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Free tax preparation software 2. Free tax preparation software   Employees' Pay Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tests for Deducting PayTest 1—Reasonableness Test 2—For Services Performed Kinds of PayAwards Bonuses Education Expenses Fringe Benefits Loans or Advances Property Reimbursements for Business Expenses Sick and Vacation Pay Introduction You can generally deduct the amount you pay your employees for the services they perform. Free tax preparation software The pay may be in cash, property, or services. Free tax preparation software It may include wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits. Free tax preparation software For information about deducting employment taxes, see chapter 5. Free tax preparation software You can claim employment credits, such as the following, if you hire individuals who meet certain requirements. Free tax preparation software Empowerment zone employment credit (Form 8844). Free tax preparation software Indian employment credit (Form 8845). Free tax preparation software Work opportunity credit (Form 5884). Free tax preparation software Credit for employer differential wage payments (Form 8932). Free tax preparation software Reduce your deduction for employee wages by the amount of employment credits you claim. Free tax preparation software For more information about these credits, see the form on which the credit is claimed. Free tax preparation software Topics - This chapter discusses: Tests for deducting pay Kinds of pay Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits See chapter 12 for information about getting publications and forms. Free tax preparation software Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. Free tax preparation software These and other requirements that apply to all business expenses are explained in chapter 1. Free tax preparation software In addition, the pay must meet both of the following tests. Free tax preparation software Test 1. Free tax preparation software It must be reasonable. Free tax preparation software Test 2. Free tax preparation software It must be for services performed. Free tax preparation software The form or method of figuring the pay does not affect its deductibility. Free tax preparation software For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. Free tax preparation software Test 1—Reasonableness You must be able to prove that the pay is reasonable. Free tax preparation software Whether the pay is reasonable depends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. Free tax preparation software If the pay is excessive, the excess pay is disallowed as a deduction. Free tax preparation software Factors to consider. Free tax preparation software   Determine the reasonableness of pay by the facts and circumstances. Free tax preparation software Generally, reasonable pay is the amount that a similar business would pay for the same or similar services. Free tax preparation software   To determine if pay is reasonable, also consider the following items and any other pertinent facts. Free tax preparation software The duties performed by the employee. Free tax preparation software The volume of business handled. Free tax preparation software The character and amount of responsibility. Free tax preparation software The complexities of your business. Free tax preparation software The amount of time required. Free tax preparation software The cost of living in the locality. Free tax preparation software The ability and achievements of the individual employee performing the service. Free tax preparation software The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation. Free tax preparation software Your policy regarding pay for all your employees. Free tax preparation software The history of pay for each employee. Free tax preparation software Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. Free tax preparation software Employee-shareholder salaries. Free tax preparation software   If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. Free tax preparation software The excessive part of the salary would not be allowed as a salary deduction by the corporation. Free tax preparation software For more information on corporate distributions to shareholders, see Publication 542, Corporations. Free tax preparation software Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salaries are discussed next. Free tax preparation software For specialized and detailed information on employees' pay and the employment tax treatment of employees' pay, see Publications 15, 15-A, and 15-B. Free tax preparation software Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. Free tax preparation software If you give property to an employee as an employee achievement award, your deduction may be limited. Free tax preparation software Achievement awards. Free tax preparation software   An achievement award is an item of tangible personal property that meets all the following requirements. Free tax preparation software It is given to an employee for length of service or safety achievement. Free tax preparation software It is awarded as part of a meaningful presentation. Free tax preparation software It is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. Free tax preparation software Length-of-service award. Free tax preparation software    An award will qualify as a length-of-service award only if either of the following applies. Free tax preparation software The employee receives the award after his or her first 5 years of employment. Free tax preparation software The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. Free tax preparation software Safety achievement award. Free tax preparation software    An award for safety achievement will qualify as an achievement award unless one of the following applies. Free tax preparation software It is given to a manager, administrator, clerical employee, or other professional employee. Free tax preparation software During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety achievement award (other than one of very small value). Free tax preparation software Deduction limit. Free tax preparation software   Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. Free tax preparation software $400 for awards that are not qualified plan awards. Free tax preparation software $1,600 for all awards, whether or not qualified plan awards. Free tax preparation software   A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. Free tax preparation software   A highly compensated employee is an employee who meets either of the following tests. Free tax preparation software The employee was a 5% owner at any time during the year or the preceding year. Free tax preparation software The employee received more than $115,000 in pay for the preceding year. Free tax preparation software You can choose to ignore test (2) if the employee was not also in the top 20% of employees ranked by pay for the preceding year. Free tax preparation software   An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. Free tax preparation software To figure this average cost, ignore awards of nominal value. Free tax preparation software Deduct achievement awards as a nonwage business expense on your return or business schedule. Free tax preparation software You may not owe employment taxes on the value of some achievement awards you provide to an employee. Free tax preparation software See Publication 15-B. Free tax preparation software Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. Free tax preparation software However, the total bonuses, salaries, and other pay must be reasonable for the services performed. Free tax preparation software If the bonus is paid in property, see Property , later. Free tax preparation software Gifts of nominal value. Free tax preparation software    If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. Free tax preparation software Your deduction for de minimis gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals. Free tax preparation software For more information on this deduction limit, see Meals and lodging , later. Free tax preparation software Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. Free tax preparation software Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. Free tax preparation software For information on educational assistance programs, see Educational Assistance in section 2 of Publication 15-B. Free tax preparation software Fringe Benefits A fringe benefit is a form of pay for the performance of services. Free tax preparation software You can generally deduct the cost of fringe benefits. Free tax preparation software You may be able to exclude all or part of the value of some fringe benefits from your employees' pay. Free tax preparation software You also may not owe employment taxes on the value of the fringe benefits. Free tax preparation software See Table 2-1, Special Rules for Various Types of Fringe Benefits, in Publication 15-B for details. Free tax preparation software Your deduction for the cost of fringe benefits for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such an activity (for example, a company aircraft) for certain officers, directors, and more-than-10% shareholders is limited. Free tax preparation software Certain fringe benefits are discussed next. Free tax preparation software See Publication 15-B for more details on these and other fringe benefits. Free tax preparation software Meals and lodging. Free tax preparation software   You can usually deduct the cost of furnishing meals and lodging to your employees. Free tax preparation software Deduct the cost in whatever category the expense falls. Free tax preparation software For example, if you operate a restaurant, deduct the cost of the meals you furnish to employees as part of the cost of goods sold. Free tax preparation software If you operate a nursing home, motel, or rental property, deduct the cost of furnishing lodging to an employee as expenses for utilities, linen service, salaries, depreciation, etc. Free tax preparation software Deduction limit on meals. Free tax preparation software   You can generally deduct only 50% of the cost of furnishing meals to your employees. Free tax preparation software However, you can deduct the full cost of the following meals. Free tax preparation software Meals whose value you include in an employee's wages. Free tax preparation software Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. Free tax preparation software This generally includes meals you furnish to employees at your place of business if more than half of these employees are provided the meals for your convenience. Free tax preparation software Meals you furnish to your employees at the work site when you operate a restaurant or catering service. Free tax preparation software Meals you furnish to your employees as part of the expense of providing recreational or social activities, such as a company picnic. Free tax preparation software Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). Free tax preparation software This does not include meals you furnish on vessels primarily providing luxury water transportation. Free tax preparation software Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. Free tax preparation software This includes meals you furnish at a support camp that is near and integral to an oil or gas drilling rig located in Alaska. Free tax preparation software Employee benefit programs. Free tax preparation software   Employee benefit programs include the following. Free tax preparation software Accident and health plans. Free tax preparation software Adoption assistance. Free tax preparation software Cafeteria plans. Free tax preparation software Dependent care assistance. Free tax preparation software Education assistance. Free tax preparation software Life insurance coverage. Free tax preparation software Welfare benefit funds. Free tax preparation software   You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. Free tax preparation software For example, if you provide dependent care by operating a dependent care facility for your employees, deduct your costs in whatever categories they fall (utilities, salaries, etc. Free tax preparation software ). Free tax preparation software Life insurance coverage. Free tax preparation software   You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. Free tax preparation software See Regulations section 1. Free tax preparation software 264-1 for more information. Free tax preparation software Welfare benefit funds. Free tax preparation software   A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent contractors, or their beneficiaries. Free tax preparation software Welfare benefits are any benefits other than deferred compensation or transfers of restricted property. Free tax preparation software   Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. Free tax preparation software If your contributions to the fund are more than its qualified cost, carry the excess over to the next tax year. Free tax preparation software   Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. Free tax preparation software The cost you would have been able to deduct using the cash method of accounting if you had paid for the benefits directly. Free tax preparation software The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. Free tax preparation software These claims can be for supplemental unemployment benefits, severance pay, or disability, medical, or life insurance benefits. Free tax preparation software   For more information, see sections 419(c) and 419A of the Internal Revenue Code and the related regulations. Free tax preparation software Loans or Advances You generally can deduct as wages an advance you make to an employee for services performed if you do not expect the employee to repay the advance. Free tax preparation software However, if the employee performs no services, treat the amount you advanced as a loan. Free tax preparation software If the employee does not repay the loan, treat it as income to the employee. Free tax preparation software Below-market interest rate loans. Free tax preparation software   On certain loans you make to an employee or shareholder, you are treated as having received interest income and as having paid compensation or dividends equal to that interest. Free tax preparation software See Below-Market Loans in chapter 4. Free tax preparation software Property If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. Free tax preparation software The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property. Free tax preparation software You can claim the deduction only for the tax year in which your employee includes the property's value in income. Free tax preparation software Your employee is deemed to have included the value in income if you report it on Form W-2, Wage and Tax Statement, in a timely manner. Free tax preparation software You treat the deductible amount as received in exchange for the property, and you must recognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. Free tax preparation software Your gain or loss is the difference between the fair market value of the property and its adjusted basis on the date of transfer. Free tax preparation software These rules also apply to property transferred to an independent contractor for services, generally reported on Form 1099-MISC, Miscellaneous Income. Free tax preparation software Restricted property. Free tax preparation software   If the property you transfer for services is subject to restrictions that affect its value, you generally cannot deduct it and do not report gain or loss until it is substantially vested in the recipient. Free tax preparation software However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. Free tax preparation software    “Substantially vested” means the property is not subject to a substantial risk of forfeiture. Free tax preparation software This means that the recipient is not likely to have to give up his or her rights in the property in the future. Free tax preparation software Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. Free tax preparation software However, your deduction may be limited. Free tax preparation software If you make the payment under an accountable plan, deduct it in the category of the expense paid. Free tax preparation software For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. Free tax preparation software If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W-2. Free tax preparation software See Reimbursement of Travel, Meals, and Entertainment in chapter 11 for more information about deducting reimbursements and an explanation of accountable and nonaccountable plans. Free tax preparation software Sick and Vacation Pay Sick pay. Free tax preparation software   You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. Free tax preparation software However, your deduction is limited to amounts not compensated by insurance or other means. Free tax preparation software Vacation pay. Free tax preparation software   Vacation pay is an employee benefit. Free tax preparation software It includes amounts paid for unused vacation leave. Free tax preparation software You can deduct vacation pay only in the tax year in which the employee actually receives it. Free tax preparation software This rule applies regardless of whether you use the cash or accrual method of accounting. Free tax preparation software Prev  Up  Next   Home   More Online Publications
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Free tax preparation software Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. Free tax preparation software More information. Free tax preparation software Exception—Community Income. Free tax preparation software Exception—Qualified joint venture. Free tax preparation software More information. Free tax preparation software More information. Free tax preparation software Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. Free tax preparation software Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. Free tax preparation software Table 1 can help you learn what those responsibilities are. Free tax preparation software Ask yourself each question listed in the table, then see the related discussion to find the answer. Free tax preparation software In addition to knowing about federal taxes, you need to make some basic business decisions. Free tax preparation software Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. Free tax preparation software For information on how to contact the SBA, see How to Get More Information, later. Free tax preparation software Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. Free tax preparation software When beginning a business, you must decide which form of business to use. Free tax preparation software Legal and tax considerations enter into this decision. Free tax preparation software Only tax considerations are discussed in this publication. Free tax preparation software Your form of business determines which income tax return form you have to file. Free tax preparation software See Table 2 to find out which form you have to file. Free tax preparation software Sole proprietorships. Free tax preparation software   A sole proprietorship is an unincorporated business that is owned by one individual. Free tax preparation software It is the simplest form of business organization to start and maintain. Free tax preparation software The business has no existence apart from you, the owner. Free tax preparation software Its liabilities are your personal liabilities. Free tax preparation software You undertake the risks of the business for all assets owned, whether or not used in the business. Free tax preparation software You include the income and expenses of the business on your personal tax return. Free tax preparation software More information. Free tax preparation software   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. Free tax preparation software If you are a farmer, see Publication 225, Farmer's Tax Guide. Free tax preparation software Partnerships. Free tax preparation software   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Free tax preparation software Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Free tax preparation software   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. Free tax preparation software , from its operations, but it does not pay income tax. Free tax preparation software Instead, it “passes through” any profits or losses to its partners. Free tax preparation software Each partner includes his or her share of the partnership's items on his or her tax return. Free tax preparation software More information. Free tax preparation software   For more information on partnerships, see Publication 541, Partnerships. Free tax preparation software Husband and wife business. Free tax preparation software   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Free tax preparation software Do not use Schedule C or C-EZ. Free tax preparation software Instead, file Form 1065, U. Free tax preparation software S. Free tax preparation software Return of Partnership Income. Free tax preparation software For more information, see Publication 541, Partnerships. Free tax preparation software Exception—Community Income. Free tax preparation software   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Free tax preparation software S. Free tax preparation software possession, you can treat the business either as a sole proprietorship or a partnership. Free tax preparation software The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Free tax preparation software A change in your reporting position will be treated as a conversion of the entity. Free tax preparation software Exception—Qualified joint venture. Free tax preparation software   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Free tax preparation software Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Free tax preparation software For an explanation of "material participation," see the Instructions for Schedule C, line G. Free tax preparation software   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Free tax preparation software Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Free tax preparation software For more information, see Qualified Joint Venture in the Instructions for Schedule SE. Free tax preparation software Corporations. Free tax preparation software   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. Free tax preparation software A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. Free tax preparation software A corporation can also take special deductions. Free tax preparation software   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. Free tax preparation software However, shareholders cannot deduct any loss of the corporation. Free tax preparation software More information. Free tax preparation software   For more information on corporations, see Publication 542, Corporations. Free tax preparation software S corporations. Free tax preparation software   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Free tax preparation software Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Free tax preparation software On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. Free tax preparation software More information. Free tax preparation software   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. Free tax preparation software S. Free tax preparation software Income Tax Return for an S Corporation. Free tax preparation software Limited liability company. Free tax preparation software   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Free tax preparation software The members of an LLC are not personally liable for its debts. Free tax preparation software An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. Free tax preparation software 7701-3. Free tax preparation software For more information, see the instructions for Form 8832, Entity Classification Election. Free tax preparation software Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. Free tax preparation software The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). Free tax preparation software An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. Free tax preparation software An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. Free tax preparation software You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. Free tax preparation software You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. Free tax preparation software This includes returns or documents filed to report the following information. Free tax preparation software Interest, dividends, royalties, etc. Free tax preparation software , paid to you. Free tax preparation software Any amount paid to you as a dependent care provider. Free tax preparation software Certain other amounts paid to you that total $600 or more for the year. Free tax preparation software If you do not furnish your identification number as required, you may be subject to penalties. Free tax preparation software See Penalties, later. Free tax preparation software Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. Free tax preparation software If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. Free tax preparation software Applying for an EIN. Free tax preparation software   You may apply for an EIN: Online—Click on the EIN link at www. Free tax preparation software irs. Free tax preparation software gov/businesses/small. Free tax preparation software The EIN is issued immediately once the application information is validated. Free tax preparation software By telephone at 1-800-829-4933. Free tax preparation software By mailing or faxing Form SS-4, Application for Employer Identification Number. Free tax preparation software When to apply. Free tax preparation software   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. Free tax preparation software If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. Free tax preparation software If you apply by telephone or through the IRS website, you can get an EIN immediately. Free tax preparation software If you apply by fax, you can get an EIN within 4 business days. Free tax preparation software   If you do not receive your EIN by the time a return is due, file your return anyway. Free tax preparation software Write “Applied for” and the date you applied for the number in the space for the EIN. Free tax preparation software Do not use your social security number as a substitute for an EIN on your tax returns. Free tax preparation software More than one EIN. Free tax preparation software   You should have only one EIN. Free tax preparation software If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. Free tax preparation software Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Free tax preparation software The IRS will tell you which number to use. Free tax preparation software More information. Free tax preparation software   For more information about EINs, see Publication 1635, Understanding Your EIN. Free tax preparation software Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). Free tax preparation software The forms used to report these payments must include the payee's identification number. Free tax preparation software Employee. Free tax preparation software   If you have employees, you must get an SSN from each of them. Free tax preparation software Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Free tax preparation software If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Free tax preparation software This may occur, for example, if the employee's name has changed due to marriage or divorce. Free tax preparation software   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. Free tax preparation software This form is available at SSA offices or by calling 1-800-772-1213. Free tax preparation software It is also available from the SSA website at www. Free tax preparation software ssa. Free tax preparation software gov. Free tax preparation software Other payee. Free tax preparation software   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. Free tax preparation software If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. Free tax preparation software   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Free tax preparation software This form is available from IRS offices or by calling 1-800-829-3676. Free tax preparation software It is also available from the IRS website at IRS. Free tax preparation software gov. Free tax preparation software    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. Free tax preparation software For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Free tax preparation software Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. Free tax preparation software A tax year is usually 12 consecutive months. Free tax preparation software There are two kinds of tax years. Free tax preparation software Calendar tax year. Free tax preparation software A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Free tax preparation software Fiscal tax year. Free tax preparation software A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Free tax preparation software A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Free tax preparation software If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Free tax preparation software You must use a calendar tax year if: You keep no books. Free tax preparation software You have no annual accounting period. Free tax preparation software Your present tax year does not qualify as a fiscal year. Free tax preparation software You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. Free tax preparation software For more information, see Publication 538, Accounting Periods and Methods. Free tax preparation software First-time filer. Free tax preparation software   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. Free tax preparation software You adopt a tax year by filing your first income tax return using that tax year. Free tax preparation software You have not adopted a tax year if you merely did any of the following. Free tax preparation software Filed an application for an extension of time to file an income tax return. Free tax preparation software Filed an application for an employer identification number. Free tax preparation software Paid estimated taxes for that tax year. Free tax preparation software Changing your tax year. Free tax preparation software   Once you have adopted your tax year, you may have to get IRS approval to change it. Free tax preparation software To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free tax preparation software You may have to pay a fee. Free tax preparation software For more information, see Publication 538. Free tax preparation software Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. Free tax preparation software You choose an accounting method for your business when you file your first income tax return. Free tax preparation software There are two basic accounting methods. Free tax preparation software Cash method. Free tax preparation software Under the cash method, you report income in the tax year you receive it. Free tax preparation software You usually deduct or capitalize expenses in the tax year you pay them. Free tax preparation software Accrual method. Free tax preparation software Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. Free tax preparation software You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. Free tax preparation software For other methods, see Publication 538. Free tax preparation software If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Free tax preparation software Inventories include goods held for sale in the normal course of business. Free tax preparation software They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Free tax preparation software Inventories are explained in Publication 538. Free tax preparation software Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. Free tax preparation software For more information, see Publication 538. Free tax preparation software You must use the same accounting method to figure your taxable income and to keep your books. Free tax preparation software Also, you must use an accounting method that clearly shows your income. Free tax preparation software In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. Free tax preparation software An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. Free tax preparation software More than one business. Free tax preparation software   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. Free tax preparation software You must keep a complete and separate set of books and records for each business. Free tax preparation software Changing your method of accounting. Free tax preparation software   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Free tax preparation software A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. Free tax preparation software For examples of changes that require approval and information on how to get approval for the change, see Publication 538. Free tax preparation software Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. Free tax preparation software The following are the four general kinds of business taxes. Free tax preparation software Income tax. Free tax preparation software Self-employment tax. Free tax preparation software Employment taxes. Free tax preparation software Excise taxes. Free tax preparation software See Table 2 for the forms you file to report these taxes. Free tax preparation software You may want to get Publication 509. Free tax preparation software It has tax calendars that tell you when to file returns and make tax payments. Free tax preparation software Income Tax All businesses except partnerships must file an annual income tax return. Free tax preparation software Partnerships file an information return. Free tax preparation software Which form you use depends on how your business is organized. Free tax preparation software See Table 2 to find out which return you have to file. Free tax preparation software The federal income tax is a pay-as-you-go tax. Free tax preparation software You must pay the tax as you earn or receive income during the year. Free tax preparation software An employee usually has income tax withheld from his or her pay. Free tax preparation software If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Free tax preparation software If you are not required to make estimated tax payments, you may pay any tax due when you file your return. Free tax preparation software Table 2. Free tax preparation software Which Forms Must I File? IF you are a. Free tax preparation software . Free tax preparation software . Free tax preparation software   THEN you may be liable for. Free tax preparation software . Free tax preparation software . Free tax preparation software   Use Form. Free tax preparation software . Free tax preparation software . Free tax preparation software Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. Free tax preparation software 2 Various other schedules may be needed. Free tax preparation software Estimated tax. Free tax preparation software   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. Free tax preparation software Sole proprietors, partners, and S corporation shareholders. Free tax preparation software   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Free tax preparation software Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Free tax preparation software For more information, see Publication 505, Tax Withholding and Estimated Tax. Free tax preparation software Corporations. Free tax preparation software   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Free tax preparation software Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. Free tax preparation software You must deposit the payments as explained later under Depositing Taxes. Free tax preparation software For more information, see Publication 542. Free tax preparation software Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Free tax preparation software Your payments of SE tax contribute to your coverage under the social security system. Free tax preparation software Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Free tax preparation software You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Free tax preparation software Your net earnings from self-employment were $400 or more. Free tax preparation software You had church employee income of $108. Free tax preparation software 28 or more. Free tax preparation software Use Schedule SE (Form 1040) to figure your SE tax. Free tax preparation software For more information, see Publication 334, Tax Guide for Small Business. Free tax preparation software You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. Free tax preparation software The Social Security Administration (SSA) time limit for posting self-employment income. Free tax preparation software   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Free tax preparation software If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. Free tax preparation software The SSA will not change its records to increase your self-employment income. Free tax preparation software Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. Free tax preparation software Employment taxes include the following. Free tax preparation software Social security and Medicare taxes. Free tax preparation software Federal income tax withholding. Free tax preparation software Federal unemployment (FUTA) tax. Free tax preparation software If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. Free tax preparation software If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. Free tax preparation software These publications explain your tax responsibilities as an employer. Free tax preparation software If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Free tax preparation software That publication has information to help you determine whether an individual is an employee or an independent contractor. Free tax preparation software If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. Free tax preparation software An independent contractor is someone who is self-employed. Free tax preparation software Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. Free tax preparation software Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. Free tax preparation software To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. Free tax preparation software Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Free tax preparation software Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Free tax preparation software Medicare tax pays for benefits under the hospital insurance part of FICA. Free tax preparation software You withhold part of these taxes from your employee's wages and you pay a part yourself. Free tax preparation software To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. Free tax preparation software Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. Free tax preparation software (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Free tax preparation software ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Free tax preparation software You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. Free tax preparation software You pay FUTA tax only from your own funds. Free tax preparation software Employees do not pay this tax or have it withheld from their pay. Free tax preparation software Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Free tax preparation software See Publication 15 to find out if you can use this form. Free tax preparation software Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. Free tax preparation software Form I-9. Free tax preparation software   You must verify that each new employee is legally eligible to work in the United States. Free tax preparation software Both you and the employee must complete the U. Free tax preparation software S. Free tax preparation software Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Free tax preparation software You can get the form from USCIS offices or from the USCIS website at www. Free tax preparation software uscis. Free tax preparation software gov. Free tax preparation software Call the USCIS at 1-800-375-5283 for more information about your responsibilities. Free tax preparation software Form W-4. Free tax preparation software   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. Free tax preparation software You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. Free tax preparation software For more information, see Publication 15. Free tax preparation software Employees claiming more than 10 withholding allowances. Free tax preparation software   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. Free tax preparation software See section 16 of Publication 15. Free tax preparation software Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. Free tax preparation software You must also send copies to the Social Security Administration. Free tax preparation software See Information Returns, later, for more information on Form W-2. Free tax preparation software Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Free tax preparation software Manufacture or sell certain products. Free tax preparation software Operate certain kinds of businesses. Free tax preparation software Use various kinds of equipment, facilities, or products. Free tax preparation software Receive payment for certain services. Free tax preparation software For more information on excise taxes, see Publication 510, Excise Taxes. Free tax preparation software Form 720. Free tax preparation software   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Free tax preparation software Environmental taxes. Free tax preparation software Communications and air transportation taxes. Free tax preparation software Fuel taxes. Free tax preparation software Tax on the first retail sale of heavy trucks, trailers, and tractors. Free tax preparation software Manufacturers taxes on the sale or use of a variety of different articles. Free tax preparation software Form 2290. Free tax preparation software   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. Free tax preparation software The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Free tax preparation software Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Free tax preparation software For more information, see the instructions for Form 2290. Free tax preparation software Form 730. Free tax preparation software   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Free tax preparation software Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. Free tax preparation software Form 11-C. Free tax preparation software   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. Free tax preparation software Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Free tax preparation software Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). Free tax preparation software Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Free tax preparation software Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. Free tax preparation software Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Free tax preparation software The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Free tax preparation software You must give a copy of each information return you are required to file to the recipient or payer. Free tax preparation software In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Free tax preparation software For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Free tax preparation software Form 1099-MISC. Free tax preparation software   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. Free tax preparation software These payments include the following items. Free tax preparation software Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. Free tax preparation software Rent payments of $600 or more, other than rents paid to real estate agents. Free tax preparation software Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Free tax preparation software Royalty payments of $10 or more. Free tax preparation software Payments to certain crew members by operators of fishing boats. Free tax preparation software You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Free tax preparation software Form W-2. Free tax preparation software   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. Free tax preparation software For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. Free tax preparation software Form 8300. Free tax preparation software   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. Free tax preparation software Cash includes U. Free tax preparation software S. Free tax preparation software and foreign coin and currency. Free tax preparation software It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Free tax preparation software For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Free tax preparation software Penalties The law provides penalties for not filing returns or paying taxes as required. Free tax preparation software Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. Free tax preparation software Failure to file tax returns. Free tax preparation software   If you do not file your tax return by the due date, you may have to pay a penalty. Free tax preparation software The penalty is based on the tax not paid by the due date. Free tax preparation software See your tax return instructions for more information about this penalty. Free tax preparation software Failure to pay tax. Free tax preparation software   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. Free tax preparation software For more information, see your tax return instructions. Free tax preparation software Failure to withhold, deposit, or pay taxes. Free tax preparation software   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. Free tax preparation software You may also be subject to penalties if you deposit the taxes late. Free tax preparation software For more information, see Publication 15. Free tax preparation software Failure to follow information reporting requirements. Free tax preparation software   The following penalties apply if you are required to file information returns. Free tax preparation software For more information, see the General Instructions for Certain Information Returns. Free tax preparation software Failure to file information returns. Free tax preparation software A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. Free tax preparation software Failure to furnish correct payee statements. Free tax preparation software A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. Free tax preparation software Waiver of penalty. Free tax preparation software   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. Free tax preparation software   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. Free tax preparation software (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. Free tax preparation software ) Failure to supply taxpayer identification number. Free tax preparation software   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. Free tax preparation software You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. Free tax preparation software Business Expenses You can deduct business expenses on your income tax return. Free tax preparation software These are the current operating costs of running your business. Free tax preparation software To be deductible, a business expense must be both ordinary and necessary. Free tax preparation software An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Free tax preparation software A necessary expense is one that is helpful and appropriate for your business, trade, or profession. Free tax preparation software An expense does not have to be indispensable to be considered necessary. Free tax preparation software The following are brief explanations of some expenses that are of interest to people starting a business. Free tax preparation software There are many other expenses that you may be able to deduct. Free tax preparation software See your form instructions and Publication 535, Business Expenses. Free tax preparation software Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. Free tax preparation software Your business start-up costs will depend on the type of business you are starting. Free tax preparation software They may include costs for advertising, travel, surveys, and training. Free tax preparation software These costs are generally capital expenses. Free tax preparation software You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Free tax preparation software You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Free tax preparation software The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Free tax preparation software Any remaining cost must be amortized. Free tax preparation software For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. Free tax preparation software Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Free tax preparation software You must spread the cost over more than one tax year and deduct part of it each year. Free tax preparation software This method of deducting the cost of business property is called depreciation. Free tax preparation software Business property you must depreciate includes the following items. Free tax preparation software Office furniture. Free tax preparation software Buildings. Free tax preparation software Machinery and equipment. Free tax preparation software You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Free tax preparation software This deduction is known as the “section 179 deduction. Free tax preparation software ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. Free tax preparation software Depreciation must be taken in the year it is allowable. Free tax preparation software Allowable depreciation not taken in a prior year cannot be taken in the current year. Free tax preparation software If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. Free tax preparation software S. Free tax preparation software Individual Income Tax Return, or by changing your accounting method. Free tax preparation software For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. Free tax preparation software Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. Free tax preparation software Even then, your deduction may be limited. Free tax preparation software To qualify to claim expenses for business use of your home, you must meet both the following tests. Free tax preparation software Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. Free tax preparation software Exclusive use. Free tax preparation software   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Free tax preparation software The area used for business can be a room or other separately identifiable space. Free tax preparation software The space does not need to be marked off by a permanent partition. Free tax preparation software   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Free tax preparation software Exceptions to exclusive use. Free tax preparation software   You do not have to meet the exclusive use test if either of the following applies. Free tax preparation software You use part of your home for the storage of inventory or product samples. Free tax preparation software You use part of your home as a daycare facility. Free tax preparation software For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Free tax preparation software Principal place of business. Free tax preparation software   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Free tax preparation software You use it exclusively and regularly for administrative or management activities of your trade or business. Free tax preparation software You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Free tax preparation software   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Free tax preparation software The relative importance of the activities performed at each location. Free tax preparation software If the relative importance factor does not determine your principal place of business, the time spent at each location. Free tax preparation software    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Free tax preparation software However, for other ways to qualify to deduct home office expenses, see Publication 587. Free tax preparation software Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Free tax preparation software If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. Free tax preparation software More information. Free tax preparation software   For more information about business use of your home, see Publication 587. Free tax preparation software Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. Free tax preparation software You generally can deduct either your actual expenses or the standard mileage rate. Free tax preparation software Actual expenses. Free tax preparation software   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Free tax preparation software You can divide your expenses based on the miles driven for each purpose. Free tax preparation software Example. Free tax preparation software You are the sole proprietor of a flower shop. Free tax preparation software You drove your van 20,000 miles during the year. Free tax preparation software 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. Free tax preparation software You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Free tax preparation software Standard mileage rate. Free tax preparation software   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Free tax preparation software You can use the standard mileage rate for a vehicle you own or lease. Free tax preparation software The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. Free tax preparation software It is announced annually by the IRS. Free tax preparation software To figure your deduction, multiply your business miles by the standard mileage rate for the year. Free tax preparation software    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. Free tax preparation software However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. Free tax preparation software Choosing the standard mileage rate. Free tax preparation software   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Free tax preparation software In later years, you can choose to use either the standard mileage rate or actual expenses. Free tax preparation software   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Free tax preparation software Additional information. Free tax preparation software   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Free tax preparation software Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. Free tax preparation software It also explains how long you must keep your records for federal tax purposes. Free tax preparation software A sample recordkeeping system is illustrated at the end of this part. Free tax preparation software Why Keep Records? Everyone in business must keep records. Free tax preparation software Good records will help you do the following. Free tax preparation software Monitor the progress of your business. Free tax preparation software   You need good records to monitor the progress of your business. Free tax preparation software Records can show whether your business is improving, which items are selling, or what changes you need to make. Free tax preparation software Good records can increase the likelihood of business success. Free tax preparation software Prepare your financial statements. Free tax preparation software   You need good records to prepare accurate financial statements. Free tax preparation software These include income (profit and loss) statements and balance sheets. Free tax preparation software These statements can help you in dealing with your bank or creditors and help you manage your business. Free tax preparation software An income statement shows the income and expenses of the business for a given period of time. Free tax preparation software A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Free tax preparation software Identify source of receipts. Free tax preparation software   You will receive money or property from many sources. Free tax preparation software Your records can identify the source of your receipts. Free tax preparation software You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. Free tax preparation software Keep track of deductible expenses. Free tax preparation software   You may forget expenses when you prepare your tax return unless you record them when they occur. Free tax preparation software Prepare your tax returns. Free tax preparation software   You need good records to prepare your tax returns. Free tax preparation software These records must support the income, expenses, and credits you report. Free tax preparation software Generally, these are the same records you use to monitor your business and prepare your financial statements. Free tax preparation software Support items reported on tax returns. Free tax preparation software   You must keep your business records available at all times for inspection by the IRS. Free tax preparation software If the IRS examines any of your tax returns, you may be asked to explain the items reported. Free tax preparation software A complete set of records will speed up the examination. Free tax preparation software Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Free tax preparation software You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Free tax preparation software The business you are in affects the type of records you need to keep for federal tax purposes. Free tax preparation software You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Free tax preparation software See Accounting Method, earlier. Free tax preparation software If you are in more than one business, you should keep a complete and separate set of records for each business. Free tax preparation software A corporation should keep minutes of board of directors' meetings. Free tax preparation software Your recordkeeping system should include a summary of your business transactions. Free tax preparation software This summary is ordinarily made in your books (for example, accounting journals and ledgers). Free tax preparation software Your books must show your gross income, as well as your deductions and credits. Free tax preparation software For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. Free tax preparation software In addition, you must keep supporting documents, explained later. Free tax preparation software Electronic records. Free tax preparation software   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Free tax preparation software When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Free tax preparation software An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Free tax preparation software The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Free tax preparation software All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Free tax preparation software Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Free tax preparation software   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Free tax preparation software You still have the responsibility of retaining any other books and records that are required to be retained. Free tax preparation software   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Free tax preparation software This test is not considered an examination and the results must be shared with you. Free tax preparation software If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Free tax preparation software If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. Free tax preparation software For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. Free tax preparation software Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Free tax preparation software Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Free tax preparation software These documents contain information you need to record in your books. Free tax preparation software It is important to keep these documents because they support the entries in your books and on your tax return. Free tax preparation software Keep them in an orderly fashion and in a safe place. Free tax preparation software For instance, organize them by year and type of income or expense. Free tax preparation software Gross receipts. Free tax preparation software   Gross receipts are the income you receive from your business. Free tax preparation software You should keep supporting documents that show the amounts and sources of your gross receipts. Free tax preparation software Documents that show gross receipts include the following. Free tax preparation software Cash register tapes. Free tax preparation software Bank deposit slips. Free tax preparation software Receipt books. Free tax preparation software Invoices. Free tax preparation software Credit card charge slips. Free tax preparation software Forms 1099-MISC. Free tax preparation software Purchases. Free tax preparation software   Purchases are the items you buy and resell to customers. Free tax preparation software If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Free tax preparation software Your supporting documents should show the amount paid and that the amount was for purchases. Free tax preparation software Documents for purchases include the following. Free tax preparation software Canceled checks. Free tax preparation software Cash register tape receipts. Free tax preparation software Credit card sales slips. Free tax preparation software Invoices. Free tax preparation software These records will help you determine the value of your inventory at the end of the year. Free tax preparation software See Publication 538 for information on methods for valuing inventory. Free tax preparation software Expenses. Free tax preparation software   Expenses are the costs you incur (other than purchases) to carry on your business. Free tax preparation software Your supporting documents should show the amount paid and that the amount was for a business expense. Free tax preparation software Documents for expenses include the following. Free tax preparation software Canceled checks. Free tax preparation software Cash register tapes. Free tax preparation software Account statements. Free tax preparation software Credit card sales slips. Free tax preparation software Invoices. Free tax preparation software Petty cash slips for small cash payments. Free tax preparation software    A petty cash fund allows you to make small payments without having to write checks for small amounts. Free tax preparation software Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. Free tax preparation software Travel, transportation, entertainment, and gift expenses. Free tax preparation software   Specific recordkeeping rules apply to these expenses. Free tax preparation software For more information, see Publication 463. Free tax preparation software Employment taxes. Free tax preparation software   There are specific employment tax records you must keep. Free tax preparation software For a list, see Publication 15. Free tax preparation software Assets. Free tax preparation software   Assets are the property, such as machinery and furniture you own and use in your business. Free tax preparation software You must keep records to verify certain information about your business assets. Free tax preparation software You need records to figure the annual depreciation and the gain or loss when you sell the assets. Free tax preparation software Your records should show the following information. Free tax preparation software When and how you acquired the asset. Free tax preparation software Purchase price. Free tax preparation software Cost of any improvements. Free tax preparation software Section 179 deduction taken. Free tax preparation software Deductions taken for depreciation. Free tax preparation software Deductions taken for casualty losses, such as losses resulting from fires or storms. Free tax preparation software How you used the asset. Free tax preparation software When and how you disposed of the asset. Free tax preparation software Selling price. Free tax preparation software Expenses of sale. Free tax preparation software   The following documents may show this information. Free tax preparation software Purchase and sales invoices. Free tax preparation software Real estate closing statements. Free tax preparation software Canceled checks. Free tax preparation software What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Free tax preparation software These include account statements prepared for the financial institution by a third party. Free tax preparation software These account statements must be highly legible. Free tax preparation software The following table lists acceptable account statements. Free tax preparation software  IF payment is by. Free tax preparation software . Free tax preparation software . Free tax preparation software THEN the statement must show the. Free tax preparation software . Free tax preparation software . Free tax preparation software Check Check number. Free tax preparation software Amount. Free tax preparation software Payee's name. Free tax preparation software Date the check amount was posted to the account by the financial institution. Free tax preparation software Electronic funds transfer Amount transferred. Free tax preparation software Payee's name. Free tax preparation software Date the transfer was posted to the account by the financial institution. Free tax preparation software Credit card Amount charged. Free tax preparation software Payee's name. Free tax preparation software Transaction date. Free tax preparation software    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Free tax preparation software You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Free tax preparation software Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. Free tax preparation software (Your business transactions are shown on the supporting documents just discussed. Free tax preparation software ) Business transactions are ordinarily summarized in books called journals and ledgers. Free tax preparation software You can buy them at your local stationery or office supply store. Free tax preparation software A journal is a book where you record each business transaction shown on your supporting documents. Free tax preparation software You may have to keep separate journals for transactions that occur frequently. Free tax preparation software A ledger is a book that contains the totals from all of your journals. Free tax preparation software It is organized into different accounts. Free tax preparation software Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. Free tax preparation software For example, a recordkeeping system for a small business might include the following items. Free tax preparation software Business checkbook. Free tax preparation software Daily summary of cash receipts. Free tax preparation software Monthly summary of cash receipts. Free tax preparation software Check disbursements journal. Free tax preparation software Depreciation worksheet. Free tax preparation software Employee compensation record. Free tax preparation software The business checkbook is explained next. Free tax preparation software The other items are illustrated later under Sample Record System. Free tax preparation software The system you use to record business transactions will be more effective if you follow good recordkeeping practices. Free tax preparation software For example, record expenses when they occur, and identify the source of recorded receipts. Free tax preparation software Generally, it is best to record transactions on a daily basis. Free tax preparation software Business checkbook. Free tax preparation software   One of the first things you should do when you start a business is open a business checking account. Free tax preparation software You should keep your business account separate from your personal checking account. Free tax preparation software   The business checkbook is your basic source of information for recording your business expenses. Free tax preparation software You should deposit all daily receipts in your business checking account. Free tax preparation software You should check your account for errors by reconciling it. Free tax preparation software See Reconciling the checking account, later. Free tax preparation software   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. Free tax preparation software You should also note on the deposit slip the source of the deposit and keep copies of all slips. Free tax preparation software   You should make all payments by check to document business expenses. Free tax preparation software Write checks payable to yourself only when making withdrawals from your business for personal use. Free tax preparation software Avoid writing checks payable to cash. Free tax preparation software If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. Free tax preparation software If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Free tax preparation software    Use the business account for business purposes only. Free tax preparation software Indicate the source of deposits and the type of expense in the checkbook. Free tax preparation software Reconciling the checking account. Free tax preparation software   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. Free tax preparation software The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. Free tax preparation software   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. Free tax preparation software    You should reconcile your checking account each month. Free tax preparation software     Before you reconcile your monthly bank statement, check your own figures. Free tax preparation software Begin with the balance shown in your checkbook at the end of the previous month. Free tax preparation software To this balance, add the total cash deposited during the month and subtract the total cash disbursements. Free tax preparation software   After checking your figures, the result should agree with your checkbook balance at the end of the month. Free tax preparation software If the result does not agree, you may have made an error in recording a check or deposit. Free tax preparation software You can find the error by doing the following. Free tax preparation software Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. Free tax preparation software If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. Free tax preparation software Adding the deposit amounts in your checkbook. Free tax preparation software Compare that total with the monthly total in your cash receipt book, if you have one. Free tax preparation software If the totals do not agree, check the individual amounts to find any errors. Free tax preparation software   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. Free tax preparation software   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Free tax preparation software Many banks print a reconciliation worksheet on the back of the statement. Free tax preparation software   To reconcile your account, follow these steps. Free tax preparation software Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Free tax preparation software Note all differences in the dollar amounts. Free tax preparation software Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Free tax preparation software Note all differences in the dollar amounts. Free tax preparation software Mark the check number in the checkbook as having cleared the bank. Free tax preparation software After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Free tax preparation software Prepare a bank reconciliation. Free tax preparation software One is illustrated later under Sample Record System. Free tax preparation software Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. Free tax preparation software At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. Free tax preparation software If you still have differences, check the previous steps to find the errors. Free tax preparation software   Table 3. Free tax preparation software Period of Limitations IF you. Free tax preparation software . Free tax preparation software . Free tax preparation software   THEN the period is. Free tax preparation software . Free tax preparation software . Free tax preparation software 1. Free tax preparation software Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. Free tax preparation software Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. Free tax preparation software File a fraudulent return   Not limited 4. Free tax preparation software Do not file a return   Not limited 5. Free tax preparation software File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. Free tax preparation software File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. Free tax preparation software The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. Free tax preparation software You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Free tax preparation software Single-entry. Free tax preparation software   A single-entry system is based on the income statement (profit or loss statement). Free tax preparation software It can be a simple and practical system if you are starting a small business. Free tax preparation software The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. Free tax preparation software Double-entry. Free tax preparation software   A double-entry bookkeeping system uses journals and ledgers. Free tax preparation software Transactions are first entered in a journal and then posted to ledger accounts. Free tax preparation software These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). Free tax preparation software You close income and expense accounts at the end of each tax year. Free tax preparation software You keep asset, liability, and net worth accounts open on a permanent basis. Free tax preparation software   In the double-entry system, each account has a left side for debits and a right side for credits. Free tax preparation software It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. Free tax preparation software   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. Free tax preparation software If the amounts do not balance, you have made an error and you must find and correct it. Free tax preparation software   An example of a journal entry exhibiting a payment of rent in October is shown next. Free tax preparation software General Journal Date Description of Entry Debit  Credit Oct. Free tax preparation software 5 Rent expense 780. Free tax preparation software 00     Cash   780. Free tax preparation software 00                 Computerized System There are computer software packages you can use for recordkeeping. Free tax preparation software They can be purchased in many retail stores. Free tax preparation software These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. Free tax preparation software If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. Free tax preparation software To meet this qualification, the machine-sensible records must reconcile with your books and return. Free tax preparation software These records must provide enough detail to identify the underlying source documents. Free tax preparation software You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. Free tax preparation software This documentation must be sufficiently detailed to show all of the following items. Free tax preparation software Functions being performed as the data flows through the system. Free tax preparation software Controls used to ensure accurate and reliable processing. Free tax preparation software Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. Free tax preparation software Charts of accounts and detailed account descriptions. Free tax preparation software See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. Free tax preparation software How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Free tax preparation software Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. Free tax preparation software The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. Free tax preparation software Table 3 contains the periods of limitations that apply to income tax returns. Free tax preparation software Unless otherwise stated, the years refer to the period after the return was filed. Free tax preparation software Returns filed before the due date are treated as filed on the due date. Free tax preparation software Keep copies of your filed tax returns. Free tax preparation software They help in preparing future tax returns and making computations if you file an amended return. Free tax preparation software Employment taxes. Free tax preparation software   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Free tax preparation software For more information about recordkeeping for employment taxes, see Publication 15. Free tax preparation software Assets. Free tax preparation software   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Free tax preparation software You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. Free tax preparation software   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. Free tax preparation software You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Free tax preparation software Records for nontax purposes. Free tax preparation software   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Free tax preparation software For example, your insurance company or creditors may require you to keep them longer than the IRS does. Free tax preparation software Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. Free tax preparation software Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. Free tax preparation software These sample records should not be viewed as a recommendation of how to keep your records. Free tax preparation software They are intended only to show how one business keeps its records. Free tax preparation software 1. Free tax preparation software Daily Summary of Cash Receipts This summary is a record of cash sales for the day. Free tax preparation software It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. Free tax preparation software Henry takes the cash sales entry from his cash register tape. Free tax preparation software If he had no cash register, he would simply total his cash sale slips and any other cash received that day. Free tax preparation software He carries the total receipts shown in this summary for January 3 ($267. Free tax preparation software 80), including cash sales ($263. Free tax preparation software 60) and sales tax ($4. Free tax preparation software 20), to the Monthly Summary of Cash Receipts. Free tax preparation software Petty cash fund. Free tax preparation software   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Free tax preparation software Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. Free tax preparation software He sets up a fixed amount ($50) in his petty cash fund. Free tax preparation software The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. Free tax preparation software When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. Free tax preparation software (See the Check Disbursements Journal entry for check number 92. Free tax preparation software ) This restores the fund to its fixed amount of $50. Free tax preparation software He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. Free tax preparation software 2. Free tax preparation software Monthly Summary of Cash Receipts This shows the income activity for the month. Free tax preparation software Henry carries the total monthly net sales shown in this summary for January ($4,865. Free tax preparation software 05) to his Annual Summary. Free tax preparation software To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. Free tax preparation software He cannot take a deduction for sales tax turned over to the state because he only collected the tax. Free tax preparation software He does not include the tax in his income. Free tax preparation software 3. Free tax preparation software Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. Free tax preparation software All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. Free tax preparation software Frequent expenses have their own headings across the sheet. Free tax preparation software He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Free tax preparation software Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. Free tax preparation software Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. Free tax preparation software If he did, he would record them in the journal, even though he could not deduct them as business expenses. Free tax preparation software Henry carries the January total of expenses for materials ($1,083. Free tax preparation software 50) to the Annual Summary. Free tax preparation software Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. Free tax preparation software , in the appropriate columns of that summary. Free tax preparation software 4. Free tax preparation software Employee Compensation Record This record shows the following information. Free tax preparation software The number of hours Henry's employee worked in a pay period. Free tax preparation software The employee's total pay for the period. Free tax preparation software The deductions Henry withheld in figuring the employee's net pay. Free tax preparation software The monthly gross payroll. Free tax preparation software Henry carries the January gross payroll ($520) to the Annual Summary. Free tax preparation software 5. Free tax preparation software Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. Free tax preparation software He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. Free tax preparation software He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. Free tax preparation software As in the journal, he keeps each major expense in a separate column. Free tax preparation software Henry carries the cash receipts total shown in the annual summary ($47,440. Free tax preparation software 9