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Tax Software 2011

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Tax Software 2011

Tax software 2011 7. Tax software 2011   Ship Passenger Tax Table of Contents A tax of $3 per passenger is imposed on certain ship voyages, as explained later under Taxable situations. Tax software 2011 The tax is imposed only once for each passenger, either at the time of first embarkation or disembarkation in the United States. Tax software 2011 The person providing the voyage (the operator of the vessel) is liable for the tax. Tax software 2011 Voyage. Tax software 2011   A voyage is the vessel's journey that includes the outward and homeward trips or passages. Tax software 2011 The voyage starts when the vessel begins to load passengers and continues until the vessel has completed at least one outward and one homeward passage. Tax software 2011 The tax may be imposed even if a passenger does not make both an outward and a homeward passage as long as the voyage begins or ends in the United States. Tax software 2011 Passenger. Tax software 2011   A passenger is an individual carried on the vessel other than the Master or a crew member or other individual engaged in the business of the vessel or its owners. Tax software 2011 Example 1. Tax software 2011 John Smith works as a guest lecturer. Tax software 2011 The cruise line hired him for the benefit of the passengers. Tax software 2011 Therefore, he is engaged in the business of the vessel and is not a passenger. Tax software 2011 Example 2. Tax software 2011 Marian Green is a travel agent. Tax software 2011 She is taking the cruise as a promotional trip to determine if she wants to offer it to her clients. Tax software 2011 She is a passenger. Tax software 2011 Taxable situations. Tax software 2011   There are two taxable situations. Tax software 2011 The first situation involves voyages on commercial passenger vessels extending over one or more nights. Tax software 2011 A voyage extends over one or more nights if it extends for more than 24 hours. Tax software 2011 A passenger vessel is any vessel with stateroom or berth accommodations for more than 16 passengers. Tax software 2011   The second situation involves voyages on a commercial vessel transporting passengers engaged in gambling on the vessel beyond the territorial waters of the United States. Tax software 2011 Territorial waters of the United States are those waters within the international boundary line between the United States and any contiguous foreign country or within 3 nautical miles (3. Tax software 2011 45 statute miles) from low tide on the coastline. Tax software 2011 If passengers participate as players in any policy game or other lottery, or any other game of chance for money or other thing of value that the owner or operator of the vessel (or their employee, agent, or franchisee) conducts, sponsors, or operates, the voyage is subject to the ship passenger tax. Tax software 2011 The tax applies regardless of the duration of the voyage. Tax software 2011 A casual, friendly game of chance with other passengers that is not conducted, sponsored, or operated by the owner or operator is not gambling for determining if the voyage is subject to the ship passenger tax. Tax software 2011 Exemptions. Tax software 2011   The tax does not apply when a vessel is on a voyage of less than 12 hours between 2 points in the United States or if a vessel is owned or operated by a state or local government. Tax software 2011 Prev  Up  Next   Home   More Online Publications
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Appeals

About the Office of Appeals

Every year, the Office of Appeals helps over 100,000 taxpayers resolve their tax disputes without going to Tax Court. We are an independent organization from the IRS whose mission is to help taxpayers and the government resolve tax disagreements. Appeals DOES NOT take sides in a dispute; rather we offer an objective point of view on each individual case. See the Treasury Inspector General for Tax Administration’s report (PDF) on their audit of Appeals’ independence.
 

Appeals also offers mediation services through Fast Track Settlement, Early Referral, and other mediation programs. These mediation programs are designed to help you resolve your dispute at the earliest possible stage in the audit or collection process.

Getting Started with Appeals

If you’ve received an IRS letter stating that your case qualifies to be reviewed with Appeals then the following topics will help you get started.

 

Page Last Reviewed or Updated: 23-Jan-2014

The Tax Software 2011

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