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2011 1040 16. 2011 1040 Rulings Program The IRS has a program for assisting taxpayers who have technical problems with tax laws and regulations. 2011 1040 The IRS will answer inquiries from individuals and organizations about the tax effect of their acts or transactions. 2011 1040 The National Office of the IRS issues rulings on those matters. 2011 1040 A ruling is a written statement to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. 2011 1040 There are also determination letters issued by IRS directors and information letters issued by IRS directors or the National Office. 2011 1040 There is a fee for most types of determination letters and rulings. 2011 1040 For complete information on the rulings program, see the first Internal Revenue Bulletin published each year. 2011 1040 Prev Up Next Home More Online Publications
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2011 1040 Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. 2011 1040 More information. 2011 1040 Exception—Community Income. 2011 1040 Exception—Qualified joint venture. 2011 1040 More information. 2011 1040 More information. 2011 1040 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. 2011 1040 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. 2011 1040 Table 1 can help you learn what those responsibilities are. 2011 1040 Ask yourself each question listed in the table, then see the related discussion to find the answer. 2011 1040 In addition to knowing about federal taxes, you need to make some basic business decisions. 2011 1040 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. 2011 1040 For information on how to contact the SBA, see How to Get More Information, later. 2011 1040 Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. 2011 1040 When beginning a business, you must decide which form of business to use. 2011 1040 Legal and tax considerations enter into this decision. 2011 1040 Only tax considerations are discussed in this publication. 2011 1040 Your form of business determines which income tax return form you have to file. 2011 1040 See Table 2 to find out which form you have to file. 2011 1040 Sole proprietorships. 2011 1040 A sole proprietorship is an unincorporated business that is owned by one individual. 2011 1040 It is the simplest form of business organization to start and maintain. 2011 1040 The business has no existence apart from you, the owner. 2011 1040 Its liabilities are your personal liabilities. 2011 1040 You undertake the risks of the business for all assets owned, whether or not used in the business. 2011 1040 You include the income and expenses of the business on your personal tax return. 2011 1040 More information. 2011 1040 For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. 2011 1040 If you are a farmer, see Publication 225, Farmer's Tax Guide. 2011 1040 Partnerships. 2011 1040 A partnership is the relationship existing between two or more persons who join to carry on a trade or business. 2011 1040 Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. 2011 1040 A partnership must file an annual information return to report the income, deductions, gains, losses, etc. 2011 1040 , from its operations, but it does not pay income tax. 2011 1040 Instead, it “passes through” any profits or losses to its partners. 2011 1040 Each partner includes his or her share of the partnership's items on his or her tax return. 2011 1040 More information. 2011 1040 For more information on partnerships, see Publication 541, Partnerships. 2011 1040 Husband and wife business. 2011 1040 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. 2011 1040 Do not use Schedule C or C-EZ. 2011 1040 Instead, file Form 1065, U. 2011 1040 S. 2011 1040 Return of Partnership Income. 2011 1040 For more information, see Publication 541, Partnerships. 2011 1040 Exception—Community Income. 2011 1040 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. 2011 1040 S. 2011 1040 possession, you can treat the business either as a sole proprietorship or a partnership. 2011 1040 The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2011 1040 A change in your reporting position will be treated as a conversion of the entity. 2011 1040 Exception—Qualified joint venture. 2011 1040 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. 2011 1040 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. 2011 1040 For an explanation of "material participation," see the Instructions for Schedule C, line G. 2011 1040 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. 2011 1040 Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. 2011 1040 For more information, see Qualified Joint Venture in the Instructions for Schedule SE. 2011 1040 Corporations. 2011 1040 In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. 2011 1040 A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. 2011 1040 A corporation can also take special deductions. 2011 1040 The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. 2011 1040 However, shareholders cannot deduct any loss of the corporation. 2011 1040 More information. 2011 1040 For more information on corporations, see Publication 542, Corporations. 2011 1040 S corporations. 2011 1040 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. 2011 1040 Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. 2011 1040 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. 2011 1040 More information. 2011 1040 For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. 2011 1040 S. 2011 1040 Income Tax Return for an S Corporation. 2011 1040 Limited liability company. 2011 1040 A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2011 1040 The members of an LLC are not personally liable for its debts. 2011 1040 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. 2011 1040 7701-3. 2011 1040 For more information, see the instructions for Form 8832, Entity Classification Election. 2011 1040 Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. 2011 1040 The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). 2011 1040 An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. 2011 1040 An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. 2011 1040 You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. 2011 1040 You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. 2011 1040 This includes returns or documents filed to report the following information. 2011 1040 Interest, dividends, royalties, etc. 2011 1040 , paid to you. 2011 1040 Any amount paid to you as a dependent care provider. 2011 1040 Certain other amounts paid to you that total $600 or more for the year. 2011 1040 If you do not furnish your identification number as required, you may be subject to penalties. 2011 1040 See Penalties, later. 2011 1040 Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. 2011 1040 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. 2011 1040 Applying for an EIN. 2011 1040 You may apply for an EIN: Online—Click on the EIN link at www. 2011 1040 irs. 2011 1040 gov/businesses/small. 2011 1040 The EIN is issued immediately once the application information is validated. 2011 1040 By telephone at 1-800-829-4933. 2011 1040 By mailing or faxing Form SS-4, Application for Employer Identification Number. 2011 1040 When to apply. 2011 1040 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. 2011 1040 If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. 2011 1040 If you apply by telephone or through the IRS website, you can get an EIN immediately. 2011 1040 If you apply by fax, you can get an EIN within 4 business days. 2011 1040 If you do not receive your EIN by the time a return is due, file your return anyway. 2011 1040 Write “Applied for” and the date you applied for the number in the space for the EIN. 2011 1040 Do not use your social security number as a substitute for an EIN on your tax returns. 2011 1040 More than one EIN. 2011 1040 You should have only one EIN. 2011 1040 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. 2011 1040 Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. 2011 1040 The IRS will tell you which number to use. 2011 1040 More information. 2011 1040 For more information about EINs, see Publication 1635, Understanding Your EIN. 2011 1040 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). 2011 1040 The forms used to report these payments must include the payee's identification number. 2011 1040 Employee. 2011 1040 If you have employees, you must get an SSN from each of them. 2011 1040 Record the name and SSN of each employee exactly as they are shown on the employee's social security card. 2011 1040 If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. 2011 1040 This may occur, for example, if the employee's name has changed due to marriage or divorce. 2011 1040 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. 2011 1040 This form is available at SSA offices or by calling 1-800-772-1213. 2011 1040 It is also available from the SSA website at www. 2011 1040 ssa. 2011 1040 gov. 2011 1040 Other payee. 2011 1040 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. 2011 1040 If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. 2011 1040 To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. 2011 1040 This form is available from IRS offices or by calling 1-800-829-3676. 2011 1040 It is also available from the IRS website at IRS. 2011 1040 gov. 2011 1040 If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. 2011 1040 For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. 2011 1040 Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. 2011 1040 A tax year is usually 12 consecutive months. 2011 1040 There are two kinds of tax years. 2011 1040 Calendar tax year. 2011 1040 A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. 2011 1040 Fiscal tax year. 2011 1040 A fiscal tax year is 12 consecutive months ending on the last day of any month except December. 2011 1040 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. 2011 1040 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. 2011 1040 You must use a calendar tax year if: You keep no books. 2011 1040 You have no annual accounting period. 2011 1040 Your present tax year does not qualify as a fiscal year. 2011 1040 You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. 2011 1040 For more information, see Publication 538, Accounting Periods and Methods. 2011 1040 First-time filer. 2011 1040 If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. 2011 1040 You adopt a tax year by filing your first income tax return using that tax year. 2011 1040 You have not adopted a tax year if you merely did any of the following. 2011 1040 Filed an application for an extension of time to file an income tax return. 2011 1040 Filed an application for an employer identification number. 2011 1040 Paid estimated taxes for that tax year. 2011 1040 Changing your tax year. 2011 1040 Once you have adopted your tax year, you may have to get IRS approval to change it. 2011 1040 To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. 2011 1040 You may have to pay a fee. 2011 1040 For more information, see Publication 538. 2011 1040 Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. 2011 1040 You choose an accounting method for your business when you file your first income tax return. 2011 1040 There are two basic accounting methods. 2011 1040 Cash method. 2011 1040 Under the cash method, you report income in the tax year you receive it. 2011 1040 You usually deduct or capitalize expenses in the tax year you pay them. 2011 1040 Accrual method. 2011 1040 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. 2011 1040 You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. 2011 1040 For other methods, see Publication 538. 2011 1040 If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. 2011 1040 Inventories include goods held for sale in the normal course of business. 2011 1040 They also include raw materials and supplies that will physically become a part of merchandise intended for sale. 2011 1040 Inventories are explained in Publication 538. 2011 1040 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. 2011 1040 For more information, see Publication 538. 2011 1040 You must use the same accounting method to figure your taxable income and to keep your books. 2011 1040 Also, you must use an accounting method that clearly shows your income. 2011 1040 In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. 2011 1040 An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. 2011 1040 More than one business. 2011 1040 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. 2011 1040 You must keep a complete and separate set of books and records for each business. 2011 1040 Changing your method of accounting. 2011 1040 Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. 2011 1040 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. 2011 1040 For examples of changes that require approval and information on how to get approval for the change, see Publication 538. 2011 1040 Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. 2011 1040 The following are the four general kinds of business taxes. 2011 1040 Income tax. 2011 1040 Self-employment tax. 2011 1040 Employment taxes. 2011 1040 Excise taxes. 2011 1040 See Table 2 for the forms you file to report these taxes. 2011 1040 You may want to get Publication 509. 2011 1040 It has tax calendars that tell you when to file returns and make tax payments. 2011 1040 Income Tax All businesses except partnerships must file an annual income tax return. 2011 1040 Partnerships file an information return. 2011 1040 Which form you use depends on how your business is organized. 2011 1040 See Table 2 to find out which return you have to file. 2011 1040 The federal income tax is a pay-as-you-go tax. 2011 1040 You must pay the tax as you earn or receive income during the year. 2011 1040 An employee usually has income tax withheld from his or her pay. 2011 1040 If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. 2011 1040 If you are not required to make estimated tax payments, you may pay any tax due when you file your return. 2011 1040 Table 2. 2011 1040 Which Forms Must I File? IF you are a. 2011 1040 . 2011 1040 . 2011 1040 THEN you may be liable for. 2011 1040 . 2011 1040 . 2011 1040 Use Form. 2011 1040 . 2011 1040 . 2011 1040 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. 2011 1040 2 Various other schedules may be needed. 2011 1040 Estimated tax. 2011 1040 Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. 2011 1040 Sole proprietors, partners, and S corporation shareholders. 2011 1040 You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. 2011 1040 Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. 2011 1040 For more information, see Publication 505, Tax Withholding and Estimated Tax. 2011 1040 Corporations. 2011 1040 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. 2011 1040 Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. 2011 1040 You must deposit the payments as explained later under Depositing Taxes. 2011 1040 For more information, see Publication 542. 2011 1040 Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. 2011 1040 Your payments of SE tax contribute to your coverage under the social security system. 2011 1040 Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. 2011 1040 You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. 2011 1040 Your net earnings from self-employment were $400 or more. 2011 1040 You had church employee income of $108. 2011 1040 28 or more. 2011 1040 Use Schedule SE (Form 1040) to figure your SE tax. 2011 1040 For more information, see Publication 334, Tax Guide for Small Business. 2011 1040 You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. 2011 1040 The Social Security Administration (SSA) time limit for posting self-employment income. 2011 1040 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. 2011 1040 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. 2011 1040 The SSA will not change its records to increase your self-employment income. 2011 1040 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. 2011 1040 Employment taxes include the following. 2011 1040 Social security and Medicare taxes. 2011 1040 Federal income tax withholding. 2011 1040 Federal unemployment (FUTA) tax. 2011 1040 If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. 2011 1040 If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. 2011 1040 These publications explain your tax responsibilities as an employer. 2011 1040 If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. 2011 1040 That publication has information to help you determine whether an individual is an employee or an independent contractor. 2011 1040 If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. 2011 1040 An independent contractor is someone who is self-employed. 2011 1040 Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. 2011 1040 Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. 2011 1040 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. 2011 1040 Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). 2011 1040 Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. 2011 1040 Medicare tax pays for benefits under the hospital insurance part of FICA. 2011 1040 You withhold part of these taxes from your employee's wages and you pay a part yourself. 2011 1040 To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. 2011 1040 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. 2011 1040 (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. 2011 1040 ) 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. 2011 1040 You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. 2011 1040 You pay FUTA tax only from your own funds. 2011 1040 Employees do not pay this tax or have it withheld from their pay. 2011 1040 Which form do I file? Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. 2011 1040 See Publication 15 to find out if you can use this form. 2011 1040 Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. 2011 1040 Form I-9. 2011 1040 You must verify that each new employee is legally eligible to work in the United States. 2011 1040 Both you and the employee must complete the U. 2011 1040 S. 2011 1040 Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. 2011 1040 You can get the form from USCIS offices or from the USCIS website at www. 2011 1040 uscis. 2011 1040 gov. 2011 1040 Call the USCIS at 1-800-375-5283 for more information about your responsibilities. 2011 1040 Form W-4. 2011 1040 Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. 2011 1040 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. 2011 1040 For more information, see Publication 15. 2011 1040 Employees claiming more than 10 withholding allowances. 2011 1040 An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. 2011 1040 See section 16 of Publication 15. 2011 1040 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. 2011 1040 You must also send copies to the Social Security Administration. 2011 1040 See Information Returns, later, for more information on Form W-2. 2011 1040 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. 2011 1040 Manufacture or sell certain products. 2011 1040 Operate certain kinds of businesses. 2011 1040 Use various kinds of equipment, facilities, or products. 2011 1040 Receive payment for certain services. 2011 1040 For more information on excise taxes, see Publication 510, Excise Taxes. 2011 1040 Form 720. 2011 1040 The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. 2011 1040 Environmental taxes. 2011 1040 Communications and air transportation taxes. 2011 1040 Fuel taxes. 2011 1040 Tax on the first retail sale of heavy trucks, trailers, and tractors. 2011 1040 Manufacturers taxes on the sale or use of a variety of different articles. 2011 1040 Form 2290. 2011 1040 There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. 2011 1040 The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. 2011 1040 Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. 2011 1040 For more information, see the instructions for Form 2290. 2011 1040 Form 730. 2011 1040 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. 2011 1040 Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. 2011 1040 Form 11-C. 2011 1040 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. 2011 1040 Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. 2011 1040 Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). 2011 1040 Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. 2011 1040 Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. 2011 1040 Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. 2011 1040 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. 2011 1040 You must give a copy of each information return you are required to file to the recipient or payer. 2011 1040 In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. 2011 1040 For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. 2011 1040 Form 1099-MISC. 2011 1040 Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. 2011 1040 These payments include the following items. 2011 1040 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. 2011 1040 Rent payments of $600 or more, other than rents paid to real estate agents. 2011 1040 Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. 2011 1040 Royalty payments of $10 or more. 2011 1040 Payments to certain crew members by operators of fishing boats. 2011 1040 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. 2011 1040 Form W-2. 2011 1040 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. 2011 1040 For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. 2011 1040 Form 8300. 2011 1040 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. 2011 1040 Cash includes U. 2011 1040 S. 2011 1040 and foreign coin and currency. 2011 1040 It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. 2011 1040 For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). 2011 1040 Penalties The law provides penalties for not filing returns or paying taxes as required. 2011 1040 Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. 2011 1040 Failure to file tax returns. 2011 1040 If you do not file your tax return by the due date, you may have to pay a penalty. 2011 1040 The penalty is based on the tax not paid by the due date. 2011 1040 See your tax return instructions for more information about this penalty. 2011 1040 Failure to pay tax. 2011 1040 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. 2011 1040 For more information, see your tax return instructions. 2011 1040 Failure to withhold, deposit, or pay taxes. 2011 1040 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. 2011 1040 You may also be subject to penalties if you deposit the taxes late. 2011 1040 For more information, see Publication 15. 2011 1040 Failure to follow information reporting requirements. 2011 1040 The following penalties apply if you are required to file information returns. 2011 1040 For more information, see the General Instructions for Certain Information Returns. 2011 1040 Failure to file information returns. 2011 1040 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. 2011 1040 Failure to furnish correct payee statements. 2011 1040 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. 2011 1040 Waiver of penalty. 2011 1040 These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. 2011 1040 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. 2011 1040 (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. 2011 1040 ) Failure to supply taxpayer identification number. 2011 1040 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. 2011 1040 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. 2011 1040 Business Expenses You can deduct business expenses on your income tax return. 2011 1040 These are the current operating costs of running your business. 2011 1040 To be deductible, a business expense must be both ordinary and necessary. 2011 1040 An ordinary expense is one that is common and accepted in your field of business, trade, or profession. 2011 1040 A necessary expense is one that is helpful and appropriate for your business, trade, or profession. 2011 1040 An expense does not have to be indispensable to be considered necessary. 2011 1040 The following are brief explanations of some expenses that are of interest to people starting a business. 2011 1040 There are many other expenses that you may be able to deduct. 2011 1040 See your form instructions and Publication 535, Business Expenses. 2011 1040 Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. 2011 1040 Your business start-up costs will depend on the type of business you are starting. 2011 1040 They may include costs for advertising, travel, surveys, and training. 2011 1040 These costs are generally capital expenses. 2011 1040 You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). 2011 1040 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. 2011 1040 The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. 2011 1040 Any remaining cost must be amortized. 2011 1040 For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. 2011 1040 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. 2011 1040 You must spread the cost over more than one tax year and deduct part of it each year. 2011 1040 This method of deducting the cost of business property is called depreciation. 2011 1040 Business property you must depreciate includes the following items. 2011 1040 Office furniture. 2011 1040 Buildings. 2011 1040 Machinery and equipment. 2011 1040 You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. 2011 1040 This deduction is known as the “section 179 deduction. 2011 1040 ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. 2011 1040 Depreciation must be taken in the year it is allowable. 2011 1040 Allowable depreciation not taken in a prior year cannot be taken in the current year. 2011 1040 If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. 2011 1040 S. 2011 1040 Individual Income Tax Return, or by changing your accounting method. 2011 1040 For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. 2011 1040 Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. 2011 1040 Even then, your deduction may be limited. 2011 1040 To qualify to claim expenses for business use of your home, you must meet both the following tests. 2011 1040 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. 2011 1040 Exclusive use. 2011 1040 To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 2011 1040 The area used for business can be a room or other separately identifiable space. 2011 1040 The space does not need to be marked off by a permanent partition. 2011 1040 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. 2011 1040 Exceptions to exclusive use. 2011 1040 You do not have to meet the exclusive use test if either of the following applies. 2011 1040 You use part of your home for the storage of inventory or product samples. 2011 1040 You use part of your home as a daycare facility. 2011 1040 For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). 2011 1040 Principal place of business. 2011 1040 Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. 2011 1040 You use it exclusively and regularly for administrative or management activities of your trade or business. 2011 1040 You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2011 1040 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. 2011 1040 The relative importance of the activities performed at each location. 2011 1040 If the relative importance factor does not determine your principal place of business, the time spent at each location. 2011 1040 If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 2011 1040 However, for other ways to qualify to deduct home office expenses, see Publication 587. 2011 1040 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. 2011 1040 If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. 2011 1040 More information. 2011 1040 For more information about business use of your home, see Publication 587. 2011 1040 Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. 2011 1040 You generally can deduct either your actual expenses or the standard mileage rate. 2011 1040 Actual expenses. 2011 1040 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. 2011 1040 You can divide your expenses based on the miles driven for each purpose. 2011 1040 Example. 2011 1040 You are the sole proprietor of a flower shop. 2011 1040 You drove your van 20,000 miles during the year. 2011 1040 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. 2011 1040 You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. 2011 1040 Standard mileage rate. 2011 1040 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. 2011 1040 You can use the standard mileage rate for a vehicle you own or lease. 2011 1040 The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. 2011 1040 It is announced annually by the IRS. 2011 1040 To figure your deduction, multiply your business miles by the standard mileage rate for the year. 2011 1040 Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. 2011 1040 However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. 2011 1040 Choosing the standard mileage rate. 2011 1040 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. 2011 1040 In later years, you can choose to use either the standard mileage rate or actual expenses. 2011 1040 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). 2011 1040 Additional information. 2011 1040 For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 2011 1040 Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. 2011 1040 It also explains how long you must keep your records for federal tax purposes. 2011 1040 A sample recordkeeping system is illustrated at the end of this part. 2011 1040 Why Keep Records? Everyone in business must keep records. 2011 1040 Good records will help you do the following. 2011 1040 Monitor the progress of your business. 2011 1040 You need good records to monitor the progress of your business. 2011 1040 Records can show whether your business is improving, which items are selling, or what changes you need to make. 2011 1040 Good records can increase the likelihood of business success. 2011 1040 Prepare your financial statements. 2011 1040 You need good records to prepare accurate financial statements. 2011 1040 These include income (profit and loss) statements and balance sheets. 2011 1040 These statements can help you in dealing with your bank or creditors and help you manage your business. 2011 1040 An income statement shows the income and expenses of the business for a given period of time. 2011 1040 A balance sheet shows the assets, liabilities, and your equity in the business on a given date. 2011 1040 Identify source of receipts. 2011 1040 You will receive money or property from many sources. 2011 1040 Your records can identify the source of your receipts. 2011 1040 You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. 2011 1040 Keep track of deductible expenses. 2011 1040 You may forget expenses when you prepare your tax return unless you record them when they occur. 2011 1040 Prepare your tax returns. 2011 1040 You need good records to prepare your tax returns. 2011 1040 These records must support the income, expenses, and credits you report. 2011 1040 Generally, these are the same records you use to monitor your business and prepare your financial statements. 2011 1040 Support items reported on tax returns. 2011 1040 You must keep your business records available at all times for inspection by the IRS. 2011 1040 If the IRS examines any of your tax returns, you may be asked to explain the items reported. 2011 1040 A complete set of records will speed up the examination. 2011 1040 Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. 2011 1040 You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. 2011 1040 The business you are in affects the type of records you need to keep for federal tax purposes. 2011 1040 You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. 2011 1040 See Accounting Method, earlier. 2011 1040 If you are in more than one business, you should keep a complete and separate set of records for each business. 2011 1040 A corporation should keep minutes of board of directors' meetings. 2011 1040 Your recordkeeping system should include a summary of your business transactions. 2011 1040 This summary is ordinarily made in your books (for example, accounting journals and ledgers). 2011 1040 Your books must show your gross income, as well as your deductions and credits. 2011 1040 For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. 2011 1040 In addition, you must keep supporting documents, explained later. 2011 1040 Electronic records. 2011 1040 All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. 2011 1040 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. 2011 1040 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. 2011 1040 The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. 2011 1040 All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. 2011 1040 Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. 2011 1040 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. 2011 1040 You still have the responsibility of retaining any other books and records that are required to be retained. 2011 1040 The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. 2011 1040 This test is not considered an examination and the results must be shared with you. 2011 1040 If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. 2011 1040 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. 2011 1040 For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. 2011 1040 Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. 2011 1040 Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. 2011 1040 These documents contain information you need to record in your books. 2011 1040 It is important to keep these documents because they support the entries in your books and on your tax return. 2011 1040 Keep them in an orderly fashion and in a safe place. 2011 1040 For instance, organize them by year and type of income or expense. 2011 1040 Gross receipts. 2011 1040 Gross receipts are the income you receive from your business. 2011 1040 You should keep supporting documents that show the amounts and sources of your gross receipts. 2011 1040 Documents that show gross receipts include the following. 2011 1040 Cash register tapes. 2011 1040 Bank deposit slips. 2011 1040 Receipt books. 2011 1040 Invoices. 2011 1040 Credit card charge slips. 2011 1040 Forms 1099-MISC. 2011 1040 Purchases. 2011 1040 Purchases are the items you buy and resell to customers. 2011 1040 If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. 2011 1040 Your supporting documents should show the amount paid and that the amount was for purchases. 2011 1040 Documents for purchases include the following. 2011 1040 Canceled checks. 2011 1040 Cash register tape receipts. 2011 1040 Credit card sales slips. 2011 1040 Invoices. 2011 1040 These records will help you determine the value of your inventory at the end of the year. 2011 1040 See Publication 538 for information on methods for valuing inventory. 2011 1040 Expenses. 2011 1040 Expenses are the costs you incur (other than purchases) to carry on your business. 2011 1040 Your supporting documents should show the amount paid and that the amount was for a business expense. 2011 1040 Documents for expenses include the following. 2011 1040 Canceled checks. 2011 1040 Cash register tapes. 2011 1040 Account statements. 2011 1040 Credit card sales slips. 2011 1040 Invoices. 2011 1040 Petty cash slips for small cash payments. 2011 1040 A petty cash fund allows you to make small payments without having to write checks for small amounts. 2011 1040 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. 2011 1040 Travel, transportation, entertainment, and gift expenses. 2011 1040 Specific recordkeeping rules apply to these expenses. 2011 1040 For more information, see Publication 463. 2011 1040 Employment taxes. 2011 1040 There are specific employment tax records you must keep. 2011 1040 For a list, see Publication 15. 2011 1040 Assets. 2011 1040 Assets are the property, such as machinery and furniture you own and use in your business. 2011 1040 You must keep records to verify certain information about your business assets. 2011 1040 You need records to figure the annual depreciation and the gain or loss when you sell the assets. 2011 1040 Your records should show the following information. 2011 1040 When and how you acquired the asset. 2011 1040 Purchase price. 2011 1040 Cost of any improvements. 2011 1040 Section 179 deduction taken. 2011 1040 Deductions taken for depreciation. 2011 1040 Deductions taken for casualty losses, such as losses resulting from fires or storms. 2011 1040 How you used the asset. 2011 1040 When and how you disposed of the asset. 2011 1040 Selling price. 2011 1040 Expenses of sale. 2011 1040 The following documents may show this information. 2011 1040 Purchase and sales invoices. 2011 1040 Real estate closing statements. 2011 1040 Canceled checks. 2011 1040 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. 2011 1040 These include account statements prepared for the financial institution by a third party. 2011 1040 These account statements must be highly legible. 2011 1040 The following table lists acceptable account statements. 2011 1040 IF payment is by. 2011 1040 . 2011 1040 . 2011 1040 THEN the statement must show the. 2011 1040 . 2011 1040 . 2011 1040 Check Check number. 2011 1040 Amount. 2011 1040 Payee's name. 2011 1040 Date the check amount was posted to the account by the financial institution. 2011 1040 Electronic funds transfer Amount transferred. 2011 1040 Payee's name. 2011 1040 Date the transfer was posted to the account by the financial institution. 2011 1040 Credit card Amount charged. 2011 1040 Payee's name. 2011 1040 Transaction date. 2011 1040 Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. 2011 1040 You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. 2011 1040 Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. 2011 1040 (Your business transactions are shown on the supporting documents just discussed. 2011 1040 ) Business transactions are ordinarily summarized in books called journals and ledgers. 2011 1040 You can buy them at your local stationery or office supply store. 2011 1040 A journal is a book where you record each business transaction shown on your supporting documents. 2011 1040 You may have to keep separate journals for transactions that occur frequently. 2011 1040 A ledger is a book that contains the totals from all of your journals. 2011 1040 It is organized into different accounts. 2011 1040 Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. 2011 1040 For example, a recordkeeping system for a small business might include the following items. 2011 1040 Business checkbook. 2011 1040 Daily summary of cash receipts. 2011 1040 Monthly summary of cash receipts. 2011 1040 Check disbursements journal. 2011 1040 Depreciation worksheet. 2011 1040 Employee compensation record. 2011 1040 The business checkbook is explained next. 2011 1040 The other items are illustrated later under Sample Record System. 2011 1040 The system you use to record business transactions will be more effective if you follow good recordkeeping practices. 2011 1040 For example, record expenses when they occur, and identify the source of recorded receipts. 2011 1040 Generally, it is best to record transactions on a daily basis. 2011 1040 Business checkbook. 2011 1040 One of the first things you should do when you start a business is open a business checking account. 2011 1040 You should keep your business account separate from your personal checking account. 2011 1040 The business checkbook is your basic source of information for recording your business expenses. 2011 1040 You should deposit all daily receipts in your business checking account. 2011 1040 You should check your account for errors by reconciling it. 2011 1040 See Reconciling the checking account, later. 2011 1040 Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. 2011 1040 You should also note on the deposit slip the source of the deposit and keep copies of all slips. 2011 1040 You should make all payments by check to document business expenses. 2011 1040 Write checks payable to yourself only when making withdrawals from your business for personal use. 2011 1040 Avoid writing checks payable to cash. 2011 1040 If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. 2011 1040 If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. 2011 1040 Use the business account for business purposes only. 2011 1040 Indicate the source of deposits and the type of expense in the checkbook. 2011 1040 Reconciling the checking account. 2011 1040 When you receive your bank statement, make sure the statement, your checkbook, and your books agree. 2011 1040 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. 2011 1040 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. 2011 1040 You should reconcile your checking account each month. 2011 1040 Before you reconcile your monthly bank statement, check your own figures. 2011 1040 Begin with the balance shown in your checkbook at the end of the previous month. 2011 1040 To this balance, add the total cash deposited during the month and subtract the total cash disbursements. 2011 1040 After checking your figures, the result should agree with your checkbook balance at the end of the month. 2011 1040 If the result does not agree, you may have made an error in recording a check or deposit. 2011 1040 You can find the error by doing the following. 2011 1040 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. 2011 1040 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. 2011 1040 Adding the deposit amounts in your checkbook. 2011 1040 Compare that total with the monthly total in your cash receipt book, if you have one. 2011 1040 If the totals do not agree, check the individual amounts to find any errors. 2011 1040 If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. 2011 1040 When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. 2011 1040 Many banks print a reconciliation worksheet on the back of the statement. 2011 1040 To reconcile your account, follow these steps. 2011 1040 Compare the deposits listed on the bank statement with the deposits shown in your checkbook. 2011 1040 Note all differences in the dollar amounts. 2011 1040 Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. 2011 1040 Note all differences in the dollar amounts. 2011 1040 Mark the check number in the checkbook as having cleared the bank. 2011 1040 After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. 2011 1040 Prepare a bank reconciliation. 2011 1040 One is illustrated later under Sample Record System. 2011 1040 Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. 2011 1040 At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. 2011 1040 If you still have differences, check the previous steps to find the errors. 2011 1040 Table 3. 2011 1040 Period of Limitations IF you. 2011 1040 . 2011 1040 . 2011 1040 THEN the period is. 2011 1040 . 2011 1040 . 2011 1040 1. 2011 1040 Owe additional tax and situations (2), (3), and (4), below, do not apply to you 3 years 2. 2011 1040 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. 2011 1040 File a fraudulent return Not limited 4. 2011 1040 Do not file a return Not limited 5. 2011 1040 File a claim for credit or refund after you filed your return Later of: 3 years or 2 years after tax was paid 6. 2011 1040 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. 2011 1040 The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. 2011 1040 You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. 2011 1040 Single-entry. 2011 1040 A single-entry system is based on the income statement (profit or loss statement). 2011 1040 It can be a simple and practical system if you are starting a small business. 2011 1040 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. 2011 1040 Double-entry. 2011 1040 A double-entry bookkeeping system uses journals and ledgers. 2011 1040 Transactions are first entered in a journal and then posted to ledger accounts. 2011 1040 These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). 2011 1040 You close income and expense accounts at the end of each tax year. 2011 1040 You keep asset, liability, and net worth accounts open on a permanent basis. 2011 1040 In the double-entry system, each account has a left side for debits and a right side for credits. 2011 1040 It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. 2011 1040 Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. 2011 1040 If the amounts do not balance, you have made an error and you must find and correct it. 2011 1040 An example of a journal entry exhibiting a payment of rent in October is shown next. 2011 1040 General Journal Date Description of Entry Debit Credit Oct. 2011 1040 5 Rent expense 780. 2011 1040 00 Cash 780. 2011 1040 00 Computerized System There are computer software packages you can use for recordkeeping. 2011 1040 They can be purchased in many retail stores. 2011 1040 These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. 2011 1040 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. 2011 1040 To meet this qualification, the machine-sensible records must reconcile with your books and return. 2011 1040 These records must provide enough detail to identify the underlying source documents. 2011 1040 You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. 2011 1040 This documentation must be sufficiently detailed to show all of the following items. 2011 1040 Functions being performed as the data flows through the system. 2011 1040 Controls used to ensure accurate and reliable processing. 2011 1040 Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. 2011 1040 Charts of accounts and detailed account descriptions. 2011 1040 See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. 2011 1040 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. 2011 1040 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. 2011 1040 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. 2011 1040 Table 3 contains the periods of limitations that apply to income tax returns. 2011 1040 Unless otherwise stated, the years refer to the period after the return was filed. 2011 1040 Returns filed before the due date are treated as filed on the due date. 2011 1040 Keep copies of your filed tax returns. 2011 1040 They help in preparing future tax returns and making computations if you file an amended return. 2011 1040 Employment taxes. 2011 1040 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. 2011 1040 For more information about recordkeeping for employment taxes, see Publication 15. 2011 1040 Assets. 2011 1040 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. 2011 1040 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. 2011 1040 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. 2011 1040 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. 2011 1040 Records for nontax purposes. 2011 1040 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. 2011 1040 For example, your insurance company or creditors may require you to keep them longer than the IRS does. 2011 1040 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. 2011 1040 Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. 2011 1040 These sample records should not be viewed as a recommendation of how to keep your records. 2011 1040 They are intended only to show how one business keeps its records. 2011 1040 1. 2011 1040 Daily Summary of Cash Receipts This summary is a record of cash sales for the day. 2011 1040 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. 2011 1040 Henry takes the cash sales entry from his cash register tape. 2011 1040 If he had no cash register, he would simply total his cash sale slips and any other cash received that day. 2011 1040 He carries the total receipts shown in this summary for January 3 ($267. 2011 1040 80), including cash sales ($263. 2011 1040 60) and sales tax ($4. 2011 1040 20), to the Monthly Summary of Cash Receipts. 2011 1040 Petty cash fund. 2011 1040 Henry uses a petty cash fund to make small payments without having to write checks for small amounts. 2011 1040 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. 2011 1040 He sets up a fixed amount ($50) in his petty cash fund. 2011 1040 The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. 2011 1040 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. 2011 1040 (See the Check Disbursements Journal entry for check number 92. 2011 1040 ) This restores the fund to its fixed amount of $50. 2011 1040 He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. 2011 1040 2. 2011 1040 Monthly Summary of Cash Receipts This shows the income activity for the month. 2011 1040 Henry carries the total monthly net sales shown in this summary for January ($4,865. 2011 1040 05) to his Annual Summary. 2011 1040 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. 2011 1040 He cannot take a deduction for sales tax turned over to the state because he only collected the tax. 2011 1040 He does not include the tax in his income. 2011 1040 3. 2011 1040 Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. 2011 1040 All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. 2011 1040 Frequent expenses have their own headings across the sheet. 2011 1040 He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. 2011 1040 Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. 2011 1040 Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. 2011 1040 If he did, he would record them in the journal, even though he could not deduct them as business expenses. 2011 1040 Henry carries the January total of expenses for materials ($1,083. 2011 1040 50) to the Annual Summary. 2011 1040 Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. 2011 1040 , in the appropriate columns of that summary. 2011 1040 4. 2011 1040 Employee Compensation Record This record shows the following information. 2011 1040 The number of hours Henry's employee worked in a pay period. 2011 1040 The employee's total pay for the period. 2011 1040 The deductions Henry withheld in figuring the employee's net pay. 2011 1040 The monthly gross payroll. 2011 1040 Henry carries the January gross payroll ($520) to the Annual Summary. 2011 1040 5. 2011 1040 Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. 2011 1040 He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. 2011 1040 He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. 2011 1040 As in the journal, he keeps each major expense in a separate column. 2011 1040 Henry carries the cash receipts total shown in the annual summary ($47,440. 2011 1040 9