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