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File Federal And State Taxes

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File Federal And State Taxes

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