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## Page 1 of 27 of Publication 583 10:01 - 17-FEB-2012 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Department of the Treasury 

## Contents **Internal Revenue Service Introduction** 

............................. . **1 What New Business Owners Need To Know** 

.... . **2** 

## Publication 583 **Forms of Business**

........................ . **3** (Rev. December 2011) **Identification Numbers**

..................... . **3** Cat. No. 15150B Employer Identification Number (EIN)

.......... . **4** Payee’s Identification Number

............... . **4** 

# Starting a **Tax Year**

................................ . **4 Accounting Method** 

....................... . **5** 

# Business and **Business Taxes**

.......................... . **5** Income Tax

............................. . **6** Self-Employment Tax

...................... . **7** 

# Keeping Employment Taxes

........................ . **7** Excise Taxes

............................ . **8** 

# Records Depositing Taxes

......................... . **8 Information Returns** 

....................... . **8 Penalties** 

................................ . **9 Business Expenses** 

....................... . **9** Business Start-Up Costs

.................... . **9** Depreciation

............................. . **9** Business Use of Your Home

................ . **10** Car and Truck Expenses

.................. . **10 Recordkeeping** 

........................... . **11** Why Keep Records?

...................... . **11** Kinds of Records To Keep

................. . **11** How Long To Keep Records

................ . **15** Sample Record System

................... . **15 How to Get More Information** 

................ . **24 Index** 

................................... . **27** 

# Introduction This publication provides basic federal tax information for people who are starting a business. It also providesinformation on keeping records and illustrates a recordkeeping system.Throughout this publication we refer to other IRS publications and forms where you will find more information. Inaddition, you may want to contact other government agencies, such as the Small Business Administration (SBA). See How To Get More Information later. **Comments and suggestions.** We welcome your com

### Get forms and other information ments about this publication and your suggestions for 

### faster and easier by: future editions. 

### Internet IRS.gov You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 

### www.irs.gov/efile 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224 **Feb 17, 2012**

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We respond to many letters by telephone. Therefore, it affecting Publication 583 (such as legislation enacted after would be helpful if you would include your daytime phone we release it) will be posted on that page. number, including the area code, in your correspondence. You can email us attaxforms@irs.gov. Please put “Publications Comment” on the subject line. You can also send 

# What New Business Owners us comments from www.irs.gov/formspubs, select “Comment on Tax Forms and Publications” under “Information 

# Need To Know about.” Although we cannot respond individually to each com- As a new business owner, you need to know your federal ment received, we do appreciate your feedback and will tax responsibilities. Table 1 can help you learn what those consider your comments as we revise our tax products. responsibilities are. Ask yourself each question listed in the table, then see the related discussion to find the answer. **Ordering forms and publications.** In addition to knowing about federal taxes, you need to Visit www.irs.gov/formspubs to download forms and make some basic business decisions. Ask yourself: publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your 

### • What are my financial resources? request is received. 

### • What products and services will I sell? Internal Revenue Service 

### • How will I market my products and services? 1201 N. Mitsubishi Motorway Bloomington, IL 61705

–6613 

### • How will I develop a strategic business plan?


### • How will I manage my business on a day-to-day **Tax questions.** If you have a tax question, check the basis? information available on IRS.gov or call 1-800-829-1040. 

### • How will I recruit employees? We cannot answer tax questions sent to either of the above addresses. The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. **Future Developments.** The IRS has created a page on For information on how to contact the SBA, seeHow to Get IRS.gov for information about Publication 583 at www.irs. More Information,later. gov/pub583. Information about any future developments 

### 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 Forms of Business

. Will I need an employer identification number (EIN)? See Identification Numbers

. Do I have to start my tax year in January, or may I start it See Tax Year

. in any other month? What method can I use to account for my income and SeeAccounting Method

. expenses? What kinds of federal taxes will I have to pay? How See Business Taxes

. should I pay my taxes? What must I do if I have employees? See Employment Taxes

. Which forms must I file? See Table 2 andInformation Returns

. Are there penalties if I do not pay my taxes or file my See Penalties

. returns? What business expenses can I deduct on my federal See Business Expenses

. income tax return? What records must I keep? How long must I keep them? See Recordkeeping

.

Page 2 **Publication 583**  **(December 2011)**

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return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership 

# Forms of Business for the tax year. Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse The most common forms of business are the sole proprie- credit for social security earnings on which retirement torship, partnership, and corporation. When beginning a benefits are based. For an explanation of ‘‘material particibusiness, you must decide which form of business to use. pation,’’ see the Instructions for Schedule C, line G. Legal and tax considerations enter into this decision. Only tax considerations are discussed in this publication. To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the Your form of business determines which income business between you and your spouse in accordance with tax return form you have to file. See Table 2 to your respective interests in the venture. Each of you must find out which form you have to file. file a separate Schedule C or C-EZ and a separate Sched**Sole proprietorships.** A sole proprietorship is an unin- ule SE. For more information, seeQualified Joint Venture corporated business that is owned by one individual. It is 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 the same deductions as a sole proprietorship to figure its income and expenses of the business on your personal tax taxable income. A corporation can also take special deducreturn. tions. The profit of a corporation is taxed to the corporation **More information.** For more information on sole propri- when earned, and then is taxed to the shareholders when etorships, see Publication 334, Tax Guide for Small Busi- distributed as dividends. However, shareholders cannot ness. If you are a farmer, see Publication 225, Farmer’s deduct any loss of the corporation. Tax Guide. **More information.** For more information on corpora- **Partnerships.** A partnership is the relationship existing tions, see Publication 542, Corporations. between two or more persons who join to carry on a trade or business. Each person contributes money, property, **S corporations.** An eligible domestic corporation can labor, or skill, and expects to share in the profits and losses avoid double taxation (once to the corporation and again to of the business. the shareholders) by electing to be treated as an S corpo- A partnership must file an annual information return to ration. Generally, an S corporation is exempt from federal report the income, deductions, gains, losses, etc., from its income tax other than tax on certain capital gains and operations, but it does not pay income tax. Instead, it passive income. On their tax returns, the S corporation’s “passes through” any profits or losses to its partners. Each shareholders include their share of the corporation’s sepa- partner includes his or her share of the partnership’s items rately stated items of income, deduction, loss, and credit, on his or her tax return. and their share of nonseparately stated income or loss. **More information.** For more information on partner- **More information.** For more information on S corpora- ships, see Publication 541, Partnerships. tions, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U.S. In- **Husband and wife business.** If you and your spouse come Tax Return for an S Corporation. jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a **Limited liability company.** A limited liability company partnership, whether or not you have a formal partnership (LLC) is an entity formed under state law by filing articles of agreement. Do not use Schedule C or C-EZ. Instead, file organization as an LLC. The members of an LLC are not Form 1065, U.S. Return of Partnership Income. For more personally liable for its debts. An LLC may be classified for information, see Publication 541, Partnerships. federal income tax purposes as either a partnership, a **Exception —** **Community Income.** If you and your corporation, or an entity disregarded as an entity 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. For more information, see the instructions for state, foreign country, or U.S. possession, you can treat Form 8832, Entity Classification Election.the business either as a sole proprietorship or a partnership. The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mex- 

# Identification Numbers ico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the You must have a taxpayer identification number so the IRS entity. can process your returns. The two most common kinds of **Exception —** **Qualified joint venture.** If you and your taxpayer identification numbers are the social security spouse each materially participate as the only members of number (SSN) and the employer identification number a jointly owned and operated business, and you file a joint (EIN). **Publication 583**  **(December 2011)** Page 3

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### • An SSN is issued to individuals by the Social Secur- If you do not receive your EIN by the time a return is due, file your return anyway. Write “Applied for” and the date ity Administration (SSA) and is in the following for- you applied for the number in the space for the EIN. Do not mat: 000

–00

–0000. use your social security number as a substitute for an EIN 

### • An EIN is issued to individuals (sole proprietors), on your tax returns. partnerships, corporations, and other entities by the IRS and is in the following format: 00

–0000000. **More than one EIN.** You should have only one EIN. If you have more than one EIN and are not sure which to use, You must include your taxpayer identification number contact the Internal Revenue Service Center where you file (SSN or EIN) on all returns and other documents you send your return. Give the numbers you have, the name and address to which each was assigned, and the address of to the IRS. You must also furnish your number to other your main place of business. The IRS will tell you which persons who use your identification number on any returns number to use. or documents they send to the IRS. This includes returns or documents filed to report the following information. **More information.** For more information about EINs, see Publication 1635, Understanding Your EIN. 1. Interest, dividends, royalties, etc., paid to you. 2. Any amount paid to you as a dependent care pro- 

## Payee’s Identification Number vider. In the operation of a business, you will probably make 3. Certain other amounts paid to you that total $600 or certain payments you must report on information returns more for the year. (discussed later under Information Returns ). The forms If you do not furnish your identification number as re- used to report these payments must include the payee’s quired, you may be subject to penalties. See Penalties, identification number. later. **Employee.** If you have employees, you must get an SSN from each of them. Record the name and SSN of each 

## Employer Identification Number (EIN) employee exactly as they are shown on the employee’s social security card. If the employee’s name is not correct EINs are used to identify the tax accounts of employers, as shown on the card, the employee should request a new certain sole proprietors, corporations, partnerships, es- card from the SSA. This may occur, for example, if the tates, trusts, and other entities. employee’s name has changed due to marriage or divorce. If you don’t already have an EIN, you need to get one if If your employee does not have an SSN, he or she you: should file Form SS-5, Application for a Social Security Card, with the SSA. This form is available at SSA offices or 1. Have employees, by calling 1-800-772-1213. It is also available from the 2. Have a qualified retirement plan, SSA website at www.ssa.gov
. 3. Operate your business as a corporation or partner- **Other payee.** If you make payments to someone who is ship, or not your employee and you must report the payments on an information return, get that person’s SSN. If you make 4. File returns for: reportable payments to an organization, such as a corpoa. Employment taxes, or ration or partnership, you must get its EIN. To get the payee’s SSN or EIN, use Form W-9,Request b. Excise taxes. for Taxpayer Identification Number and Certification. This form is available from IRS offices or by calling 1-800-829-3676. It is also available from the IRS website **Applying for an EIN.** You may apply for an EIN: at IRS.gov. 

### • Online

—Click on the EIN link at www.irs.gov/busi- If the payee does not provide you with an identifi- nesses/small. The EIN is issued immediately once cation number, you may have to withhold part of the application information is validated. the payments as backup withholding. For infor- 

### • By telephone at 1-800-829-4933. mation on backup withholding, see the Form W-9 instructions and theGeneral Instructions for Certain Information 

### • By mailing or faxing Form SS-4, Application for Em- Returns. ployer Identification Number. **When to apply.** You should apply for an EIN early enough to receive the number by the time you must file a 

# Tax Year 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 You must figure your taxable income and file an income tax EIN. If you apply by telephone or through the IRS website, return based on an annual accounting period called a tax you can get an EIN immediately. If you apply by fax, you year. A tax year is usually 12 consecutive months. There can get an EIN within 4 business days. are two kinds of tax years. Page 4 **Publication 583**  **(December 2011)**

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1. **Calendar tax year.**A calendar tax year is 12 con- 2. **Accrual method.** Under an accrual method, you generally report income in the tax year you earn it, secutive months beginning January 1 and ending even though you may receive payment in a later December 31. year. You deduct or capitalize expenses in the tax 2. **Fiscal tax year.**A fiscal tax year is 12 consecutive year you incur them, whether or not you pay them months ending on the last day of any month except that year. December. A 52-53-week tax year is a fiscal tax year For other methods, see Publication 538. that varies from 52 to 53 weeks but does not have to If you need inventories to show income correctly, you end on the last day of a month. must generally use an accrual method of accounting for If you file your first tax return using the calendar tax year purchases and sales. Inventories include goods held for and you later begin business as a sole proprietor, become sale in the normal course of business. They also include a partner in a partnership, or become a shareholder in an S raw materials and supplies that will physically become a corporation, you must continue to use the calendar year part of merchandise intended for sale. Inventories are unless you get IRS approval to change it or are otherwise explained in Publication 538. allowed to change it without IRS approval. Certain small business taxpayers can use the You must use a calendar tax year if: cash method of accounting and can also account 

### • You keep no books. for inventoriable items as materials and supplies that are not incidental. For more information, see Publica- 

### • You have no annual accounting period. tion 538. 

### • Your present tax year does not qualify as a fiscal You must use the same accounting method to figure year. your taxable income and to keep your books. Also, you must use an accounting method that clearly shows your 

### • You are required to use a calendar year by a provi- income. In general, any accounting method that consistsion of the Internal Revenue Code or the Income ently uses accounting principles suitable for your trade or Tax Regulations. business clearly shows income. An accounting method clearly shows income only if it treats all items of gross For more information, see Publication 538, Accounting income and expense the same from year to year. Periods and Methods. **More than one business.** When you own more than one **First-time filer.** If you have never filed an income tax business, you can use a different accounting method for return, you can adopt either a calendar tax year or a fiscal each business if the method you use for each clearly tax year. You adopt a tax year by filing your first income tax shows your income. You must keep a complete and sepa- return using that tax year. You have not adopted a tax year rate set of books and records for each business. if you merely did any of the following. **Changing your method of accounting.** Once you have



### • Filed an application for an extension of time to file an set up your accounting method, you must generally get income tax return. IRS approval before you can change to another method. A 

### • Filed an application for an employer identification change in accounting method not only includes a change number. in your overall system of accounting, but also a change in the treatment of any material item. For examples of 

### • Paid estimated taxes for that tax year. changes that require approval and information on how to get approval for the change, see Publication 538. **Changing your tax year.** Once you have adopted your tax year, you may have to get IRS approval to change it. To get approval, you must file Form 1128, Application To 

# Business Taxes Adopt, Change, or Retain a Tax Year. You may have to pay a fee. For more information, see Publication 538. The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general kinds of business taxes. 

# Accounting Method **•** Income tax. An accounting method is a set of rules used to determine 

### • Self-employment tax. when and how income and expenses are reported. You 

### • Employment taxes. choose an accounting method for your business when you file your first income tax return. There are two basic ac- 

### • Excise taxes. counting methods. See Table 2 for the forms you file to report these taxes.

1. **Cash method.** Under the cash method, you report You may want to get Publication 509. It has tax income in the tax year you receive it. You usually calendars that tell you when to file returns and deduct or capitalize expenses in the tax year you pay make tax payments. them. **Publication 583**  **(December 2011)** Page 5

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### Table 2.**Which Forms Must I File?**

**IF you are a... THEN you may be liable for...**  **Use Form...** Sole proprietor Income tax 1040 and Schedule C 1or C-EZ (Schedule F 1for farm business) Self-employment tax 1040 and Schedule SE Estimated tax 1040-ES Employment taxes:

**•**Social security and Medicare 941 or 944 (943 for farm

taxes and income tax employees) 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 Corporation or S corporation Income tax 1120 (corporation) 2 1120S (S corporation) 2 Estimated tax 1120-W (corporation only) Employment taxes Same as sole proprietor Excise taxes See Excise Taxes S corporation shareholder Income tax 1040 and Schedule E 2 Estimated tax 1040-ES

1File a separate schedule for each business. 2Various other schedules may be needed. **Sole proprietors, partners, and S corporation share-** 

## Income Tax **holders.** You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you All businesses except partnerships must file an annual file your return. Use Form 1040-ES, Estimated Tax for income tax return. Partnerships file an information return. Individuals, to figure and pay your estimated tax. For more Which form you use depends on how your business is information, see Publication 505, Tax Withholding and organized. See Table 2 to find out which return you have to Estimated Tax. file. The federal income tax is a pay-as-you-go tax. You **Corporations.** You generally have to make estimated must pay the tax as you earn or receive income during the tax payments for your corporation if you expect it to owe year. An employee usually has income tax withheld from tax of $500 or more when you file its return. Use Form his or her pay. If you do not pay your tax through withhold- 1120-W, Estimated Tax for Corporations, to figure the ing, or do not pay enough tax that way, you might have to estimated tax. You must deposit the payments as ex- pay estimated tax. If you are not required to make esti- plained later under Depositing Taxes. For more informa- mated tax payments, you may pay any tax due when you tion, see Publication 542. file your return. **Estimated tax.** Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year.

Page 6 **Publication 583**  **(December 2011)**

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### Federal Income, Social Security, and 

## Self-Employment Tax **Medicare Taxes** Self-employment tax (SE tax) is a social security and You generally must withhold federal income tax from your Medicare tax primarily for individuals who work for them- employee’s wages. To figure how much federal income tax selves. Your payments of SE tax contribute to your cover- to withhold from each wage payment, use the employee’s age under the social security system. Social security Form W-4 (discussed later under Hiring Employees ) and coverage provides you with retirement benefits, disability the methods described in Publication 15. benefits, survivor benefits, and hospital insurance (Medi- Social security and Medicare taxes pay for benefits that care) benefits. workers and their families receive under the Federal InsurYou must pay SE tax and file Schedule SE (Form 1040) ance Contributions Act (FICA). Social security tax pays for if either of the following applies. benefits under the old-age, survivors, and disability insur1. Your net earnings from self-employment were $400 ance part of FICA. Medicare tax pays for benefits under the or more. hospital insurance part of FICA. You withhold part of these taxes from your employee’s wages and you pay a part 2. You had church employee income of $108.28 or yourself. To find out how much social security and Medi- more. care tax to withhold and to pay, see Publication 15. Use Schedule SE (Form 1040) to figure your SE tax. For **Which form do I file?** Report these taxes on Form 941, more information, see Publication 334, Tax Guide for Employer’s QUARTERLY Federal Tax Return, or Form Small Business. 944, Employer’s ANNUAL Federal Tax Return. (Farm emYou can deduct a portion of your SE tax as an ployers use Form 943, Employer’s Annual Federal Tax adjustment to income on your Form 1040. Return for Agricultural Employees.) **The Social Security Administration (SSA) time limit for** 

### Federal Unemployment (FUTA) Tax **posting self-employment income.** Generally, the SSA will give you credit only for self-employment income re- The federal unemployment tax is part of the federal and ported on a tax return filed within 3 years, 3 months, and 15 state program under the Federal Unemployment Tax Act days after the tax year you earned the income. If you file (FUTA) that pays unemployment compensation to workers your tax return or report a change in your self-employment who lose their jobs. You report and pay FUTA tax sepaincome after this time limit, the SSA may change its rec- rately from social security and Medicare taxes and withords, but only to remove or reduce the amount. The SSA held income tax. You pay FUTA tax only from your own will not change its records to increase your funds. Employees do not pay this tax or have it withheld self-employment income. from their pay. **Which form do I file?** Report federal unemployment tax 

## Employment Taxes on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. See Publication 15 to find out if you This section briefly discusses the employment taxes you can use this form. must pay, the forms you must file to report them, and other forms that must be filed when you have employees. Employment taxes include the following. 

### Hiring Employees
**•** Social security and Medicare taxes. Have the employees you hire fill out Form I-9 and Form W-4. 

### • Federal income tax withholding.


### • Federal unemployment (FUTA) tax. **Form I-9.** You must verify that each new employee is legally eligible to work in the United States. Both you and If you have employees, you will need to get Publication the employee must complete the U.S. Citizenship and 15, Circular E, Employer’s Tax Guide. If you have agricul- Immigration Services (USCIS) Form I-9, Employment Elitural employees, get Publication 51, Circular A, Agricul- gibility Verification. You can get the form from USCIS tural Employer’s Tax Guide. These publications explain offices or from the USCIS website at www.uscis.gov . Call your tax responsibilities as an employer. the USCIS at 1-800-375-5283 for more information about your responsibilities. If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer’s **Form W-4.** Each employee must fill out Form W-4, Em- Supplemental Tax Guide. That publication has information ployee’s Withholding Allowance Certificate. You will use to help you determine whether an individual is an em- the filing status and withholding allowances shown on this ployee or an independent contractor. If you classify an form to figure the amount of income tax to withhold from employee as an independent contractor, you can be held your employee’s wages. For more information, see Publi- liable for employment taxes for that worker plus a penalty. cation 15. An independent contractor is someone who is self-employed. Generally, you do not have to withhold or **Employees claiming more than 10 withholding al** pay any taxes on payments to an independent contractor. **lowances.** An employer of an employee who claims more **Publication 583**  **(December 2011)** Page 7

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than 10 withholding allowances for wages paid can use 

## Depositing Taxesseveral methods of withholding. See section 16 of PublicaYou generally have to deposit employment taxes, certain tion 15. excise taxes, corporate income tax, and S corporation taxes before you file your return. 

### Form W-2 Wage Reporting Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System After the calendar year is over, you must furnish copies of (EFTPS). Form W-2, Wage and Tax Statement, to each employee to Any business that has a federal tax obligation and whom you paid wages during the year. You must also send requests a new EIN will automatically be enrolled in copies to the Social Security Administration. See Informa- EFTPS. Through the mail, the business will receive an tion Returns, later, for more information on Form W-2. EFTPS PIN package that contains instructions for activating its EFTPS enrollment. 

## Excise Taxes This section describes the excise taxes you may have to 

# Information Returns pay and the forms you have to file if you do any of the following. If you make or receive payments in your business, you may have to report them to the IRS on information returns. 

### • Manufacture or sell certain products. The IRS compares the payments shown on the information 

### • Operate certain kinds of businesses. returns with each person’s income tax return to see if the payments were included in income. You must give a copy 

### • Use various kinds of equipment, facilities, or prod- of each information return you are required to file to the ucts. recipient or payer. In addition to the forms described be- 

### • Receive payment for certain services. low, you may have to use other returns to report certain kinds of payments or transactions. For more details on For more information on excise taxes, see Publication 510, information returns and when you have to file them, see Excise Taxes. the 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 trade eral broad categories of taxes, including the following. or business. These payments include the following items.


### • Environmental taxes. 

### • Payments of $600 or more for services performed for your business by people not treated as your em- 

### • Communications and air transportation taxes. ployees, such as subcontractors, attorneys, account- 

### • Fuel taxes. ants, or directors.


### • Tax on the first retail sale of heavy trucks, trailers, 

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


### • Manufacturers taxes on the sale or use of a variety 

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


### • Royalty payments of $10 or more. **Form 2290.** There is a federal excise tax on certain trucks, 

### • Payments to certain crew members by operators of truck tractors, and buses used on public highways. The tax fishing boats. applies to vehicles having a taxable gross weight of 55,000 You also use Form 1099-MISC to report your sales of pounds or more. Report the tax on Form 2290, Heavy $5,000 or more of consumer goods to a person for resale Highway Vehicle Use Tax Return. For more information, anywhere other than in a permanent retail establishment. see the instructions for Form 2290. **Form W-2.** You must file Form W-2, Wage and Tax State- **Form 730.** If you are in the business of accepting wagers ment, to report payments to your employees, such as or conducting a wagering pool or lottery, you may be liable wages, tips, and other compensation, withheld income, for the federal excise tax on wagering. Use Form 730, social security, and Medicare taxes. For more information Monthly Tax Return for Wagers, to figure the tax on the on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. wagers you receive. **Form 8300.** You must file Form 8300, Report of Cash **Form 11-C.** Use Form 11-C, Occupational Tax and Regis- Payments Over $10,000 Received in a Trade or Business, tration Return for Wagering, to register for any wagering if you receive more than $10,000 in cash in one transaction activity and to pay the federal occupational tax on wager- or two or more related business transactions. Cash ining. cludes U.S. and foreign coin and currency. It also includes Page 8 **Publication 583**  **(December 2011)**

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certain monetary instruments such as cashier’s and trav- each failure. You may also be subject to the $50 penalty if eler’s checks and money orders. For more information, see you do not give your taxpayer identification number to Publication 1544, Reporting Cash Payments of Over another person when it is required on a return, statement, $10,000 (Received in a Trade or Business). or other document. 

# Penalties **Business Expenses** The law provides penalties for not filing returns or paying You can deduct business expenses on your income tax taxes as required. Criminal penalties may be imposed for return. These are the current operating costs of running willful failure to file, tax evasion, or making a false state- your business. To be deductible, a business expense must ment. be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, **Failure to file tax returns.** If you do not file your tax return trade, or profession. A necessary expense is one that is by the due date, you may have to pay a penalty. The helpful and appropriate for your business, trade, or profes- penalty is based on the tax not paid by the due date. See sion. An expense does not have to be indispensable to be your tax return instructions for more information about this considered necessary. penalty. The following are brief explanations of some expenses that are of interest to people starting a business. There are **Failure to pay tax.** If you do not pay your taxes by the due many other expenses that you may be able to deduct. See date, you will have to pay a penalty for each month, or part your form instructions and Publication 535, Business Exof a month, that your taxes are not paid. For more informa- penses. tion, see your tax return instructions. **Failure to withhold, deposit, or pay taxes.** If you do not 

## Business Start-Up Costs withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit Business start-up costs are the expenses you incur before them or pay them to the IRS, you may be subject to a you actually begin business operations. Your business penalty of the unpaid tax, plus interest. You may also be start-up costs will depend on the type of business you are subject to penalties if you deposit the taxes late. For more starting. They may include costs for advertising, travel, information, see Publication 15. surveys, and training. These costs are generally capital expenses. **Failure to follow information reporting requirements.** You usually recover costs for a particular asset (such as The following penalties apply if you are required to file machinery or office equipment) through depreciation (dis- information returns. For more information, see theGeneral cussed next). You can elect to deduct up to $5,000 of Instructions for Certain Information Returns. business start-up costs and $5,000 of organizational costs



### • **Failure to file information returns.**A penalty ap- paid or incurred after October 22, 2004. The $5,000 deduc- plies if you do not file information returns by the due tion is reduced by the amount your total start-up or organi- date, if you do not include all required information, or zational costs exceed $50,000. Any remaining cost must if you report incorrect information. be amortized.For more information about amortizing start-up and or

### • **Failure to furnish correct payee statements.**A ganizational costs, see chapter 7 in Publication 535. penalty applies if you do not furnish a required state- ment to a payee by the due date, if you do not include all required information, or if you report incor- 

## Depreciation rect information. If property you acquire to use in your business has a useful **Waiver of penalty.** These penalties will not apply if you life that extends substantially beyond the year it is placed can show that the failures were due to reasonable cause in service, you generally cannot deduct the entire cost as a and not willful neglect. business expense in the year you acquire it. You must In addition, there is no penalty for failure to include all spread the cost over more than one tax year and deduct the required information, or for including incorrect informa- part of it each year. This method of deducting the cost of tion, on a de minimis number of information returns if you business property is called depreciation. correct the errors by August 1 of the year the returns are Business property you must depreciate includes the due. (To be considered de minimis, the number of returns following items. cannot exceed the greater of 10 or 1/ 2of 1% of the total 

### • Office furniture. number of returns you are required to file for the year.) 

### • Buildings. **Failure to supply taxpayer identification number.** If you do not include your taxpayer identification number 

### • Machinery and equipment. (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or You can choose to deduct a limited amount of the cost of other document, you may be subject to a penalty of $50 for certain depreciable property in the year you place the **Publication 583**  **(December 2011)** Page 9

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property in service. This deduction is known as the “section **Principal place of business.** Your home office will qualify as your principal place of business for deducting ex179 deduction.” For more information about depreciation penses for its use if you meet the following requirements. and the section 179 deduction, see Publication 946, How To Depreciate Property. 

### • You use it exclusively and regularly for administrative or management activities of your trade or busiDepreciation must be taken in the year it is allow- ness. able. Allowable depreciation not taken in a prior year cannot be taken in the current year. If you do 

### • You have no other fixed location where you conduct not deduct the correct depreciation, you may be able to substantial administrative or management activities make a correction by filing Form 1040X, Amended U.S. of your trade or business. Individual Income Tax Return,or by changing your accounting method. For more information on how to correct Alternatively, if you use your home exclusively and regu- depreciation deductions, see chapter 1 in Publication 946. larly for your business, but your home office does not qualify as your principal place of business based on theprevious rules, you determine your principal place of busi

## Business Use of Your Home ness based on the following factors. To deduct expenses related to the business use of part of 

### • The relative importance of the activities performed at your home, you must meet specific requirements. Even each location. then, your deduction may be limited. 

### • If the relative importance factor does not determine To qualify to claim expenses for business use of your your principal place of business, the time spent at home, you must meet both the following tests. each location.

1. Your use of the business part of your home must be: If, after considering your business locations, your home a. Exclusive (however, see Exceptions to exclusive cannot be identified as your principal place of business, use, later), you cannot deduct home office expenses. However, for other ways to qualify to deduct home office expenses, see b. Regular, Publication 587. c. For your trade or business, AND **Which form do I file?** If you file Schedule C (Form 1040), 2. The business part of your home must be one of the use Form 8829, Expenses for Business Use of Your following: Home, to figure your deduction. If you file Schedule F (Form 1040) or you are a partner, you can use the work- a. Your principal place of business (defined later), sheet in Publication 587. b. A place where you meet or deal with patients, **More information.** For more information about business clients, or customers in the normal course of your use of your home, see Publication 587. trade or business, or c. A separate structure (not attached to your home) 

## Car and Truck Expenses you use in connection with your trade or business. If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. You **Exclusive use.** To qualify under the exclusive use test, generally can deduct either your actual expenses or the you must use a specific area of your home only for your standard mileage rate. trade or business. The area used for business can be a room or other separately identifiable space. The space **Actual expenses.** If you deduct actual expenses, you can does not need to be marked off by a permanent partition. deduct the cost of the following items: You do not meet the requirements of the exclusive use Depreciation Lease payments Registration test if you use the area in question both for business and Garage rent Licenses Repairs for personal purposes. Gas Oil Tires Insurance Parking fees Tolls **Exceptions to exclusive use.** You do not have to meet If you use your vehicle for both business and personal the exclusive use test if either of the following applies. purposes, you must divide your expenses between busi1. You use part of your home for the storage of inven- ness and personal use. You can divide your expenses tory or product samples. based on the miles driven for each purpose. 2. You use part of your home as a daycare facility. **Example.** You are the sole proprietor of a flower shop. For an explanation of these exceptions, see Publication You drove your van 20,000 miles during the year. 16,000 587, Business Use of Your Home (Including Use by Day- miles were for delivering flowers to customers and 4,000 care Providers). miles were for personal use. You can claim only 80% Page 10 **Publication 583**  **(December 2011)**

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(16,000 **÷**20,000) of the cost of operating your van as a 

### • A balance sheet shows the assets, liabilities, and your equity in the business on a given date. business expense. **Standard mileage rate.** Instead of figuring actual ex- **Identify source of receipts.** You will receive money or penses, you may be able to use the standard mileage rate property from many sources. Your records can identify the to figure the deductible costs of operating your car, van, source of your receipts. You need this information to sepa- pickup, or panel truck for business purposes. You can use rate business from nonbusiness receipts and taxable from the standard mileage rate for a vehicle you own or lease. nontaxable income. The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. It is **Keep track of deductible expenses.** You may forget announced annually by the IRS. To figure your deduction, expenses when you prepare your tax return unless you multiply your business miles by the standard mileage rate record them when they occur. for the year. **Prepare your tax returns.** You need good records to Generally, if you use the standard mileage rate, prepare your tax returns. These records must support the you cannot deduct your actual expenses. How- income, expenses, and credits you report. Generally, ever, you may be able to deduct business-related these are the same records you use to monitor your busi- parking fees, tolls, interest on your car loan, and certain ness and prepare your financial statements. state and local taxes. **Support items reported on tax returns.** You must keep **Choosing the standard mileage rate.** If you want to your business records available at all times for inspection use the standard mileage rate for a car you own, you must by the IRS. If the IRS examines any of your tax returns, you choose to use it in the first year the car is available for use may be asked to explain the items reported. A complete in your business. In later years, you can choose to use set of records will speed up the examination. either the standard mileage rate or actual expenses. If you use the standard mileage rate for a car you lease, 

## Kinds of Records To Keep you must choose to use it for the entire lease period (including renewals). Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeep- **Additional information.** For more information about the ing system suited to your business that clearly shows your rules for claiming car and truck expenses, see Publication income and expenses. 463, Travel, Entertainment, Gift, and Car Expenses. The business you are in affects the type of records you need to keep for federal tax purposes. You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. See 

# Recordkeeping Accounting Method, earlier. If you are in more than one business, you should keep a complete and separate set of This part explains why you must keep records, what kinds records for each business. A corporation should keep of records you must keep, and how to keep them. It also minutes of board of directors’ meetings. explains how long you must keep your records for federal Your recordkeeping system should include a summary tax purposes. A sample recordkeeping system is illus- of your business transactions. This summary is ordinarily trated at the end of this part. made in your books (for example, accounting journals and ledgers). Your books must show your gross income, as 

## Why Keep Records? well as your deductions and credits. For most small businesses, the business checkbook (discussed later) is the Everyone in business must keep records. Good records main source for entries in the business books. In addition, will help you do the following. you must keep supporting documents, explained later. **Monitor the progress of your business.** You need good **Electronic records.** All requirements that apply to hard records to monitor the progress of your business. Records copy books and records also apply to electronic storage can show whether your business is improving, which items systems that maintain tax books and records. When you are selling, or what changes you need to make. Good replace hard copy books and records, you must maintain records can increase the likelihood of business success. the electronic storage systems for as long as they are material to the administration of tax law. An electronic **Prepare your financial statements.** You need good rec- storage system is any system for preparing or keeping ords to prepare accurate financial statements. These in- your records either by electronic imaging or by transfer to clude income (profit and loss) statements and balance an electronic storage media. The electronic storage sys- sheets. These statements can help you in dealing with tem must index, store, preserve, retrieve and reproduce your bank or creditors and help you manage your busi- the electronically stored books and records in legible for- ness. mat. All electronic storage systems must provide a com-



### • An income statement shows the income and ex- plete and accurate record of your data that is accessible to penses of the business for a given period of time. the IRS. Electronic storage systems are also subject to the **Publication 583**  **(December 2011)** Page 11

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same controls and retention guidelines as those imposed 

### • Canceled checks. on your original hard copy books and records. 

### • Cash register tape receipts.The original hard copy books and records may be de

### • Credit card sales slips. stroyed provided that the electronic storage system has been tested to establish that the hard copy books and 

### • Invoices.records are being reproduced in compliance with IRS reThese records will help you determine the value of your quirements for an electronic storage system and proce- inventory at the end of the year. See Publication 538 for dures are established to ensure continued compliance with information on methods for valuing inventory. all applicable rules and regulations. You still have the responsibility of retaining any other books and records that **Expenses.** Expenses are the costs you incur (other than are required to be retained. purchases) to carry on your business. Your supporting The IRS may test your electronic storage system, in- documents should show the amount paid and that the cluding the equipment used, indexing methodology, amount was for a business expense. Documents for ex- software and retrieval capabilities. This test is not consid- penses include the following. ered an examination and the results must be shared with you. If your electronic storage system meets the require- 

### • Canceled checks. ments mentioned earlier, you will be in compliance. If not, 

### • Cash register tapes.you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy 

### • Account statements. books and records in a manner that allows you and the IRS 

### • Credit card sales slips. to determine your correct tax. For details on electronic storage system requirements, see Revenue Procedure 

### • Invoices. 97-22, available in Internal Revenue Bulletin 1997-13. 

### • Petty cash slips for small cash payments. 

### Supporting Documents A petty cash fund allows you to make small payments without having to write checks for small Purchases, sales, payroll, and other transactions you have amounts. Each time you make a payment from in your business generate supporting documents. Support- this fund, you should make out a petty cash slip and attach ing documents include sales slips, paid bills, invoices, it to your receipt as proof of payment.receipts, deposit slips, and canceled checks. These documents contain information you need to record in your **Travel, transportation, entertainment, and gift ex-** books. **penses.** Specific recordkeeping rules apply to these exIt is important to keep these documents because they penses. For more information, see Publication 463. support the entries in your books and on your tax return. **Employment taxes.** There are specific employment Keep them in an orderly fashion and in a safe place. For tax records you must keep. For a list, see Publication 15. instance, organize them by year and type of income or expense. **Assets.** Assets are the property, such as machinery and furniture you own and use in your business. You must keep **Gross receipts.** Gross receipts are the income you re- records to verify certain information about your business ceive from your business. You should keep supporting assets. You need records to figure the annual depreciation documents that show the amounts and sources of your and the gain or loss when you sell the assets. Your records gross receipts. Documents that show gross receipts in- should show the following information. clude the following. 

### • When and how you acquired the asset. 

### • Cash register tapes. 

### • Purchase price. 

### • Bank deposit slips. 

### • Cost of any improvements. 

### • Receipt books. 

### • Section 179 deduction taken. 

### • Invoices. 

### • Deductions taken for depreciation. 

### • Credit card charge slips. 

### • Deductions taken for casualty losses, such as losses 

### • Forms 1099-MISC. resulting from fires or storms.


### • How you used the asset. **Purchases.** Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this 

### • When and how you disposed of the asset. includes the cost of all raw materials or parts purchased for 

### • Selling price.manufacture into finished products. Your supporting documents should show the amount paid and that the amount 

### • Expenses of sale. was for purchases. Documents for purchases include the following. The following documents may show this information. Page 12 **Publication 583**  **(December 2011)**

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### • Purchase and sales invoices. 

### • Monthly summary of cash receipts.


### • Real estate closing statements. 

### • Check disbursements journal.


### • Canceled checks. 

### • Depreciation worksheet.


### • Employee compensation record. **What if I don’t have a canceled check?** If you do not The business checkbook is explained next. The other have a canceled check, you may be able to prove payment items are illustrated later under Sample Record System.with certain financial account statements prepared by financial institutions. These include account statements pre- The system you use to record business transac- pared for the financial institution by a third party. These tions will be more effective if you follow good account statements must be highly legible. The following recordkeeping practices. For example, record extable lists acceptable account statements. penses when they occur, and identify the source of recorded receipts. Generally, it is best to record transactions **THEN the statement must** on a daily basis. **IF payment is by... show the...**  **Business checkbook.** One of the first things you should Check 

### • Check number. do when you start a business is open a business checking 

### • Amount. account. You should keep your business account separate 

### • Payee’s name. from your personal checking account. 

### • Date the check amount The business checkbook is your basic source of infor-

was posted to the account mation for recording your business expenses. You should by the financial institution. deposit all daily receipts in your business checking account. You should check your account for errors by recon- Electronic funds transfer 

### • Amount transferred. ciling it. See Reconciling the checking account, later. 

### • Payee’s name. Consider using a checkbook that allows enough space 

### • Date the transfer was to identify the source of deposits as business income,

posted to the account by the financial institution. personal funds, or loans. You should also note on the deposit slip the source of the deposit and keep copies of all Credit card slips. 

### • Amount charged. 

### • Payee’s name. You should make all payments by check to document 

### • Transaction date. business expenses. Write checks payable to yourself only when making withdrawals from your business for personal use. Avoid writing checks payable to cash. If you must Proof of payment of an amount, by itself, does not write a check for cash to pay a business expense, include establish you are entitled to a tax deduction. You the receipt for the cash payment in your records. If you should also keep other documents, such as credit cannot get a receipt for a cash payment, you should make card sales slips and invoices, to show that you also in- an adequate explanation in your records at the time of curred the cost. payment.Use the business account for business purposes only. Indicate the source of deposits and the type 

### Recording Business Transactions of expense in the checkbook. A good recordkeeping system includes a summary of your business transactions. (Your business transactions are **Reconciling the checking account.** When you reshown on the supporting documents just discussed.) Busi- ceive your bank statement, make sure the statement, your ness transactions are ordinarily summarized in books checkbook, and your books agree. The statement balance called journals and ledgers. You can buy them at your local may not agree with the balance in your checkbook and stationery or office supply store. books if the statement: A journal is a book where you record each business 

### • Includes bank charges you did not enter in your transaction shown on your supporting documents. You books and subtract from your checkbook balance, or may have to keep separate journals for transactions that occur frequently. 

### • Does not include deposits made after the statement A ledger is a book that contains the totals from all of your date or checks that did not clear your account before journals. It is organized into different accounts. the statement date. Whether you keep journals and ledgers and how you By reconciling your checking account, you will: keep them depends on the type of business you are in. For example, a recordkeeping system for a small business 

### • Verify how much money you have in the account, might include the following items. 

### • Make sure that your checkbook and books reflect all



### • Business checkbook. bank charges and the correct balance in the check- 

### • Daily summary of cash receipts. ing account, and **Publication 583**  **(December 2011)** Page 13

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### • Correct any errors in your bank statement, check- 

### Bookkeeping System book, and books. You must decide whether to use a single-entry or a double-entry bookkeeping system. The single-entry sys- You should reconcile your checking account each tem of bookkeeping is the simplest to maintain, but it may month. not be suitable for everyone. You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Before you reconcile your monthly bank statement, check your own figures. Begin with the balance shown in **Single-entry.** A single-entry system is based on the in- your checkbook at the end of the previous month. To this come statement (profit or loss statement). It can be a balance, add the total cash deposited during the month simple and practical system if you are starting a small and subtract the total cash disbursements. business. The system records the flow of income and After checking your figures, the result should agree with expenses through the use of: your checkbook balance at the end of the month. If the result does not agree, you may have made an error in 1. A daily summary of cash receipts, and recording a check or deposit. You can find the error by 2. Monthly summaries of cash receipts and disburse- doing the following. ments.

1. Adding the amounts on your check stubs and comparing that total with the total in the “amount of **Double-entry.** A double-entry bookkeeping system uses journals and ledgers. Transactions are first entered in a check” column in your check disbursements journal. journal and then posted to ledger accounts. These acIf the totals do not agree, check the individual counts show income, expenses, assets (property a busiamounts to see if an error was made in your check ness owns), liabilities (debts of a business), and net worth stub record or in the related entry in your check (excess of assets over liabilities). You close income and disbursements journal. expense accounts at the end of each tax year. You keep 2. Adding the deposit amounts in your checkbook. asset, liability, and net worth accounts open on a perma- Compare that total with the monthly total in your cash nent basis. receipt book, if you have one. If the totals do not In the double-entry system, each account has a left side agree, check the individual amounts to find any er- for debits and a right side for credits. It is self-balancing rors. because you record every transaction as a debit entry in one account and as a credit entry in another. If your checkbook and journal entries still disagree, then Under this system, the total debits must equal the total refigure the running balance in your checkbook to make credits after you post the journal entries to the ledger sure additions and subtractions are correct. accounts. If the amounts do not balance, you have made When your checkbook balance agrees with the balance an error and you must find and correct it. figured from the journal entries, you may begin reconciling An example of a journal entry exhibiting a payment of your checkbook with the bank statement. Many banks print rent in October is shown next. a reconciliation worksheet on the back of the statement. To reconcile your account, follow these steps. 

### General Journal 1. Compare the deposits listed on the bank statement **Date Description of Entry**  **Debit Credit**  with the deposits shown in your checkbook. Note all differences in the dollar amounts. Oct. 5 Rent expense 780.00 2. Compare each canceled check, including both check number and dollar amount, with the entry in your Cash 780.00 checkbook. Note all differences in the dollar amounts. Mark the check number in the checkbook as having cleared the bank. After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. 3. Prepare a bank reconciliation. One is illustrated later under Sample Record System. 4. Update your checkbook and journals for items shown 

### Computerized Systemon the reconciliation as not recorded (such as servThere are computer software packages you can use for ice charges) or recorded incorrectly. recordkeeping. They can be purchased in many retail At this point, the adjusted bank statement balance should stores. These packages are very helpful and relatively equal your adjusted checkbook balance. If you still have easy to use; they require very little knowledge of book- differences, check the previous steps to find the errors. keeping and accounting. Page 14 **Publication 583**  **(December 2011)**

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If you use a computerized system, you must be able to **Employment taxes.** If you have employees, you must keep all employment tax records for at least 4 years after produce sufficient legible records to support and verify the date the tax becomes due or is paid, whichever is later. entries made on your return and determine your correct tax For more information about recordkeeping for employment liability. To meet this qualification, the machine-sensible taxes, see Publication 15. records must reconcile with your books and return. These records must provide enough detail to identify the underly- **Assets.** Keep records relating to property until the period ing source documents. of limitations expires for the year in which you dispose of You must also keep all machine-sensible records and a the property in a taxable disposition. You must keep these complete description of the computerized portion of your records to figure any depreciation, amortization, or deple- recordkeeping system. This documentation must be suffi- tion deduction, and to figure your basis for computing gain ciently detailed to show all of the following items. or loss when you sell or otherwise dispose of the property. Generally, if you received property in a nontaxable ex- 

### • Functions being performed as the data flows through change, your basis in that property is the same as the basis the system. of the property you gave up, increased by any money you 

### • Controls used to ensure accurate and reliable paid. You must keep the records on the old property, as processing. well as on the new property, until the period of limitations expires for the year in which you dispose of the new 

### • Controls used to prevent the unauthorized addition, property in a taxable disposition. alteration, or deletion of retained records. **Records for nontax purposes.** When your records are 

### • Charts of accounts and detailed account descripno longer needed for tax purposes, do not discard them tions. until you check to see if you have to keep them longer for See Revenue Procedure 98-25 in Cumulative Bulletin other purposes. For example, your insurance company or 1998-1 for more information. creditors may require you to keep them longer than the IRS does. 

## How Long To Keep Records **Sample Record System** You must keep your records as long as they may be This example illustrates a single-entry system used by needed for the administration of any provision of the Inter- Henry Brown, who is the sole proprietor of a small automo- nal Revenue Code. Generally, this means you must keep bile body shop. Henry uses part-time help, has no inven- records that support an item of income or deduction on a tory of items held for sale, and uses the cash method of return until the period of limitations for that return runs out. accounting. The period of limitations is the period of time in which These sample records should not be viewed as a rec- you can amend your return to claim a credit or refund, or ommendation of how to keep your records. They are in- the IRS can assess additional tax. Table 3 contains the tended only to show how one business keeps its records. periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after 

### 1. Daily Summary of Cash Receipts the return was filed. Returns filed before the due date are treated as filed on the due date. This summary is a record of cash sales for the day. It Keep copies of your filed tax returns. They help in accounts for cash at the end of the day over the amount in preparing future tax returns and making computa- the Change and Petty Cash Fund at the beginning of the tions if you file an amended return. day. 

### 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
**Publication 583**  **(December 2011)** Page 15

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Henry takes the cash sales entry from his cash register 

### 4. Employee Compensation Record tape. If he had no cash register, he would simply total his This record shows the following information. cash sale slips and any other cash received that day. He carries the total receipts shown in this summary for 

### • The number of hours Henry’s employee worked in a January 3 ($267.80), including cash sales ($263.60) and pay period. sales tax ($4.20), to the Monthly Summary of Cash Re- 

### • The employee’s total pay for the period. ceipts

. 

### • The deductions Henry withheld in figuring the em**Petty cash fund.** Henry uses a petty cash fund to make ployee’s net pay. small payments without having to write checks for small 

### • The monthly gross payroll. amounts. Each time he makes a payment from this fund, Henry carries the January gross payroll ($520) to the he makes out a petty cash slip and attaches it to his receipt Annual Summary. as proof of payment. He sets up a fixed amount ($50) in his petty cash fund. The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed 

### 5. Annual Summary amount of the fund. When the totals on the petty cash slips This annual summary of monthly cash receipts and ex- approach the fixed amount, he brings the cash in the fund pense totals provides the final amounts to enter on Henry’s back to the fixed amount by writing a check to “Petty Cash” tax return. He figures the cash receipts total from the total for the total of the outstanding slips. (See the Check Disof monthly cash receipts shown in theMonthly Summary of bursements Journalentry for check number 92.) This re- Cash Receipts. He figures the expense totals from the stores the fund to its fixed amount of $50. He then totals of monthly expense items shown in the Check Dis- summarizes the slips and enters them in the proper col- bursements Journal.As in the journal, he keeps each major umns in the monthly check disbursements journal. expense in a separate column.Henry carries the cash receipts total shown in the annual summary ($47,440.95) to Part I of Schedule C (not 

### 2. Monthly Summary of Cash Receipts illustrated). He carries the total for materials ($10,001.00) This shows the income activity for the month. Henry carries to Part II of Schedule C. the total monthly net sales shown in this summary for A business that keeps materials and supplies on January ($4,865.05) to hisAnnual Summary. hand generally must complete the inventory lines To figure total monthly net sales, Henry reduces the in Part III of Schedule C. However, there are no total monthly receipts by the sales tax imposed on his inventories of materials and supplies in this example. customers and turned over to the state. He cannot take a Henry buys parts and supplies on a per-job basis; he does deduction for sales tax turned over to the state because he not keep them on hand. only collected the tax. He does not include the tax in his Henry enters annual totals for interest, rent, taxes, and income. wages on the appropriate lines in Part II of Schedule C. The total for taxes and licenses includes the employer’sshare of social security and Medicare taxes, and the busi

### 3. Check Disbursements Journal ness license fee. He enters the total of other annual business expenses on the “Other expenses” line of Schedule Henry enters checks drawn on the business checking C. account in theCheck Disbursements Journaleach day. All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. 

### 6. Depreciation Worksheet Frequent expenses have their own headings across the sheet. He enters in a separate column expenses that This worksheet shows the information used in figuring the require comparatively numerous or large payments each depreciation allowed on assets used in Henry’s business. month, such as materials, gross payroll, and rent. Under Henry figures the depreciation using the modified accelerthe General Accounts column, he enters small expenses ated cost recovery system (MACRS). He purchased and that normally have only one or two monthly payments, placed in service several used assets that do not qualify for such as licenses and postage. the section 179 deduction. Depreciation and the section 179 deduction are discussed in Publication 946. Henry Henry does not pay personal or nonbusiness expenses uses the information in the worksheet to complete Form by checks drawn on the business account. If he did, he 4562, Depreciation and Amortization (not illustrated). would record them in the journal, even though he could not deduct them as business expenses. Henry carries the January total of expenses for materi- 

### 7. Bank Reconciliation als ($1,083.50) to the Annual Summary.Similarly, he enters the monthly total of expenses for telephone, truck/ Henry reconciles his checkbook with his bank statement auto, etc., in the appropriate columns of that summary. and prepares a bank reconciliation for January as follows.
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1. Henry begins by entering his bank statement bal- 5. Henry discovered that he mistakenly entered a deance. posit of $600.40 in his checkbook as $594.40. He adds the difference ($6.00) to the checkbook balance 2. Henry compares the deposits listed on the bank of $2,153.03. There was a $10.00 bank service statement with deposits shown in his checkbook. charge on his bank statement that he subtracts from Two deposits shown in his checkbook

—$701.33 the checkbook balance. The result is the adjusted and $516.08

—were not on his bank statement. He checkbook balance of $2,149.03. This equals his ad- enters these two amounts on the bank reconciliation. justed bank statement balance computed in (3). He adds them to the bank statement balance of $1,458.12 to arrive at a subtotal of $2,675.53. The only book adjustment Henry needs to make is to the Check Disbursements Journal for the $10 bank service 3. After comparing each canceled check with his check- charge. He does not need to adjust the Monthly Summary book, Henry found four outstanding checks totaling of Cash Receiptsbecause he correctly entered the January $526.50. He subtracts this amount from the subtotal 8 deposit of $600.40 in that record. in (2). The result of $2,149.03 is the adjusted bank statement balance. 4. Henry enters his checkbook balance on the bank reconciliation.

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### Daily Cash Receipts

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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**  **Withheld Social**  **FICA Check**  **Amount of Gross**  **Income Security**  **Medicare Day**  **Paid To #**  **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)

**State Employer’s**  **Withheld**

**Income FICA**  **Truck/**

**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

**Publication 583**  **(December 2011)** Page 21

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### Employee Compensation

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### Bank Reconciliation

**Publication 583**  **(December 2011)** Page 23

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

. 

# How to Get More Information
**•** Determine if Form 6251 must be filed by using our This section describes the help the IRS and other federal Alternative Minimum Tax (AMT) Assistant available agencies offer to taxpayers who operate their own busi- online at www.irs.gov/individuals nesses
. 

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

## Internal Revenue Service **•** Get information on starting and operating a small You can get help with unresolved tax issues, order free business. publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy **Phone.** Many services are available by phone. access to tax help. **Free help with your return.** Free help in preparing your return is available nationwide from IRS-certified volun- 

### • Ordering forms, instructions, and publications. Call teers. The Volunteer Income Tax Assistance (VITA) pro- 1-800-TAX -FORM (1-800-829-3676) to order cur- gram is designed to help low-moderate income taxpayers rent-year forms, instructions, and publications, and and the Tax Counseling for the Elderly (TCE) program is prior-year forms and instructions. You should receive designed to assist taxpayers age 60 and older with their your order within 10 days. tax returns. Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and 

### • Asking tax questions. Call the IRS with your tax deductions you may be entitled to claim. To find the near- questions at 1-800-829-1040. est VITA or TCE site, visit IRS.gov or call 1-800-906-9887 

### • Solving problems.You can get face-to-face help or 1-800-829-1040. solving tax problems every business day in IRS Tax- As part of the TCE program, AARP offers the Tax-Aide payer Assistance Centers. An employee can explain counseling program. To find the nearest AARP Tax-Aide IRS letters, request adjustments to your account, or site, call 1-888-227-7669 or visit AARP’s website at www. help you set up a payment plan. Call your local aarp.org/money/taxaide

. Taxpayer Assistance Center for an appointment. To For more information on these programs, go to IRS.gov find the number, go to www.irs.gov/localcontacts or and enter keyword “VITA” in the upper right-hand corner. look in the phone book under United States Government, Internal Revenue Service

. **Internet.** You can access the IRS website at IRS.gov 24 hours a day, 7 days a week to: 

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

### • E-file your return. Find out about commercial tax preparation and e-file services available free to eligi- 

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


### • Check the status of your 2011 refund. Go to IRS.gov 

### • Refund information.To check the status of your and click on Where’s My Refund . Wait at least 72 2011 refund, call 1-800-829-1954 or 1-800-829-4477 hours after the IRS acknowledges receipt of your (automated refund information 24 hours a day, 7 e-filed return, or 3 to 4 weeks after mailing a paper days a week). Wait at least 72 hours after the IRS return. If you filed Form 8379 with your return, wait acknowledges receipt of your e-filed return, or 3 to 4 14 weeks (11 weeks if you filed electronically). Have weeks after mailing a paper return. If you filed Form your 2011 tax return available so you can provide 8379 with your return, wait 14 weeks (11 weeks if your social security number, your filing status, and you filed electronically). Have your 2011 tax return the exact whole dollar amount of your refund. available so you can provide your social security number, your filing status, and the exact whole dollar 

### • Download forms, including talking tax forms, instruc- amount of your refund. If you check the status of tions, and publications. your refund and are not given the date it will be 

### • Order IRS products online. issued, please wait until the next week before check- ing back. 

### • Research your tax questions online.


### • Other refund information.To check the status of a 

### • Search publications online by topic or keyword. prior-year refund or amended return refund, call 

### • Use the online Internal Revenue Code, regulations, 1-800-829-1040. or other official guidance. **Evaluating the quality of our telephone services.**To 

### • View Internal Revenue Bulletins (IRBs) published in the last few years. ensure IRS representatives give accurate, courteous, and Page 24 **Publication 583**  **(December 2011)**

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professional answers, we use several methods to evaluate problems that you haven’t been able to solve on your own. Remember, the worst thing you can do is nothing at all. the quality of our telephone services. One method is for a TAS can help if you can’t resolve your problem with the second IRS representative to listen in on or record random IRS and: telephone calls. Another is to ask some callers to complete a short survey at the end of the call. 

### • Your problem is causing financial difficulties for you, your family, or your business. **Walk-in.** Many products and services are available on a walk-in basis. 

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


### • Products.You can walk in to many post offices, 

### • You have tried repeatedly to contact the IRS but no libraries, and IRS offices to pick up certain forms, one has responded, or the IRS has not responded to instructions, and publications. Some IRS offices, li- you by the date promised. braries, grocery stores, copy centers, city and county If you qualify for our help, we’ll do everything we can to government offices, credit unions, and office supply get your problem resolved. You will be assigned to one stores have a collection of products available to print advocate who will be with you at every turn. We have from a CD or photocopy from reproducible proofs. offices in every state, the District of Columbia, and Puerto Also, some IRS offices and libraries have the Inter- Rico. Although TAS is independent within the IRS, our nal Revenue Code, regulations, Internal Revenue advocates know how to work with the IRS to get your Bulletins, and Cumulative Bulletins available for re- problems resolved. And our services are always free. search purposes. As a taxpayer, you have rights that the IRS must abide 

### • Services.You can walk in to your local Taxpayer by in its dealings with you. Our tax toolkit at www. Assistance Center every business day for personal, TaxpayerAdvocate.irs.gov can help you understand these face-to-face tax help. An employee can explain IRS rights. letters, request adjustments to your tax account, or If you think TAS might be able to help you, call your local help you set up a payment plan. If you need to advocate, whose number is in your phone book and on our resolve a tax problem, have questions about how the website at www.irs.gov/advocate. You can also call our tax law applies to your individual tax return, or you toll-free number at 1-877-777-4778 or TTY/TDD are more comfortable talking with someone in per- 1-800-829-4059. son, visit your local Taxpayer Assistance Center TAS also handles large-scale or systemic problems that where you can spread out your records and talk with affect many taxpayers. If you know of one of these broad an IRS representative face-to-face. No appointment issues, please report it to us through our Systemic Advocacy Management System at www.irs.gov/advocate

. is necessary

—just walk in. If you prefer, you can call your local Center and leave a message requesting **Low Income Taxpayer Clinics (LITCs).** Low Income an appointment to resolve a tax account issue. A Taxpayer Clinics (LITCs) are independent from the IRS. representative will call you back within 2 business Some clinics serve individuals whose income is below a days to schedule an in-person appointment at your certain level and who need to resolve a tax problem. These convenience. If you have an ongoing, complex tax clinics provide professional representation before the IRS account problem or a special need, such as a disa- or in court on audits, appeals, tax collection disputes, and bility, an appointment can be requested. All other other issues for free or for a small fee. Some clinics can issues will be handled without an appointment. To provide information about taxpayer rights and responsibili- find the number of your local office, go to ties in many different languages for individuals who speak www.irs.gov/localcontacts or look in the phone book English as a second language. For more information and under United States Government, Internal Revenue to find a clinic near you, see the LITC page on www.irs.gov/ Service

. advocate or IRS Publication 4134, Low Income Taxpayer Clinic List . This publication is also available by calling 1-800-829-3676 or at your local IRS office. **Mail.**You can send your order for forms, instruc- tions, and publications to the address below. You **Free tax services.** Publication 910, IRS Guide to Free should receive a response within 10 days after Tax Services, is your guide to IRS services and resources. your request is received. Learn about free tax information from the IRS, including publications, services, and education and assistance pro- Internal Revenue Service grams. The publication also has an index of over 100 1201 N. Mitsubishi Motorway TeleTax topics (recorded tax information) you can listen to Bloomington, IL 61705-6613 on the telephone. The majority of the information and services listed in this publication are available to you free **Taxpayer Advocate Service.** The Taxpayer Advocate of charge. If there is a fee associated with a resource or Service (TAS) is your voice at the IRS. Our job is to ensure service, it is listed in the publication. that every taxpayer is treated fairly, and that you know and Accessible versions of IRS published products are understand your rights. We offer free help to guide you available on request in a variety of alternative formats for through the often-confusing process of resolving tax people with disabilities. **Publication 583**  **(December 2011)** Page 25

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**DVD for tax products.**You can order Publication are in business or are interested in starting a business can 1796, IRS Tax Products DVD, and obtain: use BICs as often as they wish at no charge. **Service Corps of Retired Executives (SCORE).** 

### • Current-year forms, instructions, and publications. SCORE provides small business counseling and training to current and prospective small business owners. SCORE 

### • Prior-year forms, instructions, and publications. is made up of current and former business people who 

### • Tax Map: an electronic research tool and finding aid. offer their expertise and knowledge to help people start, manage, and expand a small business. SCORE also offers 

### • Tax law frequently asked questions. a variety of small business workshops. 

### • Tax Topics from the IRS telephone response sys- **Internet.**You can visit the SBA website at www. tem. sba.gov.While visiting the SBA website, you can 

### • Internal Revenue Code

—Title 26 of the U.S. Code. find a variety of information of interest to small business owners. 

### • Links to other Internet based Tax Research materials. **Phone.**Call the SBA Answer Desk at 1-800-UASK-SBA (1-800-827-5722) for general 

### • Fill-in, print, and save features for most tax forms. information about programs available to assist 

### • Internal Revenue Bulletins. small business owners. 

### • Toll-free and email technical support. **Walk-in.**You can walk in to a Small Business 

### • Two releases during the year. Development Center or Business Information

–The first release will ship the beginning of January Center to request assistance with your small 2012. business. To find the location nearest you, access the SBA

–The final release will ship the beginning of March on the Internet or call the SBA Answer Desk 2012. 

## Other Federal Agencies Purchase the DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $30 (no han- Other Federal agencies also publish publications and dling fee) or call 1-877-233-6767 toll free to buy the DVD pamphlets to assist small businesses. Most of these are for $30 (plus a $6 handling fee). available from the Superintendent of Documents at the Government Printing Office. You can get information and order these publications and pamphlets in several ways. 

## Small Business Administration **Internet.**You can visit the GPO website at www. The Small Business Administration (SBA) offers training access.gpo.gov
. and educational programs, counseling services, financialprograms, and contract assistance for small business owners. The SBA also has publications and videos on a variety of business topics. The following briefly describes assis- **Mail.**Write to the GPO at the following address. tance provided by the SBA. **Small Business Development Centers (SBDCs).**SBDCs provide counseling, training, and technical services to current and prospective small business owners who Superintendent of Documents cannot afford the services of a private consultant. Help is U.S. Government Printing Office available when beginning, improving, or expanding a small P.O. Box 371954 business. Pittsburgh, PA 15250

–7954 **Business Information Centers (BICs).** BICs offer a **Phone.**Call the GPO toll-free at 1-866-512-1800 small business reference library, management video or at 202-512-1800 from the Washington, DC tapes, and computer technology to help plan a business. area. BICs also offer one-on-one assistance. Individuals who

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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 **Publications**(See Tax help) 

### A 2290

............................. 8 **Accounting method:** 8300

............................. 8

Accrual method

................. . 5 

### R 8829

............................ 10 Cash method

................... . 5 **Recordkeeping**

.................. . 11 I-9

............................... 7 **Assistance**(See Tax help) **Records, how long to keep**

..... . 15 SS-4

............................. 4 W-2

.............................. 8 

### B **S** W-4

.............................. 7 **Business: S corporation** 

.................... . 3 W-9

.............................. 4 Expenses

....................... . 9 **Self-employment tax**

............. . 7 **FUTA tax**

......................... . 7 Start-up costs

................... . 9 **Small Business** Use of car

..................... . 10 **Administration**

................ . 26 

### H Use of home

................... . 10 **Social security tax**

............... . 7 **Help**(See Tax help) **Sole proprietorship**

.............. . 3 **Help from Small Business** 

### C **Start-up costs**

.................... . 9 **Administration**

................ . 26 **Car and truck expenses**

........ . 10 **Corporation**

...................... . 3 

### T **I Tax help** 

.......................... 24 **Identification numbers**

.......... . 3 

### D **Tax year**

........................... 4 **Income tax**

..................... . 6,7 **Depositing taxes**

................. . 8 **Taxes: Information returns** 

.............. . 8 **Depreciation**

..................... . 9 Employment

.................... . 7 **Inventories**

....................... . 5 Estimated

....................... . 6 Excise

........................... 8 

### E **L** How to deposit

.................. . 8 **Employer identification number Limited liability company** 

....... . 3 Income

......................... . 6

**(EIN)**

............................. 4 Self-employment

................ . 7 **Employment taxes:** Unemployment (FUTA)

......... . 7 

### M Defined

......................... . 7 **Taxpayer Advocate**

............. . 25 **Medicare tax**

..................... . 7 Records to keep

............... . 12 **TTY/TDD information**

........... . 24 **More Information**(See Tax help) **Estimated tax**

.................... . 6 **Excise taxes**

..................... . 8 

### U **O Unemployment (FUTA) tax** 

...... . 7 **Office in home**

.................. . 10 

### F **Form:** 

### ■ 11-C

............................. 8 

### P 720

.............................. 8 **Partnership**

...................... . 3 730

.............................. 8 **Penalties**

......................... . 9 1099-MISC

..................... . 8

**Publication 583**  **(December 2011)** Page 27