 amended tax return   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 2012 amended tax return The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 2012 amended tax return The denominator (bottom number) of the fraction is your gross income from all sources. 2012 amended tax return For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 2012 amended tax return You must use special rules for deducting interest expenses. 2012 amended tax return For more information on allocating and apportioning your deductions, see Publication 514. 2012 amended tax return Exemptions. 2012 amended tax return   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 2012 amended tax return Recapture of foreign losses. 2012 amended tax return   If you have an overall foreign loss and the loss reduces your U. 2012 amended tax return S. 2012 amended tax return source income (resulting in a reduction of your U. 2012 amended tax return S. 2012 amended tax return tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 2012 amended tax return This is done by treating a part of your taxable income from foreign sources in later years as U. 2012 amended tax return S. 2012 amended tax return source income. 2012 amended tax return This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 2012 amended tax return Recapture of domestic losses. 2012 amended tax return   If you have an overall domestic loss (resulting in no U. 2012 amended tax return S. 2012 amended tax return tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 2012 amended tax return You must recapture the loss in later years when you have U. 2012 amended tax return S. 2012 amended tax return source taxable income. 2012 amended tax return This is done by treating a part of your taxable income from U. 2012 amended tax return S. 2012 amended tax return sources in later years as foreign source income. 2012 amended tax return This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 2012 amended tax return Foreign tax credit carryback and carryover. 2012 amended tax return   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 2012 amended tax return   More information on figuring the foreign tax credit can be found in Publication 514. 2012 amended tax return Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 2012 amended tax return You can deduct only foreign income taxes paid on income that is subject to U. 2012 amended tax return S. 2012 amended tax return tax. 2012 amended tax return You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 2012 amended tax return Foreign earned income exclusion. 2012 amended tax return Foreign housing exclusion. 2012 amended tax return Possession exclusion. 2012 amended tax return Example. 2012 amended tax return You are a U. 2012 amended tax return S. 2012 amended tax return citizen and qualify to exclude your foreign earned income. 2012 amended tax return Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 2012 amended tax return You received dividends from Country X of $2,000 on which you paid income tax of $600. 2012 amended tax return You can deduct the $600 tax payment because the dividends relating to it are subject to U. 2012 amended tax return S. 2012 amended tax return tax. 2012 amended tax return Because you exclude your wages, you cannot deduct the income tax of $10,000. 2012 amended tax return If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 2012 amended tax return Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 2012 amended tax return You take this deduction on Schedule A (Form 1040). 2012 amended tax return You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 2012 amended tax return On the other hand, you generally can deduct personal property taxes when you pay them to U. 2012 amended tax return S. 2012 amended tax return possessions. 2012 amended tax return But if you claim the possession exclusion, see Publication 570. 2012 amended tax return The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 2012 amended tax return You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 2012 amended tax return How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 2012 amended tax return If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 2012 amended tax return Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2012 amended tax return Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 2012 amended tax return If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 2012 amended tax return You figure that amount by subtracting from the total deduction the amount related to excluded income. 2012 amended tax return Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2012 amended tax return Attach a statement to your return showing how you figured the deductible amount. 2012 amended tax return Example 1. 2012 amended tax return You are a U. 2012 amended tax return S. 2012 amended tax return citizen employed as an accountant. 2012 amended tax return Your tax home is in Germany for the entire tax year. 2012 amended tax return You meet the physical presence test. 2012 amended tax return Your foreign earned income for the year was $122,000 and your investment income was $10,380. 2012 amended tax return After excluding $97,600, your AGI is $34,780. 2012 amended tax return You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 2012 amended tax return These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 2012 amended tax return You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 2012 amended tax return You must fill out Form 2106. 2012 amended tax return On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 2012 amended tax return You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 2012 amended tax return You carry the remaining total of $450 to line 21 of Schedule A. 2012 amended tax return Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 2012 amended tax return On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 2012 amended tax return Enter $254 on line 27 of Schedule A. 2012 amended tax return Example 2. 2012 amended tax return You are a U. 2012 amended tax return S. 2012 amended tax return citizen, have a tax home in Spain, and meet the physical presence test. 2012 amended tax return You are self-employed and personal services produce the business income. 2012 amended tax return Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 2012 amended tax return You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 2012 amended tax return Since your excluded income is 83. 2012 amended tax return 47% of your total income, 83. 2012 amended tax return 47% of your business expenses are not deductible. 2012 amended tax return Report your total income and expenses on Schedule C (Form 1040). 2012 amended tax return On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 2012 amended tax return 47% × $66,895) business expenses attributable to the exclusion. 2012 amended tax return In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 2012 amended tax return Example 3. 2012 amended tax return Assume in Example 2 that both capital and personal services combine to produce the business income. 2012 amended tax return No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 2012 amended tax return Your exclusion of $15,011 is 12. 2012 amended tax return 84% of your gross income ($15,011 ÷ $116,931). 2012 amended tax return Because you excluded 12. 2012 amended tax return 84% of your total income, $8,589 (. 2012 amended tax return 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 2012 amended tax return Example 4. 2012 amended tax return You are a U. 2012 amended tax return S. 2012 amended tax return citizen, have a tax home in Brazil, and meet the physical presence test. 2012 amended tax return You are self-employed and both capital and personal services combine to produce business income. 2012 amended tax return Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 2012 amended tax return A reasonable allowance for the services you performed for the business is $77,000. 2012 amended tax return Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 2012 amended tax return The $77,000 is foreign earned income. 2012 amended tax return If you choose to exclude the $77,000, you exclude 52. 2012 amended tax return 74% of your gross income ($77,000 ÷ $146,000), and 52. 2012 amended tax return 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 2012 amended tax return Show your total income and expenses on Schedule C (Form 1040). 2012 amended tax return On Form 2555, exclude $77,000 and show $90,713 on line 44. 2012 amended tax return Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 2012 amended tax return Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 2012 amended tax return In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 2012 amended tax return If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 2012 amended tax return To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 2012 amended tax return See Choosing the Exclusion in chapter 4. 2012 amended tax return Example 5. 2012 amended tax return You are a U. 2012 amended tax return S. 2012 amended tax return citizen, have a tax home in Panama, and meet the bona fide residence test. 2012 amended tax return You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 2012 amended tax return Capital investment is not material in producing the partnership's income. 2012 amended tax return Under the terms of the partnership agreement, you are to receive 50% of the net profits. 2012 amended tax return The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 2012 amended tax return Of the net profits of $145,750, you received $72,875 as your distributive share. 2012 amended tax return You choose to exclude $97,600 of your share of the gross income. 2012 amended tax return Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 2012 amended tax return 80 × $49,125). 2012 amended tax return Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 2012 amended tax return On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 2012 amended tax return Your exclusion on Form 2555 is $58,300. 2012 amended tax return In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 2012 amended tax return Prev  Up  Next   Home   More Online Publications
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The 2012 Amended Tax Return

2012 amended tax return Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. 2012 amended tax return More information. 2012 amended tax return Exception—Community Income. 2012 amended tax return Exception—Qualified joint venture. 2012 amended tax return More information. 2012 amended tax return More information. 2012 amended tax return Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. 2012 amended tax return Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. 2012 amended tax return Table 1 can help you learn what those responsibilities are. 2012 amended tax return Ask yourself each question listed in the table, then see the related discussion to find the answer. 2012 amended tax return In addition to knowing about federal taxes, you need to make some basic business decisions. 2012 amended tax return Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. 2012 amended tax return For information on how to contact the SBA, see How to Get More Information, later. 2012 amended tax return Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. 2012 amended tax return When beginning a business, you must decide which form of business to use. 2012 amended tax return Legal and tax considerations enter into this decision. 2012 amended tax return Only tax considerations are discussed in this publication. 2012 amended tax return Your form of business determines which income tax return form you have to file. 2012 amended tax return See Table 2 to find out which form you have to file. 2012 amended tax return Sole proprietorships. 2012 amended tax return   A sole proprietorship is an unincorporated business that is owned by one individual. 2012 amended tax return It is the simplest form of business organization to start and maintain. 2012 amended tax return The business has no existence apart from you, the owner. 2012 amended tax return Its liabilities are your personal liabilities. 2012 amended tax return You undertake the risks of the business for all assets owned, whether or not used in the business. 2012 amended tax return You include the income and expenses of the business on your personal tax return. 2012 amended tax return More information. 2012 amended tax return   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. 2012 amended tax return If you are a farmer, see Publication 225, Farmer's Tax Guide. 2012 amended tax return Partnerships. 2012 amended tax return   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. 2012 amended tax return Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. 2012 amended tax return   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. 2012 amended tax return , from its operations, but it does not pay income tax. 2012 amended tax return Instead, it “passes through” any profits or losses to its partners. 2012 amended tax return Each partner includes his or her share of the partnership's items on his or her tax return. 2012 amended tax return More information. 2012 amended tax return   For more information on partnerships, see Publication 541, Partnerships. 2012 amended tax return Husband and wife business. 2012 amended tax return   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. 2012 amended tax return Do not use Schedule C or C-EZ. 2012 amended tax return Instead, file Form 1065, U. 2012 amended tax return S. 2012 amended tax return Return of Partnership Income. 2012 amended tax return For more information, see Publication 541, Partnerships. 2012 amended tax return Exception—Community Income. 2012 amended tax return   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. 2012 amended tax return S. 2012 amended tax return possession, you can treat the business either as a sole proprietorship or a partnership. 2012 amended tax return The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2012 amended tax return A change in your reporting position will be treated as a conversion of the entity. 2012 amended tax return Exception—Qualified joint venture. 2012 amended tax return   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. 2012 amended tax return Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. 2012 amended tax return For an explanation of "material participation," see the Instructions for Schedule C, line G. 2012 amended tax return   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. 2012 amended tax return Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. 2012 amended tax return For more information, see Qualified Joint Venture in the Instructions for Schedule SE. 2012 amended tax return Corporations. 2012 amended tax return   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. 2012 amended tax return A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. 2012 amended tax return A corporation can also take special deductions. 2012 amended tax return   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. 2012 amended tax return However, shareholders cannot deduct any loss of the corporation. 2012 amended tax return More information. 2012 amended tax return   For more information on corporations, see Publication 542, Corporations. 2012 amended tax return S corporations. 2012 amended tax return   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. 2012 amended tax return Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. 2012 amended tax return On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. 2012 amended tax return More information. 2012 amended tax return   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. 2012 amended tax return S. 2012 amended tax return Income Tax Return for an S Corporation. 2012 amended tax return Limited liability company. 2012 amended tax return   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2012 amended tax return The members of an LLC are not personally liable for its debts. 2012 amended tax return An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. 2012 amended tax return 7701-3. 2012 amended tax return For more information, see the instructions for Form 8832, Entity Classification Election. 2012 amended tax return Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. 2012 amended tax return The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). 2012 amended tax return An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. 2012 amended tax return An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. 2012 amended tax return You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. 2012 amended tax return You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. 2012 amended tax return This includes returns or documents filed to report the following information. 2012 amended tax return Interest, dividends, royalties, etc. 2012 amended tax return , paid to you. 2012 amended tax return Any amount paid to you as a dependent care provider. 2012 amended tax return Certain other amounts paid to you that total $600 or more for the year. 2012 amended tax return If you do not furnish your identification number as required, you may be subject to penalties. 2012 amended tax return See Penalties, later. 2012 amended tax return Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. 2012 amended tax return If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. 2012 amended tax return Applying for an EIN. 2012 amended tax return   You may apply for an EIN: Online—Click on the EIN link at www. 2012 amended tax return irs. 2012 amended tax return gov/businesses/small. 2012 amended tax return The EIN is issued immediately once the application information is validated. 2012 amended tax return By telephone at 1-800-829-4933. 2012 amended tax return By mailing or faxing Form SS-4, Application for Employer Identification Number. 2012 amended tax return When to apply. 2012 amended tax return   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. 2012 amended tax return If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. 2012 amended tax return If you apply by telephone or through the IRS website, you can get an EIN immediately. 2012 amended tax return If you apply by fax, you can get an EIN within 4 business days. 2012 amended tax return   If you do not receive your EIN by the time a return is due, file your return anyway. 2012 amended tax return Write “Applied for” and the date you applied for the number in the space for the EIN. 2012 amended tax return Do not use your social security number as a substitute for an EIN on your tax returns. 2012 amended tax return More than one EIN. 2012 amended tax return   You should have only one EIN. 2012 amended tax return If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. 2012 amended tax return Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. 2012 amended tax return The IRS will tell you which number to use. 2012 amended tax return More information. 2012 amended tax return   For more information about EINs, see Publication 1635, Understanding Your EIN. 2012 amended tax return Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). 2012 amended tax return The forms used to report these payments must include the payee's identification number. 2012 amended tax return Employee. 2012 amended tax return   If you have employees, you must get an SSN from each of them. 2012 amended tax return Record the name and SSN of each employee exactly as they are shown on the employee's social security card. 2012 amended tax return If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. 2012 amended tax return This may occur, for example, if the employee's name has changed due to marriage or divorce. 2012 amended tax return   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. 2012 amended tax return This form is available at SSA offices or by calling 1-800-772-1213. 2012 amended tax return It is also available from the SSA website at www. 2012 amended tax return ssa. 2012 amended tax return gov. 2012 amended tax return Other payee. 2012 amended tax return   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. 2012 amended tax return If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. 2012 amended tax return   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. 2012 amended tax return This form is available from IRS offices or by calling 1-800-829-3676. 2012 amended tax return It is also available from the IRS website at IRS. 2012 amended tax return gov. 2012 amended tax return    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. 2012 amended tax return For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. 2012 amended tax return Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. 2012 amended tax return A tax year is usually 12 consecutive months. 2012 amended tax return There are two kinds of tax years. 2012 amended tax return Calendar tax year. 2012 amended tax return A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. 2012 amended tax return Fiscal tax year. 2012 amended tax return A fiscal tax year is 12 consecutive months ending on the last day of any month except December. 2012 amended tax return A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. 2012 amended tax return If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. 2012 amended tax return You must use a calendar tax year if: You keep no books. 2012 amended tax return You have no annual accounting period. 2012 amended tax return Your present tax year does not qualify as a fiscal year. 2012 amended tax return You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. 2012 amended tax return For more information, see Publication 538, Accounting Periods and Methods. 2012 amended tax return First-time filer. 2012 amended tax return   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. 2012 amended tax return You adopt a tax year by filing your first income tax return using that tax year. 2012 amended tax return You have not adopted a tax year if you merely did any of the following. 2012 amended tax return Filed an application for an extension of time to file an income tax return. 2012 amended tax return Filed an application for an employer identification number. 2012 amended tax return Paid estimated taxes for that tax year. 2012 amended tax return Changing your tax year. 2012 amended tax return   Once you have adopted your tax year, you may have to get IRS approval to change it. 2012 amended tax return To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. 2012 amended tax return You may have to pay a fee. 2012 amended tax return For more information, see Publication 538. 2012 amended tax return Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. 2012 amended tax return You choose an accounting method for your business when you file your first income tax return. 2012 amended tax return There are two basic accounting methods. 2012 amended tax return Cash method. 2012 amended tax return Under the cash method, you report income in the tax year you receive it. 2012 amended tax return You usually deduct or capitalize expenses in the tax year you pay them. 2012 amended tax return Accrual method. 2012 amended tax return Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. 2012 amended tax return You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. 2012 amended tax return For other methods, see Publication 538. 2012 amended tax return If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. 2012 amended tax return Inventories include goods held for sale in the normal course of business. 2012 amended tax return They also include raw materials and supplies that will physically become a part of merchandise intended for sale. 2012 amended tax return Inventories are explained in Publication 538. 2012 amended tax return Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. 2012 amended tax return For more information, see Publication 538. 2012 amended tax return You must use the same accounting method to figure your taxable income and to keep your books. 2012 amended tax return Also, you must use an accounting method that clearly shows your income. 2012 amended tax return In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. 2012 amended tax return An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. 2012 amended tax return More than one business. 2012 amended tax return   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. 2012 amended tax return You must keep a complete and separate set of books and records for each business. 2012 amended tax return Changing your method of accounting. 2012 amended tax return   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. 2012 amended tax return A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. 2012 amended tax return For examples of changes that require approval and information on how to get approval for the change, see Publication 538. 2012 amended tax return Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. 2012 amended tax return The following are the four general kinds of business taxes. 2012 amended tax return Income tax. 2012 amended tax return Self-employment tax. 2012 amended tax return Employment taxes. 2012 amended tax return Excise taxes. 2012 amended tax return See Table 2 for the forms you file to report these taxes. 2012 amended tax return You may want to get Publication 509. 2012 amended tax return It has tax calendars that tell you when to file returns and make tax payments. 2012 amended tax return Income Tax All businesses except partnerships must file an annual income tax return. 2012 amended tax return Partnerships file an information return. 2012 amended tax return Which form you use depends on how your business is organized. 2012 amended tax return See Table 2 to find out which return you have to file. 2012 amended tax return The federal income tax is a pay-as-you-go tax. 2012 amended tax return You must pay the tax as you earn or receive income during the year. 2012 amended tax return An employee usually has income tax withheld from his or her pay. 2012 amended tax return If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. 2012 amended tax return If you are not required to make estimated tax payments, you may pay any tax due when you file your return. 2012 amended tax return Table 2. 2012 amended tax return Which Forms Must I File? IF you are a. 2012 amended tax return . 2012 amended tax return . 2012 amended tax return   THEN you may be liable for. 2012 amended tax return . 2012 amended tax return . 2012 amended tax return   Use Form. 2012 amended tax return . 2012 amended tax return . 2012 amended tax return Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. 2012 amended tax return 2 Various other schedules may be needed. 2012 amended tax return Estimated tax. 2012 amended tax return   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. 2012 amended tax return Sole proprietors, partners, and S corporation shareholders. 2012 amended tax return   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. 2012 amended tax return Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. 2012 amended tax return For more information, see Publication 505, Tax Withholding and Estimated Tax. 2012 amended tax return Corporations. 2012 amended tax return   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. 2012 amended tax return Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. 2012 amended tax return You must deposit the payments as explained later under Depositing Taxes. 2012 amended tax return For more information, see Publication 542. 2012 amended tax return Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. 2012 amended tax return Your payments of SE tax contribute to your coverage under the social security system. 2012 amended tax return Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. 2012 amended tax return You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. 2012 amended tax return Your net earnings from self-employment were $400 or more. 2012 amended tax return You had church employee income of $108. 2012 amended tax return 28 or more. 2012 amended tax return Use Schedule SE (Form 1040) to figure your SE tax. 2012 amended tax return For more information, see Publication 334, Tax Guide for Small Business. 2012 amended tax return You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. 2012 amended tax return The Social Security Administration (SSA) time limit for posting self-employment income. 2012 amended tax return   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. 2012 amended tax return If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. 2012 amended tax return The SSA will not change its records to increase your self-employment income. 2012 amended tax return Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. 2012 amended tax return Employment taxes include the following. 2012 amended tax return Social security and Medicare taxes. 2012 amended tax return Federal income tax withholding. 2012 amended tax return Federal unemployment (FUTA) tax. 2012 amended tax return If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. 2012 amended tax return If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. 2012 amended tax return These publications explain your tax responsibilities as an employer. 2012 amended tax return If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. 2012 amended tax return That publication has information to help you determine whether an individual is an employee or an independent contractor. 2012 amended tax return If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. 2012 amended tax return An independent contractor is someone who is self-employed. 2012 amended tax return Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. 2012 amended tax return Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. 2012 amended tax return To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. 2012 amended tax return Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). 2012 amended tax return Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. 2012 amended tax return Medicare tax pays for benefits under the hospital insurance part of FICA. 2012 amended tax return You withhold part of these taxes from your employee's wages and you pay a part yourself. 2012 amended tax return To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. 2012 amended tax return Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. 2012 amended tax return (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. 2012 amended tax return ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. 2012 amended tax return You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. 2012 amended tax return You pay FUTA tax only from your own funds. 2012 amended tax return Employees do not pay this tax or have it withheld from their pay. 2012 amended tax return Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. 2012 amended tax return See Publication 15 to find out if you can use this form. 2012 amended tax return Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. 2012 amended tax return Form I-9. 2012 amended tax return   You must verify that each new employee is legally eligible to work in the United States. 2012 amended tax return Both you and the employee must complete the U. 2012 amended tax return S. 2012 amended tax return Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. 2012 amended tax return You can get the form from USCIS offices or from the USCIS website at www. 2012 amended tax return uscis. 2012 amended tax return gov. 2012 amended tax return Call the USCIS at 1-800-375-5283 for more information about your responsibilities. 2012 amended tax return Form W-4. 2012 amended tax return   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. 2012 amended tax return You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. 2012 amended tax return For more information, see Publication 15. 2012 amended tax return Employees claiming more than 10 withholding allowances. 2012 amended tax return   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. 2012 amended tax return See section 16 of Publication 15. 2012 amended tax return Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. 2012 amended tax return You must also send copies to the Social Security Administration. 2012 amended tax return See Information Returns, later, for more information on Form W-2. 2012 amended tax return Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. 2012 amended tax return Manufacture or sell certain products. 2012 amended tax return Operate certain kinds of businesses. 2012 amended tax return Use various kinds of equipment, facilities, or products. 2012 amended tax return Receive payment for certain services. 2012 amended tax return For more information on excise taxes, see Publication 510, Excise Taxes. 2012 amended tax return Form 720. 2012 amended tax return   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. 2012 amended tax return Environmental taxes. 2012 amended tax return Communications and air transportation taxes. 2012 amended tax return Fuel taxes. 2012 amended tax return Tax on the first retail sale of heavy trucks, trailers, and tractors. 2012 amended tax return Manufacturers taxes on the sale or use of a variety of different articles. 2012 amended tax return Form 2290. 2012 amended tax return   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. 2012 amended tax return The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. 2012 amended tax return Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. 2012 amended tax return For more information, see the instructions for Form 2290. 2012 amended tax return Form 730. 2012 amended tax return   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. 2012 amended tax return Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. 2012 amended tax return Form 11-C. 2012 amended tax return   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. 2012 amended tax return Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. 2012 amended tax return Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). 2012 amended tax return Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. 2012 amended tax return Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. 2012 amended tax return Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. 2012 amended tax return The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. 2012 amended tax return You must give a copy of each information return you are required to file to the recipient or payer. 2012 amended tax return In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. 2012 amended tax return For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. 2012 amended tax return Form 1099-MISC. 2012 amended tax return   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. 2012 amended tax return These payments include the following items. 2012 amended tax return Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. 2012 amended tax return Rent payments of $600 or more, other than rents paid to real estate agents. 2012 amended tax return Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. 2012 amended tax return Royalty payments of $10 or more. 2012 amended tax return Payments to certain crew members by operators of fishing boats. 2012 amended tax return You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. 2012 amended tax return Form W-2. 2012 amended tax return   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. 2012 amended tax return For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. 2012 amended tax return Form 8300. 2012 amended tax return   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. 2012 amended tax return Cash includes U. 2012 amended tax return S. 2012 amended tax return and foreign coin and currency. 2012 amended tax return It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. 2012 amended tax return For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). 2012 amended tax return Penalties The law provides penalties for not filing returns or paying taxes as required. 2012 amended tax return Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. 2012 amended tax return Failure to file tax returns. 2012 amended tax return   If you do not file your tax return by the due date, you may have to pay a penalty. 2012 amended tax return The penalty is based on the tax not paid by the due date. 2012 amended tax return See your tax return instructions for more information about this penalty. 2012 amended tax return Failure to pay tax. 2012 amended tax return   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. 2012 amended tax return For more information, see your tax return instructions. 2012 amended tax return Failure to withhold, deposit, or pay taxes. 2012 amended tax return   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. 2012 amended tax return You may also be subject to penalties if you deposit the taxes late. 2012 amended tax return For more information, see Publication 15. 2012 amended tax return Failure to follow information reporting requirements. 2012 amended tax return   The following penalties apply if you are required to file information returns. 2012 amended tax return For more information, see the General Instructions for Certain Information Returns. 2012 amended tax return Failure to file information returns. 2012 amended tax return A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. 2012 amended tax return Failure to furnish correct payee statements. 2012 amended tax return A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. 2012 amended tax return Waiver of penalty. 2012 amended tax return   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. 2012 amended tax return   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. 2012 amended tax return (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. 2012 amended tax return ) Failure to supply taxpayer identification number. 2012 amended tax return   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. 2012 amended tax return You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. 2012 amended tax return Business Expenses You can deduct business expenses on your income tax return. 2012 amended tax return These are the current operating costs of running your business. 2012 amended tax return To be deductible, a business expense must be both ordinary and necessary. 2012 amended tax return An ordinary expense is one that is common and accepted in your field of business, trade, or profession. 2012 amended tax return A necessary expense is one that is helpful and appropriate for your business, trade, or profession. 2012 amended tax return An expense does not have to be indispensable to be considered necessary. 2012 amended tax return The following are brief explanations of some expenses that are of interest to people starting a business. 2012 amended tax return There are many other expenses that you may be able to deduct. 2012 amended tax return See your form instructions and Publication 535, Business Expenses. 2012 amended tax return Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. 2012 amended tax return Your business start-up costs will depend on the type of business you are starting. 2012 amended tax return They may include costs for advertising, travel, surveys, and training. 2012 amended tax return These costs are generally capital expenses. 2012 amended tax return You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). 2012 amended tax return You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. 2012 amended tax return The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. 2012 amended tax return Any remaining cost must be amortized. 2012 amended tax return For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. 2012 amended tax return Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. 2012 amended tax return You must spread the cost over more than one tax year and deduct part of it each year. 2012 amended tax return This method of deducting the cost of business property is called depreciation. 2012 amended tax return Business property you must depreciate includes the following items. 2012 amended tax return Office furniture. 2012 amended tax return Buildings. 2012 amended tax return Machinery and equipment. 2012 amended tax return You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. 2012 amended tax return This deduction is known as the “section 179 deduction. 2012 amended tax return ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. 2012 amended tax return Depreciation must be taken in the year it is allowable. 2012 amended tax return Allowable depreciation not taken in a prior year cannot be taken in the current year. 2012 amended tax return If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. 2012 amended tax return S. 2012 amended tax return Individual Income Tax Return, or by changing your accounting method. 2012 amended tax return For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. 2012 amended tax return Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. 2012 amended tax return Even then, your deduction may be limited. 2012 amended tax return To qualify to claim expenses for business use of your home, you must meet both the following tests. 2012 amended tax return Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. 2012 amended tax return Exclusive use. 2012 amended tax return   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 2012 amended tax return The area used for business can be a room or other separately identifiable space. 2012 amended tax return The space does not need to be marked off by a permanent partition. 2012 amended tax return   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. 2012 amended tax return Exceptions to exclusive use. 2012 amended tax return   You do not have to meet the exclusive use test if either of the following applies. 2012 amended tax return You use part of your home for the storage of inventory or product samples. 2012 amended tax return You use part of your home as a daycare facility. 2012 amended tax return For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). 2012 amended tax return Principal place of business. 2012 amended tax return   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. 2012 amended tax return You use it exclusively and regularly for administrative or management activities of your trade or business. 2012 amended tax return You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2012 amended tax return   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. 2012 amended tax return The relative importance of the activities performed at each location. 2012 amended tax return If the relative importance factor does not determine your principal place of business, the time spent at each location. 2012 amended tax return    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 2012 amended tax return However, for other ways to qualify to deduct home office expenses, see Publication 587. 2012 amended tax return Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. 2012 amended tax return If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. 2012 amended tax return More information. 2012 amended tax return   For more information about business use of your home, see Publication 587. 2012 amended tax return Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. 2012 amended tax return You generally can deduct either your actual expenses or the standard mileage rate. 2012 amended tax return Actual expenses. 2012 amended tax return   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. 2012 amended tax return You can divide your expenses based on the miles driven for each purpose. 2012 amended tax return Example. 2012 amended tax return You are the sole proprietor of a flower shop. 2012 amended tax return You drove your van 20,000 miles during the year. 2012 amended tax return 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. 2012 amended tax return You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. 2012 amended tax return Standard mileage rate. 2012 amended tax return   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. 2012 amended tax return You can use the standard mileage rate for a vehicle you own or lease. 2012 amended tax return The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. 2012 amended tax return It is announced annually by the IRS. 2012 amended tax return To figure your deduction, multiply your business miles by the standard mileage rate for the year. 2012 amended tax return    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. 2012 amended tax return However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. 2012 amended tax return Choosing the standard mileage rate. 2012 amended tax return   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. 2012 amended tax return In later years, you can choose to use either the standard mileage rate or actual expenses. 2012 amended tax return   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). 2012 amended tax return Additional information. 2012 amended tax return   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 2012 amended tax return Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. 2012 amended tax return It also explains how long you must keep your records for federal tax purposes. 2012 amended tax return A sample recordkeeping system is illustrated at the end of this part. 2012 amended tax return Why Keep Records? Everyone in business must keep records. 2012 amended tax return Good records will help you do the following. 2012 amended tax return Monitor the progress of your business. 2012 amended tax return   You need good records to monitor the progress of your business. 2012 amended tax return Records can show whether your business is improving, which items are selling, or what changes you need to make. 2012 amended tax return Good records can increase the likelihood of business success. 2012 amended tax return Prepare your financial statements. 2012 amended tax return   You need good records to prepare accurate financial statements. 2012 amended tax return These include income (profit and loss) statements and balance sheets. 2012 amended tax return These statements can help you in dealing with your bank or creditors and help you manage your business. 2012 amended tax return An income statement shows the income and expenses of the business for a given period of time. 2012 amended tax return A balance sheet shows the assets, liabilities, and your equity in the business on a given date. 2012 amended tax return Identify source of receipts. 2012 amended tax return   You will receive money or property from many sources. 2012 amended tax return Your records can identify the source of your receipts. 2012 amended tax return You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. 2012 amended tax return Keep track of deductible expenses. 2012 amended tax return   You may forget expenses when you prepare your tax return unless you record them when they occur. 2012 amended tax return Prepare your tax returns. 2012 amended tax return   You need good records to prepare your tax returns. 2012 amended tax return These records must support the income, expenses, and credits you report. 2012 amended tax return Generally, these are the same records you use to monitor your business and prepare your financial statements. 2012 amended tax return Support items reported on tax returns. 2012 amended tax return   You must keep your business records available at all times for inspection by the IRS. 2012 amended tax return If the IRS examines any of your tax returns, you may be asked to explain the items reported. 2012 amended tax return A complete set of records will speed up the examination. 2012 amended tax return Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. 2012 amended tax return You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. 2012 amended tax return The business you are in affects the type of records you need to keep for federal tax purposes. 2012 amended tax return You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. 2012 amended tax return See Accounting Method, earlier. 2012 amended tax return If you are in more than one business, you should keep a complete and separate set of records for each business. 2012 amended tax return A corporation should keep minutes of board of directors' meetings. 2012 amended tax return Your recordkeeping system should include a summary of your business transactions. 2012 amended tax return This summary is ordinarily made in your books (for example, accounting journals and ledgers). 2012 amended tax return Your books must show your gross income, as well as your deductions and credits. 2012 amended tax return For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. 2012 amended tax return In addition, you must keep supporting documents, explained later. 2012 amended tax return Electronic records. 2012 amended tax return   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. 2012 amended tax return When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. 2012 amended tax return An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. 2012 amended tax return The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. 2012 amended tax return All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. 2012 amended tax return Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. 2012 amended tax return   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. 2012 amended tax return You still have the responsibility of retaining any other books and records that are required to be retained. 2012 amended tax return   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. 2012 amended tax return This test is not considered an examination and the results must be shared with you. 2012 amended tax return If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. 2012 amended tax return If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. 2012 amended tax return For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. 2012 amended tax return Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. 2012 amended tax return Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. 2012 amended tax return These documents contain information you need to record in your books. 2012 amended tax return It is important to keep these documents because they support the entries in your books and on your tax return. 2012 amended tax return Keep them in an orderly fashion and in a safe place. 2012 amended tax return For instance, organize them by year and type of income or expense. 2012 amended tax return Gross receipts. 2012 amended tax return   Gross receipts are the income you receive from your business. 2012 amended tax return You should keep supporting documents that show the amounts and sources of your gross receipts. 2012 amended tax return Documents that show gross receipts include the following. 2012 amended tax return Cash register tapes. 2012 amended tax return Bank deposit slips. 2012 amended tax return Receipt books. 2012 amended tax return Invoices. 2012 amended tax return Credit card charge slips. 2012 amended tax return Forms 1099-MISC. 2012 amended tax return Purchases. 2012 amended tax return   Purchases are the items you buy and resell to customers. 2012 amended tax return If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. 2012 amended tax return Your supporting documents should show the amount paid and that the amount was for purchases. 2012 amended tax return Documents for purchases include the following. 2012 amended tax return Canceled checks. 2012 amended tax return Cash register tape receipts. 2012 amended tax return Credit card sales slips. 2012 amended tax return Invoices. 2012 amended tax return These records will help you determine the value of your inventory at the end of the year. 2012 amended tax return See Publication 538 for information on methods for valuing inventory. 2012 amended tax return Expenses. 2012 amended tax return   Expenses are the costs you incur (other than purchases) to carry on your business. 2012 amended tax return Your supporting documents should show the amount paid and that the amount was for a business expense. 2012 amended tax return Documents for expenses include the following. 2012 amended tax return Canceled checks. 2012 amended tax return Cash register tapes. 2012 amended tax return Account statements. 2012 amended tax return Credit card sales slips. 2012 amended tax return Invoices. 2012 amended tax return Petty cash slips for small cash payments. 2012 amended tax return    A petty cash fund allows you to make small payments without having to write checks for small amounts. 2012 amended tax return Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. 2012 amended tax return Travel, transportation, entertainment, and gift expenses. 2012 amended tax return   Specific recordkeeping rules apply to these expenses. 2012 amended tax return For more information, see Publication 463. 2012 amended tax return Employment taxes. 2012 amended tax return   There are specific employment tax records you must keep. 2012 amended tax return For a list, see Publication 15. 2012 amended tax return Assets. 2012 amended tax return   Assets are the property, such as machinery and furniture you own and use in your business. 2012 amended tax return You must keep records to verify certain information about your business assets. 2012 amended tax return You need records to figure the annual depreciation and the gain or loss when you sell the assets. 2012 amended tax return Your records should show the following information. 2012 amended tax return When and how you acquired the asset. 2012 amended tax return Purchase price. 2012 amended tax return Cost of any improvements. 2012 amended tax return Section 179 deduction taken. 2012 amended tax return Deductions taken for depreciation. 2012 amended tax return Deductions taken for casualty losses, such as losses resulting from fires or storms. 2012 amended tax return How you used the asset. 2012 amended tax return When and how you disposed of the asset. 2012 amended tax return Selling price. 2012 amended tax return Expenses of sale. 2012 amended tax return   The following documents may show this information. 2012 amended tax return Purchase and sales invoices. 2012 amended tax return Real estate closing statements. 2012 amended tax return Canceled checks. 2012 amended tax return What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. 2012 amended tax return These include account statements prepared for the financial institution by a third party. 2012 amended tax return These account statements must be highly legible. 2012 amended tax return The following table lists acceptable account statements. 2012 amended tax return  IF payment is by. 2012 amended tax return . 2012 amended tax return . 2012 amended tax return THEN the statement must show the. 2012 amended tax return . 2012 amended tax return . 2012 amended tax return Check Check number. 2012 amended tax return Amount. 2012 amended tax return Payee's name. 2012 amended tax return Date the check amount was posted to the account by the financial institution. 2012 amended tax return Electronic funds transfer Amount transferred. 2012 amended tax return Payee's name. 2012 amended tax return Date the transfer was posted to the account by the financial institution. 2012 amended tax return Credit card Amount charged. 2012 amended tax return Payee's name. 2012 amended tax return Transaction date. 2012 amended tax return    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. 2012 amended tax return You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. 2012 amended tax return Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. 2012 amended tax return (Your business transactions are shown on the supporting documents just discussed. 2012 amended tax return ) Business transactions are ordinarily summarized in books called journals and ledgers. 2012 amended tax return You can buy them at your local stationery or office supply store. 2012 amended tax return A journal is a book where you record each business transaction shown on your supporting documents. 2012 amended tax return You may have to keep separate journals for transactions that occur frequently. 2012 amended tax return A ledger is a book that contains the totals from all of your journals. 2012 amended tax return It is organized into different accounts. 2012 amended tax return Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. 2012 amended tax return For example, a recordkeeping system for a small business might include the following items. 2012 amended tax return Business checkbook. 2012 amended tax return Daily summary of cash receipts. 2012 amended tax return Monthly summary of cash receipts. 2012 amended tax return Check disbursements journal. 2012 amended tax return Depreciation worksheet. 2012 amended tax return Employee compensation record. 2012 amended tax return The business checkbook is explained next. 2012 amended tax return The other items are illustrated later under Sample Record System. 2012 amended tax return The system you use to record business transactions will be more effective if you follow good recordkeeping practices. 2012 amended tax return For example, record expenses when they occur, and identify the source of recorded receipts. 2012 amended tax return Generally, it is best to record transactions on a daily basis. 2012 amended tax return Business checkbook. 2012 amended tax return   One of the first things you should do when you start a business is open a business checking account. 2012 amended tax return You should keep your business account separate from your personal checking account. 2012 amended tax return   The business checkbook is your basic source of information for recording your business expenses. 2012 amended tax return You should deposit all daily receipts in your business checking account. 2012 amended tax return You should check your account for errors by reconciling it. 2012 amended tax return See Reconciling the checking account, later. 2012 amended tax return   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. 2012 amended tax return You should also note on the deposit slip the source of the deposit and keep copies of all slips. 2012 amended tax return   You should make all payments by check to document business expenses. 2012 amended tax return Write checks payable to yourself only when making withdrawals from your business for personal use. 2012 amended tax return Avoid writing checks payable to cash. 2012 amended tax return If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. 2012 amended tax return If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. 2012 amended tax return    Use the business account for business purposes only. 2012 amended tax return Indicate the source of deposits and the type of expense in the checkbook. 2012 amended tax return Reconciling the checking account. 2012 amended tax return   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. 2012 amended tax return The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. 2012 amended tax return   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. 2012 amended tax return    You should reconcile your checking account each month. 2012 amended tax return     Before you reconcile your monthly bank statement, check your own figures. 2012 amended tax return Begin with the balance shown in your checkbook at the end of the previous month. 2012 amended tax return To this balance, add the total cash deposited during the month and subtract the total cash disbursements. 2012 amended tax return   After checking your figures, the result should agree with your checkbook balance at the end of the month. 2012 amended tax return If the result does not agree, you may have made an error in recording a check or deposit. 2012 amended tax return You can find the error by doing the following. 2012 amended tax return Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. 2012 amended tax return If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. 2012 amended tax return Adding the deposit amounts in your checkbook. 2012 amended tax return Compare that total with the monthly total in your cash receipt book, if you have one. 2012 amended tax return If the totals do not agree, check the individual amounts to find any errors. 2012 amended tax return   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. 2012 amended tax return   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. 2012 amended tax return Many banks print a reconciliation worksheet on the back of the statement. 2012 amended tax return   To reconcile your account, follow these steps. 2012 amended tax return Compare the deposits listed on the bank statement with the deposits shown in your checkbook. 2012 amended tax return Note all differences in the dollar amounts. 2012 amended tax return Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. 2012 amended tax return Note all differences in the dollar amounts. 2012 amended tax return Mark the check number in the checkbook as having cleared the bank. 2012 amended tax return After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. 2012 amended tax return Prepare a bank reconciliation. 2012 amended tax return One is illustrated later under Sample Record System. 2012 amended tax return Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. 2012 amended tax return At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. 2012 amended tax return If you still have differences, check the previous steps to find the errors. 2012 amended tax return   Table 3. 2012 amended tax return Period of Limitations IF you. 2012 amended tax return . 2012 amended tax return . 2012 amended tax return   THEN the period is. 2012 amended tax return . 2012 amended tax return . 2012 amended tax return 1. 2012 amended tax return Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. 2012 amended tax return Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. 2012 amended tax return File a fraudulent return   Not limited 4. 2012 amended tax return Do not file a return   Not limited 5. 2012 amended tax return File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. 2012 amended tax return File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. 2012 amended tax return The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. 2012 amended tax return You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. 2012 amended tax return Single-entry. 2012 amended tax return   A single-entry system is based on the income statement (profit or loss statement). 2012 amended tax return It can be a simple and practical system if you are starting a small business. 2012 amended tax return The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. 2012 amended tax return Double-entry. 2012 amended tax return   A double-entry bookkeeping system uses journals and ledgers. 2012 amended tax return Transactions are first entered in a journal and then posted to ledger accounts. 2012 amended tax return These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). 2012 amended tax return You close income and expense accounts at the end of each tax year. 2012 amended tax return You keep asset, liability, and net worth accounts open on a permanent basis. 2012 amended tax return   In the double-entry system, each account has a left side for debits and a right side for credits. 2012 amended tax return It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. 2012 amended tax return   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. 2012 amended tax return If the amounts do not balance, you have made an error and you must find and correct it. 2012 amended tax return   An example of a journal entry exhibiting a payment of rent in October is shown next. 2012 amended tax return General Journal Date Description of Entry Debit  Credit Oct. 2012 amended tax return 5 Rent expense 780. 2012 amended tax return 00     Cash   780. 2012 amended tax return 00                 Computerized System There are computer software packages you can use for recordkeeping. 2012 amended tax return They can be purchased in many retail stores. 2012 amended tax return These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. 2012 amended tax return If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. 2012 amended tax return To meet this qualification, the machine-sensible records must reconcile with your books and return. 2012 amended tax return These records must provide enough detail to identify the underlying source documents. 2012 amended tax return You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. 2012 amended tax return This documentation must be sufficiently detailed to show all of the following items. 2012 amended tax return Functions being performed as the data flows through the system. 2012 amended tax return Controls used to ensure accurate and reliable processing. 2012 amended tax return Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. 2012 amended tax return Charts of accounts and detailed account descriptions. 2012 amended tax return See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. 2012 amended tax return How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. 2012 amended tax return Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. 2012 amended tax return The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. 2012 amended tax return Table 3 contains the periods of limitations that apply to income tax returns. 2012 amended tax return Unless otherwise stated, the years refer to the period after the return was filed. 2012 amended tax return Returns filed before the due date are treated as filed on the due date. 2012 amended tax return Keep copies of your filed tax returns. 2012 amended tax return They help in preparing future tax returns and making computations if you file an amended return. 2012 amended tax return Employment taxes. 2012 amended tax return   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. 2012 amended tax return For more information about recordkeeping for employment taxes, see Publication 15. 2012 amended tax return Assets. 2012 amended tax return   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. 2012 amended tax return You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. 2012 amended tax return   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. 2012 amended tax return You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. 2012 amended tax return Records for nontax purposes. 2012 amended tax return   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. 2012 amended tax return For example, your insurance company or creditors may require you to keep them longer than the IRS does. 2012 amended tax return Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. 2012 amended tax return Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. 2012 amended tax return These sample records should not be viewed as a recommendation of how to keep your records. 2012 amended tax return They are intended only to show how one business keeps its records. 2012 amended tax return 1. 2012 amended tax return Daily Summary of Cash Receipts This summary is a record of cash sales for the day. 2012 amended tax return It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. 2012 amended tax return Henry takes the cash sales entry from his cash register tape. 2012 amended tax return If he had no cash register, he would simply total his cash sale slips and any other cash received that day. 2012 amended tax return He carries the total receipts shown in this summary for January 3 ($267. 2012 amended tax return 80), including cash sales ($263. 2012 amended tax return 60) and sales tax ($4. 2012 amended tax return 20), to the Monthly Summary of Cash Receipts. 2012 amended tax return Petty cash fund. 2012 amended tax return   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. 2012 amended tax return Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. 2012 amended tax return He sets up a fixed amount ($50) in his petty cash fund. 2012 amended tax return The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. 2012 amended tax return When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. 2012 amended tax return (See the Check Disbursements Journal entry for check number 92. 2012 amended tax return ) This restores the fund to its fixed amount of $50. 2012 amended tax return He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. 2012 amended tax return 2. 2012 amended tax return Monthly Summary of Cash Receipts This shows the income activity for the month. 2012 amended tax return Henry carries the total monthly net sales shown in this summary for January ($4,865. 2012 amended tax return 05) to his Annual Summary. 2012 amended tax return To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. 2012 amended tax return He cannot take a deduction for sales tax turned over to the state because he only collected the tax. 2012 amended tax return He does not include the tax in his income. 2012 amended tax return 3. 2012 amended tax return Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. 2012 amended tax return All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. 2012 amended tax return Frequent expenses have their own headings across the sheet. 2012 amended tax return He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. 2012 amended tax return Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. 2012 amended tax return Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. 2012 amended tax return If he did, he would record them in the journal, even though he could not deduct them as business expenses. 2012 amended tax return Henry carries the January total of expenses for materials ($1,083. 2012 amended tax return 50) to the Annual Summary. 2012 amended tax return Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. 2012 amended tax return , in the appropriate columns of that summary. 2012 amended tax return 4. 2012 amended tax return Employee Compensation Record This record shows the following information. 2012 amended tax return The number of hours Henry's employee worked in a pay period. 2012 amended tax return The employee's total pay for the period. 2012 amended tax return The deductions Henry withheld in figuring the employee's net pay. 2012 amended tax return The monthly gross payroll. 2012 amended tax return Henry carries the January gross payroll ($520) to the Annual Summary. 2012 amended tax return 5. 2012 amended tax return Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. 2012 amended tax return He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. 2012 amended tax return He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. 2012 amended tax return As in the journal, he keeps each major expense in a separate column. 2012 amended tax return Henry carries the cash receipts total shown in the annual summary ($47,440. 2012 amended tax return 9