Table of Contents
As a new business owner, you need to know your federal tax responsibilities. Table 1, below, can help you learn what those responsibilities are. Ask yourself each question listed in the table, then see the related discussion to find the answer.
In addition to knowing about federal taxes, you need to make some basic business decisions. Ask yourself:
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What are my financial resources?
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What products and services will I sell?
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How will I market my products and services?
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How will I develop a strategic business plan?
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How will I manage my business on a day-to-day basis?
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How will I recruit employees?
The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. For information on how to contact the SBA, see page 26.
The most common forms of business are the sole proprietorship, partnership, and corporation. When beginning a business, you must decide which form of business to use. Legal and tax considerations enter into this decision. Only tax considerations are discussed in this publication.
Your form of business determines which income tax return form you have to file. See Table 2 on page 6 to find out which form you have to file.
You must have a taxpayer identification number so the IRS can process your returns. The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN).
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An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000-00-0000.
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An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00-0000000.
You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. This includes returns or documents filed to report the following information.
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Interest, dividends, royalties, etc., paid to you.
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Any amount paid to you as a dependent care provider.
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Certain other amounts paid to you that total $600 or more for the year.
If you do not furnish your identification number as required, you may be subject to penalties. See Penalties, later.
EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities.
If you don't already have an EIN, you need to get one if you:
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Have employees,
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Have a qualified retirement plan,
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Operate your business as a corporation or partnership, or
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File returns for:
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Employment taxes, or
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Excise taxes.
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Online—Click on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.
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By telephone at 1-800-829-4933 from 7:00 a.m. to 10:00 p.m. in the applicant's local time zone.
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By mailing or faxing Form SS-4, Application for Employer Identification Number.
In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). The forms used to report these payments must include the payee's identification number.
You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. A tax year is usually 12 consecutive months. There are two kinds of tax years.
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Calendar tax year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.
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Fiscal tax year. A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.
If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval.
You must use a calendar tax year if:
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You keep no books.
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You have no annual accounting period.
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Your present tax year does not qualify as a fiscal year.
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You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
For more information, see Publication 538, Accounting Periods and Methods.
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Filed an application for an extension of time to file an income tax return.
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Filed an application for an employer identification number.
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Paid estimated taxes for that tax year.
An accounting method is a set of rules used to determine when and how income and expenses are reported. You choose an accounting method for your business when you file your first income tax return. There are two basic accounting methods.
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Cash method. Under the cash method, you report income in the tax year you receive it. You usually deduct or capitalize expenses in the tax year you pay them.
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Accrual method. Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year.
For other methods, see Publication 538.
If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Inventories include goods held for sale in the normal course of business. They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Inventories are explained in Publication 538.
Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. For more information, see Publication 538.
You must use the same accounting method to figure your taxable income and to keep your books. Also, you must use an accounting method that clearly shows your income. In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year.
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.
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Income tax.
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Self-employment tax.
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Employment taxes.
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Excise taxes.
See Table 2 on page 6 for the forms you file to report these taxes.
You may want to get Publication 509. It has tax calendars that tell you when to file returns and make tax payments.
All businesses except partnerships must file an annual income tax return. Partnerships file an information return. Which form you use depends on how your business is organized. See Table 2 on page 6 to find out which return you have to file.
The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.
Table 2. Which Forms Must I File?
IF you are a... | THEN you may be liable for... | Use Form... | ||
Sole proprietor | Income tax | 1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business) | ||
Self-employment tax | 1040 and Schedule SE | |||
Estimated tax | 1040-ES | |||
Employment taxes: | ||||
• Social security and Medicare
taxes and income tax withholding |
941 (943 for farm employees) | |||
• Federal unemployment (FUTA)
tax |
940 | |||
• Depositing employment taxes | 8109 2 | |||
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 3 | ||
Self-employment tax | 1040 and Schedule SE | |||
Estimated tax | 1040-ES | |||
Corporation or S corporation | Income tax |
1120 or 1120-A (corporation)
3 1120S (S corporation) 3 |
||
Estimated tax | 1120-W (corporation only) and 8109 2 | |||
Employment taxes | Same as sole proprietor | |||
Excise taxes | See Excise Taxes | |||
S corporation shareholder | Income tax | 1040 and Schedule E 3 | ||
Estimated tax | 1040-ES |
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.
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Your net earnings from self-employment were $400 or more.
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You had church employee income of $108.28 or more.
Use Schedule SE (Form 1040) to figure your SE tax. For more information, see Publication 533, Self-Employment Tax.
You can deduct one-half of your SE tax as an adjustment to income on your Form 1040.
This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees.
Employment taxes include the following.
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Social security and Medicare taxes.
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Federal income tax withholding.
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Federal unemployment (FUTA) tax.
If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. These publications explain your tax responsibilities as an employer.
If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. That publication has information to help you determine whether an individual is an employee or an independent contractor. If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. An independent contractor is someone who is self-employed. Generally, you do not have to withhold or pay any taxes on payments to an independent contractor.
You generally must withhold federal income tax from your employee's wages. To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15.
Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA. You withhold part of these taxes from your employee's wages and you pay a matching amount yourself. To find out how much social security and Medicare tax to withhold and to pay, see Publication 15.
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.
Have the employees you hire fill out Form I-9 and Form W-4. If your employees qualify for and want to receive advanced earned income credit payments, they must give you a completed Form W-5.
This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following.
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Manufacture or sell certain products.
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Operate certain kinds of businesses.
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Use various kinds of equipment, facilities, or products.
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Receive payment for certain services.
For more information on excise taxes, see Publication 510, Excise Taxes for 2006.
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Environmental taxes.
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Communications and air transportation taxes.
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Fuel taxes.
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Tax on the first retail sale of heavy trucks, trailers, and tractors.
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Manufacturers taxes on the sale or use of a variety of different articles.
You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return.
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Your EIN.
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Type of tax.
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Tax period for the payment.
If you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. You must give a copy of each information return you are required to file to the recipient or payer. In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. For more details on information returns and when you have to file them, see the General Instructions for Forms 1099, 1098, 5498, and W-2G.
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Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors.
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Rent payments of $600 or more, other than rents paid to real estate agents.
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Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows.
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Royalty payments of $10 or more.
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Payments to certain crew members by operators of fishing boats.
The law provides penalties for not filing returns or paying taxes as required. Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement.
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Failure to file information returns. A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information.
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Failure to furnish correct payee statements. A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information.
You can deduct business expenses on your income tax return. These are the current operating costs of running your business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate for your business, trade, or profession. An expense does not have to be indispensable to be considered necessary.
The following are brief explanations of some expenses that are of interest to people starting a business. There are many other expenses that you may be able to deduct. See your form instructions and Publication 535, Business Expenses.
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.
You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.
For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535.
If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year. This method of deducting the cost of business property is called depreciation.
Business property you must depreciate includes the following items.
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Office furniture.
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Buildings.
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Machinery and equipment.
You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the “section 179 deduction.” You can take a special depreciation allowance for certain property you acquire and place in service before January 1, 2005. For more information about depreciation, the section 179 deduction, and the special depreciation allowance, see Publication 946, How To Depreciate Property.
Depreciation must be taken in the year it is allowable. Allowable depreciation not taken in a prior year cannot be taken in the current year. If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U.S. Individual Income Tax Return, or by changing your accounting method. For more information on how to correct depreciation deductions, see chapter 1 in Publication 946.
To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.
To qualify to claim expenses for business use of your home, you must meet both the following tests.
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Your use of the business part of your home must be:
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Exclusive (however, see Exceptions to exclusive use, later),
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Regular,
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For your trade or business, AND
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The business part of your home must be one of the following:
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Your principal place of business (defined later),
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A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
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A separate structure (not attached to your home) you use in connection with your trade or business.
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You use part of your home for the storage of inventory or product samples.
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You use part of your home as a daycare facility.
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You use it exclusively and regularly for administrative or management activities of your trade or business.
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You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
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The relative importance of the activities performed at each location.
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If the relative importance factor does not determine your principal place of business, the time spent at each location.
If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. You generally can deduct either your actual expenses or the standard mileage rate.
Depreciation | Lease payments | Registration |
Garage rent | Licenses | Repairs |
Gas | Oil | Tires |
Insurance | Parking fees | Tolls |
This part explains why you must keep records, what kinds of records you must keep, and how to keep them. It also explains how long you must keep your records for federal tax purposes. A sample recordkeeping system is illustrated at the end of this part.
Everyone in business must keep records. Good records will help you do the following.
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An income statement shows the income and expenses of the business for a given period of time.
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A balance sheet shows the assets, liabilities, and your equity in the business on a given date.
Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.
The business you are in affects the type of records you need to keep for federal tax purposes. You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. See Accounting Method, earlier. If you are in more than one business, you should keep a complete and separate set of records for each business. A corporation should keep minutes of board of directors' meetings.
Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily made in your books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. In addition, you must keep supporting documents, explained next.
Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain information you need to record in your books.
It is important to keep these documents because they support the entries in your books and on your tax return. Keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.
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Cash register tapes.
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Bank deposit slips.
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Receipt books.
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Invoices.
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Credit card charge slips.
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Forms 1099-MISC.
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Canceled checks.
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Cash register tape receipts.
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Credit card sales slips.
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Invoices.
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Canceled checks.
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Cash register tapes.
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Account statements.
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Credit card sales slips.
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Invoices.
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Petty cash slips for small cash payments.
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When and how you acquired the asset.
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Purchase price.
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Cost of any improvements.
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Section 179 deduction taken.
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Deductions taken for depreciation.
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Deductions taken for casualty losses, such as losses resulting from fires or storms.
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How you used the asset.
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When and how you disposed of the asset.
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Selling price.
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Expenses of sale.
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Purchase and sales invoices.
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Real estate closing statements.
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Canceled checks.
IF payment is by... | THEN the statement must show the... |
Check |
|
Electronic funds transfer |
|
Credit card |
|
A good recordkeeping system includes a summary of your business transactions. (Your business transactions are shown on the supporting documents just discussed.) Business transactions are ordinarily summarized in books called journals and ledgers. You can buy them at your local stationery or office supply store.
A journal is a book where you record each business transaction shown on your supporting documents. You may have to keep separate journals for transactions that occur frequently.
A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.
Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. For example, a recordkeeping system for a small business might include the following items.
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Business checkbook.
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Daily summary of cash receipts.
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Monthly summary of cash receipts.
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Check disbursements journal.
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Depreciation worksheet.
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Employee compensation record.
The business checkbook is explained next. The other items are illustrated later under Sample Record System.
The system you use to record business transactions will be more effective if you follow good recordkeeping practices. For example, record expenses when they occur, and identify the source of recorded receipts. Generally, it is best to record transactions on a daily basis.
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Includes bank charges you did not enter in your books and subtract from your checkbook balance, or
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Does not include deposits made after the statement date or checks that did not clear your account before the statement date.
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Verify how much money you have in the account,
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Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and
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Correct any errors in your bank statement, checkbook, and books.
Before you reconcile your monthly bank statement, check your own figures. Begin with the balance shown in your checkbook at the end of the previous month. To this balance, add the total cash deposited during the month and subtract the total cash disbursements. After checking your figures, the result should agree with your checkbook balance at the end of the month. If the result does not agree, you may have made an error in recording a check or deposit. You can find the error by doing the following.
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Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal.
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Adding the deposit amounts in your checkbook. Compare that total with the monthly total in your cash receipt book, if you have one. If the totals do not agree, check the individual amounts to find any errors.
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Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Note all differences in the dollar amounts.
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Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Note all differences in the dollar amounts. Mark the check number in the checkbook as having cleared the bank. After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks.
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Prepare a bank reconciliation. One is illustrated later under Sample Record System.
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Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly.
Table 3. Period of Limitations
IF you... | THEN the period is... | |
1. Owe additional tax and situations (2), (3), and (4), below, do not apply to you | 3 years | |
2. Do not report income that you should report and it is more than 25% of the gross income shown on the return | 6 years | |
3. File a fraudulent return | Not limited | |
4. Do not file a return | Not limited | |
5. File a claim for credit or refund after you filed your return |
Later of: 3 years or
2 years after tax was paid |
|
6. File a claim for a loss from worthless securities or a bad debt deduction | 7 years |
You must decide whether to use a single-entry or a double-entry bookkeeping system. The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control.
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A daily summary of cash receipts, and
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Monthly summaries of cash receipts and disbursements.
Date | Description of Entry | Debit | Credit |
Oct. 5 | Rent expense | 780.00 | |
Cash | 780.00 | ||
There are computer software packages you can use for recordkeeping. They can be purchased in many retail stores. These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting.
If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and return. These records must provide enough detail to identify the underlying source documents.
You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. This documentation must be sufficiently detailed to show all of the following items.
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Functions being performed as the data flows through the system.
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Controls used to ensure accurate and reliable processing.
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Controls used to prevent the unauthorized addition, alteration, or deletion of retained records.
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Charts of accounts and detailed account descriptions.
See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information.
Microfilm and microfiche reproductions of general books of accounts, such as cash books, journals, voucher registers, and ledgers, are accepted for recordkeeping purposes if they comply with Revenue Procedure 81-46 in Cumulative Bulletin 1981-2.
Records maintained in an electronic storage system are accepted for recordkeeping purposes if the system complies with Revenue Procedure 97-22 in Cumulative Bulletin 1997-1.
An electronic storage system is one that either images hardcopy (paper) books and records or transfers computerized books and records to an electronic storage media, such as an optical disk.
You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out.
The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. Table 3 below contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting.
These sample records should not be viewed as a recommendation of how to keep your records. They are intended only to show how one business keeps its records.
This summary is a record of cash sales for the day. It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day.
Henry takes the cash sales entry from his cash register tape. If he had no cash register, he would simply total his cash sale slips and any other cash received that day.
He carries the total receipts shown in this summary for January 3 ($267.80), including cash sales ($263.60) and sales tax ($4.20), to the Monthly Summary of Cash Receipts.
This shows the income activity for the month. Henry carries the total monthly net sales shown in this summary for January ($4,865.05) to his Annual Summary.
To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. He cannot take a deduction for sales tax turned over to the state because he only collected the tax. He does not include the tax in his income.
Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal.
Frequent expenses have their own headings across the sheet. He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage.
Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. If he did, he would record them in the journal, even though he could not deduct them as business expenses.
Henry carries the January total of expenses for materials ($1,083.50) to the Annual Summary. Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc., in the appropriate columns of that summary.
This record shows the following information.
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The number of hours Henry's employee worked in a pay period.
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The employee's total pay for the period.
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The deductions Henry withheld in figuring the employee's net pay.
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The monthly gross payroll.
Henry carries the January gross payroll ($520) to the Annual Summary.
This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. As in the journal, he keeps each major expense in a separate column.
Henry carries the cash receipts total shown in the annual summary ($47,440.95) to Part I of Schedule C (not illustrated). He carries the total for materials ($10,001.00) to Part II of Schedule C.
A business that keeps materials and supplies on hand generally must complete the inventory lines in Part III of Schedule C. However, there are no inventories of materials and supplies in this example. Henry buys parts and supplies on a per-job basis; he does not keep them on hand.
Henry enters annual totals for interest, rent, taxes, and wages on the appropriate lines in Part II of Schedule C. The total for taxes and licenses includes the employer's share of social security and Medicare taxes, and the business license fee. He enters the total of other annual business expenses on the “Other expenses” line of Schedule C.
This worksheet shows the information used in figuring the depreciation allowed on assets used in Henry's business. Henry figures the depreciation using the modified accelerated cost recovery system (MACRS). He purchased and placed in service several used assets that do not qualify for the section 179 deduction or the special depreciation allowance. Depreciation, the section 179 deduction, and the special depreciation allowance are discussed in Publication 946. Henry uses the information in the worksheet to complete Form 4562, Depreciation and Amortization (not illustrated).
Henry reconciles his checkbook with his bank statement and prepares a bank reconciliation for January as follows.
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Henry begins by entering his bank statement balance.
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Henry compares the deposits listed on the bank statement with deposits shown in his checkbook. Two deposits shown in his checkbook— $701.33 and $516.08—were not on his bank statement. He enters these two amounts on the bank reconciliation. He adds them to the bank statement balance of $1,458.12 to arrive at a subtotal of $2,675.53.
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After comparing each canceled check with his checkbook, Henry found four outstanding checks totaling $526.50. He subtracts this amount from the subtotal in (2). The result of $2,149.03 is the adjusted bank statement balance.
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Henry enters his checkbook balance on the bank reconciliation.
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Henry discovered that he mistakenly entered a deposit of $600.40 in his checkbook as $594.40. He adds the difference ($6.00) to the checkbook balance of $2,153.03. There was a $10.00 bank service charge on his bank statement that he subtracts from the checkbook balance. The result is the adjusted checkbook balance of $2,149.03. This equals his adjusted bank statement balance computed in (3).
The only book adjustment Henry needs to make is to the Check Disbursements Journal for the $10 bank service charge. He does not need to adjust the Monthly Summary of Cash Receipts because he correctly entered the January 8 deposit of $600.40 in that record.
1. Daily Summary of Cash Receipts. Summary: This is an example of the daily summary of cash receipts as pertains to the sample in the text. It states:
Date: January 3, 20-- | ||
Cash sales: 263.60 | ||
Sales tax: 4.20 | ||
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Cash on hand | ||
Cash in register (including unspent petty cash) | ||
Coins: 23.75 | ||
Bills: 143.00 | ||
Checks: 134.05 | ||
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Add: Petty cash slips: 17.00 | ||
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Less: Change and petty cash | ||
Petty cash slips: 17.00 | ||
Coins and bills (unspent petty cash): 33.00 | ||
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2. Monthly Summary of Cash Receipts
Year20—MonthJanuary |
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Day | Net Sales | Sales Tax | Daily Receipts | Deposit | ||||||
3 | 263.60 | 4.20 | 267.80 | |||||||
4 | 212.00 | 3.39 | 215.39 | |||||||
5 | 194.40 | 3.10 | 197.50 | 680.69 | ||||||
6 | 222.40 | 3.54 | 225.94 | |||||||
7 | 231.15 | 3.68 | 234.83 | |||||||
8 | 137.50 | 2.13 | 139.63 | 600.40 | ||||||
10 | 187.90 | 2.99 | 190.89 | |||||||
11 | 207.56 | 3.31 | 210.87 | 401.76 | ||||||
12 | 128.95 | 2.05 | 131.00 | |||||||
13 | 231.40 | 3.77 | 235.17 | |||||||
14 | 201.28 | 3.21 | 204.49 | |||||||
15 | 88.01 | 1.40 | 89.41 | 660.07 | ||||||
17 | 210.95 | 3.36 | 214.31 | |||||||
18 | 221.80 | 3.53 | 225.33 | 439.64 | ||||||
19 | 225.15 | 3.59 | 228.74 | |||||||
20 | 221.93 | 3.52 | 225.45 | |||||||
21 | 133.53 | 2.13 | 135.66 | 589.85 | ||||||
22 | 130.84 | 2.08 | 132.92 | |||||||
24 | 216.37 | 3.45 | 219.82 | 352.74 | ||||||
25 | 220.05 | 3.50 | 223.55 | |||||||
26 | 197.80 | 3.15 | 200.95 | |||||||
27 | 272.49 | 4.34 | 276.83 | 701.33 | ||||||
28 | 150.64 | 2.40 | 153.04 | |||||||
29 | 224.05 | 3.56 | 227.61 | |||||||
31 | 133.30 | 2.13 | 135.43 | 516.08 | ||||||
TOTALS | 4,865.05 | 77.51 | 4,942.56 | 4,942.56 | ||||||
3. Check Disbursements Journal
Year 20— Month January | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Day | Paid To | Check # | Amount of Check | Materials | Gross Payroll | Federal Withheld Income Tax | FICA Social Security Reserve | FICA Medicare Reserve | ||||||
3 | Dale Advertising | 74 | 85.00 | |||||||||||
4 | City Treasurer | 75 | 35.00 | |||||||||||
4 | Auto Parts, Inc. | 76 | 203.00 | 203.00 | ||||||||||
4 | John E. Marks | 77 | 214.11 | 260.00 | (20.00) | (16.12) | (3.77) | |||||||
6 | Henry Brown | 78 | 250.00 | |||||||||||
6 | Mike's Deli | 79 | 36.00 | |||||||||||
6 | Joe's Service Station | 80 | 74.50 | 29.50 | ||||||||||
6 | ABC Auto Paint | 81 | 137.50 | 137.50 | ||||||||||
7 | Henry Brown | 82 | 225.00 | |||||||||||
14 | Telephone Co. | 83 | 27.00 | |||||||||||
15 | National Bank (Tax Deposit) | 84 | 119.56 | 40.00 | 32.24 | 7.54 | ||||||||
18 | National Bank | 85 | 90.09 | |||||||||||
18 | Auto Parts, Inc. | 86 | 472.00 | 472.00 | ||||||||||
18 | Henry Brown | 87 | 275.00 | |||||||||||
18 | John E. Marks | 88 | 214.11 | 260.00 | (20.00) | (16.12) | (3.77) | |||||||
21 | Electric Co. | 89 | 175.30 | |||||||||||
21 | M.B. Ignition | 90 | 66.70 | 66.70 | ||||||||||
21 | Baker's Fender Co. | 91 | 9.80 | 9.80 | ||||||||||
21 | Petty Cash | 92 | 17.00 | 15.00 | ||||||||||
21 | Henry Brown | 93 | 225.00 | |||||||||||
25 | Baker's Fender Co. | 94 | 150.00 | 150.00 | ||||||||||
25 | Enterprise Properties | 95 | 300.00 | |||||||||||
25 | State Treasurer | 96 | 12.00 | |||||||||||
25 | State Treasurer | 97 | 65.00 | |||||||||||
3,478.67 | 1,083.50 | 520.00 | -0- | -0- | -0- | |||||||||
Bank service charge | 10.00 | |||||||||||||
TOTALS | 3,488.67 | 1,083.50 | 520.00 | -0- | -0- | -0- | ||||||||
3. Check Disbursements Journal (Continued)
State Withheld Income Tax | Employer's
FICA Tax |
Electric | Interest | Rent | Telephone | Truck/Auto | Drawing | General Accounts | ||||||||||
Advertising | 85.00 | |||||||||||||||||
License | 35.00 | |||||||||||||||||
(6.00) | ||||||||||||||||||
250.00 | ||||||||||||||||||
Holiday Party | 36.00 | |||||||||||||||||
45.00 | ||||||||||||||||||
225.00 | ||||||||||||||||||
27.00 | ||||||||||||||||||
39.78 |
||||||||||||||||||
18.09 | Loan | 72.00 | ||||||||||||||||
275.00 | ||||||||||||||||||
(6.00) | ||||||||||||||||||
175.30 | ||||||||||||||||||
Postage | 2.00 | |||||||||||||||||
225.00 | ||||||||||||||||||
300.00 | ||||||||||||||||||
12.00 | ||||||||||||||||||
Sales Tax | 65.00 | |||||||||||||||||
-0- | 39.78 | 175.30 | 18.09 | 300.00 | 27.00 | 45.00 | 975.00 | 295.00 | ||||||||||
10.00 | ||||||||||||||||||
-0- | 39.78 | 175.30 | 18.09 | 300.00 | 27.00 | 45.00 | 975.00 | 305.00 |
This section describes the help the IRS and other federal agencies offer to taxpayers who operate their own businesses.
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Internet. You can access the IRS website 24 hours a day, 7 days a week, at www.irs.gov to:
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E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
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Check the status of your refund. Click on Where's My Refund. Wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Have your tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount of your refund.
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Download forms, instructions, and publications.
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Order IRS products online.
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Research your tax questions online.
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Search publications online by topic or keyword.
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View Internal Revenue Bulletins (IRBs) published in the last few years.
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Figure your withholding allowances using our withholding calculator.
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Sign up to receive local and national tax news by email.
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Get information on starting and operating a small business.
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Phone. Many services are available by phone.
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Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications, and prior-year forms and instructions. You should receive your order within 10 days.
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Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
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Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustment to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
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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.
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TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
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Refund information. To check the status of your refund, call 1-800-829-4477 and press 1 for automated refund information or call 1-800-829-1954. Wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Have your tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount of your refund.
Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers,
we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to
listen in on or record
random telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
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Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
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Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary, but if you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the address below and receive a response within 10 business days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
CD for tax products. You can order Publication 1796, IRS Tax Products CD, and obtain:
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A CD that is released twice so you have the latest products. The first release ships in January and the final release ships in March.
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Current-year forms, instructions, and publications.
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Prior-year forms, instructions, and publications.
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Bonus: Historical Tax Products DVD - Ships with the final release.
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Tax Map: an electronic research tool and finding aid.
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Tax law frequently asked questions.
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Tax Topics from the IRS telephone response system.
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Fill-in, print, and save features for most tax forms.
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Internal Revenue Bulletins.
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Toll-free and email technical support.
Buy the CD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $25 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD for $25 (plus a $5 handling fee). Price is subject to change.
CD for small businesses. Publication 3207 is a must for every small business owner or any taxpayer about to start a business. The CD includes:
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Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
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All the business tax forms, instructions, and publications needed to successfully manage a business.
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Tax law changes.
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Tax Map: an electronic research tool and finding aid.
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Web links to various government agencies, business associations, and IRS organizations.
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“Rate the Product” survey—your opportunity to suggest changes for future editions.
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A site map of the CD to help you navigate the pages of the CD with ease.
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An interactive “Teens in Biz” module that gives practical tips for teens about starting their own business, creating a business plan, and filing taxes.
An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or by visiting www.irs.gov/smallbiz.
The Small Business Administration (SBA) offers training and educational programs, counseling services, financial programs, and contract assistance for small business owners. The SBA also has publications and videos on a variety of business topics. The following briefly describes assistance provided by the SBA.
Internet. You can visit the SBA website at www.sba.gov. While visiting the SBA website, you can find a variety of information of interest to small business owners.
Phone. Call the SBA Answer Desk at 1-800- UASK-SBA (1-800-827-5722) for general information about programs available to assist small business owners.
Walk-in. You can walk in to a Small Business Development Center or Business Information Center to request assistance with your small business. To find the location nearest you, access the SBA on the Internet or call the SBA Answer Desk.
Other federal agencies also publish publications and pamphlets to assist small businesses. Most of these are available from the Superintendent of Documents at the Government Printing Office. You can get information and order these publications and pamphlets in several ways.
Internet. You can visit the GPO website at www.access.gpo.gov.
Mail. Write to the GPO at the following address.
Superintendent of Documents
U.S. Government Printing Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
Phone. Call the GPO toll-free at 1-866-512-1800 or at 202-512-1800 from the Washington, DC area.
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