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Vita free tax help Publication 551 - Introductory Material Table of Contents What's New Reminder IntroductionOrdering forms and publications. Vita free tax help Tax questions. Vita free tax help Useful Items - You may want to see: What's New Property acquired from a decedent who died in 2010. Vita free tax help  Property acquired from a decedent dying in 2010 will no longer have an automatic increase in basis. Vita free tax help See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Vita free tax help Reminder Photographs of missing children. Vita free tax help  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Vita free tax help Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Vita free tax help You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Vita free tax help Introduction Basis is the amount of your investment in property for tax purposes. Vita free tax help Use the basis of property to figure depreciation, amortization, depletion, and casualty losses. Vita free tax help Also use it to figure gain or loss on the sale or other disposition of property. Vita free tax help You must keep accurate records of all items that affect the basis of property so you can make these computations. Vita free tax help This publication is divided into the following sections. Vita free tax help Cost Basis Adjusted Basis Basis Other Than Cost The basis of property you buy is usually its cost. Vita free tax help You may also have to capitalize (add to basis) certain other costs related to buying or producing the property. Vita free tax help Your original basis in property is adjusted (increased or decreased) by certain events. Vita free tax help If you make improvements to the property, increase your basis. Vita free tax help If you take deductions for depreciation or casualty losses, reduce your basis. Vita free tax help You cannot determine your basis in some assets by cost. Vita free tax help This includes property you receive as a gift or inheritance. Vita free tax help It also applies to property received in an involuntary conversion and certain other circumstances. Vita free tax help Comments and suggestions. Vita free tax help   We welcome your comments about this publication and your suggestions for future editions. Vita free tax help   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Vita free tax help NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Vita free tax help Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Vita free tax help   You can email us at taxforms@irs. Vita free tax help gov. Vita free tax help Please put “Publications Comment” on the subject line. Vita free tax help You can also send us comments from www. Vita free tax help irs. Vita free tax help gov/formspubs/, select “Comment on Tax Forms and Publications” under “Information about. Vita free tax help ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Vita free tax help Ordering forms and publications. Vita free tax help   Visit www. Vita free tax help irs. Vita free tax help gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 business days after your request is received. Vita free tax help  Internal Revenue Service  1201 N. Vita free tax help Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Vita free tax help   If you have a tax question, visit IRS. Vita free tax help gov or call 1-800-829-1040. Vita free tax help We cannot answer tax questions sent to either of the above addresses. Vita free tax help Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 523 Selling Your Home 525 Taxable and Nontaxable Income 527 Residential Rental Property 530 Tax Information for First-Time Homeowners 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 559 Survivors, Executors, and Administrators 587 Business Use of Your Home 946 How To Depreciate Property Form (and Instructions) 706 United States Estate (and Generation-Skipping Transfer) Tax Return 706-A United States Additional Estate Tax Return 8594 Asset Acquisition Statement See How To Get Tax Help near the end of this publication for information about getting publications and forms. Vita free tax help Prev  Up  Next   Home   More Online Publications
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Vita free tax help Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. Vita free tax help More information. Vita free tax help Exception—Community Income. Vita free tax help Exception—Qualified joint venture. Vita free tax help More information. Vita free tax help More information. Vita free tax help 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. Vita free tax help 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. Vita free tax help Table 1 can help you learn what those responsibilities are. Vita free tax help Ask yourself each question listed in the table, then see the related discussion to find the answer. Vita free tax help In addition to knowing about federal taxes, you need to make some basic business decisions. Vita free tax help 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. Vita free tax help For information on how to contact the SBA, see How to Get More Information, later. Vita free tax help Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. Vita free tax help When beginning a business, you must decide which form of business to use. Vita free tax help Legal and tax considerations enter into this decision. Vita free tax help Only tax considerations are discussed in this publication. Vita free tax help Your form of business determines which income tax return form you have to file. Vita free tax help See Table 2 to find out which form you have to file. Vita free tax help Sole proprietorships. Vita free tax help   A sole proprietorship is an unincorporated business that is owned by one individual. Vita free tax help It is the simplest form of business organization to start and maintain. Vita free tax help The business has no existence apart from you, the owner. Vita free tax help Its liabilities are your personal liabilities. Vita free tax help You undertake the risks of the business for all assets owned, whether or not used in the business. Vita free tax help You include the income and expenses of the business on your personal tax return. Vita free tax help More information. Vita free tax help   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. Vita free tax help If you are a farmer, see Publication 225, Farmer's Tax Guide. Vita free tax help Partnerships. Vita free tax help   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Vita free tax help Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Vita free tax help   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. Vita free tax help , from its operations, but it does not pay income tax. Vita free tax help Instead, it “passes through” any profits or losses to its partners. Vita free tax help Each partner includes his or her share of the partnership's items on his or her tax return. Vita free tax help More information. Vita free tax help   For more information on partnerships, see Publication 541, Partnerships. Vita free tax help Husband and wife business. Vita free tax help   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. Vita free tax help Do not use Schedule C or C-EZ. Vita free tax help Instead, file Form 1065, U. Vita free tax help S. Vita free tax help Return of Partnership Income. Vita free tax help For more information, see Publication 541, Partnerships. Vita free tax help Exception—Community Income. Vita free tax help   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. Vita free tax help S. Vita free tax help possession, you can treat the business either as a sole proprietorship or a partnership. Vita free tax help The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Vita free tax help A change in your reporting position will be treated as a conversion of the entity. Vita free tax help Exception—Qualified joint venture. Vita free tax help   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. Vita free tax help 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. Vita free tax help For an explanation of "material participation," see the Instructions for Schedule C, line G. Vita free tax help   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. Vita free tax help Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Vita free tax help For more information, see Qualified Joint Venture in the Instructions for Schedule SE. Vita free tax help Corporations. Vita free tax help   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. Vita free tax help A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. Vita free tax help A corporation can also take special deductions. Vita free tax help   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. Vita free tax help However, shareholders cannot deduct any loss of the corporation. Vita free tax help More information. Vita free tax help   For more information on corporations, see Publication 542, Corporations. Vita free tax help S corporations. Vita free tax help   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. Vita free tax help Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Vita free tax help 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. Vita free tax help More information. Vita free tax help   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. Vita free tax help S. Vita free tax help Income Tax Return for an S Corporation. Vita free tax help Limited liability company. Vita free tax help   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Vita free tax help The members of an LLC are not personally liable for its debts. Vita free tax help 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. Vita free tax help 7701-3. Vita free tax help For more information, see the instructions for Form 8832, Entity Classification Election. Vita free tax help Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. Vita free tax help The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). Vita free tax help An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. Vita free tax help An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. Vita free tax help You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. Vita free tax help You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. Vita free tax help This includes returns or documents filed to report the following information. Vita free tax help Interest, dividends, royalties, etc. Vita free tax help , paid to you. Vita free tax help Any amount paid to you as a dependent care provider. Vita free tax help Certain other amounts paid to you that total $600 or more for the year. Vita free tax help If you do not furnish your identification number as required, you may be subject to penalties. Vita free tax help See Penalties, later. Vita free tax help Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. Vita free tax help 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. Vita free tax help Applying for an EIN. Vita free tax help   You may apply for an EIN: Online—Click on the EIN link at www. Vita free tax help irs. Vita free tax help gov/businesses/small. Vita free tax help The EIN is issued immediately once the application information is validated. Vita free tax help By telephone at 1-800-829-4933. Vita free tax help By mailing or faxing Form SS-4, Application for Employer Identification Number. Vita free tax help When to apply. Vita free tax help   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. Vita free tax help If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. Vita free tax help If you apply by telephone or through the IRS website, you can get an EIN immediately. Vita free tax help If you apply by fax, you can get an EIN within 4 business days. Vita free tax help   If you do not receive your EIN by the time a return is due, file your return anyway. Vita free tax help Write “Applied for” and the date you applied for the number in the space for the EIN. Vita free tax help Do not use your social security number as a substitute for an EIN on your tax returns. Vita free tax help More than one EIN. Vita free tax help   You should have only one EIN. Vita free tax help 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. Vita free tax help Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Vita free tax help The IRS will tell you which number to use. Vita free tax help More information. Vita free tax help   For more information about EINs, see Publication 1635, Understanding Your EIN. Vita free tax help 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). Vita free tax help The forms used to report these payments must include the payee's identification number. Vita free tax help Employee. Vita free tax help   If you have employees, you must get an SSN from each of them. Vita free tax help Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Vita free tax help If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Vita free tax help This may occur, for example, if the employee's name has changed due to marriage or divorce. Vita free tax help   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. Vita free tax help This form is available at SSA offices or by calling 1-800-772-1213. Vita free tax help It is also available from the SSA website at www. Vita free tax help ssa. Vita free tax help gov. Vita free tax help Other payee. Vita free tax help   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. Vita free tax help If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. Vita free tax help   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Vita free tax help This form is available from IRS offices or by calling 1-800-829-3676. Vita free tax help It is also available from the IRS website at IRS. Vita free tax help gov. Vita free tax help    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. Vita free tax help For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Vita free tax help Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. Vita free tax help A tax year is usually 12 consecutive months. Vita free tax help There are two kinds of tax years. Vita free tax help Calendar tax year. Vita free tax help A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Vita free tax help Fiscal tax year. Vita free tax help A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Vita free tax help 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. Vita free tax help 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. Vita free tax help You must use a calendar tax year if: You keep no books. Vita free tax help You have no annual accounting period. Vita free tax help Your present tax year does not qualify as a fiscal year. Vita free tax help You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. Vita free tax help For more information, see Publication 538, Accounting Periods and Methods. Vita free tax help First-time filer. Vita free tax help   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. Vita free tax help You adopt a tax year by filing your first income tax return using that tax year. Vita free tax help You have not adopted a tax year if you merely did any of the following. Vita free tax help Filed an application for an extension of time to file an income tax return. Vita free tax help Filed an application for an employer identification number. Vita free tax help Paid estimated taxes for that tax year. Vita free tax help Changing your tax year. Vita free tax help   Once you have adopted your tax year, you may have to get IRS approval to change it. Vita free tax help To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. Vita free tax help You may have to pay a fee. Vita free tax help For more information, see Publication 538. Vita free tax help Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. Vita free tax help You choose an accounting method for your business when you file your first income tax return. Vita free tax help There are two basic accounting methods. Vita free tax help Cash method. Vita free tax help Under the cash method, you report income in the tax year you receive it. Vita free tax help You usually deduct or capitalize expenses in the tax year you pay them. Vita free tax help Accrual method. Vita free tax help 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. Vita free tax help You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. Vita free tax help For other methods, see Publication 538. Vita free tax help If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Vita free tax help Inventories include goods held for sale in the normal course of business. Vita free tax help They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Vita free tax help Inventories are explained in Publication 538. Vita free tax help 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. Vita free tax help For more information, see Publication 538. Vita free tax help You must use the same accounting method to figure your taxable income and to keep your books. Vita free tax help Also, you must use an accounting method that clearly shows your income. Vita free tax help In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. Vita free tax help An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. Vita free tax help More than one business. Vita free tax help   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. Vita free tax help You must keep a complete and separate set of books and records for each business. Vita free tax help Changing your method of accounting. Vita free tax help   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Vita free tax help 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. Vita free tax help For examples of changes that require approval and information on how to get approval for the change, see Publication 538. Vita free tax help Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. Vita free tax help The following are the four general kinds of business taxes. Vita free tax help Income tax. Vita free tax help Self-employment tax. Vita free tax help Employment taxes. Vita free tax help Excise taxes. Vita free tax help See Table 2 for the forms you file to report these taxes. Vita free tax help You may want to get Publication 509. Vita free tax help It has tax calendars that tell you when to file returns and make tax payments. Vita free tax help Income Tax All businesses except partnerships must file an annual income tax return. Vita free tax help Partnerships file an information return. Vita free tax help Which form you use depends on how your business is organized. Vita free tax help See Table 2 to find out which return you have to file. Vita free tax help The federal income tax is a pay-as-you-go tax. Vita free tax help You must pay the tax as you earn or receive income during the year. Vita free tax help An employee usually has income tax withheld from his or her pay. Vita free tax help If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Vita free tax help If you are not required to make estimated tax payments, you may pay any tax due when you file your return. Vita free tax help Table 2. Vita free tax help Which Forms Must I File? IF you are a. Vita free tax help . Vita free tax help . Vita free tax help   THEN you may be liable for. Vita free tax help . Vita free tax help . Vita free tax help   Use Form. Vita free tax help . Vita free tax help . Vita free tax help 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. Vita free tax help 2 Various other schedules may be needed. Vita free tax help Estimated tax. Vita free tax help   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. Vita free tax help Sole proprietors, partners, and S corporation shareholders. Vita free tax help   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Vita free tax help Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Vita free tax help For more information, see Publication 505, Tax Withholding and Estimated Tax. Vita free tax help Corporations. Vita free tax help   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. Vita free tax help Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. Vita free tax help You must deposit the payments as explained later under Depositing Taxes. Vita free tax help For more information, see Publication 542. Vita free tax help Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Vita free tax help Your payments of SE tax contribute to your coverage under the social security system. Vita free tax help Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Vita free tax help You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Vita free tax help Your net earnings from self-employment were $400 or more. Vita free tax help You had church employee income of $108. Vita free tax help 28 or more. Vita free tax help Use Schedule SE (Form 1040) to figure your SE tax. Vita free tax help For more information, see Publication 334, Tax Guide for Small Business. Vita free tax help You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. Vita free tax help The Social Security Administration (SSA) time limit for posting self-employment income. Vita free tax help   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. Vita free tax help 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. Vita free tax help The SSA will not change its records to increase your self-employment income. Vita free tax help 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. Vita free tax help Employment taxes include the following. Vita free tax help Social security and Medicare taxes. Vita free tax help Federal income tax withholding. Vita free tax help Federal unemployment (FUTA) tax. Vita free tax help If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. Vita free tax help If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. Vita free tax help These publications explain your tax responsibilities as an employer. Vita free tax help If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Vita free tax help That publication has information to help you determine whether an individual is an employee or an independent contractor. Vita free tax help If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. Vita free tax help An independent contractor is someone who is self-employed. Vita free tax help Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. Vita free tax help Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. Vita free tax help 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. Vita free tax help Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Vita free tax help Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Vita free tax help Medicare tax pays for benefits under the hospital insurance part of FICA. Vita free tax help You withhold part of these taxes from your employee's wages and you pay a part yourself. Vita free tax help To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. Vita free tax help 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. Vita free tax help (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Vita free tax help ) 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. Vita free tax help You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. Vita free tax help You pay FUTA tax only from your own funds. Vita free tax help Employees do not pay this tax or have it withheld from their pay. Vita free tax help Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Vita free tax help See Publication 15 to find out if you can use this form. Vita free tax help Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. Vita free tax help Form I-9. Vita free tax help   You must verify that each new employee is legally eligible to work in the United States. Vita free tax help Both you and the employee must complete the U. Vita free tax help S. Vita free tax help Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Vita free tax help You can get the form from USCIS offices or from the USCIS website at www. Vita free tax help uscis. Vita free tax help gov. Vita free tax help Call the USCIS at 1-800-375-5283 for more information about your responsibilities. Vita free tax help Form W-4. Vita free tax help   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. Vita free tax help 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. Vita free tax help For more information, see Publication 15. Vita free tax help Employees claiming more than 10 withholding allowances. Vita free tax help   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. Vita free tax help See section 16 of Publication 15. Vita free tax help 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. Vita free tax help You must also send copies to the Social Security Administration. Vita free tax help See Information Returns, later, for more information on Form W-2. Vita free tax help 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. Vita free tax help Manufacture or sell certain products. Vita free tax help Operate certain kinds of businesses. Vita free tax help Use various kinds of equipment, facilities, or products. Vita free tax help Receive payment for certain services. Vita free tax help For more information on excise taxes, see Publication 510, Excise Taxes. Vita free tax help Form 720. Vita free tax help   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Vita free tax help Environmental taxes. Vita free tax help Communications and air transportation taxes. Vita free tax help Fuel taxes. Vita free tax help Tax on the first retail sale of heavy trucks, trailers, and tractors. Vita free tax help Manufacturers taxes on the sale or use of a variety of different articles. Vita free tax help Form 2290. Vita free tax help   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. Vita free tax help The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Vita free tax help Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Vita free tax help For more information, see the instructions for Form 2290. Vita free tax help Form 730. Vita free tax help   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. Vita free tax help Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. Vita free tax help Form 11-C. Vita free tax help   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. Vita free tax help Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Vita free tax help Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). Vita free tax help Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Vita free tax help Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. Vita free tax help Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Vita free tax help 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. Vita free tax help You must give a copy of each information return you are required to file to the recipient or payer. Vita free tax help In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Vita free tax help For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Vita free tax help Form 1099-MISC. Vita free tax help   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. Vita free tax help These payments include the following items. Vita free tax help 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. Vita free tax help Rent payments of $600 or more, other than rents paid to real estate agents. Vita free tax help Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Vita free tax help Royalty payments of $10 or more. Vita free tax help Payments to certain crew members by operators of fishing boats. Vita free tax help 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. Vita free tax help Form W-2. Vita free tax help   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. Vita free tax help For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. Vita free tax help Form 8300. Vita free tax help   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. Vita free tax help Cash includes U. Vita free tax help S. Vita free tax help and foreign coin and currency. Vita free tax help It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Vita free tax help For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Vita free tax help Penalties The law provides penalties for not filing returns or paying taxes as required. Vita free tax help Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. Vita free tax help Failure to file tax returns. Vita free tax help   If you do not file your tax return by the due date, you may have to pay a penalty. Vita free tax help The penalty is based on the tax not paid by the due date. Vita free tax help See your tax return instructions for more information about this penalty. Vita free tax help Failure to pay tax. Vita free tax help   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. Vita free tax help For more information, see your tax return instructions. Vita free tax help Failure to withhold, deposit, or pay taxes. Vita free tax help   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. Vita free tax help You may also be subject to penalties if you deposit the taxes late. Vita free tax help For more information, see Publication 15. Vita free tax help Failure to follow information reporting requirements. Vita free tax help   The following penalties apply if you are required to file information returns. Vita free tax help For more information, see the General Instructions for Certain Information Returns. Vita free tax help Failure to file information returns. Vita free tax help 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. Vita free tax help Failure to furnish correct payee statements. Vita free tax help 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. Vita free tax help Waiver of penalty. Vita free tax help   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. Vita free tax help   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. Vita free tax help (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. Vita free tax help ) Failure to supply taxpayer identification number. Vita free tax help   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. Vita free tax help 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. Vita free tax help Business Expenses You can deduct business expenses on your income tax return. Vita free tax help These are the current operating costs of running your business. Vita free tax help To be deductible, a business expense must be both ordinary and necessary. Vita free tax help An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Vita free tax help A necessary expense is one that is helpful and appropriate for your business, trade, or profession. Vita free tax help An expense does not have to be indispensable to be considered necessary. Vita free tax help The following are brief explanations of some expenses that are of interest to people starting a business. Vita free tax help There are many other expenses that you may be able to deduct. Vita free tax help See your form instructions and Publication 535, Business Expenses. Vita free tax help Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. Vita free tax help Your business start-up costs will depend on the type of business you are starting. Vita free tax help They may include costs for advertising, travel, surveys, and training. Vita free tax help These costs are generally capital expenses. Vita free tax help You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Vita free tax help 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. Vita free tax help The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Vita free tax help Any remaining cost must be amortized. Vita free tax help For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. Vita free tax help 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. Vita free tax help You must spread the cost over more than one tax year and deduct part of it each year. Vita free tax help This method of deducting the cost of business property is called depreciation. Vita free tax help Business property you must depreciate includes the following items. Vita free tax help Office furniture. Vita free tax help Buildings. Vita free tax help Machinery and equipment. Vita free tax help You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Vita free tax help This deduction is known as the “section 179 deduction. Vita free tax help ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. Vita free tax help Depreciation must be taken in the year it is allowable. Vita free tax help Allowable depreciation not taken in a prior year cannot be taken in the current year. Vita free tax help If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. Vita free tax help S. Vita free tax help Individual Income Tax Return, or by changing your accounting method. Vita free tax help For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. Vita free tax help Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. Vita free tax help Even then, your deduction may be limited. Vita free tax help To qualify to claim expenses for business use of your home, you must meet both the following tests. Vita free tax help 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. Vita free tax help Exclusive use. Vita free tax help   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Vita free tax help The area used for business can be a room or other separately identifiable space. Vita free tax help The space does not need to be marked off by a permanent partition. Vita free tax help   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. Vita free tax help Exceptions to exclusive use. Vita free tax help   You do not have to meet the exclusive use test if either of the following applies. Vita free tax help You use part of your home for the storage of inventory or product samples. Vita free tax help You use part of your home as a daycare facility. Vita free tax help For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Vita free tax help Principal place of business. Vita free tax help   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Vita free tax help You use it exclusively and regularly for administrative or management activities of your trade or business. Vita free tax help You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Vita free tax help   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. Vita free tax help The relative importance of the activities performed at each location. Vita free tax help If the relative importance factor does not determine your principal place of business, the time spent at each location. Vita free tax help    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Vita free tax help However, for other ways to qualify to deduct home office expenses, see Publication 587. Vita free tax help 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. Vita free tax help If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. Vita free tax help More information. Vita free tax help   For more information about business use of your home, see Publication 587. Vita free tax help Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. Vita free tax help You generally can deduct either your actual expenses or the standard mileage rate. Vita free tax help Actual expenses. Vita free tax help   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. Vita free tax help You can divide your expenses based on the miles driven for each purpose. Vita free tax help Example. Vita free tax help You are the sole proprietor of a flower shop. Vita free tax help You drove your van 20,000 miles during the year. Vita free tax help 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. Vita free tax help You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Vita free tax help Standard mileage rate. Vita free tax help   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. Vita free tax help You can use the standard mileage rate for a vehicle you own or lease. Vita free tax help The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. Vita free tax help It is announced annually by the IRS. Vita free tax help To figure your deduction, multiply your business miles by the standard mileage rate for the year. Vita free tax help    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. Vita free tax help However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. Vita free tax help Choosing the standard mileage rate. Vita free tax help   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. Vita free tax help In later years, you can choose to use either the standard mileage rate or actual expenses. Vita free tax help   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). Vita free tax help Additional information. Vita free tax help   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Vita free tax help Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. Vita free tax help It also explains how long you must keep your records for federal tax purposes. Vita free tax help A sample recordkeeping system is illustrated at the end of this part. Vita free tax help Why Keep Records? Everyone in business must keep records. Vita free tax help Good records will help you do the following. Vita free tax help Monitor the progress of your business. Vita free tax help   You need good records to monitor the progress of your business. Vita free tax help Records can show whether your business is improving, which items are selling, or what changes you need to make. Vita free tax help Good records can increase the likelihood of business success. Vita free tax help Prepare your financial statements. Vita free tax help   You need good records to prepare accurate financial statements. Vita free tax help These include income (profit and loss) statements and balance sheets. Vita free tax help These statements can help you in dealing with your bank or creditors and help you manage your business. Vita free tax help An income statement shows the income and expenses of the business for a given period of time. Vita free tax help A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Vita free tax help Identify source of receipts. Vita free tax help   You will receive money or property from many sources. Vita free tax help Your records can identify the source of your receipts. Vita free tax help You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. Vita free tax help Keep track of deductible expenses. Vita free tax help   You may forget expenses when you prepare your tax return unless you record them when they occur. Vita free tax help Prepare your tax returns. Vita free tax help   You need good records to prepare your tax returns. Vita free tax help These records must support the income, expenses, and credits you report. Vita free tax help Generally, these are the same records you use to monitor your business and prepare your financial statements. Vita free tax help Support items reported on tax returns. Vita free tax help   You must keep your business records available at all times for inspection by the IRS. Vita free tax help If the IRS examines any of your tax returns, you may be asked to explain the items reported. Vita free tax help A complete set of records will speed up the examination. Vita free tax help Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Vita free tax help You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Vita free tax help The business you are in affects the type of records you need to keep for federal tax purposes. Vita free tax help You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Vita free tax help See Accounting Method, earlier. Vita free tax help If you are in more than one business, you should keep a complete and separate set of records for each business. Vita free tax help A corporation should keep minutes of board of directors' meetings. Vita free tax help Your recordkeeping system should include a summary of your business transactions. Vita free tax help This summary is ordinarily made in your books (for example, accounting journals and ledgers). Vita free tax help Your books must show your gross income, as well as your deductions and credits. Vita free tax help For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. Vita free tax help In addition, you must keep supporting documents, explained later. Vita free tax help Electronic records. Vita free tax help   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Vita free tax help 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. Vita free tax help 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. Vita free tax help The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Vita free tax help All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Vita free tax help Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Vita free tax help   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. Vita free tax help You still have the responsibility of retaining any other books and records that are required to be retained. Vita free tax help   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Vita free tax help This test is not considered an examination and the results must be shared with you. Vita free tax help If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Vita free tax help 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. Vita free tax help For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. Vita free tax help Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Vita free tax help Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Vita free tax help These documents contain information you need to record in your books. Vita free tax help It is important to keep these documents because they support the entries in your books and on your tax return. Vita free tax help Keep them in an orderly fashion and in a safe place. Vita free tax help For instance, organize them by year and type of income or expense. Vita free tax help Gross receipts. Vita free tax help   Gross receipts are the income you receive from your business. Vita free tax help You should keep supporting documents that show the amounts and sources of your gross receipts. Vita free tax help Documents that show gross receipts include the following. Vita free tax help Cash register tapes. Vita free tax help Bank deposit slips. Vita free tax help Receipt books. Vita free tax help Invoices. Vita free tax help Credit card charge slips. Vita free tax help Forms 1099-MISC. Vita free tax help Purchases. Vita free tax help   Purchases are the items you buy and resell to customers. Vita free tax help If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Vita free tax help Your supporting documents should show the amount paid and that the amount was for purchases. Vita free tax help Documents for purchases include the following. Vita free tax help Canceled checks. Vita free tax help Cash register tape receipts. Vita free tax help Credit card sales slips. Vita free tax help Invoices. Vita free tax help These records will help you determine the value of your inventory at the end of the year. Vita free tax help See Publication 538 for information on methods for valuing inventory. Vita free tax help Expenses. Vita free tax help   Expenses are the costs you incur (other than purchases) to carry on your business. Vita free tax help Your supporting documents should show the amount paid and that the amount was for a business expense. Vita free tax help Documents for expenses include the following. Vita free tax help Canceled checks. Vita free tax help Cash register tapes. Vita free tax help Account statements. Vita free tax help Credit card sales slips. Vita free tax help Invoices. Vita free tax help Petty cash slips for small cash payments. Vita free tax help    A petty cash fund allows you to make small payments without having to write checks for small amounts. Vita free tax help 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. Vita free tax help Travel, transportation, entertainment, and gift expenses. Vita free tax help   Specific recordkeeping rules apply to these expenses. Vita free tax help For more information, see Publication 463. Vita free tax help Employment taxes. Vita free tax help   There are specific employment tax records you must keep. Vita free tax help For a list, see Publication 15. Vita free tax help Assets. Vita free tax help   Assets are the property, such as machinery and furniture you own and use in your business. Vita free tax help You must keep records to verify certain information about your business assets. Vita free tax help You need records to figure the annual depreciation and the gain or loss when you sell the assets. Vita free tax help Your records should show the following information. Vita free tax help When and how you acquired the asset. Vita free tax help Purchase price. Vita free tax help Cost of any improvements. Vita free tax help Section 179 deduction taken. Vita free tax help Deductions taken for depreciation. Vita free tax help Deductions taken for casualty losses, such as losses resulting from fires or storms. Vita free tax help How you used the asset. Vita free tax help When and how you disposed of the asset. Vita free tax help Selling price. Vita free tax help Expenses of sale. Vita free tax help   The following documents may show this information. Vita free tax help Purchase and sales invoices. Vita free tax help Real estate closing statements. Vita free tax help Canceled checks. Vita free tax help 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. Vita free tax help These include account statements prepared for the financial institution by a third party. Vita free tax help These account statements must be highly legible. Vita free tax help The following table lists acceptable account statements. Vita free tax help  IF payment is by. Vita free tax help . Vita free tax help . Vita free tax help THEN the statement must show the. Vita free tax help . Vita free tax help . Vita free tax help Check Check number. Vita free tax help Amount. Vita free tax help Payee's name. Vita free tax help Date the check amount was posted to the account by the financial institution. Vita free tax help Electronic funds transfer Amount transferred. Vita free tax help Payee's name. Vita free tax help Date the transfer was posted to the account by the financial institution. Vita free tax help Credit card Amount charged. Vita free tax help Payee's name. Vita free tax help Transaction date. Vita free tax help    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Vita free tax help You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Vita free tax help Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. Vita free tax help (Your business transactions are shown on the supporting documents just discussed. Vita free tax help ) Business transactions are ordinarily summarized in books called journals and ledgers. Vita free tax help You can buy them at your local stationery or office supply store. Vita free tax help A journal is a book where you record each business transaction shown on your supporting documents. Vita free tax help You may have to keep separate journals for transactions that occur frequently. Vita free tax help A ledger is a book that contains the totals from all of your journals. Vita free tax help It is organized into different accounts. Vita free tax help Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. Vita free tax help For example, a recordkeeping system for a small business might include the following items. Vita free tax help Business checkbook. Vita free tax help Daily summary of cash receipts. Vita free tax help Monthly summary of cash receipts. Vita free tax help Check disbursements journal. Vita free tax help Depreciation worksheet. Vita free tax help Employee compensation record. Vita free tax help The business checkbook is explained next. Vita free tax help The other items are illustrated later under Sample Record System. Vita free tax help The system you use to record business transactions will be more effective if you follow good recordkeeping practices. Vita free tax help For example, record expenses when they occur, and identify the source of recorded receipts. Vita free tax help Generally, it is best to record transactions on a daily basis. Vita free tax help Business checkbook. Vita free tax help   One of the first things you should do when you start a business is open a business checking account. Vita free tax help You should keep your business account separate from your personal checking account. Vita free tax help   The business checkbook is your basic source of information for recording your business expenses. Vita free tax help You should deposit all daily receipts in your business checking account. Vita free tax help You should check your account for errors by reconciling it. Vita free tax help See Reconciling the checking account, later. Vita free tax help   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. Vita free tax help You should also note on the deposit slip the source of the deposit and keep copies of all slips. Vita free tax help   You should make all payments by check to document business expenses. Vita free tax help Write checks payable to yourself only when making withdrawals from your business for personal use. Vita free tax help Avoid writing checks payable to cash. Vita free tax help If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. Vita free tax help If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Vita free tax help    Use the business account for business purposes only. Vita free tax help Indicate the source of deposits and the type of expense in the checkbook. Vita free tax help Reconciling the checking account. Vita free tax help   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. Vita free tax help 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. Vita free tax help   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. Vita free tax help    You should reconcile your checking account each month. Vita free tax help     Before you reconcile your monthly bank statement, check your own figures. Vita free tax help Begin with the balance shown in your checkbook at the end of the previous month. Vita free tax help To this balance, add the total cash deposited during the month and subtract the total cash disbursements. Vita free tax help   After checking your figures, the result should agree with your checkbook balance at the end of the month. Vita free tax help If the result does not agree, you may have made an error in recording a check or deposit. Vita free tax help You can find the error by doing the following. Vita free tax help 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. Vita free tax help 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. Vita free tax help Adding the deposit amounts in your checkbook. Vita free tax help Compare that total with the monthly total in your cash receipt book, if you have one. Vita free tax help If the totals do not agree, check the individual amounts to find any errors. Vita free tax help   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. Vita free tax help   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Vita free tax help Many banks print a reconciliation worksheet on the back of the statement. Vita free tax help   To reconcile your account, follow these steps. Vita free tax help Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Vita free tax help Note all differences in the dollar amounts. Vita free tax help Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Vita free tax help Note all differences in the dollar amounts. Vita free tax help Mark the check number in the checkbook as having cleared the bank. Vita free tax help After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Vita free tax help Prepare a bank reconciliation. Vita free tax help One is illustrated later under Sample Record System. Vita free tax help Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. Vita free tax help At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. Vita free tax help If you still have differences, check the previous steps to find the errors. Vita free tax help   Table 3. Vita free tax help Period of Limitations IF you. Vita free tax help . Vita free tax help . Vita free tax help   THEN the period is. Vita free tax help . Vita free tax help . Vita free tax help 1. Vita free tax help Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. Vita free tax help 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. Vita free tax help File a fraudulent return   Not limited 4. Vita free tax help Do not file a return   Not limited 5. Vita free tax help File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. Vita free tax help 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. Vita free tax help The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. Vita free tax help You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Vita free tax help Single-entry. Vita free tax help   A single-entry system is based on the income statement (profit or loss statement). Vita free tax help It can be a simple and practical system if you are starting a small business. Vita free tax help 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. Vita free tax help Double-entry. Vita free tax help   A double-entry bookkeeping system uses journals and ledgers. Vita free tax help Transactions are first entered in a journal and then posted to ledger accounts. Vita free tax help These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). Vita free tax help You close income and expense accounts at the end of each tax year. Vita free tax help You keep asset, liability, and net worth accounts open on a permanent basis. Vita free tax help   In the double-entry system, each account has a left side for debits and a right side for credits. Vita free tax help It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. Vita free tax help   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. Vita free tax help If the amounts do not balance, you have made an error and you must find and correct it. Vita free tax help   An example of a journal entry exhibiting a payment of rent in October is shown next. Vita free tax help General Journal Date Description of Entry Debit  Credit Oct. Vita free tax help 5 Rent expense 780. Vita free tax help 00     Cash   780. Vita free tax help 00                 Computerized System There are computer software packages you can use for recordkeeping. Vita free tax help They can be purchased in many retail stores. Vita free tax help These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. Vita free tax help 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. Vita free tax help To meet this qualification, the machine-sensible records must reconcile with your books and return. Vita free tax help These records must provide enough detail to identify the underlying source documents. Vita free tax help You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. Vita free tax help This documentation must be sufficiently detailed to show all of the following items. Vita free tax help Functions being performed as the data flows through the system. Vita free tax help Controls used to ensure accurate and reliable processing. Vita free tax help Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. Vita free tax help Charts of accounts and detailed account descriptions. Vita free tax help See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. Vita free tax help 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. Vita free tax help 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. Vita free tax help 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. Vita free tax help Table 3 contains the periods of limitations that apply to income tax returns. Vita free tax help Unless otherwise stated, the years refer to the period after the return was filed. Vita free tax help Returns filed before the due date are treated as filed on the due date. Vita free tax help Keep copies of your filed tax returns. Vita free tax help They help in preparing future tax returns and making computations if you file an amended return. Vita free tax help Employment taxes. Vita free tax help   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. Vita free tax help For more information about recordkeeping for employment taxes, see Publication 15. Vita free tax help Assets. Vita free tax help   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. Vita free tax help 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. Vita free tax help   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. Vita free tax help 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. Vita free tax help Records for nontax purposes. Vita free tax help   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. Vita free tax help For example, your insurance company or creditors may require you to keep them longer than the IRS does. Vita free tax help 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. Vita free tax help Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. Vita free tax help These sample records should not be viewed as a recommendation of how to keep your records. Vita free tax help They are intended only to show how one business keeps its records. Vita free tax help 1. Vita free tax help Daily Summary of Cash Receipts This summary is a record of cash sales for the day. Vita free tax help 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. Vita free tax help Henry takes the cash sales entry from his cash register tape. Vita free tax help If he had no cash register, he would simply total his cash sale slips and any other cash received that day. Vita free tax help He carries the total receipts shown in this summary for January 3 ($267. Vita free tax help 80), including cash sales ($263. Vita free tax help 60) and sales tax ($4. Vita free tax help 20), to the Monthly Summary of Cash Receipts. Vita free tax help Petty cash fund. Vita free tax help   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Vita free tax help 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. Vita free tax help He sets up a fixed amount ($50) in his petty cash fund. Vita free tax help The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. Vita free tax help 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. Vita free tax help (See the Check Disbursements Journal entry for check number 92. Vita free tax help ) This restores the fund to its fixed amount of $50. Vita free tax help He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. Vita free tax help 2. Vita free tax help Monthly Summary of Cash Receipts This shows the income activity for the month. Vita free tax help Henry carries the total monthly net sales shown in this summary for January ($4,865. Vita free tax help 05) to his Annual Summary. Vita free tax help 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. Vita free tax help He cannot take a deduction for sales tax turned over to the state because he only collected the tax. Vita free tax help He does not include the tax in his income. Vita free tax help 3. Vita free tax help Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. Vita free tax help All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. Vita free tax help Frequent expenses have their own headings across the sheet. Vita free tax help He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Vita free tax help Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. Vita free tax help Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. Vita free tax help If he did, he would record them in the journal, even though he could not deduct them as business expenses. Vita free tax help Henry carries the January total of expenses for materials ($1,083. Vita free tax help 50) to the Annual Summary. Vita free tax help Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. Vita free tax help , in the appropriate columns of that summary. Vita free tax help 4. Vita free tax help Employee Compensation Record This record shows the following information. Vita free tax help The number of hours Henry's employee worked in a pay period. Vita free tax help The employee's total pay for the period. Vita free tax help The deductions Henry withheld in figuring the employee's net pay. Vita free tax help The monthly gross payroll. Vita free tax help Henry carries the January gross payroll ($520) to the Annual Summary. Vita free tax help 5. Vita free tax help Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. Vita free tax help He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. Vita free tax help He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. Vita free tax help As in the journal, he keeps each major expense in a separate column. Vita free tax help Henry carries the cash receipts total shown in the annual summary ($47,440. Vita free tax help 9