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