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Form 1040ez More:label_form_201040ez More:taxes

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Form 1040ez More:label_form_201040ez More:taxes

Form 1040ez more:label_form_201040ez more:taxes Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes Exception—Community Income. Form 1040ez more:label_form_201040ez more:taxes Exception—Qualified joint venture. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. Form 1040ez more:label_form_201040ez more:taxes Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. Form 1040ez more:label_form_201040ez more:taxes Table 1 can help you learn what those responsibilities are. Form 1040ez more:label_form_201040ez more:taxes Ask yourself each question listed in the table, then see the related discussion to find the answer. Form 1040ez more:label_form_201040ez more:taxes In addition to knowing about federal taxes, you need to make some basic business decisions. Form 1040ez more:label_form_201040ez more:taxes Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. Form 1040ez more:label_form_201040ez more:taxes For information on how to contact the SBA, see How to Get More Information, later. Form 1040ez more:label_form_201040ez more:taxes Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. Form 1040ez more:label_form_201040ez more:taxes When beginning a business, you must decide which form of business to use. Form 1040ez more:label_form_201040ez more:taxes Legal and tax considerations enter into this decision. Form 1040ez more:label_form_201040ez more:taxes Only tax considerations are discussed in this publication. Form 1040ez more:label_form_201040ez more:taxes Your form of business determines which income tax return form you have to file. Form 1040ez more:label_form_201040ez more:taxes See Table 2 to find out which form you have to file. Form 1040ez more:label_form_201040ez more:taxes Sole proprietorships. Form 1040ez more:label_form_201040ez more:taxes   A sole proprietorship is an unincorporated business that is owned by one individual. Form 1040ez more:label_form_201040ez more:taxes It is the simplest form of business organization to start and maintain. Form 1040ez more:label_form_201040ez more:taxes The business has no existence apart from you, the owner. Form 1040ez more:label_form_201040ez more:taxes Its liabilities are your personal liabilities. Form 1040ez more:label_form_201040ez more:taxes You undertake the risks of the business for all assets owned, whether or not used in the business. Form 1040ez more:label_form_201040ez more:taxes You include the income and expenses of the business on your personal tax return. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. Form 1040ez more:label_form_201040ez more:taxes If you are a farmer, see Publication 225, Farmer's Tax Guide. Form 1040ez more:label_form_201040ez more:taxes Partnerships. Form 1040ez more:label_form_201040ez more:taxes   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Form 1040ez more:label_form_201040ez more:taxes Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Form 1040ez more:label_form_201040ez more:taxes   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. Form 1040ez more:label_form_201040ez more:taxes , from its operations, but it does not pay income tax. Form 1040ez more:label_form_201040ez more:taxes Instead, it “passes through” any profits or losses to its partners. Form 1040ez more:label_form_201040ez more:taxes Each partner includes his or her share of the partnership's items on his or her tax return. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes   For more information on partnerships, see Publication 541, Partnerships. Form 1040ez more:label_form_201040ez more:taxes Husband and wife business. Form 1040ez more:label_form_201040ez more:taxes   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Form 1040ez more:label_form_201040ez more:taxes Do not use Schedule C or C-EZ. Form 1040ez more:label_form_201040ez more:taxes Instead, file Form 1065, U. Form 1040ez more:label_form_201040ez more:taxes S. Form 1040ez more:label_form_201040ez more:taxes Return of Partnership Income. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 541, Partnerships. Form 1040ez more:label_form_201040ez more:taxes Exception—Community Income. Form 1040ez more:label_form_201040ez more:taxes   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Form 1040ez more:label_form_201040ez more:taxes S. Form 1040ez more:label_form_201040ez more:taxes possession, you can treat the business either as a sole proprietorship or a partnership. Form 1040ez more:label_form_201040ez more:taxes The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Form 1040ez more:label_form_201040ez more:taxes A change in your reporting position will be treated as a conversion of the entity. Form 1040ez more:label_form_201040ez more:taxes Exception—Qualified joint venture. Form 1040ez more:label_form_201040ez more:taxes   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Form 1040ez more:label_form_201040ez more:taxes Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Form 1040ez more:label_form_201040ez more:taxes For an explanation of "material participation," see the Instructions for Schedule C, line G. Form 1040ez more:label_form_201040ez more:taxes   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Form 1040ez more:label_form_201040ez more:taxes Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Form 1040ez more:label_form_201040ez more:taxes For more information, see Qualified Joint Venture in the Instructions for Schedule SE. Form 1040ez more:label_form_201040ez more:taxes Corporations. Form 1040ez more:label_form_201040ez more:taxes   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. Form 1040ez more:label_form_201040ez more:taxes A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. Form 1040ez more:label_form_201040ez more:taxes A corporation can also take special deductions. Form 1040ez more:label_form_201040ez more:taxes   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. Form 1040ez more:label_form_201040ez more:taxes However, shareholders cannot deduct any loss of the corporation. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes   For more information on corporations, see Publication 542, Corporations. Form 1040ez more:label_form_201040ez more:taxes S corporations. Form 1040ez more:label_form_201040ez more:taxes   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Form 1040ez more:label_form_201040ez more:taxes Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Form 1040ez more:label_form_201040ez more:taxes On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. Form 1040ez more:label_form_201040ez more:taxes S. Form 1040ez more:label_form_201040ez more:taxes Income Tax Return for an S Corporation. Form 1040ez more:label_form_201040ez more:taxes Limited liability company. Form 1040ez more:label_form_201040ez more:taxes   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Form 1040ez more:label_form_201040ez more:taxes The members of an LLC are not personally liable for its debts. Form 1040ez more:label_form_201040ez more:taxes An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. Form 1040ez more:label_form_201040ez more:taxes 7701-3. Form 1040ez more:label_form_201040ez more:taxes For more information, see the instructions for Form 8832, Entity Classification Election. Form 1040ez more:label_form_201040ez more:taxes Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. Form 1040ez more:label_form_201040ez more:taxes The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). Form 1040ez more:label_form_201040ez more:taxes An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. Form 1040ez more:label_form_201040ez more:taxes An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. Form 1040ez more:label_form_201040ez more:taxes You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. Form 1040ez more:label_form_201040ez more:taxes You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. Form 1040ez more:label_form_201040ez more:taxes This includes returns or documents filed to report the following information. Form 1040ez more:label_form_201040ez more:taxes Interest, dividends, royalties, etc. Form 1040ez more:label_form_201040ez more:taxes , paid to you. Form 1040ez more:label_form_201040ez more:taxes Any amount paid to you as a dependent care provider. Form 1040ez more:label_form_201040ez more:taxes Certain other amounts paid to you that total $600 or more for the year. Form 1040ez more:label_form_201040ez more:taxes If you do not furnish your identification number as required, you may be subject to penalties. Form 1040ez more:label_form_201040ez more:taxes See Penalties, later. Form 1040ez more:label_form_201040ez more:taxes Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. Form 1040ez more:label_form_201040ez more:taxes If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. Form 1040ez more:label_form_201040ez more:taxes Applying for an EIN. Form 1040ez more:label_form_201040ez more:taxes   You may apply for an EIN: Online—Click on the EIN link at www. Form 1040ez more:label_form_201040ez more:taxes irs. Form 1040ez more:label_form_201040ez more:taxes gov/businesses/small. Form 1040ez more:label_form_201040ez more:taxes The EIN is issued immediately once the application information is validated. Form 1040ez more:label_form_201040ez more:taxes By telephone at 1-800-829-4933. Form 1040ez more:label_form_201040ez more:taxes By mailing or faxing Form SS-4, Application for Employer Identification Number. Form 1040ez more:label_form_201040ez more:taxes When to apply. Form 1040ez more:label_form_201040ez more:taxes   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. Form 1040ez more:label_form_201040ez more:taxes If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. Form 1040ez more:label_form_201040ez more:taxes If you apply by telephone or through the IRS website, you can get an EIN immediately. Form 1040ez more:label_form_201040ez more:taxes If you apply by fax, you can get an EIN within 4 business days. Form 1040ez more:label_form_201040ez more:taxes   If you do not receive your EIN by the time a return is due, file your return anyway. Form 1040ez more:label_form_201040ez more:taxes Write “Applied for” and the date you applied for the number in the space for the EIN. Form 1040ez more:label_form_201040ez more:taxes Do not use your social security number as a substitute for an EIN on your tax returns. Form 1040ez more:label_form_201040ez more:taxes More than one EIN. Form 1040ez more:label_form_201040ez more:taxes   You should have only one EIN. Form 1040ez more:label_form_201040ez more:taxes If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. Form 1040ez more:label_form_201040ez more:taxes Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Form 1040ez more:label_form_201040ez more:taxes The IRS will tell you which number to use. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes   For more information about EINs, see Publication 1635, Understanding Your EIN. Form 1040ez more:label_form_201040ez more:taxes Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). Form 1040ez more:label_form_201040ez more:taxes The forms used to report these payments must include the payee's identification number. Form 1040ez more:label_form_201040ez more:taxes Employee. Form 1040ez more:label_form_201040ez more:taxes   If you have employees, you must get an SSN from each of them. Form 1040ez more:label_form_201040ez more:taxes Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Form 1040ez more:label_form_201040ez more:taxes If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Form 1040ez more:label_form_201040ez more:taxes This may occur, for example, if the employee's name has changed due to marriage or divorce. Form 1040ez more:label_form_201040ez more:taxes   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. Form 1040ez more:label_form_201040ez more:taxes This form is available at SSA offices or by calling 1-800-772-1213. Form 1040ez more:label_form_201040ez more:taxes It is also available from the SSA website at www. Form 1040ez more:label_form_201040ez more:taxes ssa. Form 1040ez more:label_form_201040ez more:taxes gov. Form 1040ez more:label_form_201040ez more:taxes Other payee. Form 1040ez more:label_form_201040ez more:taxes   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. Form 1040ez more:label_form_201040ez more:taxes If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. Form 1040ez more:label_form_201040ez more:taxes   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Form 1040ez more:label_form_201040ez more:taxes This form is available from IRS offices or by calling 1-800-829-3676. Form 1040ez more:label_form_201040ez more:taxes It is also available from the IRS website at IRS. Form 1040ez more:label_form_201040ez more:taxes gov. Form 1040ez more:label_form_201040ez more:taxes    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. Form 1040ez more:label_form_201040ez more:taxes For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Form 1040ez more:label_form_201040ez more:taxes Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. Form 1040ez more:label_form_201040ez more:taxes A tax year is usually 12 consecutive months. Form 1040ez more:label_form_201040ez more:taxes There are two kinds of tax years. Form 1040ez more:label_form_201040ez more:taxes Calendar tax year. Form 1040ez more:label_form_201040ez more:taxes A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Form 1040ez more:label_form_201040ez more:taxes Fiscal tax year. Form 1040ez more:label_form_201040ez more:taxes A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Form 1040ez more:label_form_201040ez more:taxes A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Form 1040ez more:label_form_201040ez more:taxes If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Form 1040ez more:label_form_201040ez more:taxes You must use a calendar tax year if: You keep no books. Form 1040ez more:label_form_201040ez more:taxes You have no annual accounting period. Form 1040ez more:label_form_201040ez more:taxes Your present tax year does not qualify as a fiscal year. Form 1040ez more:label_form_201040ez more:taxes You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 538, Accounting Periods and Methods. Form 1040ez more:label_form_201040ez more:taxes First-time filer. Form 1040ez more:label_form_201040ez more:taxes   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. Form 1040ez more:label_form_201040ez more:taxes You adopt a tax year by filing your first income tax return using that tax year. Form 1040ez more:label_form_201040ez more:taxes You have not adopted a tax year if you merely did any of the following. Form 1040ez more:label_form_201040ez more:taxes Filed an application for an extension of time to file an income tax return. Form 1040ez more:label_form_201040ez more:taxes Filed an application for an employer identification number. Form 1040ez more:label_form_201040ez more:taxes Paid estimated taxes for that tax year. Form 1040ez more:label_form_201040ez more:taxes Changing your tax year. Form 1040ez more:label_form_201040ez more:taxes   Once you have adopted your tax year, you may have to get IRS approval to change it. Form 1040ez more:label_form_201040ez more:taxes To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. Form 1040ez more:label_form_201040ez more:taxes You may have to pay a fee. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 538. Form 1040ez more:label_form_201040ez more:taxes Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. Form 1040ez more:label_form_201040ez more:taxes You choose an accounting method for your business when you file your first income tax return. Form 1040ez more:label_form_201040ez more:taxes There are two basic accounting methods. Form 1040ez more:label_form_201040ez more:taxes Cash method. Form 1040ez more:label_form_201040ez more:taxes Under the cash method, you report income in the tax year you receive it. Form 1040ez more:label_form_201040ez more:taxes You usually deduct or capitalize expenses in the tax year you pay them. Form 1040ez more:label_form_201040ez more:taxes Accrual method. Form 1040ez more:label_form_201040ez more:taxes Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. Form 1040ez more:label_form_201040ez more:taxes You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. Form 1040ez more:label_form_201040ez more:taxes For other methods, see Publication 538. Form 1040ez more:label_form_201040ez more:taxes If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Form 1040ez more:label_form_201040ez more:taxes Inventories include goods held for sale in the normal course of business. Form 1040ez more:label_form_201040ez more:taxes They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Form 1040ez more:label_form_201040ez more:taxes Inventories are explained in Publication 538. Form 1040ez more:label_form_201040ez more:taxes Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 538. Form 1040ez more:label_form_201040ez more:taxes You must use the same accounting method to figure your taxable income and to keep your books. Form 1040ez more:label_form_201040ez more:taxes Also, you must use an accounting method that clearly shows your income. Form 1040ez more:label_form_201040ez more:taxes In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. Form 1040ez more:label_form_201040ez more:taxes An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. Form 1040ez more:label_form_201040ez more:taxes More than one business. Form 1040ez more:label_form_201040ez more:taxes   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. Form 1040ez more:label_form_201040ez more:taxes You must keep a complete and separate set of books and records for each business. Form 1040ez more:label_form_201040ez more:taxes Changing your method of accounting. Form 1040ez more:label_form_201040ez more:taxes   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Form 1040ez more:label_form_201040ez more:taxes A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. Form 1040ez more:label_form_201040ez more:taxes For examples of changes that require approval and information on how to get approval for the change, see Publication 538. Form 1040ez more:label_form_201040ez more:taxes Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. Form 1040ez more:label_form_201040ez more:taxes The following are the four general kinds of business taxes. Form 1040ez more:label_form_201040ez more:taxes Income tax. Form 1040ez more:label_form_201040ez more:taxes Self-employment tax. Form 1040ez more:label_form_201040ez more:taxes Employment taxes. Form 1040ez more:label_form_201040ez more:taxes Excise taxes. Form 1040ez more:label_form_201040ez more:taxes See Table 2 for the forms you file to report these taxes. Form 1040ez more:label_form_201040ez more:taxes You may want to get Publication 509. Form 1040ez more:label_form_201040ez more:taxes It has tax calendars that tell you when to file returns and make tax payments. Form 1040ez more:label_form_201040ez more:taxes Income Tax All businesses except partnerships must file an annual income tax return. Form 1040ez more:label_form_201040ez more:taxes Partnerships file an information return. Form 1040ez more:label_form_201040ez more:taxes Which form you use depends on how your business is organized. Form 1040ez more:label_form_201040ez more:taxes See Table 2 to find out which return you have to file. Form 1040ez more:label_form_201040ez more:taxes The federal income tax is a pay-as-you-go tax. Form 1040ez more:label_form_201040ez more:taxes You must pay the tax as you earn or receive income during the year. Form 1040ez more:label_form_201040ez more:taxes An employee usually has income tax withheld from his or her pay. Form 1040ez more:label_form_201040ez more:taxes If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Form 1040ez more:label_form_201040ez more:taxes If you are not required to make estimated tax payments, you may pay any tax due when you file your return. Form 1040ez more:label_form_201040ez more:taxes Table 2. Form 1040ez more:label_form_201040ez more:taxes Which Forms Must I File? IF you are a. Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes   THEN you may be liable for. Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes   Use Form. Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. Form 1040ez more:label_form_201040ez more:taxes 2 Various other schedules may be needed. Form 1040ez more:label_form_201040ez more:taxes Estimated tax. Form 1040ez more:label_form_201040ez more:taxes   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. Form 1040ez more:label_form_201040ez more:taxes Sole proprietors, partners, and S corporation shareholders. Form 1040ez more:label_form_201040ez more:taxes   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Form 1040ez more:label_form_201040ez more:taxes Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 505, Tax Withholding and Estimated Tax. Form 1040ez more:label_form_201040ez more:taxes Corporations. Form 1040ez more:label_form_201040ez more:taxes   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Form 1040ez more:label_form_201040ez more:taxes Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. Form 1040ez more:label_form_201040ez more:taxes You must deposit the payments as explained later under Depositing Taxes. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 542. Form 1040ez more:label_form_201040ez more:taxes Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Form 1040ez more:label_form_201040ez more:taxes Your payments of SE tax contribute to your coverage under the social security system. Form 1040ez more:label_form_201040ez more:taxes Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Form 1040ez more:label_form_201040ez more:taxes You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Form 1040ez more:label_form_201040ez more:taxes Your net earnings from self-employment were $400 or more. Form 1040ez more:label_form_201040ez more:taxes You had church employee income of $108. Form 1040ez more:label_form_201040ez more:taxes 28 or more. Form 1040ez more:label_form_201040ez more:taxes Use Schedule SE (Form 1040) to figure your SE tax. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 334, Tax Guide for Small Business. Form 1040ez more:label_form_201040ez more:taxes You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. Form 1040ez more:label_form_201040ez more:taxes The Social Security Administration (SSA) time limit for posting self-employment income. Form 1040ez more:label_form_201040ez more:taxes   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Form 1040ez more:label_form_201040ez more:taxes If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. Form 1040ez more:label_form_201040ez more:taxes The SSA will not change its records to increase your self-employment income. Form 1040ez more:label_form_201040ez more:taxes Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. Form 1040ez more:label_form_201040ez more:taxes Employment taxes include the following. Form 1040ez more:label_form_201040ez more:taxes Social security and Medicare taxes. Form 1040ez more:label_form_201040ez more:taxes Federal income tax withholding. Form 1040ez more:label_form_201040ez more:taxes Federal unemployment (FUTA) tax. Form 1040ez more:label_form_201040ez more:taxes If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. Form 1040ez more:label_form_201040ez more:taxes If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. Form 1040ez more:label_form_201040ez more:taxes These publications explain your tax responsibilities as an employer. Form 1040ez more:label_form_201040ez more:taxes If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Form 1040ez more:label_form_201040ez more:taxes That publication has information to help you determine whether an individual is an employee or an independent contractor. Form 1040ez more:label_form_201040ez more:taxes If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. Form 1040ez more:label_form_201040ez more:taxes An independent contractor is someone who is self-employed. Form 1040ez more:label_form_201040ez more:taxes Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. Form 1040ez more:label_form_201040ez more:taxes Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. Form 1040ez more:label_form_201040ez more:taxes To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. Form 1040ez more:label_form_201040ez more:taxes Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Form 1040ez more:label_form_201040ez more:taxes Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Form 1040ez more:label_form_201040ez more:taxes Medicare tax pays for benefits under the hospital insurance part of FICA. Form 1040ez more:label_form_201040ez more:taxes You withhold part of these taxes from your employee's wages and you pay a part yourself. Form 1040ez more:label_form_201040ez more:taxes To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. Form 1040ez more:label_form_201040ez more:taxes Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. Form 1040ez more:label_form_201040ez more:taxes (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Form 1040ez more:label_form_201040ez more:taxes ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Form 1040ez more:label_form_201040ez more:taxes You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. Form 1040ez more:label_form_201040ez more:taxes You pay FUTA tax only from your own funds. Form 1040ez more:label_form_201040ez more:taxes Employees do not pay this tax or have it withheld from their pay. Form 1040ez more:label_form_201040ez more:taxes Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Form 1040ez more:label_form_201040ez more:taxes See Publication 15 to find out if you can use this form. Form 1040ez more:label_form_201040ez more:taxes Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. Form 1040ez more:label_form_201040ez more:taxes Form I-9. Form 1040ez more:label_form_201040ez more:taxes   You must verify that each new employee is legally eligible to work in the United States. Form 1040ez more:label_form_201040ez more:taxes Both you and the employee must complete the U. Form 1040ez more:label_form_201040ez more:taxes S. Form 1040ez more:label_form_201040ez more:taxes Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Form 1040ez more:label_form_201040ez more:taxes You can get the form from USCIS offices or from the USCIS website at www. Form 1040ez more:label_form_201040ez more:taxes uscis. Form 1040ez more:label_form_201040ez more:taxes gov. Form 1040ez more:label_form_201040ez more:taxes Call the USCIS at 1-800-375-5283 for more information about your responsibilities. Form 1040ez more:label_form_201040ez more:taxes Form W-4. Form 1040ez more:label_form_201040ez more:taxes   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. Form 1040ez more:label_form_201040ez more:taxes You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 15. Form 1040ez more:label_form_201040ez more:taxes Employees claiming more than 10 withholding allowances. Form 1040ez more:label_form_201040ez more:taxes   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. Form 1040ez more:label_form_201040ez more:taxes See section 16 of Publication 15. Form 1040ez more:label_form_201040ez more:taxes Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. Form 1040ez more:label_form_201040ez more:taxes You must also send copies to the Social Security Administration. Form 1040ez more:label_form_201040ez more:taxes See Information Returns, later, for more information on Form W-2. Form 1040ez more:label_form_201040ez more:taxes Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Form 1040ez more:label_form_201040ez more:taxes Manufacture or sell certain products. Form 1040ez more:label_form_201040ez more:taxes Operate certain kinds of businesses. Form 1040ez more:label_form_201040ez more:taxes Use various kinds of equipment, facilities, or products. Form 1040ez more:label_form_201040ez more:taxes Receive payment for certain services. Form 1040ez more:label_form_201040ez more:taxes For more information on excise taxes, see Publication 510, Excise Taxes. Form 1040ez more:label_form_201040ez more:taxes Form 720. Form 1040ez more:label_form_201040ez more:taxes   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Form 1040ez more:label_form_201040ez more:taxes Environmental taxes. Form 1040ez more:label_form_201040ez more:taxes Communications and air transportation taxes. Form 1040ez more:label_form_201040ez more:taxes Fuel taxes. Form 1040ez more:label_form_201040ez more:taxes Tax on the first retail sale of heavy trucks, trailers, and tractors. Form 1040ez more:label_form_201040ez more:taxes Manufacturers taxes on the sale or use of a variety of different articles. Form 1040ez more:label_form_201040ez more:taxes Form 2290. Form 1040ez more:label_form_201040ez more:taxes   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. Form 1040ez more:label_form_201040ez more:taxes The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Form 1040ez more:label_form_201040ez more:taxes Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Form 1040ez more:label_form_201040ez more:taxes For more information, see the instructions for Form 2290. Form 1040ez more:label_form_201040ez more:taxes Form 730. Form 1040ez more:label_form_201040ez more:taxes   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Form 1040ez more:label_form_201040ez more:taxes Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. Form 1040ez more:label_form_201040ez more:taxes Form 11-C. Form 1040ez more:label_form_201040ez more:taxes   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. Form 1040ez more:label_form_201040ez more:taxes Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Form 1040ez more:label_form_201040ez more:taxes Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). Form 1040ez more:label_form_201040ez more:taxes Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Form 1040ez more:label_form_201040ez more:taxes Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. Form 1040ez more:label_form_201040ez more:taxes Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Form 1040ez more:label_form_201040ez more:taxes The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Form 1040ez more:label_form_201040ez more:taxes You must give a copy of each information return you are required to file to the recipient or payer. Form 1040ez more:label_form_201040ez more:taxes In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Form 1040ez more:label_form_201040ez more:taxes For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Form 1040ez more:label_form_201040ez more:taxes Form 1099-MISC. Form 1040ez more:label_form_201040ez more:taxes   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. Form 1040ez more:label_form_201040ez more:taxes These payments include the following items. Form 1040ez more:label_form_201040ez more:taxes Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. Form 1040ez more:label_form_201040ez more:taxes Rent payments of $600 or more, other than rents paid to real estate agents. Form 1040ez more:label_form_201040ez more:taxes Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Form 1040ez more:label_form_201040ez more:taxes Royalty payments of $10 or more. Form 1040ez more:label_form_201040ez more:taxes Payments to certain crew members by operators of fishing boats. Form 1040ez more:label_form_201040ez more:taxes You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Form 1040ez more:label_form_201040ez more:taxes Form W-2. Form 1040ez more:label_form_201040ez more:taxes   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. Form 1040ez more:label_form_201040ez more:taxes For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. Form 1040ez more:label_form_201040ez more:taxes Form 8300. Form 1040ez more:label_form_201040ez more:taxes   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. Form 1040ez more:label_form_201040ez more:taxes Cash includes U. Form 1040ez more:label_form_201040ez more:taxes S. Form 1040ez more:label_form_201040ez more:taxes and foreign coin and currency. Form 1040ez more:label_form_201040ez more:taxes It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Form 1040ez more:label_form_201040ez more:taxes Penalties The law provides penalties for not filing returns or paying taxes as required. Form 1040ez more:label_form_201040ez more:taxes Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. Form 1040ez more:label_form_201040ez more:taxes Failure to file tax returns. Form 1040ez more:label_form_201040ez more:taxes   If you do not file your tax return by the due date, you may have to pay a penalty. Form 1040ez more:label_form_201040ez more:taxes The penalty is based on the tax not paid by the due date. Form 1040ez more:label_form_201040ez more:taxes See your tax return instructions for more information about this penalty. Form 1040ez more:label_form_201040ez more:taxes Failure to pay tax. Form 1040ez more:label_form_201040ez more:taxes   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. Form 1040ez more:label_form_201040ez more:taxes For more information, see your tax return instructions. Form 1040ez more:label_form_201040ez more:taxes Failure to withhold, deposit, or pay taxes. Form 1040ez more:label_form_201040ez more:taxes   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. Form 1040ez more:label_form_201040ez more:taxes You may also be subject to penalties if you deposit the taxes late. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 15. Form 1040ez more:label_form_201040ez more:taxes Failure to follow information reporting requirements. Form 1040ez more:label_form_201040ez more:taxes   The following penalties apply if you are required to file information returns. Form 1040ez more:label_form_201040ez more:taxes For more information, see the General Instructions for Certain Information Returns. Form 1040ez more:label_form_201040ez more:taxes Failure to file information returns. Form 1040ez more:label_form_201040ez more:taxes A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. Form 1040ez more:label_form_201040ez more:taxes Failure to furnish correct payee statements. Form 1040ez more:label_form_201040ez more:taxes A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. Form 1040ez more:label_form_201040ez more:taxes Waiver of penalty. Form 1040ez more:label_form_201040ez more:taxes   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. Form 1040ez more:label_form_201040ez more:taxes   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. Form 1040ez more:label_form_201040ez more:taxes (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. Form 1040ez more:label_form_201040ez more:taxes ) Failure to supply taxpayer identification number. Form 1040ez more:label_form_201040ez more:taxes   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. Form 1040ez more:label_form_201040ez more:taxes You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. Form 1040ez more:label_form_201040ez more:taxes Business Expenses You can deduct business expenses on your income tax return. Form 1040ez more:label_form_201040ez more:taxes These are the current operating costs of running your business. Form 1040ez more:label_form_201040ez more:taxes To be deductible, a business expense must be both ordinary and necessary. Form 1040ez more:label_form_201040ez more:taxes An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Form 1040ez more:label_form_201040ez more:taxes A necessary expense is one that is helpful and appropriate for your business, trade, or profession. Form 1040ez more:label_form_201040ez more:taxes An expense does not have to be indispensable to be considered necessary. Form 1040ez more:label_form_201040ez more:taxes The following are brief explanations of some expenses that are of interest to people starting a business. Form 1040ez more:label_form_201040ez more:taxes There are many other expenses that you may be able to deduct. Form 1040ez more:label_form_201040ez more:taxes See your form instructions and Publication 535, Business Expenses. Form 1040ez more:label_form_201040ez more:taxes Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. Form 1040ez more:label_form_201040ez more:taxes Your business start-up costs will depend on the type of business you are starting. Form 1040ez more:label_form_201040ez more:taxes They may include costs for advertising, travel, surveys, and training. Form 1040ez more:label_form_201040ez more:taxes These costs are generally capital expenses. Form 1040ez more:label_form_201040ez more:taxes You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Form 1040ez more:label_form_201040ez more:taxes You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Form 1040ez more:label_form_201040ez more:taxes The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Form 1040ez more:label_form_201040ez more:taxes Any remaining cost must be amortized. Form 1040ez more:label_form_201040ez more:taxes For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. Form 1040ez more:label_form_201040ez more:taxes Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Form 1040ez more:label_form_201040ez more:taxes You must spread the cost over more than one tax year and deduct part of it each year. Form 1040ez more:label_form_201040ez more:taxes This method of deducting the cost of business property is called depreciation. Form 1040ez more:label_form_201040ez more:taxes Business property you must depreciate includes the following items. Form 1040ez more:label_form_201040ez more:taxes Office furniture. Form 1040ez more:label_form_201040ez more:taxes Buildings. Form 1040ez more:label_form_201040ez more:taxes Machinery and equipment. Form 1040ez more:label_form_201040ez more:taxes You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Form 1040ez more:label_form_201040ez more:taxes This deduction is known as the “section 179 deduction. Form 1040ez more:label_form_201040ez more:taxes ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. Form 1040ez more:label_form_201040ez more:taxes Depreciation must be taken in the year it is allowable. Form 1040ez more:label_form_201040ez more:taxes Allowable depreciation not taken in a prior year cannot be taken in the current year. Form 1040ez more:label_form_201040ez more:taxes If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. Form 1040ez more:label_form_201040ez more:taxes S. Form 1040ez more:label_form_201040ez more:taxes Individual Income Tax Return, or by changing your accounting method. Form 1040ez more:label_form_201040ez more:taxes For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. Form 1040ez more:label_form_201040ez more:taxes Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. Form 1040ez more:label_form_201040ez more:taxes Even then, your deduction may be limited. Form 1040ez more:label_form_201040ez more:taxes To qualify to claim expenses for business use of your home, you must meet both the following tests. Form 1040ez more:label_form_201040ez more:taxes Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. Form 1040ez more:label_form_201040ez more:taxes Exclusive use. Form 1040ez more:label_form_201040ez more:taxes   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Form 1040ez more:label_form_201040ez more:taxes The area used for business can be a room or other separately identifiable space. Form 1040ez more:label_form_201040ez more:taxes The space does not need to be marked off by a permanent partition. Form 1040ez more:label_form_201040ez more:taxes   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Form 1040ez more:label_form_201040ez more:taxes Exceptions to exclusive use. Form 1040ez more:label_form_201040ez more:taxes   You do not have to meet the exclusive use test if either of the following applies. Form 1040ez more:label_form_201040ez more:taxes You use part of your home for the storage of inventory or product samples. Form 1040ez more:label_form_201040ez more:taxes You use part of your home as a daycare facility. Form 1040ez more:label_form_201040ez more:taxes For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Form 1040ez more:label_form_201040ez more:taxes Principal place of business. Form 1040ez more:label_form_201040ez more:taxes   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Form 1040ez more:label_form_201040ez more:taxes You use it exclusively and regularly for administrative or management activities of your trade or business. Form 1040ez more:label_form_201040ez more:taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Form 1040ez more:label_form_201040ez more:taxes   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Form 1040ez more:label_form_201040ez more:taxes The relative importance of the activities performed at each location. Form 1040ez more:label_form_201040ez more:taxes If the relative importance factor does not determine your principal place of business, the time spent at each location. Form 1040ez more:label_form_201040ez more:taxes    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Form 1040ez more:label_form_201040ez more:taxes However, for other ways to qualify to deduct home office expenses, see Publication 587. Form 1040ez more:label_form_201040ez more:taxes Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Form 1040ez more:label_form_201040ez more:taxes If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes   For more information about business use of your home, see Publication 587. Form 1040ez more:label_form_201040ez more:taxes Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. Form 1040ez more:label_form_201040ez more:taxes You generally can deduct either your actual expenses or the standard mileage rate. Form 1040ez more:label_form_201040ez more:taxes Actual expenses. Form 1040ez more:label_form_201040ez more:taxes   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Form 1040ez more:label_form_201040ez more:taxes You can divide your expenses based on the miles driven for each purpose. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes You are the sole proprietor of a flower shop. Form 1040ez more:label_form_201040ez more:taxes You drove your van 20,000 miles during the year. Form 1040ez more:label_form_201040ez more:taxes 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. Form 1040ez more:label_form_201040ez more:taxes You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Form 1040ez more:label_form_201040ez more:taxes Standard mileage rate. Form 1040ez more:label_form_201040ez more:taxes   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Form 1040ez more:label_form_201040ez more:taxes You can use the standard mileage rate for a vehicle you own or lease. Form 1040ez more:label_form_201040ez more:taxes The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. Form 1040ez more:label_form_201040ez more:taxes It is announced annually by the IRS. Form 1040ez more:label_form_201040ez more:taxes To figure your deduction, multiply your business miles by the standard mileage rate for the year. Form 1040ez more:label_form_201040ez more:taxes    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. Form 1040ez more:label_form_201040ez more:taxes However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. Form 1040ez more:label_form_201040ez more:taxes Choosing the standard mileage rate. Form 1040ez more:label_form_201040ez more:taxes   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Form 1040ez more:label_form_201040ez more:taxes In later years, you can choose to use either the standard mileage rate or actual expenses. Form 1040ez more:label_form_201040ez more:taxes   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Form 1040ez more:label_form_201040ez more:taxes Additional information. Form 1040ez more:label_form_201040ez more:taxes   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Form 1040ez more:label_form_201040ez more:taxes Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. Form 1040ez more:label_form_201040ez more:taxes It also explains how long you must keep your records for federal tax purposes. Form 1040ez more:label_form_201040ez more:taxes A sample recordkeeping system is illustrated at the end of this part. Form 1040ez more:label_form_201040ez more:taxes Why Keep Records? Everyone in business must keep records. Form 1040ez more:label_form_201040ez more:taxes Good records will help you do the following. Form 1040ez more:label_form_201040ez more:taxes Monitor the progress of your business. Form 1040ez more:label_form_201040ez more:taxes   You need good records to monitor the progress of your business. Form 1040ez more:label_form_201040ez more:taxes Records can show whether your business is improving, which items are selling, or what changes you need to make. Form 1040ez more:label_form_201040ez more:taxes Good records can increase the likelihood of business success. Form 1040ez more:label_form_201040ez more:taxes Prepare your financial statements. Form 1040ez more:label_form_201040ez more:taxes   You need good records to prepare accurate financial statements. Form 1040ez more:label_form_201040ez more:taxes These include income (profit and loss) statements and balance sheets. Form 1040ez more:label_form_201040ez more:taxes These statements can help you in dealing with your bank or creditors and help you manage your business. Form 1040ez more:label_form_201040ez more:taxes An income statement shows the income and expenses of the business for a given period of time. Form 1040ez more:label_form_201040ez more:taxes A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Form 1040ez more:label_form_201040ez more:taxes Identify source of receipts. Form 1040ez more:label_form_201040ez more:taxes   You will receive money or property from many sources. Form 1040ez more:label_form_201040ez more:taxes Your records can identify the source of your receipts. Form 1040ez more:label_form_201040ez more:taxes You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. Form 1040ez more:label_form_201040ez more:taxes Keep track of deductible expenses. Form 1040ez more:label_form_201040ez more:taxes   You may forget expenses when you prepare your tax return unless you record them when they occur. Form 1040ez more:label_form_201040ez more:taxes Prepare your tax returns. Form 1040ez more:label_form_201040ez more:taxes   You need good records to prepare your tax returns. Form 1040ez more:label_form_201040ez more:taxes These records must support the income, expenses, and credits you report. Form 1040ez more:label_form_201040ez more:taxes Generally, these are the same records you use to monitor your business and prepare your financial statements. Form 1040ez more:label_form_201040ez more:taxes Support items reported on tax returns. Form 1040ez more:label_form_201040ez more:taxes   You must keep your business records available at all times for inspection by the IRS. Form 1040ez more:label_form_201040ez more:taxes If the IRS examines any of your tax returns, you may be asked to explain the items reported. Form 1040ez more:label_form_201040ez more:taxes A complete set of records will speed up the examination. Form 1040ez more:label_form_201040ez more:taxes Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Form 1040ez more:label_form_201040ez more:taxes You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Form 1040ez more:label_form_201040ez more:taxes The business you are in affects the type of records you need to keep for federal tax purposes. Form 1040ez more:label_form_201040ez more:taxes You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Form 1040ez more:label_form_201040ez more:taxes See Accounting Method, earlier. Form 1040ez more:label_form_201040ez more:taxes If you are in more than one business, you should keep a complete and separate set of records for each business. Form 1040ez more:label_form_201040ez more:taxes A corporation should keep minutes of board of directors' meetings. Form 1040ez more:label_form_201040ez more:taxes Your recordkeeping system should include a summary of your business transactions. Form 1040ez more:label_form_201040ez more:taxes This summary is ordinarily made in your books (for example, accounting journals and ledgers). Form 1040ez more:label_form_201040ez more:taxes Your books must show your gross income, as well as your deductions and credits. Form 1040ez more:label_form_201040ez more:taxes For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. Form 1040ez more:label_form_201040ez more:taxes In addition, you must keep supporting documents, explained later. Form 1040ez more:label_form_201040ez more:taxes Electronic records. Form 1040ez more:label_form_201040ez more:taxes   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Form 1040ez more:label_form_201040ez more:taxes When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Form 1040ez more:label_form_201040ez more:taxes An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Form 1040ez more:label_form_201040ez more:taxes The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Form 1040ez more:label_form_201040ez more:taxes All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Form 1040ez more:label_form_201040ez more:taxes Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Form 1040ez more:label_form_201040ez more:taxes   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Form 1040ez more:label_form_201040ez more:taxes You still have the responsibility of retaining any other books and records that are required to be retained. Form 1040ez more:label_form_201040ez more:taxes   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Form 1040ez more:label_form_201040ez more:taxes This test is not considered an examination and the results must be shared with you. Form 1040ez more:label_form_201040ez more:taxes If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Form 1040ez more:label_form_201040ez more:taxes If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. Form 1040ez more:label_form_201040ez more:taxes For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. Form 1040ez more:label_form_201040ez more:taxes Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Form 1040ez more:label_form_201040ez more:taxes Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Form 1040ez more:label_form_201040ez more:taxes These documents contain information you need to record in your books. Form 1040ez more:label_form_201040ez more:taxes It is important to keep these documents because they support the entries in your books and on your tax return. Form 1040ez more:label_form_201040ez more:taxes Keep them in an orderly fashion and in a safe place. Form 1040ez more:label_form_201040ez more:taxes For instance, organize them by year and type of income or expense. Form 1040ez more:label_form_201040ez more:taxes Gross receipts. Form 1040ez more:label_form_201040ez more:taxes   Gross receipts are the income you receive from your business. Form 1040ez more:label_form_201040ez more:taxes You should keep supporting documents that show the amounts and sources of your gross receipts. Form 1040ez more:label_form_201040ez more:taxes Documents that show gross receipts include the following. Form 1040ez more:label_form_201040ez more:taxes Cash register tapes. Form 1040ez more:label_form_201040ez more:taxes Bank deposit slips. Form 1040ez more:label_form_201040ez more:taxes Receipt books. Form 1040ez more:label_form_201040ez more:taxes Invoices. Form 1040ez more:label_form_201040ez more:taxes Credit card charge slips. Form 1040ez more:label_form_201040ez more:taxes Forms 1099-MISC. Form 1040ez more:label_form_201040ez more:taxes Purchases. Form 1040ez more:label_form_201040ez more:taxes   Purchases are the items you buy and resell to customers. Form 1040ez more:label_form_201040ez more:taxes If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Form 1040ez more:label_form_201040ez more:taxes Your supporting documents should show the amount paid and that the amount was for purchases. Form 1040ez more:label_form_201040ez more:taxes Documents for purchases include the following. Form 1040ez more:label_form_201040ez more:taxes Canceled checks. Form 1040ez more:label_form_201040ez more:taxes Cash register tape receipts. Form 1040ez more:label_form_201040ez more:taxes Credit card sales slips. Form 1040ez more:label_form_201040ez more:taxes Invoices. Form 1040ez more:label_form_201040ez more:taxes These records will help you determine the value of your inventory at the end of the year. Form 1040ez more:label_form_201040ez more:taxes See Publication 538 for information on methods for valuing inventory. Form 1040ez more:label_form_201040ez more:taxes Expenses. Form 1040ez more:label_form_201040ez more:taxes   Expenses are the costs you incur (other than purchases) to carry on your business. Form 1040ez more:label_form_201040ez more:taxes Your supporting documents should show the amount paid and that the amount was for a business expense. Form 1040ez more:label_form_201040ez more:taxes Documents for expenses include the following. Form 1040ez more:label_form_201040ez more:taxes Canceled checks. Form 1040ez more:label_form_201040ez more:taxes Cash register tapes. Form 1040ez more:label_form_201040ez more:taxes Account statements. Form 1040ez more:label_form_201040ez more:taxes Credit card sales slips. Form 1040ez more:label_form_201040ez more:taxes Invoices. Form 1040ez more:label_form_201040ez more:taxes Petty cash slips for small cash payments. Form 1040ez more:label_form_201040ez more:taxes    A petty cash fund allows you to make small payments without having to write checks for small amounts. Form 1040ez more:label_form_201040ez more:taxes Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. Form 1040ez more:label_form_201040ez more:taxes Travel, transportation, entertainment, and gift expenses. Form 1040ez more:label_form_201040ez more:taxes   Specific recordkeeping rules apply to these expenses. Form 1040ez more:label_form_201040ez more:taxes For more information, see Publication 463. Form 1040ez more:label_form_201040ez more:taxes Employment taxes. Form 1040ez more:label_form_201040ez more:taxes   There are specific employment tax records you must keep. Form 1040ez more:label_form_201040ez more:taxes For a list, see Publication 15. Form 1040ez more:label_form_201040ez more:taxes Assets. Form 1040ez more:label_form_201040ez more:taxes   Assets are the property, such as machinery and furniture you own and use in your business. Form 1040ez more:label_form_201040ez more:taxes You must keep records to verify certain information about your business assets. Form 1040ez more:label_form_201040ez more:taxes You need records to figure the annual depreciation and the gain or loss when you sell the assets. Form 1040ez more:label_form_201040ez more:taxes Your records should show the following information. Form 1040ez more:label_form_201040ez more:taxes When and how you acquired the asset. Form 1040ez more:label_form_201040ez more:taxes Purchase price. Form 1040ez more:label_form_201040ez more:taxes Cost of any improvements. Form 1040ez more:label_form_201040ez more:taxes Section 179 deduction taken. Form 1040ez more:label_form_201040ez more:taxes Deductions taken for depreciation. Form 1040ez more:label_form_201040ez more:taxes Deductions taken for casualty losses, such as losses resulting from fires or storms. Form 1040ez more:label_form_201040ez more:taxes How you used the asset. Form 1040ez more:label_form_201040ez more:taxes When and how you disposed of the asset. Form 1040ez more:label_form_201040ez more:taxes Selling price. Form 1040ez more:label_form_201040ez more:taxes Expenses of sale. Form 1040ez more:label_form_201040ez more:taxes   The following documents may show this information. Form 1040ez more:label_form_201040ez more:taxes Purchase and sales invoices. Form 1040ez more:label_form_201040ez more:taxes Real estate closing statements. Form 1040ez more:label_form_201040ez more:taxes Canceled checks. Form 1040ez more:label_form_201040ez more:taxes What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Form 1040ez more:label_form_201040ez more:taxes These include account statements prepared for the financial institution by a third party. Form 1040ez more:label_form_201040ez more:taxes These account statements must be highly legible. Form 1040ez more:label_form_201040ez more:taxes The following table lists acceptable account statements. Form 1040ez more:label_form_201040ez more:taxes  IF payment is by. Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes THEN the statement must show the. Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes Check Check number. Form 1040ez more:label_form_201040ez more:taxes Amount. Form 1040ez more:label_form_201040ez more:taxes Payee's name. Form 1040ez more:label_form_201040ez more:taxes Date the check amount was posted to the account by the financial institution. Form 1040ez more:label_form_201040ez more:taxes Electronic funds transfer Amount transferred. Form 1040ez more:label_form_201040ez more:taxes Payee's name. Form 1040ez more:label_form_201040ez more:taxes Date the transfer was posted to the account by the financial institution. Form 1040ez more:label_form_201040ez more:taxes Credit card Amount charged. Form 1040ez more:label_form_201040ez more:taxes Payee's name. Form 1040ez more:label_form_201040ez more:taxes Transaction date. Form 1040ez more:label_form_201040ez more:taxes    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Form 1040ez more:label_form_201040ez more:taxes You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Form 1040ez more:label_form_201040ez more:taxes Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. Form 1040ez more:label_form_201040ez more:taxes (Your business transactions are shown on the supporting documents just discussed. Form 1040ez more:label_form_201040ez more:taxes ) Business transactions are ordinarily summarized in books called journals and ledgers. Form 1040ez more:label_form_201040ez more:taxes You can buy them at your local stationery or office supply store. Form 1040ez more:label_form_201040ez more:taxes A journal is a book where you record each business transaction shown on your supporting documents. Form 1040ez more:label_form_201040ez more:taxes You may have to keep separate journals for transactions that occur frequently. Form 1040ez more:label_form_201040ez more:taxes A ledger is a book that contains the totals from all of your journals. Form 1040ez more:label_form_201040ez more:taxes It is organized into different accounts. Form 1040ez more:label_form_201040ez more:taxes Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. Form 1040ez more:label_form_201040ez more:taxes For example, a recordkeeping system for a small business might include the following items. Form 1040ez more:label_form_201040ez more:taxes Business checkbook. Form 1040ez more:label_form_201040ez more:taxes Daily summary of cash receipts. Form 1040ez more:label_form_201040ez more:taxes Monthly summary of cash receipts. Form 1040ez more:label_form_201040ez more:taxes Check disbursements journal. Form 1040ez more:label_form_201040ez more:taxes Depreciation worksheet. Form 1040ez more:label_form_201040ez more:taxes Employee compensation record. Form 1040ez more:label_form_201040ez more:taxes The business checkbook is explained next. Form 1040ez more:label_form_201040ez more:taxes The other items are illustrated later under Sample Record System. Form 1040ez more:label_form_201040ez more:taxes The system you use to record business transactions will be more effective if you follow good recordkeeping practices. Form 1040ez more:label_form_201040ez more:taxes For example, record expenses when they occur, and identify the source of recorded receipts. Form 1040ez more:label_form_201040ez more:taxes Generally, it is best to record transactions on a daily basis. Form 1040ez more:label_form_201040ez more:taxes Business checkbook. Form 1040ez more:label_form_201040ez more:taxes   One of the first things you should do when you start a business is open a business checking account. Form 1040ez more:label_form_201040ez more:taxes You should keep your business account separate from your personal checking account. Form 1040ez more:label_form_201040ez more:taxes   The business checkbook is your basic source of information for recording your business expenses. Form 1040ez more:label_form_201040ez more:taxes You should deposit all daily receipts in your business checking account. Form 1040ez more:label_form_201040ez more:taxes You should check your account for errors by reconciling it. Form 1040ez more:label_form_201040ez more:taxes See Reconciling the checking account, later. Form 1040ez more:label_form_201040ez more:taxes   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. Form 1040ez more:label_form_201040ez more:taxes You should also note on the deposit slip the source of the deposit and keep copies of all slips. Form 1040ez more:label_form_201040ez more:taxes   You should make all payments by check to document business expenses. Form 1040ez more:label_form_201040ez more:taxes Write checks payable to yourself only when making withdrawals from your business for personal use. Form 1040ez more:label_form_201040ez more:taxes Avoid writing checks payable to cash. Form 1040ez more:label_form_201040ez more:taxes If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. Form 1040ez more:label_form_201040ez more:taxes If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Form 1040ez more:label_form_201040ez more:taxes    Use the business account for business purposes only. Form 1040ez more:label_form_201040ez more:taxes Indicate the source of deposits and the type of expense in the checkbook. Form 1040ez more:label_form_201040ez more:taxes Reconciling the checking account. Form 1040ez more:label_form_201040ez more:taxes   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. Form 1040ez more:label_form_201040ez more:taxes The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. Form 1040ez more:label_form_201040ez more:taxes   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. Form 1040ez more:label_form_201040ez more:taxes    You should reconcile your checking account each month. Form 1040ez more:label_form_201040ez more:taxes     Before you reconcile your monthly bank statement, check your own figures. Form 1040ez more:label_form_201040ez more:taxes Begin with the balance shown in your checkbook at the end of the previous month. Form 1040ez more:label_form_201040ez more:taxes To this balance, add the total cash deposited during the month and subtract the total cash disbursements. Form 1040ez more:label_form_201040ez more:taxes   After checking your figures, the result should agree with your checkbook balance at the end of the month. Form 1040ez more:label_form_201040ez more:taxes If the result does not agree, you may have made an error in recording a check or deposit. Form 1040ez more:label_form_201040ez more:taxes You can find the error by doing the following. Form 1040ez more:label_form_201040ez more:taxes Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. Form 1040ez more:label_form_201040ez more:taxes If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. Form 1040ez more:label_form_201040ez more:taxes Adding the deposit amounts in your checkbook. Form 1040ez more:label_form_201040ez more:taxes Compare that total with the monthly total in your cash receipt book, if you have one. Form 1040ez more:label_form_201040ez more:taxes If the totals do not agree, check the individual amounts to find any errors. Form 1040ez more:label_form_201040ez more:taxes   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. Form 1040ez more:label_form_201040ez more:taxes   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Form 1040ez more:label_form_201040ez more:taxes Many banks print a reconciliation worksheet on the back of the statement. Form 1040ez more:label_form_201040ez more:taxes   To reconcile your account, follow these steps. Form 1040ez more:label_form_201040ez more:taxes Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Form 1040ez more:label_form_201040ez more:taxes Note all differences in the dollar amounts. Form 1040ez more:label_form_201040ez more:taxes Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Form 1040ez more:label_form_201040ez more:taxes Note all differences in the dollar amounts. Form 1040ez more:label_form_201040ez more:taxes Mark the check number in the checkbook as having cleared the bank. Form 1040ez more:label_form_201040ez more:taxes After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Form 1040ez more:label_form_201040ez more:taxes Prepare a bank reconciliation. Form 1040ez more:label_form_201040ez more:taxes One is illustrated later under Sample Record System. Form 1040ez more:label_form_201040ez more:taxes Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. Form 1040ez more:label_form_201040ez more:taxes At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. Form 1040ez more:label_form_201040ez more:taxes If you still have differences, check the previous steps to find the errors. Form 1040ez more:label_form_201040ez more:taxes   Table 3. Form 1040ez more:label_form_201040ez more:taxes Period of Limitations IF you. Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes   THEN the period is. Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes . Form 1040ez more:label_form_201040ez more:taxes 1. Form 1040ez more:label_form_201040ez more:taxes Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. Form 1040ez more:label_form_201040ez more:taxes Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. Form 1040ez more:label_form_201040ez more:taxes File a fraudulent return   Not limited 4. Form 1040ez more:label_form_201040ez more:taxes Do not file a return   Not limited 5. Form 1040ez more:label_form_201040ez more:taxes File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. Form 1040ez more:label_form_201040ez more:taxes File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. Form 1040ez more:label_form_201040ez more:taxes The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. Form 1040ez more:label_form_201040ez more:taxes You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Form 1040ez more:label_form_201040ez more:taxes Single-entry. Form 1040ez more:label_form_201040ez more:taxes   A single-entry system is based on the income statement (profit or loss statement). Form 1040ez more:label_form_201040ez more:taxes It can be a simple and practical system if you are starting a small business. Form 1040ez more:label_form_201040ez more:taxes The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. Form 1040ez more:label_form_201040ez more:taxes Double-entry. Form 1040ez more:label_form_201040ez more:taxes   A double-entry bookkeeping system uses journals and ledgers. Form 1040ez more:label_form_201040ez more:taxes Transactions are first entered in a journal and then posted to ledger accounts. Form 1040ez more:label_form_201040ez more:taxes These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). Form 1040ez more:label_form_201040ez more:taxes You close income and expense accounts at the end of each tax year. Form 1040ez more:label_form_201040ez more:taxes You keep asset, liability, and net worth accounts open on a permanent basis. Form 1040ez more:label_form_201040ez more:taxes   In the double-entry system, each account has a left side for debits and a right side for credits. Form 1040ez more:label_form_201040ez more:taxes It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. Form 1040ez more:label_form_201040ez more:taxes   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. Form 1040ez more:label_form_201040ez more:taxes If the amounts do not balance, you have made an error and you must find and correct it. Form 1040ez more:label_form_201040ez more:taxes   An example of a journal entry exhibiting a payment of rent in October is shown next. Form 1040ez more:label_form_201040ez more:taxes General Journal Date Description of Entry Debit  Credit Oct. Form 1040ez more:label_form_201040ez more:taxes 5 Rent expense 780. Form 1040ez more:label_form_201040ez more:taxes 00     Cash   780. Form 1040ez more:label_form_201040ez more:taxes 00                 Computerized System There are computer software packages you can use for recordkeeping. Form 1040ez more:label_form_201040ez more:taxes They can be purchased in many retail stores. Form 1040ez more:label_form_201040ez more:taxes These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. Form 1040ez more:label_form_201040ez more:taxes If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. Form 1040ez more:label_form_201040ez more:taxes To meet this qualification, the machine-sensible records must reconcile with your books and return. Form 1040ez more:label_form_201040ez more:taxes These records must provide enough detail to identify the underlying source documents. Form 1040ez more:label_form_201040ez more:taxes You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. Form 1040ez more:label_form_201040ez more:taxes This documentation must be sufficiently detailed to show all of the following items. Form 1040ez more:label_form_201040ez more:taxes Functions being performed as the data flows through the system. Form 1040ez more:label_form_201040ez more:taxes Controls used to ensure accurate and reliable processing. Form 1040ez more:label_form_201040ez more:taxes Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. Form 1040ez more:label_form_201040ez more:taxes Charts of accounts and detailed account descriptions. Form 1040ez more:label_form_201040ez more:taxes See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. Form 1040ez more:label_form_201040ez more:taxes How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Form 1040ez more:label_form_201040ez more:taxes Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. Form 1040ez more:label_form_201040ez more:taxes The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. Form 1040ez more:label_form_201040ez more:taxes Table 3 contains the periods of limitations that apply to income tax returns. Form 1040ez more:label_form_201040ez more:taxes Unless otherwise stated, the years refer to the period after the return was filed. Form 1040ez more:label_form_201040ez more:taxes Returns filed before the due date are treated as filed on the due date. Form 1040ez more:label_form_201040ez more:taxes Keep copies of your filed tax returns. Form 1040ez more:label_form_201040ez more:taxes They help in preparing future tax returns and making computations if you file an amended return. Form 1040ez more:label_form_201040ez more:taxes Employment taxes. Form 1040ez more:label_form_201040ez more:taxes   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Form 1040ez more:label_form_201040ez more:taxes For more information about recordkeeping for employment taxes, see Publication 15. Form 1040ez more:label_form_201040ez more:taxes Assets. Form 1040ez more:label_form_201040ez more:taxes   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Form 1040ez more:label_form_201040ez more:taxes You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. Form 1040ez more:label_form_201040ez more:taxes   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. Form 1040ez more:label_form_201040ez more:taxes You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Form 1040ez more:label_form_201040ez more:taxes Records for nontax purposes. Form 1040ez more:label_form_201040ez more:taxes   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Form 1040ez more:label_form_201040ez more:taxes For example, your insurance company or creditors may require you to keep them longer than the IRS does. Form 1040ez more:label_form_201040ez more:taxes Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. Form 1040ez more:label_form_201040ez more:taxes Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. Form 1040ez more:label_form_201040ez more:taxes These sample records should not be viewed as a recommendation of how to keep your records. Form 1040ez more:label_form_201040ez more:taxes They are intended only to show how one business keeps its records. Form 1040ez more:label_form_201040ez more:taxes 1. Form 1040ez more:label_form_201040ez more:taxes Daily Summary of Cash Receipts This summary is a record of cash sales for the day. Form 1040ez more:label_form_201040ez more:taxes It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. Form 1040ez more:label_form_201040ez more:taxes Henry takes the cash sales entry from his cash register tape. Form 1040ez more:label_form_201040ez more:taxes If he had no cash register, he would simply total his cash sale slips and any other cash received that day. Form 1040ez more:label_form_201040ez more:taxes He carries the total receipts shown in this summary for January 3 ($267. Form 1040ez more:label_form_201040ez more:taxes 80), including cash sales ($263. Form 1040ez more:label_form_201040ez more:taxes 60) and sales tax ($4. Form 1040ez more:label_form_201040ez more:taxes 20), to the Monthly Summary of Cash Receipts. Form 1040ez more:label_form_201040ez more:taxes Petty cash fund. Form 1040ez more:label_form_201040ez more:taxes   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Form 1040ez more:label_form_201040ez more:taxes Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. Form 1040ez more:label_form_201040ez more:taxes He sets up a fixed amount ($50) in his petty cash fund. Form 1040ez more:label_form_201040ez more:taxes The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. Form 1040ez more:label_form_201040ez more:taxes When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. Form 1040ez more:label_form_201040ez more:taxes (See the Check Disbursements Journal entry for check number 92. Form 1040ez more:label_form_201040ez more:taxes ) This restores the fund to its fixed amount of $50. Form 1040ez more:label_form_201040ez more:taxes He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. Form 1040ez more:label_form_201040ez more:taxes 2. Form 1040ez more:label_form_201040ez more:taxes Monthly Summary of Cash Receipts This shows the income activity for the month. Form 1040ez more:label_form_201040ez more:taxes Henry carries the total monthly net sales shown in this summary for January ($4,865. Form 1040ez more:label_form_201040ez more:taxes 05) to his Annual Summary. Form 1040ez more:label_form_201040ez more:taxes To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. Form 1040ez more:label_form_201040ez more:taxes He cannot take a deduction for sales tax turned over to the state because he only collected the tax. Form 1040ez more:label_form_201040ez more:taxes He does not include the tax in his income. Form 1040ez more:label_form_201040ez more:taxes 3. Form 1040ez more:label_form_201040ez more:taxes Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. Form 1040ez more:label_form_201040ez more:taxes All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. Form 1040ez more:label_form_201040ez more:taxes Frequent expenses have their own headings across the sheet. Form 1040ez more:label_form_201040ez more:taxes He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Form 1040ez more:label_form_201040ez more:taxes Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. Form 1040ez more:label_form_201040ez more:taxes Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. Form 1040ez more:label_form_201040ez more:taxes If he did, he would record them in the journal, even though he could not deduct them as business expenses. Form 1040ez more:label_form_201040ez more:taxes Henry carries the January total of expenses for materials ($1,083. Form 1040ez more:label_form_201040ez more:taxes 50) to the Annual Summary. Form 1040ez more:label_form_201040ez more:taxes Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. Form 1040ez more:label_form_201040ez more:taxes , in the appropriate columns of that summary. Form 1040ez more:label_form_201040ez more:taxes 4. Form 1040ez more:label_form_201040ez more:taxes Employee Compensation Record This record shows the following information. Form 1040ez more:label_form_201040ez more:taxes The number of hours Henry's employee worked in a pay period. Form 1040ez more:label_form_201040ez more:taxes The employee's total pay for the period. Form 1040ez more:label_form_201040ez more:taxes The deductions Henry withheld in figuring the employee's net pay. Form 1040ez more:label_form_201040ez more:taxes The monthly gross payroll. Form 1040ez more:label_form_201040ez more:taxes Henry carries the January gross payroll ($520) to the Annual Summary. Form 1040ez more:label_form_201040ez more:taxes 5. Form 1040ez more:label_form_201040ez more:taxes Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. Form 1040ez more:label_form_201040ez more:taxes He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. Form 1040ez more:label_form_201040ez more:taxes He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. Form 1040ez more:label_form_201040ez more:taxes As in the journal, he keeps each major expense in a separate column. Form 1040ez more:label_form_201040ez more:taxes Henry carries the cash receipts total shown in the annual summary ($47,440. Form 1040ez more:label_form_201040ez more:taxes 9
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The Form 1040ez More:label_form_201040ez More:taxes

Form 1040ez more:label_form_201040ez more:taxes Publication 721 - Introductory Material Table of Contents Reminders IntroductionOrdering forms and publications. Form 1040ez more:label_form_201040ez more:taxes Tax questions. Form 1040ez more:label_form_201040ez more:taxes Useful Items - You may want to see: Reminders Future developments. Form 1040ez more:label_form_201040ez more:taxes  For the latest information about developments related to Publication 721, such as legislation enacted after it was published, go to www. Form 1040ez more:label_form_201040ez more:taxes IRS. Form 1040ez more:label_form_201040ez more:taxes gov/pub721. Form 1040ez more:label_form_201040ez more:taxes Phased retirement. Form 1040ez more:label_form_201040ez more:taxes   The new phased retirement program was signed into law by the Moving Ahead for Progress in the 21st Century Act and will be available for retirement eligible individuals once the regulations for this program are effective. Form 1040ez more:label_form_201040ez more:taxes This new program will allow eligible employees to begin receiving annuity payments while working part-time. Form 1040ez more:label_form_201040ez more:taxes For more information, go to the Office of Personnel Management (OPM) website at www. Form 1040ez more:label_form_201040ez more:taxes opm. Form 1040ez more:label_form_201040ez more:taxes gov. Form 1040ez more:label_form_201040ez more:taxes Roth Thrift Savings Plan (TSP) balance. Form 1040ez more:label_form_201040ez more:taxes  You may be able to contribute to a designated Roth account through the TSP known as the Roth TSP. Form 1040ez more:label_form_201040ez more:taxes Roth TSP contributions are after-tax contributions, subject to the same contribution limits as the traditional TSP. Form 1040ez more:label_form_201040ez more:taxes Qualified distributions from a Roth TSP are not included in your income. Form 1040ez more:label_form_201040ez more:taxes See Thrift Savings Plan in Part II for more information. Form 1040ez more:label_form_201040ez more:taxes Rollovers. Form 1040ez more:label_form_201040ez more:taxes  You can roll over certain amounts from the CSRS, FERS, or TSP, to a tax-sheltered annuity plan (403(b) plan) or a state or local government section 457 deferred compensation plan. Form 1040ez more:label_form_201040ez more:taxes See Rollover Rules in Part II. Form 1040ez more:label_form_201040ez more:taxes Rollovers by surviving spouse. Form 1040ez more:label_form_201040ez more:taxes  You may be able to roll over a distribution you receive as the surviving spouse of a deceased employee or retiree into a qualified retirement plan or an IRA. Form 1040ez more:label_form_201040ez more:taxes See Rollover Rules in Part II. Form 1040ez more:label_form_201040ez more:taxes Thrift Savings Plan (TSP) beneficiary participant accounts. Form 1040ez more:label_form_201040ez more:taxes  If you are the spouse beneficiary of a decedent's TSP account, you have the option of leaving the death benefit payment in a TSP account in your own name (a beneficiary participant account). Form 1040ez more:label_form_201040ez more:taxes The amounts in the beneficiary participant account are neither taxable or reportable until you choose to make a withdrawal, or otherwise receive a distribution from the account. Form 1040ez more:label_form_201040ez more:taxes Benefits for public safety officer's survivors. Form 1040ez more:label_form_201040ez more:taxes  A survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty generally will be excluded from the recipient's income. Form 1040ez more:label_form_201040ez more:taxes For more information, see Dependents of public safety officers in Part IV. Form 1040ez more:label_form_201040ez more:taxes Uniformed services Thrift Savings Plan (TSP) accounts. Form 1040ez more:label_form_201040ez more:taxes  If you have a uniformed services TSP account, it may include contributions from combat zone pay. Form 1040ez more:label_form_201040ez more:taxes This pay is tax-exempt and contributions attributable to that pay are tax-exempt when they are distributed from the uniformed services TSP account. Form 1040ez more:label_form_201040ez more:taxes However, any earnings on those contributions are subject to tax when they are distributed. Form 1040ez more:label_form_201040ez more:taxes The statement you receive from the TSP will separately state the total amount of your distribution and the amount of your taxable distribution for the year. Form 1040ez more:label_form_201040ez more:taxes If you have both a civilian and a uniformed services TSP account, you should apply the rules discussed in this publication separately to each account. Form 1040ez more:label_form_201040ez more:taxes You can get more information from the TSP website, www. Form 1040ez more:label_form_201040ez more:taxes tsp. Form 1040ez more:label_form_201040ez more:taxes gov, or the TSP Service Office. Form 1040ez more:label_form_201040ez more:taxes Photographs of missing children. Form 1040ez more:label_form_201040ez more:taxes  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Form 1040ez more:label_form_201040ez more:taxes Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Form 1040ez more:label_form_201040ez more:taxes 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. Form 1040ez more:label_form_201040ez more:taxes Introduction This publication explains how the federal income tax rules apply to civil service retirement benefits received by retired federal employees (including those disabled) or their survivors. Form 1040ez more:label_form_201040ez more:taxes These benefits are paid primarily under the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). Form 1040ez more:label_form_201040ez more:taxes Tax rules for annuity benefits. Form 1040ez more:label_form_201040ez more:taxes   Part of the annuity benefits you receive is a tax-free recovery of your contributions to the CSRS or FERS. Form 1040ez more:label_form_201040ez more:taxes The rest of your benefits are taxable. Form 1040ez more:label_form_201040ez more:taxes If your annuity starting date is after November 18, 1996, you must use the Simplified Method to figure the taxable and tax-free parts. Form 1040ez more:label_form_201040ez more:taxes If your annuity starting date is before November 19, 1996, you generally could have chosen to use the Simplified Method or the General Rule. Form 1040ez more:label_form_201040ez more:taxes See Part II, Rules for Retirees . Form 1040ez more:label_form_201040ez more:taxes Thrift Savings Plan. Form 1040ez more:label_form_201040ez more:taxes   The Thrift Savings Plan (TSP) provides federal employees with the same savings and tax benefits that many private employers offer their employees. Form 1040ez more:label_form_201040ez more:taxes This plan is similar to private sector 401(k) plans. Form 1040ez more:label_form_201040ez more:taxes You can defer tax on part of your pay by having it contributed to your traditional balance in the plan. Form 1040ez more:label_form_201040ez more:taxes The contributions and earnings on them are not taxed until they are distributed to you. Form 1040ez more:label_form_201040ez more:taxes Also the TSP offers a Roth TSP option. Form 1040ez more:label_form_201040ez more:taxes Contributions to this type of balance are after tax and qualified distributions from the account are tax free. Form 1040ez more:label_form_201040ez more:taxes See Thrift Savings Plan in Part II. Form 1040ez more:label_form_201040ez more:taxes Comments and suggestions. Form 1040ez more:label_form_201040ez more:taxes   We welcome your comments about this publication and your suggestions for future editions. Form 1040ez more:label_form_201040ez more:taxes   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Form 1040ez more:label_form_201040ez more:taxes NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Form 1040ez more:label_form_201040ez more:taxes Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Form 1040ez more:label_form_201040ez more:taxes   You can send your comments from www. Form 1040ez more:label_form_201040ez more:taxes irs. Form 1040ez more:label_form_201040ez more:taxes gov/formspubs/. Form 1040ez more:label_form_201040ez more:taxes Click on “More Information” and then on “Comment on Tax Forms and Publications”. Form 1040ez more:label_form_201040ez more:taxes   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. Form 1040ez more:label_form_201040ez more:taxes Ordering forms and publications. Form 1040ez more:label_form_201040ez more:taxes   Visit www. Form 1040ez more:label_form_201040ez more:taxes irs. Form 1040ez more:label_form_201040ez more:taxes gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Form 1040ez more:label_form_201040ez more:taxes Internal Revenue Service 1201 N. Form 1040ez more:label_form_201040ez more:taxes Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Form 1040ez more:label_form_201040ez more:taxes   If you have a tax question, check the information available on IRS. Form 1040ez more:label_form_201040ez more:taxes gov or call 1-800-829-1040. Form 1040ez more:label_form_201040ez more:taxes We cannot answer tax questions sent to either of the above addresses. Form 1040ez more:label_form_201040ez more:taxes Useful Items - You may want to see: Publication 524 Credit for the Elderly or the Disabled 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 939 General Rule for Pensions and Annuities Form (and Instructions) CSA 1099R Statement of Annuity Paid CSF 1099R Statement of Survivor Annuity Paid W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Form 1040ez more:label_form_201040ez more:taxes 5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts See How To Get Tax Help near the end of this publication for information about getting publications and forms. Form 1040ez more:label_form_201040ez more:taxes Prev  Up  Next   Home   More Online Publications