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         Department of the Treasury
         Internal Revenue Service

Publication 583
(Rev. January 2015)
Cat. No. 15150B

Starting a

Business and

Keeping 

Records

Get forms and other information faster and easier at:
• IRS.gov (English) 
• IRS.gov/Spanish (Español) 
• IRS.gov/Chinese

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Comments and Suggestions What New Business Owners

We welcome your comments about this publication and Need To Know
your suggestions for future editions.
As a new business owner, you need to know your federal
You can send us comments from www.irs.gov/ tax responsibilities. Table 1 can help you learn what those
formspubs. Click on “More Information” and then on “Give responsibilities are. Ask yourself each question listed in
us feedback.” the table, then see the related discussion to find the an-
swer.
Or you can write to:
In addition to knowing about federal taxes, you need to
Internal Revenue Service make some basic business decisions. Ask yourself:
Tax Forms and Publications
What are my financial resources?
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224 What products and services will I sell?

We respond to many letters by telephone. Therefore, it How will I market my products and services?
would be helpful if you would include your daytime phone
number, including the area code, in your correspondence. How will I develop a strategic business plan?

Although we cannot respond individually to each com- How will I manage my business on a day-to-day ba-
ment received, we do appreciate your feedback and will sis?
consider your comments as we revise our tax products. How will I recruit employees?
Ordering forms and publications. Visit www.irs.gov/ The Small Business Administration (SBA) is a federal
formspubs to download forms and publications. Other- agency that can help you answer these types of ques-
wise, you can go to www.irs.gov/orderforms to order tions. For information on how to contact the SBA, see
forms or call 1-800-829-3676 to order current and How To Get Tax Help, later.
prior-year forms and instructions. Your order should arrive
within 10 business days.
Tax questions. If you have a tax question, check the
information available on IRS.gov or call 1-800-829-1040.
We cannot answer tax questions sent to the above ad-
dress.
Table 1. What New Business Owners Need To Know About Federal Taxes

(Note: This table is intended to help you, as a new business owner, learn what you need to know about
your federal tax responsibilities. To use it, ask yourself each question in the left column, then see the
related discussion in the right column.)

What Must I Know? Where To Find the Answer
Which form of business will I use? See Determining Which Type of Business to Use.
Will I need an employer identification number (EIN)? See Getting a Taxpayer Identification Number.
Do I have to start my tax year in January, or may I start it in See Designating a Tax Year.
any other month?
What method can I use to account for my income and See Choosing an Accounting Method.
expenses?
What kinds of federal taxes will I have to pay? How should I See Business Taxes.
pay my taxes?
What must I do if I have employees? See Employment Taxes.
Which forms must I file? See Table 2 and Information Returns.
Are there penalties if I do not pay my taxes or file my returns? See Penalties.
What business expenses can I deduct on my federal income See Deducting Business Expenses.
tax return?
What records must I keep? How long must I keep them? See Recordkeeping.

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Exception—Qualified joint venture. If you and your
spouse each materially participate as the only members of
Determining Which Type 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
Business to Use
treated as a qualified joint venture instead of a partnership
for the tax year. Making this election will allow you to avoid
The most common forms of business are the sole proprie-
the complexity of Form 1065 but still give each spouse
torship, partnership, and corporation. When beginning a
credit for social security earnings on which retirement
business, you must decide which form of business to use.
benefits are based. For an explanation of "material partici-
Legal and tax considerations enter into this decision. Only
pation," see the Instructions for Schedule C, line G.
tax considerations are discussed in this publication.
To make this election, you must divide all items of in-
Your form of business determines which income come, gain, loss, deduction, and credit attributable to the
TIP tax return form you have to file. See Table 2 to business between you and your spouse in accordance
find out which form you have to file. with your respective interests in the venture. Each of you
must file a separate Schedule C or C-EZ and a separate
Sole proprietorships. A sole proprietorship is an unin- Schedule SE. For more information, see Qualified Joint
corporated business that is owned by one individual. It is Venture in the Instructions for Schedule SE.
the simplest form of business organization to start and
maintain. The business has no existence apart from you, Corporations. In forming a corporation, prospective
the owner. Its liabilities are your personal liabilities. You shareholders exchange money, property, or both, for the
undertake the risks of the business for all assets owned, corporation's capital stock. A corporation generally takes
whether or not used in the business. You include the in- the same deductions as a sole proprietorship to figure its
come and expenses of the business on your personal tax taxable income. A corporation can also take special de-
return. ductions.
More information. For more information on sole pro- C corporations. The profit of a C corporation is taxed
prietorships, see Publication 334, Tax Guide for Small to the corporation when earned, and then is taxed to the
Business. If you are a farmer, see Publication 225, Farm- shareholders when distributed as dividends. However,
er's Tax Guide. shareholders cannot deduct any loss of the corporation.
For more information on corporations, see Publication
Partnerships. A partnership is the relationship existing 542, Corporations.
between two or more persons who join to carry on a trade
S corporations. An eligible domestic corporation (or a
or business. Each person contributes money, property, la-
domestic entity eligible to elect to be treated as a corpora-
bor, or skill, and expects to share in the profits and losses
tion) can avoid double taxation (once to the corporation
of the business.
and again to the shareholders) as long as it meets certain
A partnership must file an annual information return to
tests and elects to be treated as an S corporation. Gener-
report the income, deductions, gains, losses, etc., from its
ally, an S corporation is exempt from federal income tax
operations, but it does not pay income tax. Instead, it
other than tax on certain capital gains and passive in-
“passes through” any profits or losses to its partners. Each
come. On their tax returns, the S corporation's sharehold-
partner includes his or her share of the partnership's items
ers include their share of the corporation's separately sta-
on his or her tax return.
ted items of income, deduction, loss, and credit, and their
More information. For more information on partner- share of nonseparately stated income or loss. For more
ships, see Publication 541, Partnerships. information on S corporations and the tests that need to
be met to be eligible to elect to be an S corporation, see
Business owned and operated by spouses. If you and the instructions for Form 2553, Election by a Small Busi-
your spouse jointly own and operate an unincorporated ness Corporation, and Form 1120S, U.S. Income Tax Re-
business and share in the profits and losses, you are part- turn for an S Corporation.
ners in a partnership, whether or not you have a formal
partnership agreement. Do not use Schedule C or C-EZ. Limited liability company. A limited liability company
Instead, file Form 1065, U.S. Return of Partnership In- (LLC) is an entity formed under state law by filing articles
come. For more information, see Publication 541, Partner- of organization as an LLC. The members of an LLC are
ships. not personally liable for its debts. An LLC may be classi-
fied for federal income tax purposes as either a partner-
Exception—Community Income. If you and your ship, a corporation, or an entity disregarded as separate
spouse wholly own an unincorporated business as com- from its owner by applying the rules in Regulations section
munity property under the community property laws of a 301.7701-3.
state, foreign country, or U.S. possession, you can treat
the business either as a sole proprietorship or a partner- More information. For more information on LLCs, see
ship. The only states with community property laws are the instructions for Form 8832, Entity Classification Elec-
Arizona, California, Idaho, Louisiana, Nevada, New Mex- tion.
ico, Texas, Washington, and Wisconsin.

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you can get an EIN immediately. If you apply by fax, you
can get an EIN within 4 business days.
Getting a Taxpayer If you do not receive your EIN by the time a return is
due, file your return anyway. Write “Applied for” and the
Identification Number
date you applied for the number in the space for the EIN.
Do not use your social security number as a substitute for
You must have a taxpayer identification number so the
an EIN on your tax returns.
IRS can process your returns. Two of the most common
kinds of taxpayer identification numbers are the social se- More than one EIN. You should have only one EIN. If
curity number (SSN) and the employer identification num- you have more than one EIN and are not sure which to
ber (EIN). use, contact the Internal Revenue Service Center where
An SSN is issued to individuals by the Social Security you file your return. Give the numbers you have, the name
Administration (SSA) and is in the following format: and address to which each was assigned, and the ad-
000–00–0000. dress of your main place of business. The IRS will tell you
which number to use.
An EIN is issued to individuals (sole proprietors), part-
nerships, corporations, and other entities by the IRS More information. For more information about EINs, see
and is in the following format: 00–0000000. Publication 1635, Understanding Your EIN.
Providing your identification number to others. You
must include your taxpayer identification number (SSN or Payee's Identification Number
EIN) on all returns and other documents you send to the
IRS. You must also give your number to other persons In the operation of a business, you will probably make cer-
who use your identification number on any returns or tain payments you must report on information returns (dis-
documents they send to the IRS. This includes returns or cussed later under Information Returns). The forms used
documents filed to report the following information. to report these payments must include the payee's identi-
fication number.
1. Interest, dividends, royalties, etc., paid to you.
Employee. If you have employees, you must get an SSN
2. Any amount paid to you as a dependent care pro- from each of them. Record the name and SSN of each
vider. employee exactly as they are shown on the employee's
3. Certain other amounts paid to you that total $600 or social security card. If the employee's name is not correct
more for the year. as shown on the card, the employee should request a new
card from the SSA. This may occur, for example, if the
If you do not furnish your identification number as re- employee's name has changed due to marriage or di-
quired, you may be subject to penalties. See Penalties, vorce.
later. If your employee does not have an SSN, he or she
should file Form SS-5, Application for a Social Security
Employer Identification Number (EIN) Card, with the SSA. This form is available at SSA offices
or by calling 1-800-772-1213. It is also available from the
EINs are assigned to sole proprietors, LLCs, corporations, SSA website at www.ssa.gov.
and partnerships for tax filing and reporting purposes. See
Form SS-4 and its instructions for more information and to Other payee. If you make payments to someone who is
see which businesses must get an EIN. not your employee and you must report the payments on
an information return, get that person's SSN. If you make
Applying for an EIN. You may apply for an EIN: reportable payments to an organization, such as a corpo-
Online—Click on the Employer ID Numbers (EINs) link ration or partnership, you must get its EIN.
at www.irs.gov/businesses/small. The EIN is issued To get the payee's SSN or EIN, use Form W-9, Re-
immediately once the application information is valida- quest for Taxpayer Identification Number and Certifica-
ted. tion. This form is available from IRS offices or by calling
1-800-829-3676. It is also available from the IRS website
By mailing or faxing Form SS-4, Application for Em- at IRS.gov.
ployer Identification Number.
If the payee does not provide you with an identifi
International applicants may call 267-941-1099 (not a cation number, you may have to withhold part of
toll-free number). CAUTION! the payments as backup withholding. For infor
mation on backup withholding, see the Form W9 instruc
tions and the General Instructions for Certain Information
When to apply. You should apply for an EIN early
Returns.
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,

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Designating a Tax Year Choosing an Accounting

You must figure your taxable income and file an income Method
tax return based on an annual accounting period called a
tax year. A tax year is usually 12 consecutive months. An accounting method is a set of rules used to determine
There are two kinds of tax years. when and how income and expenses are reported. You
choose an accounting method for your business when you
1. Calendar tax year. A calendar tax year is 12 consec- file your first income tax return. There are two basic ac-
utive months beginning January 1 and ending De- counting methods.
cember 31.
1. Cash method. Under the cash method, you report in-
2. Fiscal tax year. A fiscal tax year is 12 consecutive come in the tax year you receive it. You usually de-
months ending on the last day of any month except duct or capitalize expenses in the tax year you pay
December. A 52-53-week tax year is a fiscal tax year them.
that varies from 52 to 53 weeks but does not have to
end on the last day of a month. 2. Accrual method. Under an accrual method, you gen-
erally report income in the tax year you earn it, even
If you file your first tax return using the calendar tax though you may receive payment in a later year. You
year and you later begin business as a sole proprietor, be- deduct or capitalize expenses in the tax year you in-
come a partner in a partnership, or become a shareholder cur them, whether or not you pay them that year.
in an S corporation, you must continue to use the calendar
year unless you get IRS approval to change it or are other- For other methods, see Publication 538.
wise allowed to change it without IRS approval. If an inventory is necessary to account for your income,
You must use a calendar tax year if: you must generally use an accrual method of accounting
for purchases and sales. Inventories include goods held
You keep no books. for sale in the normal course of business. They also in-
You have no annual accounting period. clude raw materials and supplies that will physically be-
come a part of merchandise intended for sale. Inventories
Your present tax year does not qualify as a fiscal year. are explained in Publication 538.
You are required to use a calendar year by a provision Certain small business taxpayers can use the
of the Internal Revenue Code or the Income Tax Reg- TIP cash method of accounting and can also account
ulations. for inventoriable items as materials and supplies
that are not incidental. For more information, see Publica
For more information, see Publication 538, Accounting tion 538.
Periods and Methods.
You must use the same accounting method to figure
First-time filer. If you have never filed an income tax re- your taxable income and to keep your books. Also, you
turn for your business, you can adopt either a calendar tax must use an accounting method that clearly shows your
year or a fiscal tax year. Although, some partnerships and income. In general, any accounting method that consis-
S corporations must use a particular tax year. See Publi- tently uses accounting principles suitable for your trade or
cation 538 for more information. You adopt a tax year by business clearly shows income. An accounting method
filing your first income tax return using that tax year. You clearly shows income only if it treats all items of gross in-
have not adopted a tax year if all you did was one or more come and expense the same from year to year.
of the following.
Filed an application for an extension of time to file an More than one business. When you own more than one
income tax return. business, you can use a different accounting method for
each business if the method you use for each clearly
Filed an application for an employer identification shows your income. You must keep a complete and sepa-
number. rate set of books and records for each business.
Paid estimated taxes for that tax year.
Changing your method of accounting. Once you have
set up your accounting method, you must generally get
Changing your tax year. Once you have adopted your IRS approval before you can change to another method. A
tax year, you may have to get IRS approval to change it. change in accounting method not only includes a change
To get approval, you must file Form 1128, Application To in your overall system of accounting, but also a change in
Adopt, Change, or Retain a Tax Year. You may have to the treatment of any material item. For examples of
pay a fee. For more information, see Publication 538. changes that require approval and information on how to
get approval for the change, see Publication 538.

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Table 2. Which Forms Must I File?

IF you are a... THEN you may have to pay... FILE form...
Sole proprietor Income tax 1040 and Schedule C or C-EZ 1
(Schedule F for farm business)1

Self-employment tax 1040 and Schedule SE
Estimated tax 1040-ES
Employment taxes:
• Social security and Medicare 941 or 944 (943 for farm employees)
taxes and income tax
withholding
• Federal unemployment (FUTA) 940
tax
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
C corporation or S corporation Income tax 1120 (C 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.

Income Tax
Business Taxes
All businesses except partnerships must file an annual in-
The form of business you operate determines what taxes come tax return. Partnerships file an information return.
you must pay and how you pay them. The following are Which form you use depends on how your business is or-
the four general kinds of business taxes. ganized. See Table 2 to find out which return you have to
file.
Income tax.
The federal income tax is a pay-as-you-go tax. You
Self-employment tax. must pay the tax as you earn or receive income during the
Employment taxes. year. An employee usually has income tax withheld from
his or her pay. If you do not pay your tax through withhold-
Excise taxes. ing, or do not pay enough tax that way, you might have to
pay estimated tax. If you are not required to make estima-
See Table 2 for the forms you file to report these taxes. ted tax payments, you may pay any tax due when you file
your return.
You may want to get Publication 509. It has tax
TIP calendars that tell you when to file returns and Reminder. If your business is an LLC, how you elected to
make tax payments. have the LLC treated for tax purposes (either as a corpo-
ration, partnership, or as part of the LLC owner's tax re-
turn) will determine what taxes you must pay and what
forms you should use to pay your taxes.

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Estimated tax. Generally, you must pay taxes on in- Employment taxes include the following.
come, including self-employment tax (discussed next), by Social security and Medicare taxes.
making regular payments of estimated tax during the year.
Sole proprietors, partners, and S corporation Federal income tax withholding.

shareholders. You generally have to make estimated tax Federal unemployment (FUTA) tax.
payments if you expect to owe tax of $1,000 or more
when you file your return. Use Form 1040-ES, Estimated If you have employees, you will need to get Publication
Tax for Individuals, to figure and pay your estimated tax. 15 (Circular E), Employer's Tax Guide. If you have agricul-
For more information, see Publication 505, Tax Withhold- tural employees, get Publication 51 (Circular A), Agricul-
ing and Estimated Tax. tural Employer's Tax Guide. These publications explain
Corporations. You generally have to make estimated your tax responsibilities as an employer.
tax payments for your corporation if you expect it to owe
tax of $500 or more when you file its return. Use Form If you are not sure whether the people working for you
1120-W, Estimated Tax for Corporations, to figure the es- are your employees, see Publication 15-A, Employer's
timated tax. You must deposit the payments as explained Supplemental Tax Guide. That publication has information
later under Depositing Taxes. For more information, see to help you determine whether an individual is an em-
Publication 542. ployee or an independent contractor. If you wrongly clas-
sify an employee as an independent contractor, you can
be held liable for employment taxes for that worker plus a
Self-Employment Tax penalty. An independent contractor is someone who is
self-employed. Generally, you do not have to withhold or
Self-employment tax (SE tax) is a social security and pay any taxes on payments to an independent contractor.
Medicare tax primarily for individuals who work for them-
selves. Your payments of SE tax contribute to your cover- Federal Income, Social Security, and
age under the social security system. Social security cov-
Medicare Taxes
erage provides you with retirement benefits, disability
benefits, survivor benefits, and hospital insurance (Medi- You generally must withhold federal income tax from your
care) benefits. employee's wages. To figure how much federal income
tax to withhold from each wage payment, use the employ-
You must pay SE tax and file Schedule SE (Form 1040)
ee's Form W-4 (discussed later under Hiring Employees)
if either of the following applies.
and the methods described in Publication 15.
1. Your net earnings from self-employment were $400 or
more. Social security and Medicare taxes pay for benefits that
workers and their families receive under the Federal Insur-
2. You had church employee income of $108.28 or ance Contributions Act (FICA). Social security tax pays for
more. benefits under the old-age, survivors, and disability insur-
Use Schedule SE (Form 1040) to figure your SE tax. For ance part of FICA. Medicare tax pays for benefits under
more information, see Publication 334, Tax Guide for the hospital insurance part of FICA. You withhold part of
Small Business. these taxes from your employee's wages and you pay a
part yourself. To find out how much social security and
You can deduct a portion of your SE tax as an ad Medicare tax to withhold and to pay, see Publication 15.
TIP justment to income on your Form 1040.
Which form do I file? Report these taxes on Form 941,
Employer's QUARTERLY Federal Tax Return, or Form
The Social Security Administration (SSA) time limit 944, Employer's ANNUAL Federal Tax Return. (Farm em-
for posting self-employment income. Generally, the ployers use Form 943, Employer's Annual Federal Tax
SSA will give you credit only for self-employment income Return for Agricultural Employees.)
reported on a tax return filed within 3 years, 3 months, and
15 days after the tax year you earned the income. If you
Federal Unemployment (FUTA) Tax
file your tax return or report a change in your self-employ-
ment income after this time limit, the SSA may change its The federal unemployment tax is part of the federal and
records, but only to remove or reduce the amount. The state program under the Federal Unemployment Tax Act
SSA will not change its records to increase your self-em- (FUTA) that pays unemployment compensation to work-
ployment income. ers who lose their jobs. You report and pay FUTA tax sep-
arately from social security and Medicare taxes and with-
Employment Taxes held income tax. You pay FUTA tax only from your own
funds. Employees do not pay this tax or have it withheld
This section briefly discusses the employment taxes you from their pay.
must pay, the forms you must file to report them, and
other forms that must be filed when you have employees. Which form do I file? Report federal unemployment tax
on Form 940, Employer's Annual Federal Unemployment

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(FUTA) Tax Return. See Publication 15 to find out if you Tax on the first retail sale of heavy trucks, trailers, and
can use this form. tractors.
Manufacturers taxes on the sale or use of a variety of
Hiring Employees different articles.

Have the employees you hire fill out Form I-9 and Form Form 2290. There is a federal excise tax on certain
W-4. trucks, truck tractors, and buses used on public highways.
The tax applies to vehicles having a taxable gross weight
Form I-9. You must verify that each new employee is le-
of 55,000 pounds or more. Report the tax on Form 2290,
gally eligible to work in the United States. Both you and
Heavy Highway Vehicle Use Tax Return. For more infor-
the employee must complete the U.S. Citizenship and Im-
mation, see the Instructions for Form 2290.
migration Services (USCIS) Form I-9, Employment Eligi-
bility Verification. You can get the form from USCIS offices Form 730. If you are in the business of accepting wagers
or from the USCIS website at www.uscis.gov. Call the US- or conducting a wagering pool or lottery, you may be liable
CIS at 1-800-375-5283 for more information about your for the federal excise tax on wagering. Use Form 730,
responsibilities. Monthly Tax Return for Wagers, to figure the tax on the
wagers you receive.
Form W-4. Each employee must fill out Form W-4, Em-
ployee's Withholding Allowance Certificate. You will use Form 11-C. Use Form 11-C, Occupational Tax and Reg-
the filing status and withholding allowances shown on this istration Return for Wagering, to register for any wagering
form to figure the amount of income tax to withhold from activity and to pay the federal occupational tax on wager-
your employee's wages. For more information, see Publi- ing.
cation 15.
Employees claiming more than 10 withholding al Depositing Taxes
lowances. An employer of an employee who claims
more than 10 withholding allowances for wages paid can You generally have to deposit employment taxes, certain
use several methods of withholding. See section 16 of excise taxes, corporate income tax, and S corporation
Publication 15. taxes before you file your return.
Generally, taxpayers are required to deposit taxes
Form W-2 Wage Reporting through the Electronic Federal Tax Payment System
(EFTPS).
After the calendar year is over, you must furnish copies of
Form W-2, Wage and Tax Statement, to each employee Any business that has a federal tax obligation and re-
to whom you paid wages during the year. You must also quests a new EIN will automatically be enrolled in EFTPS.
send copies to the Social Security Administration. See In Through the mail, the business will receive an EFTPS PIN
formation Returns, later, for more information on Form package that contains instructions for activating its EFTPS
W-2. enrollment.

Excise Taxes
Information Returns
This section describes the excise taxes you may have to
pay and the forms you have to file if you do any of the fol- If you make or receive payments in your business, you
lowing. may have to report them to the IRS on information returns.
Manufacture or sell certain products. The IRS compares the payments shown on the informa-
tion returns with each person's income tax return to see if
Operate certain kinds of businesses. the payments were included in income. You must give a
copy of each information return you are required to file to
Use various kinds of equipment, facilities, or products. the recipient or payer. In addition to the forms described
below, you may have to use other returns to report certain
Receive payment for certain services.
kinds of payments or transactions. For more details on in-
For more information on excise taxes, see Publication formation returns and when you have to file them, see the
510, Excise Taxes. General Instructions for Certain Information Returns.

Form 720. The federal excise taxes reported on Form Form 1099-MISC. Use Form 1099-MISC, Miscellaneous
720, Quarterly Federal Excise Tax Return, consist of sev- Income, to report certain payments you make in your
eral broad categories of taxes, including the following. trade or business. These payments include the following
items.
Environmental taxes.
Payments of $600 or more for services performed for
Communications and air transportation taxes. your business by people not treated as your employ-
ees, such as subcontractors, attorneys, accountants,
Fuel taxes. or directors.

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Rent payments of $600 or more, other than rents paid formation returns. For more information, see the General
to real estate agents. Instructions for Certain Information Returns.
Prizes and awards of $600 or more that are not for Failure to file information returns. A penalty ap-
services, such as winnings on TV or radio shows. plies if you do not file information returns by the due
Royalty payments of $10 or more. date, if you do not include all required information, or if
you report incorrect information.
Payments to certain crew members by operators of Failure to furnish correct payee statements. A
fishing boats. penalty applies if you do not furnish a required state-
You also use Form 1099-MISC to report your sales of ment to a payee by the due date, if you do not include
$5,000 or more of consumer goods to a person for resale all required information, or if you report incorrect infor-
anywhere other than in a permanent retail establishment. mation.
Form W-2. You must file Form W-2, Wage and Tax Waiver of penalty. These penalties will not apply if
Statement, to report payments to your employees, such you can show that the failures were due to reasonable
as wages, tips, and other compensation, withheld income, cause and not willful neglect.
social security, and Medicare taxes. For more information In addition, there is no penalty for failure to include all
on what to report on Form W-2, see the Instructions for the required information, or for including incorrect informa-
Forms W-2 and W-3. tion, on a de minimis number of information returns if you
correct the errors by August 1 of the year the returns are
Form 8300. You must file Form 8300, Report of Cash due. (To be considered de minimis, the number of returns
Payments Over $10,000 Received in a Trade or Business, cannot exceed the greater of 10 or of 1% of the total 12
if you receive more than $10,000 in cash in one transac- number of returns you are required to file for the year.)
tion or two or more related business transactions. Cash in-
cludes U.S. and foreign coin and currency. It also includes Failure to supply taxpayer identification number. If
certain monetary instruments such as cashier's and travel- you do not include your taxpayer identification number
er's checks and money orders. For more information, see (SSN or EIN) or the taxpayer identification number of an-
Publication 1544, Reporting Cash Payments of Over other person where required on a return, statement, or
$10,000 (Received in a Trade or Business). other document, you may be subject to a penalty of $50
for each failure. You may also be subject to the $50 pen-
alty if you do not give your taxpayer identification number
to another person when it is required on a return, state-
Penalties ment, or other document.
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 state- Deducting Business Expenses
ment.
You can deduct business expenses on your business or
Failure to file tax returns. If you do not file your tax re- personal income tax return, depending on the form of your
turn by the due date, you may have to pay a penalty. The business. These are the current operating costs of running
penalty is based on the tax not paid by the due date. See your business. To be deductible, a business expense
your tax return instructions for more information about this must be both ordinary and necessary. An ordinary ex-
penalty. pense is one that is common and accepted in your field of
business, trade, or profession. A necessary expense is
Failure to pay tax. If you do not pay your taxes by the one that is helpful and appropriate for your business,
due date, you will have to pay a penalty for each month, or trade, or profession. An expense does not have to be in-
part of a month, that your taxes are not paid. For more in- dispensable to be considered necessary.
formation, see your tax return instructions.
The following are brief explanations of some expenses
Failure to withhold, deposit, or pay taxes. If you do that are of interest to people starting a business. There
not withhold income, social security, or Medicare taxes are many other expenses that you may be able to deduct.
from employees, or if you withhold taxes but do not de- See your form instructions and Publication 535, Business
posit them or pay them to the IRS, you may be subject to Expenses.
a penalty of the unpaid tax, plus interest. You may also be
subject to penalties if you deposit the taxes late. For more Business Start-Up Costs
information, see Publication 15.
Business start-up costs are the expenses you incur before
Failure to follow information reporting requirements.
you actually begin business operations. Your business
The following penalties apply if you are required to file in-
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.

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You usually recover costs for a particular asset (such c. For your trade or business, AND
as machinery or office equipment) through depreciation
2. The business part of your home must be one of the
(discussed next). You can elect to deduct up to $5,000 of
following:
business start-up costs and $5,000 of organizational costs
paid or incurred after October 22, 2004. The $5,000 de- a. Your principal place of business (defined later),
duction is reduced by the amount your total start-up or or-
b. A place where you meet or deal with patients, cli-
ganizational costs exceed $50,000. Any remaining cost
ents, or customers in the normal course of your
must be amortized.
trade or business, or
For more information about amortizing start-up and or-
c. A separate structure (not attached to your home)
ganizational costs, see chapter 7 in Publication 535.
you use in connection with your trade or business.

Depreciation Exclusive use. To qualify under the exclusive use test,
you must use a specific area of your home only for your
If property you acquire to use in your business has a use- trade or business. The area used for business can be a
ful life that extends substantially beyond the year it is room or other separately identifiable space. The space
placed in service, you generally cannot deduct the entire does not need to be marked off by a permanent partition.
cost as a business expense in the year you acquire it. You You do not meet the requirements of the exclusive use
must spread the cost over more than one tax year and de- test if you use the area in question both for business and
duct part of it each year. This method of deducting the for personal purposes.
cost of business property is called depreciation.
Exceptions to exclusive use. You do not have to meet
Business property you must depreciate includes the the exclusive use test if either of the following applies.
following items.
1. You use part of your home for the storage of inventory
Office furniture. or product samples.
Buildings. 2. You use part of your home as a daycare facility.
Machinery and equipment. For an explanation of these exceptions, see Publication
587, Business Use of Your Home (Including Use by Day-
You can choose to deduct a limited amount of the cost care Providers).
of certain depreciable property in the year you place the
property in service. This deduction is known as the “sec- Principal place of business. Your home office will qual-
tion 179 deduction.” For more information about deprecia- ify as your principal place of business for deducting ex-
tion and the section 179 deduction, see Publication 946, penses for its use if you meet the following requirements.
How To Depreciate Property. You use it exclusively and regularly for administrative
Depreciation must be taken in the year it is allow or management activities of your trade or business.
TIP able. Allowable depreciation not taken in a prior You have no other fixed location where you conduct
year cannot be taken in the current year. If you do substantial administrative or management activities of
not deduct the correct depreciation, you may be able to your trade or business.
make a correction by filing Form 1040X, Amended U.S. Alternatively, if you use your home exclusively and reg-
Individual Income Tax Return, or by changing your ac ularly for your business, but your home office does not
counting method. For more information on how to correct qualify as your principal place of business based on the
depreciation deductions, see chapter 1 in Publication 946. previous rules, you determine your principal place of busi-
ness based on the following factors.
Business Use of Your Home The relative importance of the activities performed at
each location.
To deduct expenses related to the business use of part of
your home, you must meet specific requirements. Even If the relative importance factor does not determine
then, your deduction may be limited. You may be able to your principal place of business, the time spent at
use the simplified method to figure your expenses for each location.
business use of your home. For more information, see If, after considering your business locations, your home
Schedule C (Form 1040) and its instructions. cannot be identified as your principal place of business,
you cannot deduct home office expenses. However, for
To qualify to claim expenses for business use of your
other ways to qualify to deduct home office expenses, see
home, you must meet both the following tests.
Publication 587.
1. Your use of the business part of your home must be:
Which form do I file? If you file Schedule C (Form
a. Exclusive (however, see Exceptions to exclusive 1040), use Form 8829, Expenses for Business Use of
use, later),
b. Regular,

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Your Home, to figure your deduction. If you file Sched- Additional information. For more information about the
ule F (Form 1040) or you are a partner, you can use the rules for claiming car and truck expenses, see Publication
worksheet in Publication 587. 463, Travel, Entertainment, Gift, and Car Expenses.

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

Car and Truck Expenses This part explains why you must keep records, what kinds
of records you must keep, and how to keep them. It also
If you use your car or truck in your business, you can de-
explains how long you must keep your records for federal
duct the costs of operating and maintaining it. You gener-
tax purposes. A sample recordkeeping system is illustra-
ally can deduct either your actual expenses or the stand-
ted at the end of this part.
ard mileage rate.

Actual expenses. If you deduct actual expenses, you Why Keep Records?
can deduct the cost of the following items:
Everyone in business must keep records. Good records
will help you do the following.
Depreciation Lease payments Registration
Garage rent Licenses Repairs Monitor the progress of your business. You need
Gas Oil Tires good records to monitor the progress of your business.
Insurance Parking fees Tolls Records can show whether your business is improving,
which items are selling, or what changes you need to
If you use your vehicle for both business and personal make. Good records can increase the likelihood of busi-
purposes, you must divide your expenses between busi- ness success.
ness and personal use. You can divide your expenses
based on the miles driven for each purpose. Prepare your financial statements. You need good re-
cords to prepare accurate financial statements. These in-
Example. You are the sole proprietor of a flower shop. clude income (profit and loss) statements and balance
You drove your van 20,000 miles during the year. 16,000 sheets. These statements can help you in dealing with
miles were for delivering flowers to customers and 4,000 your bank or creditors and help you manage your busi-
miles were for personal use. You can claim only 80% ness.
(16,000 ÷ 20,000) of the cost of operating your van as a
business expense. An income statement shows the income and expen-
ses of the business for a given period of time.
Standard mileage rate. Instead of figuring actual expen- A balance sheet shows the assets, liabilities, and your
ses, you may be able to use the standard mileage rate to equity in the business on a given date.
figure the deductible costs of operating your car, van,
pickup, or panel truck for business purposes. You can use Identify source of receipts. You will receive money or
the standard mileage rate for a vehicle you own or lease. property from many sources. Your records can identify the
The standard mileage rate is a specified amount of money source of your receipts. You need this information to sep-
you can deduct for each business mile you drive. It is an- arate business from nonbusiness receipts and taxable
nounced annually by the IRS. To figure your deduction, from nontaxable income.
multiply your business miles by the standard mileage rate
for the year. Keep track of deductible expenses. You may forget
expenses when you prepare your tax return unless you re-
Generally, if you use the standard mileage rate, cord them when they occur.
you cannot deduct your actual expenses. How
CAUTION! ever, you may be able to deduct businessrelated
Prepare your tax returns. You need good records to
parking fees, tolls, interest on your car loan, and certain prepare your tax returns. These records must support the
state and local taxes. income, expenses, and credits you report. Generally,
these are the same records you use to monitor your busi-
Choosing the standard mileage rate. If you want to ness and prepare your financial statements.
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 Support items reported on tax returns. You must keep
in your business. In later years, you can choose to use ei- your business records available at all times for inspection
ther the standard mileage rate or actual expenses. by the IRS. If the IRS examines any of your tax returns,
If you use the standard mileage rate for a car you lease, you may be asked to explain the items reported. A com-
you must choose to use it for the entire lease period (in- plete set of records will speed up the examination.
cluding renewals).

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Kinds of Records To Keep Supporting Documents

Except in a few cases, the law does not require any spe- Purchases, sales, payroll, and other transactions you
cific kind of records. You can choose any recordkeeping have in your business generate supporting documents.
system suited to your business that clearly shows your in- Supporting documents include sales slips, paid bills, in-
come and expenses. voices, receipts, deposit slips, and canceled checks.
These documents contain information you need to record
The business you are in affects the type of records you
in your books.
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 It is important to keep these documents because they
Choosing an Accounting Method, earlier. If you are in support the entries in your books and on your tax return.
more than one business, you should keep a complete and Keep them in an orderly fashion and in a safe place. For
separate set of records for each business. A corporation instance, organize them by year and type of income or ex-
should keep minutes of board of directors' meetings. pense.

Your recordkeeping system should include a summary Gross receipts. Gross receipts are the income you re-
of your business transactions. This summary is ordinarily ceive from your business. You should keep supporting
made in your books (for example, accounting journals and documents that show the amounts and sources of your
ledgers). Your books must show your gross income, as gross receipts. Documents that show gross receipts in-
well as your deductions and credits. For most small busi- clude the following.
nesses, the business checkbook (discussed later) is the
Cash register tapes.
main source for entries in the business books. In addition,
you must keep supporting documents, explained later. Bank deposit slips.

Electronic records. All requirements that apply to hard Receipt books.
copy books and records also apply to electronic storage
systems that maintain tax books and records. When you Invoices.
replace hard copy books and records, you must maintain
the electronic storage systems for as long as they are ma- Credit card charge slips.
terial to the administration of tax law. An electronic stor-
Forms 1099-MISC.
age 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 Inventory. Inventory is any item you buy and resell to
must index, store, preserve, retrieve, and reproduce the customers. If you are a manufacturer or producer, this in-
electronically stored books and records in legible format. cludes the cost of all raw materials or parts purchased for
All electronic storage systems must provide a complete manufacture into finished products. Your supporting docu-
and accurate record of your data that is accessible to the ments should show the amount paid and that the amount
IRS. Electronic storage systems are also subject to the was for inventory. Documents reporting the cost of inven-
same controls and retention guidelines as those imposed tory include the following.
on your original hard copy books and records. Canceled checks.
The original hard copy books and records may be de-
stroyed provided that the electronic storage system has Cash register tape receipts.
been tested to establish that the hard copy books and re-
cords are being reproduced in compliance with IRS re- Credit card sales slips.

quirements for an electronic storage system and proce- Invoices.
dures are established to ensure continued compliance
with all applicable rules and regulations. You still have the These records will help you determine the value of your in-
responsibility of retaining any other books and records ventory at the end of the year. See Publication 538 for in-
that are required to be retained. formation on methods for valuing inventory.
The IRS may test your electronic storage system, in-
cluding the equipment used, indexing methodology, soft- Expenses. Expenses are the costs you incur (other than
ware and retrieval capabilities. This test is not considered the cost of inventory) to carry on your business. Your sup-
an examination and the results must be shared with you. If porting documents should show the amount paid and that
your electronic storage system meets the requirements the amount was for a business expense. Documents for
mentioned earlier, you will be in compliance. If not, you expenses include the following.
may be subject to penalties for non-compliance, unless Canceled checks.
you continue to maintain your original hard copy books
and records in a manner that allows you and the IRS to Cash register tapes.
determine your correct tax.
For details on electronic storage system requirements, Account statements.
see Revenue Procedure 97-22, available at www.irs.gov/
TaxExemptBonds/RevenueProcedures. Credit card sales slips.

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Invoices. THEN the statement must
IF payment is by... show the...
Petty cash slips for small cash payments.
Check Check number.
A petty cash fund allows you to make small pay
Amount.
TIP ments without having to write checks for small
amounts. Each time you make a payment from Payee's name.
this fund, you should make out a petty cash slip and at Date the check amount
tach it to your receipt as proof of payment. was posted to the
account by the financial
Travel, transportation, entertainment, and gift ex institution.
penses. Specific recordkeeping rules apply to these ex-
penses. For more information, see Publication 463. Electronic funds transfer Amount transferred.
Payee's name.
Employment taxes. There are specific employment
tax records you must keep. For a list, see Publication 15. Date the transfer was
posted to the account by
Assets. Assets are the property, such as machinery and the financial institution.
furniture you own and use in your business. You must Credit card Amount charged.
keep records to verify certain information about your busi-
ness assets. You need records to figure the annual depre- Payee's name.
ciation and the gain or loss when you sell the assets. Your Transaction date.
records should show the following information.
When and how you acquired the asset. Proof of payment of an amount, by itself, does
not establish you are entitled to a tax deduction.
Purchase price. CAUTION! You should also keep other documents, such as
credit card sales slips and invoices, to show that you also
Cost of any improvements. incurred the cost.
Section 179 deduction taken.
Recording Business Transactions
Deductions taken for depreciation.
A good recordkeeping system includes a summary of your
Deductions taken for casualty losses, such as losses business transactions. (Your business transactions are
resulting from fires or storms. shown on the supporting documents just discussed.)
How you used the asset. Business transactions are ordinarily summarized in books
called journals and ledgers. You can buy them at your lo-
When and how you disposed of the asset. cal stationery or office supply store.

Selling price. A journal is a book where you record each business
transaction shown on your supporting documents. You
Expenses of sale. may have to keep separate journals for transactions that
The following documents may show this information. occur frequently.

Purchase and sales invoices. A ledger is a book that contains the totals from all of
your journals. It is organized into different accounts.
Real estate closing statements.
Whether you keep journals and ledgers and how you
Canceled checks. keep them depends on the type of business you are in.
For example, a recordkeeping system for a small busi-
What if I don't have a canceled check? If you do not ness might include the following items.
have a canceled check, you may be able to prove pay-
ment with certain financial account statements prepared Business checkbook.

by financial institutions. These include account statements Daily summary of cash receipts.
prepared for the financial institution by a third party. These
account statements must be highly legible. The following Monthly summary of cash receipts.
table lists acceptable account statements.
Check disbursements journal.

Depreciation worksheet.

Employee compensation record.

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The business checkbook is explained next. The other Before you reconcile your monthly bank statement,
items are illustrated later under Recordkeeping System check your own figures. Begin with the balance shown in
Example. your checkbook at the end of the previous month. To this
balance, add the total cash deposited during the month
The system you use to record business transac
and subtract the total cash disbursements.
TIP tions will be more effective if you follow good re After checking your figures, the result should agree with
cordkeeping practices. For example, record ex your checkbook balance at the end of the month. If the re-
penses when they occur, and identify the source of sult does not agree, you may have made an error in re-
recorded receipts. Generally, it is best to record transac cording a check or deposit. You can find the error by do-
tions on a daily basis. ing the following.
Business checkbook. One of the first things you should 1. Adding the amounts on your check stubs and com-
do when you start a business is open a business checking paring that total with the total in the “amount of check”
account. You should keep your business account sepa- column in your check disbursements journal. If the to-
rate from your personal checking account. tals do not agree, check the individual amounts to see
The business checkbook is your basic source of infor- if an error was made in your check stub record or in
mation for recording your business expenses. You should the related entry in your check disbursements journal.
deposit all daily receipts in your business checking ac- 2. Adding the deposit amounts in your checkbook. Com-
count. You should check your account for errors by recon- pare that total with the monthly total in your cash re-
ciling it. See Reconciling the checking account, later. ceipt book, if you have one. If the totals do not agree,
Consider using a checkbook that allows enough space check the individual amounts to find any errors.
to identify the source of deposits as business income, per-
sonal funds, or loans. You should also note on the deposit If your checkbook and journal entries still disagree,
slip the source of the deposit and keep copies of all slips. then refigure the running balance in your checkbook to
You should make all payments by check to document make sure additions and subtractions are correct.
business expenses. Write checks payable to yourself only When your checkbook balance agrees with the balance
when making withdrawals from your business for personal figured from the journal entries, you may begin reconciling
use. Avoid writing checks payable to cash. If you must your checkbook with the bank statement. Many banks
write a check for cash to pay a business expense, include print a reconciliation worksheet on the back of the state-
the receipt for the cash payment in your records. If you ment.
cannot get a receipt for a cash payment, you should make To reconcile your account, follow these steps.
an adequate explanation in your records at the time of 1. Compare the deposits listed on the bank statement
payment. with the deposits shown in your checkbook. Note all
Use the business account for business purposes differences in the dollar amounts.
TIP only. Indicate the source of deposits and the type 2. Compare each canceled check, including both check
of expense in the checkbook. number and dollar amount, with the entry in your
checkbook. Note all differences in the dollar amounts.
Reconciling the checking account. When you re- Mark the check number in the checkbook as having
ceive your bank statement, make sure the statement, your cleared the bank. After accounting for all checks re-
checkbook, and your books agree. The statement balance turned by the bank, those not marked in your check-
may not agree with the balance in your checkbook and book are your outstanding checks.
books if the statement:
3. Prepare a bank reconciliation. One is illustrated later
Includes bank charges you did not enter in your books under Recordkeeping System Example.
and subtract from your checkbook balance, or
4. Update your checkbook and journals for items shown
Does not include deposits made after the statement on the reconciliation as not recorded (such as service
date or checks that did not clear your account before charges) or recorded incorrectly.
the statement date.
At this point, the adjusted bank statement balance should
By reconciling your checking account, you will:
equal your adjusted checkbook balance. If you still have
Verify how much money you have in the account, differences, check the previous steps to find the errors.
Make sure that your checkbook and books reflect all
Bookkeeping System
bank charges and the correct balance in the checking
account, and You must decide whether to use a single-entry or a dou-
Correct any errors in your bank statement, checkbook, ble-entry bookkeeping system. The single-entry system of
and books. bookkeeping is the simplest to maintain, but it may not be
suitable for everyone. You may find the double-entry sys-
You should reconcile your checking account tem better because it has built-in checks and balances to
TIP each month. assure accuracy and control.

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Single-entry. A  single-entry  system  is  based  on  the  in-    Computerized System
come statement (profit or loss statement). It can be a sim-
ple and practical system if you are starting a small busi-        There  are  computer  software  packages  you  can  use  for 
ness.  The  system  records  the  flow  of  income  and           recordkeeping.  They  can  be  purchased  in  many  retail 
expenses through the use of:                                      stores.  These  packages  are  very  helpful  and  relatively 
                                                                  easy  to  use;  they  require  very  little  knowledge  of  book-
1. A daily summary of cash receipts, and                          keeping and accounting.
2. Monthly summaries of cash receipts and disburse-
ments.                                                            If you use a computerized system, you must be able to 
                                                                  produce sufficient legible records to support and verify en-
Double-entry. A double-entry bookkeeping system uses              tries made on your return and determine your correct tax 
journals  and  ledgers.  Transactions  are  first  entered  in  a liability.  To  meet  this  qualification,  the  machine-sensible 
journal  and  then  posted  to  ledger  accounts.  These  ac-     records must reconcile with your books and return. These 
counts show income, expenses, assets (property a busi-            records must provide enough detail to identify the underly-
ness owns), liabilities (debts of a business), and net worth      ing source documents.
(excess of assets over liabilities). You close income and 
expense accounts at the end of each tax year. You keep            You must also keep all machine-sensible records and a 
asset, liability, and net worth accounts open on a perma-         complete description of the computerized portion of your 
nent basis.                                                       recordkeeping system. This documentation must be suffi-
In  the  double-entry  system,  each  account  has  a  left       ciently detailed to show all of the following items.
side for debits and a right side for credits. It is self-balanc-  Functions being performed as the data flows through 
ing because you record every transaction as a debit entry         the system.
in one account and as a credit entry in another.
Under this system, the total debits must equal the total          Controls used to ensure accurate and reliable pro-
credits after you post the journal entries to the ledger ac-      cessing.
counts. If the amounts do not balance, you have made an           Controls used to prevent the unauthorized addition, al-
error and you must find and correct it.                           teration, or deletion of retained records.
An example of a journal entry exhibiting a payment of 
                                                                  Charts of accounts and detailed account descriptions.
rent in October is shown next.
                                                                  For  more  information,  see  Revenue  Procedure  98-25  in 
General Journal                                                   Cumulative  Bulletin  1998-1,  available  at    www.irs.gov/
                                                                  Businesses/AutomatedRecords.
Date       Description of Entry  Debit           Credit
                                                                  How Long To Keep Records
Oct. 5    Rent expense          780.00
                                                                  You must keep your records as long as they may be nee-
                                                                  ded for the administration of any provision of the Internal 
         Cash                                   780.00            Revenue Code. Generally, this means you must keep re-
                                                                  cords that support an item of income or deduction on a re-
                                                                  turn 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. Un-
                                                                  less  otherwise  stated,  the  years  refer  to  the  period  after 
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      6 years
income shown on the return
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

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the return was filed. Returns filed before the due date are Petty cash fund. Henry uses a petty cash fund to make
treated as filed on the due date. small payments without having to write checks for small
amounts. Each time he makes a payment from this fund,
Keep copies of your filed tax returns. They help in
he makes out a petty cash slip and attaches it to his re-
TIP preparing future tax returns and making computa
ceipt as proof of payment. He sets up a fixed amount
tions if you file an amended return.
($50) in his petty cash fund. The total of the unspent petty
cash and the amounts on the petty cash slips should
Employment taxes. If you have employees, you must equal the fixed amount of the fund. When the totals on the
keep all employment tax records for at least 4 years after petty cash slips approach the fixed amount, he brings the
the date the tax becomes due or is paid, whichever is cash in the fund back to the fixed amount by writing a
later. For more information about recordkeeping for em- check to “Petty Cash” for the total of the outstanding slips.
ployment taxes, see Publication 15. (See the Check Disbursements Journal entry for check
number 92.) This restores the fund to its fixed amount of
Assets. Keep records relating to property until the period
$50. He then summarizes the slips and enters them in the
of limitations expires for the year in which you dispose of
proper columns in the monthly check disbursements jour-
the property in a taxable disposition. You must keep these
nal.
records to figure any depreciation, amortization, or deple-
tion deduction, and to figure your basis for computing gain
or loss when you sell or otherwise dispose of the property. 2. Monthly Summary of Cash Receipts

Generally, if you received property in a nontaxable ex- This shows the income activity for the month. Henry car-
change, your basis in that property is the same as the ba- ries the total monthly net sales shown in this summary for
sis of the property you gave up, increased by any money January ($4,865.05) to his Annual Summary.
you paid. You must keep the records on the old property,
as well as on the new property, until the period of limita- To figure total monthly net sales, Henry reduces the to-
tions expires for the year in which you dispose of the new tal monthly receipts by the sales tax imposed on his cus-
property in a taxable disposition. tomers and turned over to the state. He cannot take a de-
duction for sales tax turned over to the state because he
Records for nontax purposes. When your records are
only collected the tax. He does not include the tax in his
no longer needed for tax purposes, do not discard them income.
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 3. Check Disbursements Journal

IRS does. Henry enters checks drawn on the business checking ac-
count in the Check Disbursements Journal each day. All
Recordkeeping System Example checks are prenumbered and each check number is listed
and accounted for in the column provided in the journal.
This example illustrates a single-entry system used by
Henry Brown, who is the sole proprietor of a small auto- Frequent expenses have their own headings across the
mobile body shop. Henry uses part-time help, has no in- sheet. He enters in a separate column expenses that re-
ventory of items held for sale, and uses the cash method quire comparatively numerous or large payments each
of accounting. month, such as materials, gross payroll, and rent. Under
the General Accounts column, he enters small expenses
These sample records should not be viewed as a rec- that normally have only one or two monthly payments,
ommendation of how to keep your records. They are in- such as licenses and postage.
tended only to show how one business keeps its records.
Henry does not pay personal or nonbusiness expenses
1. Daily Summary of Cash Receipts by checks drawn on the business account. If he did, he
would record them in the journal, even though he could
This summary is a record of cash sales for the day. It ac- not deduct them as business expenses.
counts for cash at the end of the day over the amount in
the Change and Petty Cash Fund at the beginning of the Henry carries the January total of expenses for materi-
day. als ($1,083.50) to the Annual Summary. Similarly, he en-
ters the monthly total of expenses for telephone, truck/
Henry takes the cash sales entry from his cash register auto, etc., in the appropriate columns of that summary.
tape. If he had no cash register, he would simply total his
cash sale slips and any other cash received that day. 4. Employee Compensation Record

This record shows the following information.
He carries the total receipts shown in this summary for
January 3 ($267.80), including cash sales ($263.60) and The number of hours Henry's employee worked in a
sales tax ($4.20), to the Monthly Summary of Cash Re pay period.
ceipts. The employee's total pay for the period.

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The deductions Henry withheld in figuring the employ- placed in service several used assets that do not qualify
ee's net pay. for the section 179 deduction. Depreciation and the sec-
The monthly gross payroll. tion 179 deduction are discussed in Publication 946.
Henry uses the information in the worksheet to complete
Henry carries the January gross payroll ($520) to the An Form 4562, Depreciation and Amortization (not illustra-
nual Summary. ted).

5. Annual Summary 7. Bank Reconciliation

This annual summary of monthly cash receipts and ex- Henry reconciles his checkbook with his bank statement
pense totals provides the final amounts to enter on and prepares a bank reconciliation for January as follows.
Henry's tax return. He figures the cash receipts total from
1. Henry begins by entering his bank statement balance.
the total of monthly cash receipts shown in the Monthly
Summary of Cash Receipts. He figures the expense totals 2. Henry compares the deposits listed on the bank state-
from the totals of monthly expense items shown in the ment with deposits shown in his checkbook. Two de-
Check Disbursements Journal. As in the journal, he keeps posits shown in his checkbook— $701.33 and
each major expense in a separate column. $516.08—were not on his bank statement. He enters
these two amounts on the bank reconciliation. He
Henry carries the cash receipts total shown in the an- adds them to the bank statement balance of
nual summary ($47,440.95) to Part I of Schedule C (not il- $1,458.12 to arrive at a subtotal of $2,675.53.
lustrated). He carries the total for materials ($10,001.00)
to Part II of Schedule C. 3. After comparing each canceled check with his check-
book, Henry found four outstanding checks totaling
A business that keeps materials and supplies on $526.50. He subtracts this amount from the subtotal
hand generally must complete the inventory lines in (2). The result of $2,149.03 is the adjusted bank
CAUTION! in Part III of Schedule C. However, there are no
statement balance.
inventories of materials and supplies in this example.
Henry buys parts and supplies on a perjob basis; he does 4. Henry enters his checkbook balance on the bank rec-
not keep them on hand. onciliation.
5. Henry discovered that he mistakenly entered a de-
Henry enters annual totals for interest, rent, taxes, and posit of $600.40 in his checkbook as $594.40. He
wages on the appropriate lines in Part II of Schedule C. adds the difference ($6.00) to the checkbook balance
The total for taxes and licenses includes the employer's of $2,153.03. There was a $10.00 bank service
share of social security and Medicare taxes, and the busi- charge on his bank statement that he subtracts from
ness license fee. He enters the total of other annual busi- the checkbook balance. The result is the adjusted
ness expenses on the “Other expenses” line of Sched- checkbook balance of $2,149.03. This equals his ad-
ule C. justed bank statement balance computed in (3).

6. Depreciation Worksheet The only book adjustment Henry needs to make is to
the Check Disbursements Journal for the $10 bank serv-
This worksheet shows the information used in figuring the ice charge. He does not need to adjust the Monthly Sum
depreciation allowed on assets used in Henry's business. mary of Cash Receipts because he correctly entered the
Henry figures the depreciation using the modified acceler- January 8 deposit of $600.40 in that record.
ated cost recovery system (MACRS). He purchased and

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Daily Cash Receipts
                   1. Daily Summary of Cash Receipts

                   Date       January 3, 20 —

                   Cash sales                                     263.60

                   Sales tax                                       4.20

                                         TOTAL RECEIPTS           267.80

                   Cash on hand

                   Cash in register (including unspent petty cash)

                        Coins                 23.75

                        Bills                 143.00

                        Checks                134.05
                                                                  
                   TOTAL CASH IN REGISTER                         300.80

                   Add: Petty cash slips                           17.00

                                              TOTAL CASH          317.80

                   Less: Change and petty cash

                   Petty cash slips           17.00

                   Coins and bills            33.00
                   (unspent petty cash)
                                                                  
                   TOTAL CHANGE AND PETTY CASH FUND               50.00

                               TOTAL CASH RECEIPTS                267.80

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2. Monthly Summary of Cash Receipts

Year 20—   Month January
 
 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

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3. Check Disbursements Journal

Year 20—   Month     January

                                                                     Federal  FICA                                       FICA 
                                                                     Withheld Social                                     Medicar
                              Chec Amount of           Gross         Income   Security                                   e 
Day      Paid To              k #  Check     Materials Payroll       Tax      Reserve  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
        National Bank (Tax 
15      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- 

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3. Check Disbursements Journal (Continued)

           Employer'
 State     s 
 Withheld   FICA                                               Truck/
Income Tax Tax       Electric Interest  Rent  Telephone        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

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Employee Compensation
4. Employee Compensation Record

Name      John E. Marks                                                        Full Time          Soc. Sec. No.         567-00-8901

Address   1 Elm St., Anytown, NJ 07101                                     X   Part Time          Date of Birth    12-21-65
Phone     555-6075                                                                                No. of Exemptions            1 / single

              Hours Worked                                            Earnings                       Deductions
Pay                                              Total                                                                  Federal       State
Period  Date                                     Regular              Regular  Overtime              Social             Income        Income
Ending  Paid  S M T W T F S        S M T W T F S Hours      Overtime  Rate     Rate        Total     Security  Medicare Tax           Tax     Net Pay
1 - 1   1 - 4     5     5 5 5      5       5 4 6     40               $6.50          .     $260.00   $16.12      $3.77  $20.00        $6.00   $214.11
1 - 15 1 - 18     444442           43 443            40               $6.50          .     $260.00   $16.12      $3.77  $20.00        $6.00   $214.11
                                                     80                 .            .     $520.00   $32.24      $7.54  $40.00        $12.00  $428.22

                                                                        .            .        .      . ... .
                        QUARTERLY TOTALS                                .            .     $1,262.40 $78.23      $18.31 $100.00 $30.00 $1,035.86

5. Annual Summary

             Cash       Materials/ Gross   FICA      Bank                                                   Truck/             Office Taxes/
Month        Receipts   Supplies   Payroll Taxes     Charges Electric Interest Insurance Rent    Telephones Auto   Advertising Expenses Licenses Misc.

January      $4,865.05 $1,083.50 $520.00 $39.78 $10.00 $175.30 $18.09          .         $300.00 $27.00 $45.00 $85.00 $36.00 $100.00             $2.00
February     3,478.32   874.93     235.40    17.68   7.50   153.10    18.09 210.00         300.00    21.50 28.50   .           .            .    .
March        3,942.00   724.90     507.00    38.08   11.25  145.81    18.09    .           300.00    32.10  51.30  .           .            .    .

December     3,656.52   609.23     520.00    39.78   10.00  169.00    18.09    .           300.00    23.13 37.62   .           4.00         .    71.91
TOTALS
             $47,440.95 $10,001.00 $5,434.00 $408.09 $92.30 $1,642.37 $217.08 $420.00 $3,600.00 $324.09 $571.46 $85.00 $40.00 $218.00            $344.00

6. Depreciation Worksheet
                                                                Section 179
                                                     Business/  Deduction      Depreci-
                        Date Placed Cost or          Investment and Special    ation Prior Basis for Method/       Recovery Rate or         Depreciation
Description of Property in Service   Other Basis Use %          Allowance      Years       Depreciation Convention Period      Table %      Deduction
Used Equipment—
Transmission Jack       1 - 3              3,000     100%             —        —           3,000     200 DB/HY     7           14.29%         $429
Used Pickup Truck       1 - 3              8,000     100%             —        —           8,000     200 DB/HY     5            20%           1,600
Used Heavy Duty
Tow Truck               1 - 3            30,000      100%             —        —           30,000    200 DB/HY     5            20%           6,000
Used Equipment—
Engine Hoist            1 - 3              4,000     100%             —        —           4,000     200 DB/HY     7           14.29%            572
                                                                                                                                              $8,601

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Bank Reconciliation
                   7. Bank Reconciliation as of

                   Date             January 31, 20 —

                   Closing balance shown on bank statement       1,458.12

                   Add deposits not credited:
                                         1/28           701.33

                                         1/31           516.08
                                                                 
                               TOTAL DEPOSITS NOT CREDITED       1,217.41

                   Subtotal                                      2,675.53

                   Subtract outstanding checks:

                               No.       90             66.70

                                         91                  9.80

                                         94             150.00

                                         95             300.00
                                                                 
                               TOTAL OUTSTANDING CHECKS          526.50

                   Adjusted balance per bank statement           2,149.03

                   Balance shown in checkbook                    2,153.03
                                    Deposit of $600.40 for
                               Add: 1/8 entered as                6.00
                                    $594.40 (difference)
                                                                 2,159.03

                               Subtract: Bank service charge     10.00

                   Adjusted checkbook balance                    2,149.03

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Tax forms and publications. You can download or print
all of the forms and publications you may need on
How To Get Tax Help www.irs.gov/formspubs. Otherwise, you can:
Do you need help with a tax issue or preparing your tax re- Go to www.irs.gov/orderforms to place an order and
turn, or do you need a free publication or form? have forms mailed to you, or
Call 1-800-829-3676 to order current-year forms, in-
Preparing and filing your tax return. Find free options
structions, publications, and prior-year forms and in-
to prepare and file your return on IRS.gov or in your local
structions (limited to 5 years).
community if you qualify.
You should receive your order within 10 business days.
Go to IRS.gov and click on the Filing tab to see your
options. Where to file your tax return.
Enter “Free File” in the search box to use brand name There are many ways to file your return electronically.
software to prepare and efile your federal tax return It’s safe, quick and easy. See Preparing and filing your
for free. tax return, earlier, for more information.
Enter “VITA” in the search box, download the free See your tax return instructions to determine where to
IRS2Go app, or call 1-800-906-9887 to find the near- mail your completed paper tax return.
est Volunteer Income Tax Assistance or Tax Counsel-
ing for the Elderly (TCE) location for free tax prepara- Getting a transcript or copy of a return.
tion. Go to IRS.gov and click on “Get Transcript of Your
Enter “TCE” in the search box, download the free Tax Records” under “Tools.”
IRS2Go app, or call 1-888-227-7669 to find the near- Download the free IRS2Go app to your smart phone
est Tax Counseling for the Elderly location for free tax and use it to order transcripts of your tax returns or tax
preparation. account.
The Volunteer Income Tax Assistance (VITA) program
Call the transcript toll-free line at 1-800-908-9946.
offers free tax help to people who generally make $53,000
or less, persons with disabilities, the elderly, and limi- Mail Form 4506-T or Form 4506T-EZ (both available
ted-English-speaking taxpayers who need help preparing on IRS.gov).
their own tax returns. The Tax Counseling for the Elderly
(TCE) program offers free tax help for all taxpayers, par- Using online tools to help prepare your return. Go to
ticularly those who are 60 years of age and older. TCE IRS.gov and click on the Tools bar to use these and other
volunteers specialize in answering questions about pen- self-service options.
sions and retirement-related issues unique to seniors.
The Earned Income Tax Credit Assistant determines if
Getting answers to your tax law questions. IRS.gov you are eligible for the EIC.
and IRS2Go are ready when you are—24 hours a day, 7 The First Time Homebuyer Credit Account Lookup
days a week. tool provides information on your repayments and ac-
Enter “ITA” in the search box on IRS.gov for the Inter- count balance.
active Tax Assistant, a tool that will ask you questions The Alternative Minimum Tax (AMT) Assistant deter-
on a number of tax law topics and provide answers. mines whether you may be subject to AMT.
You can print the entire interview and the final re-
The Online EIN Application helps you get an Employer
sponse.
Identification Number.
Enter “Tax Map” or “Tax Trails” in the search box for
The IRS Withholding Calculator estimates the amount
detailed information by tax topic.
you should have withheld from your paycheck for fed-
Enter “Pub 17” in the search box to get Pub. 17, Your eral income tax purposes.
Federal Income Tax for Individuals, which features de-
The Electronic Filing PIN Request helps to verify your
tails on tax-saving opportunities, 2014 tax changes,
identity when you do not have your prior year AGI or
and thousands of interactive links to help you find an-
prior year self-selected PIN available.
swers to your questions.
Call TeleTax at 1-800-829-4477 for recorded informa- Understanding identity theft issues.
tion on a variety of tax topics. Go to www.irs.gov/uac/IdentityProtection for informa-
Access tax law information in your electronic filing tion and videos.
software. If your SSN has been lost or stolen or you suspect you
Go to IRS.gov and click on the Help & Resources tab are a victim of tax-related identity theft, visit
for more information. www.irs.gov/identitytheft to learn what steps you
should take.

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Checking on the status of a refund. 1. Taxpayers can find information on IRS.gov in the fol-
Go to www.irs.gov/refunds. lowing languages.
a. Spanish.
Download the free IRS2Go app to your smart phone
and use it to check your refund status. b. Chinese.
Call the automated refund hotline at 1-800-829-1954. c. Vietnamese.
d. Korean.
Making a tax payment. You can make electronic pay-
ments online, by phone, or from a mobile device. Paying e. Russian.
electronically is safe and secure. The IRS uses the latest
2. The IRS Taxpayer Assistance Centers provide
encryption technology and does not store banking infor-
over-the-phone interpreter service in over 170 lan-
mation. It’s easy and secure and much quicker than mail-
guages, and the service is available free to taxpayers.
ing in a check or money order. Go to IRS.gov and click on
the Payments tab or the “Pay Your Tax Bill” icon to make a
payment using the following options. The Taxpayer Advocate Service Is
Direct Pay (only if you are an individual who has a Here To Help You
checking or savings account). What is the Taxpayer Advocate Service?
Debit or credit card.
The Taxpayer Advocate Service (TAS) is an independ
Electronic Federal Tax Payment System. ent organization within the Internal Revenue Service that
helps taxpayers and protects taxpayer rights. Our job is to
Check or money order. ensure that every taxpayer is treated fairly and that you
know and understand your rights under the Taxpayer Bill
What if I can’t pay now? Click on the Payments tab or of Rights.
the “Pay Your Tax Bill” icon on IRS.gov to find more infor-
mation about these additional options.
What Can the Taxpayer Advocate Service
An online payment agreement determines if you are Do For You?
eligible to apply for an installment agreement if you
cannot pay your taxes in full today. With the needed We can help you resolve problems that you can’t resolve
information, you can complete the application in about with the IRS. And our service is free. If you qualify for our
30 minutes, and get immediate approval. assistance, you will be assigned to one advocate who will
An offer in compromise allows you to settle your tax work with you throughout the process and will do every-
debt for less than the full amount you owe. Use the thing possible to resolve your issue. TAS can help you if:
Offer in Compromise PreQualifier to confirm your eli- Your problem is causing financial difficulty for you,
gibility. your family, or your business,
Checking the status of an amended return. Go to You face (or your business is facing) an immediate
IRS.gov and click on the Tools tab and then Where’s My threat of adverse action, or
Amended Return? You’ve tried repeatedly to contact the IRS but no one
has responded, or the IRS hasn’t responded by the
Understanding an IRS notice or letter. Enter “Under- date promised.
standing your notice” in the search box on IRS.gov to find
additional information about your IRS notice or letter.
How Can You Reach Us?
Visiting the IRS. Locate the nearest Taxpayer Assis-
We have offices in every state, the District of Columbia,
tance Center using the Office Locator tool on IRS.gov. En-
and Puerto Rico. Your local advocate’s number is in your
ter “office locator” in the search box. Or choose the “Con-
local directory and at www.taxpayeradvocate.irs.gov. You
tact Us” option on the IRS2Go app and search Local
can also call us at 1-877-777-4778.
Offices. Before you visit, use the Locator tool to check
hours and services available.
How Can You Learn About Your Taxpayer
Watching IRS videos. The IRS Video portal Rights?
www.irsvideos.gov contains video and audio presenta-
tions on topics of interest to individuals, small businesses, The Taxpayer Bill of Rights describes ten basic rights that
and tax professionals. You’ll find video clips of tax topics, all taxpayers have when dealing with the IRS. Our Tax
archived versions of live panel discussions and Webinars, Toolkit at www.taxpayeradvocate.irs.gov can help you un-
and audio archives of tax practitioner phone forums. derstand what these rights mean to you and how they ap-
ply. These are your rights. Know them. Use them.
Getting tax information in other languages. For tax-
payers whose native language is not English, we have the
following resources available.

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How Else Does the Taxpayer Advocate                          tax problems such as audits, appeals, and tax collection 
Service Help Taxpayers?                                      disputes. Some clinics can provide information about tax-
                                                             payer rights and responsibilities in different languages for 
TAS  works  to  resolve  large-scale  problems  that  affect individuals who speak English as a second language. To 
many taxpayers. If you know of one of these broad issues,    find  a  clinic  near  you,  visit www.irs.gov/litc  or  see  IRS 
please report it to us at www.irs.gov/sams.                  Publication 4134, Low Income Taxpayer Clinic List.

Low Income Taxpayer Clinics

Low  Income  Taxpayer  Clinics  (LITCs)  serve  individuals 
whose income is below a certain level and need to resolve 

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                   To help us develop a more useful index, please let us know if you have ideas for index entries.
Index              See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
                                 1128 5                             Penalties 9
A                                11-C 8                             Publications (See Tax help)
Accounting method:               2290 8
  Accrual method  5              720 8
  Cash method   5                730 8                              R
Assistance (See Tax help)        8300 9                             Recordkeeping   11
                                 8829 10                            Records, how long to keep                            15
                                 I-9 8
B                                SS-4 4
Business:                        W-2  8 9,                          S
                                                                    S corporation 3
  Expenses   9                   W-4  8
                                                                    Self-employment tax  7
  Start-up costs 9               W-9  4
                                                                    Social security tax 7
  Taxes 6                      Forms of business  3
                                                                    Sole proprietorship  3
  Use of car 11                FUTA tax 7
  Use of home  10                                                   Start-up costs 9

                               G
C                              Getting a taxpayer identification    T
                                                                    Taxes:
Car and truck expenses 11        number    4
C corporation  3                                                     Employment    7
Corporation  3                                                       Estimated  7
                               I                                     Excise  8
                               Income tax  6 7,                      How to deposit 8
D                              Information returns 8                 Income   6
Depositing taxes  8            Inventories 5                         Self-employment    7
Depreciation 10                                                      Unemployment (FUTA)              7
                                                                    Tax help 24
                               L                                    Tax year 5
E                              Limited liability company 3          TTY/TDD information   24
Employer identification number 
  (EIN) 4
Employment taxes:              M                                    U
  Defined 7                    Medicare tax 7                       Unemployment (FUTA) tax                              7
  Records to keep  13
Estimated tax  7
Excise taxes 8                 O
                               Office in home   10

F
Form:                          P
  1099-MISC  8                 Partnership  3

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