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Publication 583 (Rev Department of the Treasury Contents Internal Revenue Service Introduction ........................................................ 1 What New Business Owners Need To Know .. 1 Publication 583 (Rev. January 1999) Forms of Business ............................................. 2 Cat. No. 15150B Identification Numbers ...................................... 3 Employer Identification Number (EIN) ............. 3 Starting a Payee's Identification Number ......................... 3 Tax Year .............................................................. 4 Business and Accounting Method ............................................ 4 Business Taxes .................................................. 4 Income Tax ...................................................... 5 Keeping Self-Employment Tax ...................................... 5 Employment Taxes .......................................... 5 Excise Taxes ................................................... 7 Records Depositing Taxes ............................................. 7 Information Returns ........................................... 8 Penalties .............................................................. 8 Business Expenses ........................................... 8 Business Start-Up Costs ................................. 9 Depreciation ..................................................... 9 Business Use of Your Home ........................... 9 Car and Truck Expenses ................................. 9 Recordkeeping ................................................... 10 Why Keep Records? ........................................ 10 Kinds of Records To Keep .............................. 10 How Long To Keep Records ........................... 14 Sample Record System ................................... 14 Where To Go for Help ........................................ 22 Index .................................................................... 24 Introduction This publication provides basic federal tax information for people who are starting a business. It also provides information on keeping records and illustrates a recordkeeping system. Throughout this publication we refer you to other IRS publications and forms where you will find more infor- mation. In addition, you may want to contact other government agencies, such as the Small Business Ad- ministration (SBA). See page 22 to find out how to get more information. Get forms and other information faster and easier by: COMPUTER • World Wide Web ➤ www.irs.ustreas.gov What New Business Owners • FTP ➤ ftp.irs.ustreas.gov • IRIS at FedWorld ➤ (703) 321-8020 Need To Know FAX As a new business owner, you need to know your fed- • From your FAX machine, dial ➤ (703) 368-9694 eral tax responsibilities. Table 1 on page 2 can help you See Where To Go for Help in this publication. learn what those responsibilities are. Ask yourself each question listed in the table, then see the related dis- cussion to find the answer. 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 on the page shown in the right column. Z What Must I Know?Z Where To Find the Answer Which form of business will I use? See Forms of Business below. Will I need an employer identification number (EIN)? See Identification Numbers on page 3. Do I have to start my tax year in January? Or may I See Tax Year on page 4. start it in any other month? What method can I use to account for my income and See Accounting Method on page 4. expenses? What kinds of federal taxes will I have to pay? See Business Taxes on page 4. How should I pay my taxes? What must I do if I have employees? See Employment Taxes on page 5. What forms must I file? See Table 2 on page 6 and Information Returns on page 8. Are there penalties if I do not pay my taxes or file my See Penalties on page 8. returns? What business expenses can I deduct on my federal See Business Expenses on page 8. income tax return? What records must I keep? How long must I keep See Recordkeeping on page 10. them? In addition to knowing about federal taxes, you need Sole proprietorships. A sole proprietorship is an un- to make some basic business decisions. Ask yourself: incorporated business that is owned by one individual. It is the simplest form of business organization to start • What are my financial resources? and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal li- • What products and services will I sell? abilities and you undertake the risks of the business for • How will I market my products and services? all assets owned, whether or not used in the business. You include the income and expenses of the business • How will I develop a strategic business plan? on your own tax return. More information. For more information on sole • How will I manage my business on a day-to-day proprietorships, see Publication 334, Tax Guide for basis? Small Business. But if you are a farmer, see Publication • How will I recruit employees? 225, Farmer's Tax Guide. The Small Business Administration (SBA) is a federal agency that can help you answer questions such as Partnerships. A partnership is the relationship existing those listed above. For information on how to contact between two or more persons who join to carry on a the SBA, see page 23. trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., Forms of Business from its operations, but it does not pay income tax. In- When beginning a business, you must decide which stead, it “passes through” any profits or losses to its form of business to use. Legal and tax considerations partners. Each partner includes his or her share of the enter into this decision. Only tax considerations are partnership's items on his or her tax return. discussed in this publication. More information. For more information on part- The most common forms of business are the sole nerships, see Publication 541, Partnerships. proprietorship, partnership, and corporation. Your form of business determines which income Corporations. In forming a corporation, prospective TIP tax return form you have to file. SeeTable 2 shareholders transfer money, property, or both, for the on page 6 to find out which form you have to corporation's capital stock. A corporation generally file. takes the same deductions as a sole proprietorship to Page 2 figure its taxable income. A corporation can also take 1) Have employees, special deductions. The profit of a corporation is taxed to the corporation 2) Have a Keogh plan, when earned, and then is taxed to the shareholders 3) Operate your business as a corporation or partner- when distributed as dividends. However, shareholders ship, or cannot deduct any loss of the corporation. More information. For more information on corpo- 4) File returns for: rations, see Publication 542, Corporations. a) Employment taxes, S corporations. An eligible domestic corporation can b) Excise taxes, or avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as c) Alcohol, tobacco, or firearms taxes. an S corporation. An S corporation generally is exempt from federal income tax other than tax on certain capital How to get an EIN. You can get an EIN either through gains and passive income. Its shareholders include on the mail or by telephone. But first you must fill out Form their tax returns their share of the corporation's sepa- SS–4, Application for Employer Identification Number. rately stated items of income, deduction, loss, and You can get Form SS–4 at SSA offices or by calling the credit, and their share of nonseparately stated income IRS at 1–800–829–3676. or loss. When to apply. You should apply for an EIN early More information. For more information on S cor- enough to receive the number by the time you must file porations, see the instructions for Form 2553, Election a return or statement or make a tax deposit. If you apply by a Small Business Corporation, and for Form 1120S, by telephone, you can get an EIN immediately. If you U.S. Income Tax Return for an S Corporation. apply by mail, file Form SS–4 at least 4 to 5 weeks before you need an EIN. If you do not receive your EIN by the time a return is due, file your return anyway. Write “Applied for” and Identification Numbers the date you applied for the number in the space for the You must have a taxpayer identification number so that EIN. the IRS can process your returns. The two most com- mon kinds of taxpayer identification numbers are the social security number (SSN) and the employer iden- More than one EIN. You should have only one EIN. tification number (EIN). If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center • An SSN is issued by the Social Security Adminis- where you file your return. Give the numbers you have, tration (SSA) and is in the following format: the name and address to which each was assigned, 000–00–0000 and the address of your main place of business. The IRS will tell you which number to use. • An EIN is issued by the IRS and is in the following format: 00–0000000 More information. For more information about EINs, You must include your
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