Publication 583 - Main Content


What New Business Owners Need To Know

As a new business owner, you need to know your federal tax responsibilities. Table 1 can help you learn what those responsibilities are. Ask yourself each question listed in the table, then see the related discussion to find the answer.

In addition to knowing about federal taxes, you need to make some basic business decisions. 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. For information on how to contact the SBA, see How to Get More Information, later.

Forms of Business

The most common forms of business are the sole proprietorship, partnership, and corporation. When beginning a business, you must decide which form of business to use. Legal and tax considerations enter into this decision. Only tax considerations are discussed in this publication.

Your form of business determines which income tax return form you have to file. See Table 2 to find out which form you have to file.

Sole proprietorships.   A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether or not used in the business. You include the income and expenses of the business on your personal tax return.

More information.   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. If you are a farmer, see Publication 225, Farmer's Tax Guide.

Partnerships.   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business.

  A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership's items on his or her tax return.

More information.   For more information on partnerships, see Publication 541, Partnerships.

Husband and wife business.   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. Do not use Schedule C or C-EZ. Instead, file Form 1065, U.S. Return of Partnership Income. For more information, see Publication 541, Partnerships.

Exception—Community Income.   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.S. possession, you can treat the business either as a sole proprietorship or a partnership. The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the entity.

Exception—Qualified joint venture.   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. 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. For an explanation of "material participation," see the Instructions for Schedule C, line G.

  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. Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. For more information, see Qualified Joint Venture in the Instructions for Schedule SE.

Corporations.   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions.

  The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. However, shareholders cannot deduct any loss of the corporation.

More information.   For more information on corporations, see Publication 542, Corporations.

S corporations.   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. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. 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.

More information.   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U.S. Income Tax Return for an S Corporation.

Limited liability company.   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. The members of an LLC are not personally liable for its debts. 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 301.7701-3. For more information, see the instructions for Form 8832, Entity Classification Election.

Identification Numbers

You must have a taxpayer identification number so the IRS can process your returns. The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN).

  • An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000.

  • An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000.

You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. This includes returns or documents filed to report the following information.

  1. Interest, dividends, royalties, etc., paid to you.

  2. Any amount paid to you as a dependent care provider.

  3. Certain other amounts paid to you that total $600 or more for the year.

If you do not furnish your identification number as required, you may be subject to penalties. See Penalties, later.

Employer Identification Number (EIN)

EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities.

If you don't already have an EIN, you need to get one if you:

  1. Have employees,

  2. Have a qualified retirement plan,

  3. Operate your business as a corporation or partnership, or

  4. File returns for:

    1. Employment taxes, or

    2. Excise taxes.

Applying for an EIN.   You may apply for an EIN:
  • Online—Click on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.

  • By telephone at 1-800-829-4933.

  • By mailing or faxing Form SS-4, Application for Employer Identification Number.

When to apply.   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. If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. If you apply by telephone or through the IRS website, you can get an EIN immediately. If you apply by fax, you can get an EIN within 4 business days.

  If you do not receive your EIN by the time a return is due, file your return anyway. Write “Applied for” and the date you applied for the number in the space for the EIN. Do not use your social security number as a substitute for an EIN on your tax returns.

More than one EIN.   You should have only one EIN. 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. Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. The IRS will tell you which number to use.

More information.   For more information about EINs, see Publication 1635, Understanding Your EIN.

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). The forms used to report these payments must include the payee's identification number.

Employee.   If you have employees, you must get an SSN from each of them. Record the name and SSN of each employee exactly as they are shown on the employee's social security card. If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. This may occur, for example, if the employee's name has changed due to marriage or divorce.

  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. This form is available at SSA offices or by calling 1-800-772-1213. It is also available from the SSA website at www.ssa.gov.

Other payee.   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. If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN.

  To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. This form is available from IRS offices or by calling 1-800-829-3676. It is also available from the IRS website at IRS.gov.

  
If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns.

Tax Year

You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. A tax year is usually 12 consecutive months. There are two kinds of tax years.

  1. Calendar tax year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.

  2. Fiscal tax year. A fiscal tax year is 12 consecutive months ending on the last day of any month except December. 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.

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.

You must use a calendar tax year if:

  • You keep no books.

  • You have no annual accounting period.

  • Your present tax year does not qualify as a fiscal year.

  • You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.

For more information, see Publication 538, Accounting Periods and Methods.

First-time filer.   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. You adopt a tax year by filing your first income tax return using that tax year. You have not adopted a tax year if you merely did any of the following.
  • Filed an application for an extension of time to file an income tax return.

  • Filed an application for an employer identification number.

  • Paid estimated taxes for that tax year.

Changing your tax year.   Once you have adopted your tax year, you may have to get IRS approval to change it. To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. You may have to pay a fee. For more information, see Publication 538.

Accounting Method

An accounting method is a set of rules used to determine when and how income and expenses are reported. You choose an accounting method for your business when you file your first income tax return. There are two basic accounting methods.

  1. Cash method. Under the cash method, you report income in the tax year you receive it. You usually deduct or capitalize expenses in the tax year you pay them.

  2. Accrual method. 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. You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year.

For other methods, see Publication 538.

If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Inventories include goods held for sale in the normal course of business. They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Inventories are explained in Publication 538.

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. For more information, see Publication 538.

You must use the same accounting method to figure your taxable income and to keep your books. Also, you must use an accounting method that clearly shows your income. In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year.

More than one business.   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. You must keep a complete and separate set of books and records for each business.

Changing your method of accounting.   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. 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. For examples of changes that require approval and information on how to get approval for the change, see Publication 538.

Business Taxes

The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general kinds of business taxes.

  • Income tax.

  • Self-employment tax.

  • Employment taxes.

  • Excise taxes.

See Table 2 for the forms you file to report these taxes.

You may want to get Publication 509. It has tax calendars that tell you when to file returns and make tax payments.

Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. Which form you use depends on how your business is organized. See Table 2 to find out which return you have to file.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Table 2. Which Forms Must I File?

IF you are a...   THEN you may be liable for...   Use Form...
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.
2 Various other schedules may be needed.

Estimated tax.   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year.

Sole proprietors, partners, and S corporation shareholders.   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. For more information, see Publication 505, Tax Withholding and Estimated Tax.

Corporations.   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. Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. You must deposit the payments as explained later under Depositing Taxes. For more information, see Publication 542.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

  1. Your net earnings from self-employment were $400 or more.

  2. You had church employee income of $108.28 or more.

Use Schedule SE (Form 1040) to figure your SE tax. For more information, see Publication 334, Tax Guide for Small Business.

You can deduct a portion of your SE tax as an adjustment to income on your Form 1040.

The Social Security Administration (SSA) time limit for posting self-employment income.   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. 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. The SSA will not change its records to increase your self-employment income.

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.

Employment taxes include the following.

  • Social security and Medicare taxes.

  • Federal income tax withholding.

  • Federal unemployment (FUTA) tax.

If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. These publications explain your tax responsibilities as an employer.

If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. That publication has information to help you determine whether an individual is an employee or an independent contractor. If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. An independent contractor is someone who is self-employed. Generally, you do not have to withhold or pay any taxes on payments to an independent contractor.

Federal Income, Social Security, and Medicare Taxes

You generally must withhold federal income tax from your employee's wages. 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.

Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA. You withhold part of these taxes from your employee's wages and you pay a part yourself. To find out how much social security and Medicare tax to withhold and to pay, see Publication 15.

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. (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees.)

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. You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.

Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. See Publication 15 to find out if you can use this form.

Hiring Employees

Have the employees you hire fill out Form I-9 and Form W-4.

Form I-9.   You must verify that each new employee is legally eligible to work in the United States. Both you and the employee must complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You can get the form from USCIS offices or from the USCIS website at www.uscis.gov. Call the USCIS at 1-800-375-5283 for more information about your responsibilities.

Form W-4.   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. 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. For more information, see Publication 15.

Employees claiming more than 10 withholding allowances.   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. See section 16 of Publication 15.

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. You must also send copies to the Social Security Administration. See Information Returns, later, for more information on Form W-2.

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.

  • Manufacture or sell certain products.

  • Operate certain kinds of businesses.

  • Use various kinds of equipment, facilities, or products.

  • Receive payment for certain services.

For more information on excise taxes, see Publication 510, Excise Taxes.

Form 720.   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following.
  • Environmental taxes.

  • Communications and air transportation taxes.

  • Fuel taxes.

  • Tax on the first retail sale of heavy trucks, trailers, and tractors.

  • Manufacturers taxes on the sale or use of a variety of different articles.

Form 2290.   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. For more information, see the instructions for Form 2290.

Form 730.   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. Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive.

Form 11-C.   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.

Depositing Taxes

You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return.

Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS).

Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment.

Information Returns

If you make or receive payments in your business, you may have to report them to the IRS on information returns. 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. You must give a copy of each information return you are required to file to the recipient or payer. In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns.

Form 1099-MISC.   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. These payments include the following items.
  • 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.

  • Rent payments of $600 or more, other than rents paid to real estate agents.

  • Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows.

  • Royalty payments of $10 or more.

  • Payments to certain crew members by operators of fishing boats.

You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment.

Form W-2.   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. For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3.

Form 8300.   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. Cash includes U.S. and foreign coin and currency. It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business).

Penalties

The law provides penalties for not filing returns or paying taxes as required. Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement.

Failure to file tax returns.   If you do not file your tax return by the due date, you may have to pay a penalty. The penalty is based on the tax not paid by the due date. See your tax return instructions for more information about this penalty.

Failure to pay tax.   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. For more information, see your tax return instructions.

Failure to withhold, deposit, or pay taxes.   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. You may also be subject to penalties if you deposit the taxes late. For more information, see Publication 15.

Failure to follow information reporting requirements.   The following penalties apply if you are required to file information returns. For more information, see the General Instructions for Certain Information Returns.
  • Failure to file information returns. 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.

  • Failure to furnish correct payee statements. 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.

Waiver of penalty.   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect.

  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. (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.)

Failure to supply taxpayer identification number.   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. 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.

Business Expenses

You can deduct business expenses on your income tax return. These are the current operating costs of running your business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate for your business, trade, or profession. An expense does not have to be indispensable to be considered necessary.

The following are brief explanations of some expenses that are of interest to people starting a business. There are many other expenses that you may be able to deduct. See your form instructions and Publication 535, Business Expenses.

Business Start-Up Costs

Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.

You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). 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. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.

For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535.

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. You must spread the cost over more than one tax year and deduct part of it each year. This method of deducting the cost of business property is called depreciation.

Business property you must depreciate includes the following items.

  • Office furniture.

  • Buildings.

  • Machinery and equipment.

You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the “section 179 deduction.” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property.

Depreciation must be taken in the year it is allowable. Allowable depreciation not taken in a prior year cannot be taken in the current year. If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U.S. Individual Income Tax Return, or by changing your accounting method. For more information on how to correct depreciation deductions, see chapter 1 in Publication 946.

Business Use of Your Home

To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.

To qualify to claim expenses for business use of your home, you must meet both the following tests.

  1. Your use of the business part of your home must be:

    1. Exclusive (however, see Exceptions to exclusive use, later),

    2. Regular,

    3. For your trade or business, AND

  2. The business part of your home must be one of the following:

    1. Your principal place of business (defined later),

    2. A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or

    3. A separate structure (not attached to your home) you use in connection with your trade or business.

Exclusive use.   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.

  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.

Exceptions to exclusive use.   You do not have to meet the exclusive use test if either of the following applies.
  1. You use part of your home for the storage of inventory or product samples.

  2. You use part of your home as a daycare facility.

For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers).

Principal place of business.   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
  • You use it exclusively and regularly for administrative or management activities of your trade or business.

  • You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

  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.
  • The relative importance of the activities performed at each location.

  • If the relative importance factor does not determine your principal place of business, the time spent at each location.

   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, for other ways to qualify to deduct home office expenses, see Publication 587.

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. If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587.

More information.   For more information about business use of your home, see Publication 587.

Car and Truck Expenses

If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. You generally can deduct either your actual expenses or the standard mileage rate.

Actual expenses.   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. You can divide your expenses based on the miles driven for each purpose.

Example.

You are the sole proprietor of a flower shop. You drove your van 20,000 miles during the year. 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense.

Standard mileage rate.   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. You can use the standard mileage rate for a vehicle you own or lease. The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. It is announced annually by the IRS. To figure your deduction, multiply your business miles by the standard mileage rate for the year.

  
Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes.

Choosing the standard mileage rate.   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. In later years, you can choose to use either the standard mileage rate or actual expenses.

  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).

Additional information.   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Recordkeeping

This part explains why you must keep records, what kinds of records you must keep, and how to keep them. It also explains how long you must keep your records for federal tax purposes. A sample recordkeeping system is illustrated at the end of this part.

Why Keep Records?

Everyone in business must keep records. Good records will help you do the following.

Monitor the progress of your business.   You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.

Prepare your financial statements.   You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
  • An income statement shows the income and expenses of the business for a given period of time.

  • A balance sheet shows the assets, liabilities, and your equity in the business on a given date.

Identify source of receipts.   You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.

Keep track of deductible expenses.   You may forget expenses when you prepare your tax return unless you record them when they occur.

Prepare your tax returns.   You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statements.

Support items reported on tax returns.   You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.

Kinds of Records To Keep

Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.

The business you are in affects the type of records you need to keep for federal tax purposes. You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. See Accounting Method, earlier. If you are in more than one business, you should keep a complete and separate set of records for each business. A corporation should keep minutes of board of directors' meetings.

Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily made in your books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. In addition, you must keep supporting documents, explained later.

Electronic records.   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. 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. 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. The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records.

  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. You still have the responsibility of retaining any other books and records that are required to be retained.

  The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. This test is not considered an examination and the results must be shared with you. If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. 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. For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13.

Supporting Documents

Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain information you need to record in your books.

It is important to keep these documents because they support the entries in your books and on your tax return. Keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.

Gross receipts.   Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents that show gross receipts include the following.
  • Cash register tapes.

  • Bank deposit slips.

  • Receipt books.

  • Invoices.

  • Credit card charge slips.

  • Forms 1099-MISC.

Purchases.   Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following.
  • Canceled checks.

  • Cash register tape receipts.

  • Credit card sales slips.

  • Invoices.

These records will help you determine the value of your inventory at the end of the year. See Publication 538 for information on methods for valuing inventory.

Expenses.   Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following.
  • Canceled checks.

  • Cash register tapes.

  • Account statements.

  • Credit card sales slips.

  • Invoices.

  • Petty cash slips for small cash payments.

  
A petty cash fund allows you to make small payments without having to write checks for small amounts. 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.

Travel, transportation, entertainment, and gift expenses.   Specific recordkeeping rules apply to these expenses. For more information, see Publication 463.

Employment taxes.   There are specific employment tax records you must keep. For a list, see Publication 15.

Assets.   Assets are the property, such as machinery and furniture you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets. Your records should show the following information.
  • When and how you acquired the asset.

  • Purchase price.

  • Cost of any improvements.

  • Section 179 deduction taken.

  • Deductions taken for depreciation.

  • Deductions taken for casualty losses, such as losses resulting from fires or storms.

  • How you used the asset.

  • When and how you disposed of the asset.

  • Selling price.

  • Expenses of sale.

  The following documents may show this information.
  • Purchase and sales invoices.

  • Real estate closing statements.

  • Canceled checks.

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. These include account statements prepared for the financial institution by a third party. These account statements must be highly legible. The following table lists acceptable account statements.  
IF payment is by... THEN the statement must show the...
Check
  • Check number.

  • Amount.

  • Payee's name.

  • Date the check amount was posted to the account by the financial institution.

Electronic funds transfer
  • Amount transferred.

  • Payee's name.

  • Date the transfer was posted to the account by the financial institution.

Credit card
  • Amount charged.

  • Payee's name.

  • Transaction date.

  
Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost.

Recording Business Transactions

A good recordkeeping system includes a summary of your business transactions. (Your business transactions are shown on the supporting documents just discussed.) Business transactions are ordinarily summarized in books called journals and ledgers. You can buy them at your local stationery or office supply store.

A journal is a book where you record each business transaction shown on your supporting documents. You may have to keep separate journals for transactions that occur frequently.

A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.

Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. For example, a recordkeeping system for a small business might include the following items.

  • Business checkbook.

  • Daily summary of cash receipts.

  • Monthly summary of cash receipts.

  • Check disbursements journal.

  • Depreciation worksheet.

  • Employee compensation record.

The business checkbook is explained next. The other items are illustrated later under Sample Record System.

The system you use to record business transactions will be more effective if you follow good recordkeeping practices. For example, record expenses when they occur, and identify the source of recorded receipts. Generally, it is best to record transactions on a daily basis.

Business checkbook.   One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account.

  The business checkbook is your basic source of information for recording your business expenses. You should deposit all daily receipts in your business checking account. You should check your account for errors by reconciling it. See Reconciling the checking account, later.

  Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. You should also note on the deposit slip the source of the deposit and keep copies of all slips.

  You should make all payments by check to document business expenses. Write checks payable to yourself only when making withdrawals from your business for personal use. Avoid writing checks payable to cash. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment.

  
Use the business account for business purposes only. Indicate the source of deposits and the type of expense in the checkbook.

Reconciling the checking account.   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. 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.

  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.

  
You should reconcile your checking account each month.  

  Before you reconcile your monthly bank statement, check your own figures. Begin with the balance shown in your checkbook at the end of the previous month. To this balance, add the total cash deposited during the month and subtract the total cash disbursements.

  After checking your figures, the result should agree with your checkbook balance at the end of the month. If the result does not agree, you may have made an error in recording a check or deposit. You can find the error by doing the following.
  1. 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. 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.

  2. Adding the deposit amounts in your checkbook. Compare that total with the monthly total in your cash receipt book, if you have one. If the totals do not agree, check the individual amounts to find any errors.

  If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct.

  When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Many banks print a reconciliation worksheet on the back of the statement.

  To reconcile your account, follow these steps.
  1. Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Note all differences in the dollar amounts.

  2. Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Note all differences in the dollar amounts. Mark the check number in the checkbook as having cleared the bank. After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks.

  3. Prepare a bank reconciliation. One is illustrated later under Sample Record System.

  4. Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly.

At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. If you still have differences, check the previous steps to find the errors.  

Table 3. Period of Limitations

IF you...   THEN the period is...
1. Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years
2. 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. File a fraudulent return   Not limited
4. Do not file a return   Not limited
5. File a claim for credit or refund after you filed your return   Later of: 3 years or  
2 years after tax  
was paid
6. 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. The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control.

Single-entry.   A single-entry system is based on the income statement (profit or loss statement). It can be a simple and practical system if you are starting a small business. The system records the flow of income and expenses through the use of:
  1. A daily summary of cash receipts, and

  2. Monthly summaries of cash receipts and disbursements.

Double-entry.   A double-entry bookkeeping system uses journals and ledgers. Transactions are first entered in a journal and then posted to ledger accounts. These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). You close income and expense accounts at the end of each tax year. You keep asset, liability, and net worth accounts open on a permanent basis.

  In the double-entry system, each account has a left side for debits and a right side for credits. It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another.

  Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. If the amounts do not balance, you have made an error and you must find and correct it.

  An example of a journal entry exhibiting a payment of rent in October is shown next.

General Journal

Date Description of Entry Debit  Credit
Oct. 5 Rent expense 780.00  
  Cash   780.00
       
       

Computerized System

There are computer software packages you can use for recordkeeping. They can be purchased in many retail stores. These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting.

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. To meet this qualification, the machine-sensible records must reconcile with your books and return. These records must provide enough detail to identify the underlying source documents.

You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. This documentation must be sufficiently detailed to show all of the following items.

  • Functions being performed as the data flows through the system.

  • Controls used to ensure accurate and reliable processing.

  • Controls used to prevent the unauthorized addition, alteration, or deletion of retained records.

  • Charts of accounts and detailed account descriptions.

See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information.

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. 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.

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. Table 3 contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

Employment taxes.   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. For more information about recordkeeping for employment taxes, see Publication 15.

Assets.   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. 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.

  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. 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.

Records for nontax purposes.   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. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

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. Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting.

These sample records should not be viewed as a recommendation of how to keep your records. They are intended only to show how one business keeps its records.

1. Daily Summary of Cash Receipts

This summary is a record of cash sales for the day. 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.

Henry takes the cash sales entry from his cash register tape. If he had no cash register, he would simply total his cash sale slips and any other cash received that day.

He carries the total receipts shown in this summary for January 3 ($267.80), including cash sales ($263.60) and sales tax ($4.20), to the Monthly Summary of Cash Receipts.

Petty cash fund.   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. 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. He sets up a fixed amount ($50) in his petty cash fund. The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. 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. (See the Check Disbursements Journal entry for check number 92.) This restores the fund to its fixed amount of $50. He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal.

2. Monthly Summary of Cash Receipts

This shows the income activity for the month. Henry carries the total monthly net sales shown in this summary for January ($4,865.05) to his Annual Summary.

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. He cannot take a deduction for sales tax turned over to the state because he only collected the tax. He does not include the tax in his income.

3. Check Disbursements Journal

Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal.

Frequent expenses have their own headings across the sheet. He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage.

Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. If he did, he would record them in the journal, even though he could not deduct them as business expenses.

Henry carries the January total of expenses for materials ($1,083.50) to the Annual Summary. Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc., in the appropriate columns of that summary.

4. Employee Compensation Record

This record shows the following information.

  • The number of hours Henry's employee worked in a pay period.

  • The employee's total pay for the period.

  • The deductions Henry withheld in figuring the employee's net pay.

  • The monthly gross payroll.

Henry carries the January gross payroll ($520) to the Annual Summary.

5. Annual Summary

This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal.As in the journal, he keeps each major expense in a separate column.

Henry carries the cash receipts total shown in the annual summary ($47,440.95) to Part I of Schedule C (not illustrated). He carries the total for materials ($10,001.00) to Part II of Schedule C.

A business that keeps materials and supplies on hand generally must complete the inventory lines in Part III of Schedule C. However, there are no inventories of materials and supplies in this example. Henry buys parts and supplies on a per-job basis; he does not keep them on hand.

Henry enters annual totals for interest, rent, taxes, and wages on the appropriate lines in Part II of Schedule C. The total for taxes and licenses includes the employer's share of social security and Medicare taxes, and the business license fee. He enters the total of other annual business expenses on the “Other expenses” line of Schedule C.

6. Depreciation Worksheet

This worksheet shows the information used in figuring the depreciation allowed on assets used in Henry's business. Henry figures the depreciation using the modified accelerated cost recovery system (MACRS). He purchased and placed in service several used assets that do not qualify for the section 179 deduction. Depreciation and the section 179 deduction are discussed in Publication 946. Henry uses the information in the worksheet to complete Form 4562, Depreciation and Amortization (not illustrated).

7. Bank Reconciliation

Henry reconciles his checkbook with his bank statement and prepares a bank reconciliation for January as follows.

  1. Henry begins by entering his bank statement balance.

  2. Henry compares the deposits listed on the bank statement with deposits shown in his checkbook. Two deposits shown in his checkbook— $701.33 and $516.08—were not on his bank statement. He enters these two amounts on the bank reconciliation. He adds them to the bank statement balance of $1,458.12 to arrive at a subtotal of $2,675.53.

  3. After comparing each canceled check with his checkbook, Henry found four outstanding checks totaling $526.50. He subtracts this amount from the subtotal in (2). The result of $2,149.03 is the adjusted bank statement balance.

  4. Henry enters his checkbook balance on the bank reconciliation.

  5. Henry discovered that he mistakenly entered a deposit of $600.40 in his checkbook as $594.40. He adds the difference ($6.00) to the checkbook balance of $2,153.03. There was a $10.00 bank service charge on his bank statement that he subtracts from the checkbook balance. The result is the adjusted checkbook balance of $2,149.03. This equals his adjusted bank statement balance computed in (3).

The only book adjustment Henry needs to make is to the Check Disbursements Journalfor the $10 bank service charge. He does not need to adjust the Monthly Summary of Cash Receiptsbecause he correctly entered the January 8 deposit of $600.40 in that record.

Daily Cash Receipts

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Daily summary cash receipts

2. Monthly Summary of Cash Receipts

  Year20—MonthJanuary  
 
   
  Day Net Sales   Sales Tax   Daily Receipts   Deposit    
  3 263.60   4.20   267.80        
  4 212.00   3.39   215.39        
  5 194.40   3.10   197.50   680.69    
  6 222.40   3.54   225.94        
  7 231.15   3.68   234.83        
  8 137.50   2.13   139.63   600.40    
  10 187.90   2.99   190.89        
  11 207.56   3.31   210.87   401.76    
  12 128.95   2.05   131.00        
  13 231.40   3.77   235.17        
  14 201.28   3.21   204.49        
  15 88.01   1.40   89.41   660.07    
  17 210.95   3.36   214.31        
  18 221.80   3.53   225.33   439.64    
  19 225.15   3.59   228.74        
  20 221.93   3.52   225.45        
  21 133.53   2.13   135.66   589.85    
  22 130.84   2.08   132.92        
  24 216.37   3.45   219.82   352.74    
  25 220.05   3.50   223.55        
  26 197.80   3.15   200.95        
  27 272.49   4.34   276.83   701.33    
  28 150.64   2.40   153.04        
  29 224.05   3.56   227.61              
  31 133.30   2.13   135.43   516.08    
  TOTALS 4,865.05   77.51   4,942.56   4,942.56    
                     

3. Check Disbursements Journal

Year 20— Month January
 
Day   Paid To Check # Amount of Check Materials Gross Payroll Federal Withheld Income Tax FICA Social Security Reserve FICA Medicare Reserve
3   Dale Advertising 74 85.00                    
4   City Treasurer 75 35.00                    
4   Auto Parts, Inc. 76 203.00   203.00                
4   John E. Marks 77 214.11       260.00   (20.00)   (16.12)   (3.77)
6   Henry Brown 78 250.00                    
6   Mike's Deli 79 36.00                    
6   Joe's Service Station 80 74.50   29.50                
6   ABC Auto Paint 81 137.50   137.50                
7   Henry Brown 82 225.00                    
14   Telephone Co. 83 27.00                    
15   National Bank (Tax Deposit) 84 119.56           40.00   32.24   7.54
18   National Bank 85 90.09                    
18   Auto Parts, Inc. 86 472.00   472.00                
18   Henry Brown 87 275.00                    
18   John E. Marks 88 214.11       260.00   (20.00)   (16.12)   (3.77)
21   Electric Co. 89 175.30                    
21   M.B. Ignition 90 66.70   66.70                
21   Baker's Fender Co. 91 9.80   9.80                
21   Petty Cash 92 17.00   15.00                
21   Henry Brown 93 225.00                    
25   Baker's Fender Co. 94 150.00   150.00                
25   Enterprise Properties 95 300.00                    
25   State Treasurer 96 12.00                    
25   State Treasurer 97 65.00                    
        3,478.67   1,083.50   520.00   -0-     -0-   -0-
    Bank service charge   10.00                    
TOTALS       3,488.67   1,083.50   520.00   -0-     -0-   -0-
                             

3. Check Disbursements Journal (Continued)

 
State Withheld Income Tax Employer's  
FICA  
Tax
Electric Interest    Rent Telephone   Truck/Auto Drawing   General Accounts
                                  Advertising 85.00
                                  License 35.00
                                     
  (6.00)                                  
                              250.00      
                                  Holiday Party 36.00
                          45.00          
                                     
                              225.00      
                      27.00              
       
39.78
                             
              18.09                   Loan 72.00
                                     
                              275.00      
  (6.00)                                  
          175.30                          
                                     
                                     
                                  Postage 2.00
                              225.00      
                                     
                  300.00                  
  12.00                                  
                                  Sales Tax 65.00
-0-   39.78   175.30   18.09   300.00   27.00   45.00   975.00     295.00
                                    10.00
-0-   39.78   175.30   18.09   300.00   27.00   45.00   975.00     305.00

Employee Compensation

4. Employee Compensation Record, 5. Annual Summary, and 6. Depreciation Worksheet
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Employee compensation record, annual summary, and depreciation worksheet

Bank Reconciliation

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Bank reconciliation

How to Get More Information

This section describes the help the IRS and other federal agencies offer to taxpayers who operate their own businesses .

Internal Revenue Service

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Free help with your return.   Free help in preparing your return is available nationwide from IRS-certified volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. To find the nearest VITA or TCE site, visit IRS.gov or call 1-800-906-9887 or 1-800-829-1040.

  As part of the TCE program, AARP offers the Tax-Aide counseling program. To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website at www.aarp.org/money/taxaide.

  For more information on these programs, go to IRS.gov and enter keyword “VITA” in the upper right-hand corner.

  
Internet. You can access the IRS website at IRS.gov 24 hours a day, 7 days a week to:
  • E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.

  • Check the status of your 2011 refund. Go to IRS.gov and click on Where's My Refund. Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund.

  • Download forms, including talking tax forms, instructions, and publications.

  • Order IRS products online.

  • Research your tax questions online.

  • Search publications online by topic or keyword.

  • Use the online Internal Revenue Code, regulations, or other official guidance.

  • View Internal Revenue Bulletins (IRBs) published in the last few years.

  • Figure your withholding allowances using the withholding calculator online at www.irs.gov/individuals.

  • Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant available online at www.irs.gov/individuals

  • Sign up to receive local and national tax news by email.

  • Get information on starting and operating a small business.

  
Phone. Many services are available by phone.  
  • Ordering forms, instructions, and publications. Call 1-800-TAX -FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. You should receive your order within 10 days.

  • Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.

  • Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.

  • TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.

  • TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.

  • Refund information. To check the status of your 2011 refund, call 1-800-829-1954 or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back.

  • Other refund information. To check the status of a prior-year refund or amended return refund, call 1-800-829-1040.

   Evaluating the quality of our telephone services. To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to listen in on or record random telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

  
Walk-in. Many products and services are available on a walk-in basis. 
  • Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.

  • Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary—just walk in. If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. All other issues will be handled without an appointment. To find the number of your local office, go to  
    www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.

  
Mail. You can send your order for forms, instructions, and publications to the address below. You should receive a response within 10 days after your request is received.

 
Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613

Taxpayer Advocate Service.   The Taxpayer Advocate Service (TAS) is your voice at the IRS. Our job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. We offer free help to guide you through the often-confusing process of resolving tax problems that you haven’t been able to solve on your own. Remember, the worst thing you can do is nothing at all.

  TAS can help if you can’t resolve your problem with the IRS and:
  • Your problem is causing financial difficulties for you, your family, or your business.

  • You face (or your business is facing) an immediate threat of adverse action.

  • You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised.

  If you qualify for our help, we’ll do everything we can to get your problem resolved. You will be assigned to one advocate who will be with you at every turn. We have offices in every state, the District of Columbia, and Puerto Rico. Although TAS is independent within the IRS, our advocates know how to work with the IRS to get your problems resolved. And our services are always free.

  As a taxpayer, you have rights that the IRS must abide by in its dealings with you. Our tax toolkit at www.TaxpayerAdvocate.irs.gov can help you understand these rights.

  If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www.irs.gov/advocate. You can also call our toll-free number at 1-877-777-4778 or TTY/TDD 1-800-829-4059.

  TAS also handles large-scale or systemic problems that affect many taxpayers. If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www.irs.gov/advocate.

Low Income Taxpayer Clinics (LITCs).   Low Income Taxpayer Clinics (LITCs) are independent from the IRS. Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. For more information and to find a clinic near you, see the LITC page on www.irs.gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. This publication is also available by calling 1-800-829-3676 or at your local IRS office.

Free tax services.   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Learn about free tax information from the IRS, including publications, services, and education and assistance programs. The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. The majority of the information and services listed in this publication are available to you free of charge. If there is a fee associated with a resource or service, it is listed in the publication.

  Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities.

DVD for tax products. You can order Publication 1796, IRS Tax Products DVD, and obtain:

  • Current-year forms, instructions, and publications.

  • Prior-year forms, instructions, and publications.

  • Tax Map: an electronic research tool and finding aid.

  • Tax law frequently asked questions.

  • Tax Topics from the IRS telephone response system.

  • Internal Revenue Code—Title 26 of the U.S. Code.

  • Links to other Internet based Tax Research materials.

  • Fill-in, print, and save features for most tax forms.

  • Internal Revenue Bulletins.

  • Toll-free and email technical support.

  • Two releases during the year. 
    – The first release will ship the beginning of January 2012. 
    – The final release will ship the beginning of March 2012.

Purchase the DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee).

Small Business Administration

The Small Business Administration (SBA) offers training and educational programs, counseling services, financial programs, and contract assistance for small business owners. The SBA also has publications and videos on a variety of business topics. The following briefly describes assistance provided by the SBA.

Small Business Development Centers (SBDCs).   SBDCs provide counseling, training, and technical services to current and prospective small business owners who cannot afford the services of a private consultant. Help is available when beginning, improving, or expanding a small business.

Business Information Centers (BICs).   BICs offer a small business reference library, management video tapes, and computer technology to help plan a business. BICs also offer one-on-one assistance. Individuals who are in business or are interested in starting a business can use BICs as often as they wish at no charge.

Service Corps of Retired Executives (SCORE).   SCORE provides small business counseling and training to current and prospective small business owners. SCORE is made up of current and former business people who offer their expertise and knowledge to help people start, manage, and expand a small business. SCORE also offers a variety of small business workshops.

  
Internet. You can visit the SBA website at www.sba.gov. While visiting the SBA website, you can find a variety of information of interest to small business owners.

  
Phone. Call the SBA Answer Desk at 1-800-UASK-SBA (1-800-827-5722) for general information about programs available to assist small business owners.

  
Walk-in. You can walk in to a Small Business Development Center or Business Information Center to request assistance with your small business. To find the location nearest you, access the SBA on the Internet or call the SBA Answer Desk

Other Federal Agencies

Other Federal agencies also publish publications and pamphlets to assist small businesses. Most of these are available from the Superintendent of Documents at the Government Printing Office. You can get information and order these publications and pamphlets in several ways.

Internet. You can visit the GPO website at www.access.gpo.gov.

Mail. Write to the GPO at the following address. 
 
 
 

Superintendent of Documents 
U.S. Government Printing Office 
P.O. Box 371954 
Pittsburgh, PA 15250–7954

Phone. Call the GPO toll-free at 1-866-512-1800 or at 202-512-1800 from the Washington, DC area.


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