File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Free State Tax File

Do Unemployed People File TaxesWww Irs GovlefileMyfreetaxes Com TucsonHow Do I Refile My Taxes1040 Ez OnlineIrs Free FileHow Can I File 2012 TaxesH&r Block Free Tax Prep2011 Tax Returns2010 Tax Forms 1040 Ez2011 Federal Tax FormsIrs E FilePrintable 1040ez Forms1040ez 2012Free Tax FiingTax Forms 1040xFree File State ReturnH&r Block Online2012 Free Taxes OnlineAmending Tax Return OnlineHow To Amend Tax Return 2013Filing 2011 Tax ReturnCan I Still File My 2010 Taxes OnlineTax Rates And TablesFree State Tax Filing 2014Full Time Student Filing TaxesState Tax Return FormsFree File Fillable FormsIrs 1040 Ez Form 20112011 Form 1040File Tax Extension OnlineH&r Block Tax ReturnIrs Gov Form1040xFederal Income Tax FormsIrs 1040x Amended ReturnFiling Taxes Military1040 Ez Tax Form 2011Where To File 2011 Tax ReturnFile Amended Tax ReturnH&r Block Free File 2012

Free State Tax File

Free state tax file Publication 970 - Additional Material Table of Contents AppendicesAppendix A. Free state tax file Illustrated Example of Education Credits Glossary Appendices The following appendices are provided to help you claim the education benefits that will give you the lowest tax. Free state tax file Appendix A—An illustrated example of education credits, including a filled-in Form 8863 showing how to claim both the American opportunity credit and lifetime learning credit for 2013. Free state tax file Appendix B—A chart summarizing some of the major differences between the education tax benefits discussed in this publication. Free state tax file It is intended only as a guide. Free state tax file Look in this publication for more complete information. Free state tax file   Appendix A. Free state tax file Illustrated Example of Education Credits Dave and Valerie Jones are married and on their 2013 joint tax return they claim exemptions for their two dependent children, Sean (age 21, social security number: 000-00-0001) and Carey (age 18, social security number: 000–00–0002). Free state tax file Their modified adjusted gross income (MAGI) on Form 1040, line 38 is $110,000. Free state tax file Because Dave and Valerie have unusually high itemized deductions, their taxable income is $10,000 and their tax before credits is $1,000. Free state tax file Sean enrolled as a full-time graduate student in August 2013 at California State College. Free state tax file He graduated with his bachelor's degree in 2012 and did not attend school from January 2013 through July 2013. Free state tax file His parents claimed the Hope Scholarship Credit for Sean for 2008 and the American opportunity credit for Sean for 2010, 2011, and 2012. Free state tax file Carey enrolled full time as a freshman at the same college in January 2013 to begin working on her bachelor's degree. Free state tax file In 2013, Dave and Valerie paid $7,000 in tuition for Sean and $8,500 in tuition for Carey. Free state tax file California State College issued two Forms 1098-T, one for Sean and one for Carey, and sent them to the Joneses' residence. Free state tax file California State College reports amounts billed in 2013 instead of amounts paid during 2013. Free state tax file In completing Form 8863, the Joneses use the amounts they paid. Free state tax file Neither Sean nor Carey has been convicted of a felony for possession or distribution of a controlled substance before the end of 2013. Free state tax file Dave and Valerie figure their education credits by completing Form 8863. Free state tax file They begin Form 8863 on page 2 before completing Part I on page 1. Free state tax file Because the Joneses have two eligible students, they will complete page 2 twice, once for their son, Sean, and once for their daughter, Carey. Free state tax file The Joneses decide to complete Part III for Carey first, as shown later. Free state tax file They carry over the amount of $2,500 entered on Part III, line 30, to Part I, line 1. Free state tax file The Joneses complete a separate Part III for their son Sean. Free state tax file They check the “Yes” box on line 23, determine that Sean is not eligible for the American opportunity credit, and go to line 31 as instructed. Free state tax file They figure their line 31 adjusted qualified education expenses for Sean to be $7,000. Free state tax file Once they have completed Part III for each student, they figure their credits. Free state tax file The Joneses figure their refundable American opportunity credit of $1,000 by completing Form 8863, Part I, lines 1 through 8. Free state tax file They enter the amount from line 8, $1,000, on line 66 of their Form 1040. Free state tax file The Joneses enter $7,000 on Part II, line 10, of Form 8863 and figure their tentative lifetime learning credit for 2013 to be $1,400 (line 12). Free state tax file They cannot claim the full amount because their MAGI of $110,000 is greater than $107,000. Free state tax file They enter the reduced amount of $1,190 (figured on Part II, line 18) on the Credit Limit Worksheet, line 1. Free state tax file The $1,190 is added to their nonrefundable American opportunity credit ($1,500 on line 2 of the Credit Limit Worksheet) for a total nonrefundable credit of $2,690. Free state tax file The Joneses enter $1,000 on line 7 of the Credit Limit Worksheet, which is the smaller of their tax from line 46 of their Form 1040 (which is $1,000) or the $2,690 on line 3 of the Credit Limit Worksheet. Free state tax file They enter $1,000 on line 19, Part II of Form 8863 and on line 49 of Form 1040. Free state tax file This image is too large to be displayed in the current screen. Free state tax file Please click the link to view the image. Free state tax file Form 1098-T Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions) 1. Free state tax file Total qualified education expenses paid for or on behalf of the student in 2013 for the academic period 8,500 2. Free state tax file Less adjustments:     a. Free state tax file Tax-free educational assistance received in 2013 allocable to the academic period   0     b. Free state tax file Tax-free educational assistance received in 2014 (and before you file your 2013 tax return) allocable to the academic period   0     c. Free state tax file Refunds of qualified education expenses paid in 2013 if the refund is received in 2013 or in 2014 before you file your 2013 tax return   0   3. Free state tax file Total adjustments (add lines 2a, 2b, and 2c) 0 4. Free state tax file Adjusted qualified education expenses. Free state tax file Subtract line 3 from line 1. Free state tax file If zero or less, enter -0- 8,500 This image is too large to be displayed in the current screen. Free state tax file Please click the link to view the image. Free state tax file Form 1098-T Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions) 1. Free state tax file Total qualified education expenses paid for or on behalf of the student in 2013 for the academic period 7,000 2. Free state tax file Less adjustments:     a. Free state tax file Tax-free educational assistance received in 2013 allocable to the academic period   0     b. Free state tax file Tax-free educational assistance received in 2014 (and before you file your 2013 tax return) allocable to the academic period   0     c. Free state tax file Refunds of qualified education expenses paid in 2013 if the refund is received in 2013 or in 2014 before you file your 2013 tax return   0   3. Free state tax file Total adjustments (add lines 2a, 2b, and 2c) 0 4. Free state tax file Adjusted qualified education expenses. Free state tax file Subtract line 3 from line 1. Free state tax file If zero or less, enter -0- 7,000 Credit Limit Worksheet (Form 8863 instructions) Nonrefundable Credit Worksheet 1. Free state tax file Enter the amount from Form 8863, line 18 1. Free state tax file 1,190 2. Free state tax file Enter the amount from Form 8863, line 9 2. Free state tax file 1,500 3. Free state tax file Add lines 1 and 2 3. Free state tax file 2,690 4. Free state tax file Enter the amount from: Form 1040, line 46; or Form 1040A, line 28 4. Free state tax file 1,000 5. Free state tax file Enter the amount from either: Form 1040, lines 47 and 48, and the amount from Schedule R included on Form 1040, line 53; or Form 1040A, lines 29 and 30 5. Free state tax file 0 6. Free state tax file Subtract line 5 from line 4 6. Free state tax file 1,000 7. Free state tax file   Enter the smaller of line 3 or line 6 here and on Form 8863, line 19 7. Free state tax file 1,000 This image is too large to be displayed in the current screen. Free state tax file Please click the link to view the image. Free state tax file Form 8863 for Dave and Valerie Jones This image is too large to be displayed in the current screen. Free state tax file Please click the link to view the image. Free state tax file Carey Jones page 2 This image is too large to be displayed in the current screen. Free state tax file Please click the link to view the image. Free state tax file Filled-in Form 8863 Jones page 2 Appendix B. Free state tax file Highlights of Education Tax Benefits for Tax Year 2013 This chart highlights some differences among the benefits discussed in this publication. Free state tax file See the text for definitions and details. Free state tax file Do not rely on this chart alone. Free state tax file    Caution:You generally cannot claim more than one benefit for the same education expense. Free state tax file   Scholarships,  Fellowships, Grants, and  Tuition  Reductions American Opportunity Credit Lifetime Learning Credit Student Loan Interest Deduction Tuition and Fees Deduction Coverdell ESA† Qualified Tuition Program (QTP)† Education Exception to Additional Tax on Early IRA Distributions† Education Savings Bond Program† Employer- Provided Educational Assistance† Business Deduction for Work-Related Education What is your  benefit? Amounts received may not be taxable   Credits can reduce the amount of tax you have to pay. Free state tax file    40% of the credit may be refundable (limited to $1,000 per student). Free state tax file Credits can reduce amount of tax you must pay Can deduct interest paid Can deduct expenses Earnings not  taxed Earnings not taxed No 10%  additional tax on early distribution Interest not taxed Employer benefits not taxed Can deduct expenses What is the annual limit? None $2,500 credit per student $2,000 credit per tax return     $2,500 deduction $4,000 deduction $2,000 contribution per beneficiary None Amount of qualified  education expenses Amount of qualified  education expenses $5,250 exclusion Amount of qualifying work-related education expenses What expenses  qualify besides  tuition and required enrollment fees? Course-related expenses such as fees, books, supplies, and equipment Course-related books, supplies, and equipment Amounts paid for required books, etc. Free state tax file , that must be paid to the educational institution, etc. Free state tax file , are required fees Books Supplies Equipment  Room & board  Transportation  Other necessary expenses  None Books Supplies Equipment  Expenses for special needs services  Payments to QTP  Higher education: Room & board if  at least half-time  student  Elem/sec (K–12) education: Tutoring Room & board Uniforms Transportation Computer  access Supplementary expenses Books Supplies Equipment  Room & board if  at least half-time student  Expenses for special needs services Books Supplies Equipment  Room & board if  at least half-time student  Expenses for special needs services Payments to Coverdell ESA  Payments to QTP Books Supplies Equipment Transportation  Travel  Other necessary expenses   Scholarships,  Fellowships, Grants, and  Tuition  Reductions American Opportunity Credit Lifetime Learning Credit Student Loan Interest Deduction Tuition and Fees Deduction Coverdell ESA† Qualified Tuition Program (QTP)† Education Exception to Additional Tax on Early IRA Distributions† Education Savings Bond Program† Employer- Provided Educational Assistance† Business Deduction for Work-Related Education What education qualifies? Undergraduate & graduate  K–12 Undergraduate & graduate Undergraduate & graduate  Courses to acquire or improve job skills    Undergraduate & graduate Undergraduate & graduate Undergraduate & graduate  K–12 Undergraduate & graduate Undergraduate & graduate Undergraduate & graduate Undergraduate & graduate Required by employer or law to keep present job, salary, status  Maintain or improve job skills What are some of the other  conditions that  apply? Must be in degree or vocational program  Payment of tuition and required fees must be allowed under the grant Can be claimed for only 4 tax years (which includes years Hope Scholarship Credit claimed)  Must be enrolled at least half-time in degree program  No felony drug conviction(s)  Must not have completed first 4 years of postsecondary education before end of preceding tax year. Free state tax file   No other conditions Must have been at least half-time  student in degree program Cannot claim both deduction & education credit for same student in same year Assets must be distributed at age 30 unless special  needs beneficiary No other conditions No other conditions Applies only to qualified series  EE bonds issued after 1989 or series I bonds No other conditions Cannot be to  meet minimum educational requirements of present trade/business  Cannot qualify  you for new trade/business   In what income  range do benefits  phase out? No phaseout $80,000 – $90,000  $160,000 – $180,000 for joint returns $53,000 – $63,000  $107,000 – $127,000 for joint returns $60,000 – $75,000  $125,000 –  $155,000 for  joint returns  $60,000 – $80,000  $130,000 –  $160,000 for  joint returns  $95,000 – $110,000  $190,000 – $220,000 for  joint returns No phaseout No phaseout   No phaseout No phaseout † Any nontaxable distribution is limited to the amount that does not exceed qualified education expenses. Free state tax file Glossary The education benefits included in this publication were enacted over many years, leading to a number of common terms being defined differently from one benefit to the next. Free state tax file For example, an eligible educational institution means one thing when determining if earnings from a Coverdell education savings account are not taxable and something else when determining if a scholarship or fellowship is not taxable. Free state tax file For each term listed below that has more than one definition, the definition for each education benefit is listed. Free state tax file Academic period:   A semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Free state tax file If an educational institution uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Free state tax file Adjusted qualified education expenses (AQEE):    Qualified education expenses (defined later) reduced by any tax-free educational assistance, such as a tax-free scholarship or employer-provided educational assistance. Free state tax file They must also be reduced by any qualified education expenses deducted elsewhere on your return, used to determine an education credit or other benefit, or used to determine a tax-free distribution. Free state tax file For information on a specific benefit, see the appropriate chapter in this publication. Free state tax file Candidate for a degree:   A student who meets either of the following requirements. Free state tax file Attends a primary or secondary school or pursues a degree at a college or university, or Attends an accredited educational institution that is authorized to provide: A program that is acceptable for full credit toward a bachelor's or higher degree, or A program of training to prepare students for gainful employment in a recognized occupation. Free state tax file Designated beneficiary:   The individual named in the document creating the account/plan who is to receive the benefit of the funds in the account/plan. Free state tax file Eligible educational institution:    American opportunity credit. Free state tax file Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Free state tax file It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free state tax file Coverdell education savings account (ESA). Free state tax file Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Free state tax file It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free state tax file Also included is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Free state tax file Education savings bond program. Free state tax file Same as American opportunity credit in this category. Free state tax file IRA, early distributions from. Free state tax file Same as American opportunity credit in this category. Free state tax file Lifetime learning credit. Free state tax file Same as American opportunity credit in this category. Free state tax file Qualified tuition program (QTP). Free state tax file Same as American opportunity credit in this category. Free state tax file Scholarships and fellowships. Free state tax file An institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Free state tax file Student loan, cancellation of. Free state tax file Same as Scholarships and fellowships in this category. Free state tax file Student loan interest deduction. Free state tax file Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Free state tax file It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free state tax file Also included is an institution that conducts an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. Free state tax file Tuition and fees deduction. Free state tax file Same as American opportunity credit in this category. Free state tax file Eligible student:    American opportunity credit. Free state tax file A student who meets all of the following requirements for the tax year for which the credit is being determined. Free state tax file Did not have expenses that were used to figure an American opportunity or Hope Scholarship Credit in any 4 earlier tax years. Free state tax file Had not completed the first 4 years of postsecondary education (generally the freshman through senior years). Free state tax file For at least one academic period beginning in the tax year, was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution. Free state tax file Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year. Free state tax file Lifetime learning credit. Free state tax file A student who is enrolled in one or more courses at an eligible educational institution. Free state tax file Student loan interest deduction. Free state tax file A student who was enrolled at least half-time in a program leading to a postsecondary degree, certificate, or other recognized educational credential at an eligible educational institution. Free state tax file Tuition and fees deduction. Free state tax file A student who is enrolled in one or more courses at an eligible educational institution. Free state tax file Half-time student:   A student who is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Free state tax file Modified adjusted gross income (MAGI):    American opportunity credit. Free state tax file Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free state tax file Coverdell education savings account (ESA). Free state tax file Same as American opportunity credit in this category. Free state tax file Education savings bond program. Free state tax file Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any savings bond interest exclusion and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, Exclusion of income by bona fide residents of Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for student loan interest, Deduction for tuition and fees, and Deduction for domestic production activities. Free state tax file Lifetime learning credit. Free state tax file Same as American opportunity credit in this category. Free state tax file Student loan interest deduction. Free state tax file Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any student loan interest deduction, tuition and fees deduction, or domestic production activities deduction, and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free state tax file Tuition and fees deduction. Free state tax file Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any tuition and fees deduction, or domestic production activities deduction, and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free state tax file Phaseout:   The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is greater than a specified amount of income. Free state tax file Qualified education expenses:   See pertinent chapter for specific items. Free state tax file    American opportunity credit. Free state tax file Tuition and certain related expenses (including student activity fees) required for enrollment or attendance at an eligible educational institution. Free state tax file Books, supplies, and equipment needed for a course of study are included even if not purchased from the educational institution. Free state tax file Does not include expenses for room and board. Free state tax file Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program. Free state tax file Coverdell education savings account (ESA). Free state tax file Expenses related to or required for enrollment or attendance of the designated beneficiary at an eligible elementary, secondary, or postsecondary school. Free state tax file Many specialized expenses included for K–12. Free state tax file Also includes expenses for special needs services and contribution to qualified tuition program (QTP). Free state tax file Education savings bond program. Free state tax file Tuition and fees required to enroll at or attend an eligible educational institution. Free state tax file Also includes contributions to a qualified tuition program (QTP) or Coverdell education savings account (ESA). Free state tax file Does not include expenses for room and board. Free state tax file Does not include expenses for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Free state tax file IRA, early distributions from. Free state tax file Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half-time. Free state tax file Also includes expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Free state tax file Lifetime learning credit. Free state tax file Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Free state tax file Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Free state tax file Does not include expenses for room and board. Free state tax file Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program, unless taken by the student to acquire or improve job skills. Free state tax file Qualified tuition program (QTP). Free state tax file Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half-time. Free state tax file Includes expenses for special needs services and computer access. Free state tax file Scholarships and fellowships. Free state tax file Expenses for tuition and fees required to enroll at or attend an eligible educational institution, and course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Free state tax file Course-related items must be required of all students in the course of instruction. Free state tax file Student loan interest deduction. Free state tax file Total costs of attending an eligible educational institution, including graduate school (however, limitations may apply to the cost of room and board allowed). Free state tax file Tuition and fees deduction. Free state tax file Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Free state tax file Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Free state tax file Recapture:   To include as income on your current year's return an amount allowed as a deduction in a prior year. Free state tax file To include as tax on your current year's return an amount allowed as a credit in a prior year. Free state tax file Rollover:   A tax-free distribution to you of cash or other assets from a tax-favored plan that you contribute to another tax-favored plan. Free state tax file Transfer:   A movement of funds in a tax-favored plan from one trustee directly to another, either at your request or at the trustee's request. Free state tax file Prev  Up  Next   Home   More Online Publications
Print - Click this link to Print this page

Do I Have Cancellation of Debt Income on My Personal Residence?

Information You Will Need:

  • Filing Status
  • Form 1099-C, Cancellation of Debt, received from your mortgage lender

Note: This application is not designed to address the cancellation of debt that applies to a joint liability when debt was cancelled in bankruptcy and only 1 individual filed for bankruptcy. Please refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

Estimated Completion Time: 10 minutes. However: 5 minutes of inactivity will end the interview and you will be forced to start over.

Begin

Page Last Reviewed or Updated: 14-Feb-2014

The Free State Tax File

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