Depreciation & Recapture
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
I purchased a computer last year to do online day trading part-time from home for additional income. Can I deduct or depreciate the cost of the computer or internet connection from my investment income?
You may deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Form 1040, Schedule A (PDF), line 22, Itemized Deductions. This would include depreciation on the portion of your computer used for investment purposes, and the portion of your internet access charges used for investment purposes. These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization, to compute the depreciation for the portion of your computer used for investment purposes. Unless the computer is used more than 50% for business purpose (as opposed to investment purposes), you cannot claim section 179 expensing of the computer or claim accelerated depreciation for it. For more information, refer to "Listed Property" in Publication 946 (PDF), How to Depreciate Property.
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I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?
If you have qualified business use of your home and enough gross income from that business use to that entitle you to a depreciation deduction, you are required to reduce your basis in the home by the amount of depreciation allowed (deducted) or allowable (could have been deducted).
Whether you choose to deduct the depreciation on your current return(s) will not matter. For tax purposes, you will still be treated as if you had taken the allowable deduction, and your basis will have to be reduced. For more information, refer to Publication 946 (PDF), How to Depreciate Property, Publication 544 (PDF), Sales and Other Dispositions of Assets, and Publication 587 (PDF), Business Use of Your Home.
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12.3 Small Business/Self-Employed/Other Business: Form W-2, FICA, Medicare, Tips, Employee Benefits
Does a household employer have to pay social security and Medicare for all household employees if only one employee makes more than $1,300 in the year?
No. The employer only has to pay social security and Medicare tax for the employee(s) who receive $1,300 or more in wages for the year. If the amount paid to any employee in a calendar year is less than $1,300, no social security or Medicare tax is owed for that employee. If social security and Medicare tax must be paid, the employee's portion of the social security and Medicare tax should be withheld also, unless the employer chooses to pay both the employer's share and the employee's share.
References:
- Publication 926 (PDF), Household Employer's Tax Guide; Do You Need to Pay Employment Taxes?
- Tax Topic 756, Employment Taxes for Household Employees
12.5 Small Business/Self-Employed/Other Business: Form SS-4 & Employer Identification Number (EIN)
As a sole proprietor, do I need an employer identification number (EIN)?
As a sole proprietor, you would need to obtain an identification number if either of the following apply: (1) you pay wages to one or more employees, or (2) you file pension or excise tax returns. If these conditions do not apply, your social security number is your taxpayer identification number.
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Is an employer identification number (EIN) required if the husband and wife are the only persons working in the business?
If both of you carry on a business together and share in the profits and losses, you are a partnership and each would receive a Form 1065, Schedule K-1 (PDF) that is important for determining your self-employment income. If you work for your spouse, you should receive a Form W-2, showing taxes withheld and the owner spouse would claim the wages paid to you as a deduction. Both a partnership and a sole proprietor with an employee must have an EIN.
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Does a small company need a tax ID number?
A sole proprietor who does not have any employees and who does not file any excise or pension plan tax returns is the only business person who does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.
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How do I apply for an employer identification number (EIN)?
To obtain an EIN, you must complete Form SS-4 (PDF), Application for Employer Identification Number. After you have completed the Form SS-4, you can get the EIN by mail, FAX, or by phone. The instructions for Form SS-4 provide both an IRS service center address and a phone number to apply under the Tele-TIN program. For more information, refer to Tax Topic 755, Employer Identification Number (EIN) - How to Apply, or Publication 1635 (PDF), Understanding Your EIN.
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I would like to submit Form SS-4, Application for Employer Identification Number, by fax. What is the fax number?
You can find the fax telephone numbers by calling the IRS at 1-800-829-0922 or refer to Tax Information for Business. This can be found on the IRS website www.irs.gov under Businesses.
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Under what circumstances am I required to change my employer identification number (EIN)?
If you already have an EIN, and the organization or ownership of your business changes, you may need to apply for a new number. Some of the circumstances under which a new number is required are as follows:
- An existing business is purchased or inherited by an individual who will operate it as a sole proprietorship
- A sole proprietorship changes to a corporation or a partnership,
- A partnership changes to a corporation or a sole proprietorship,
- A corporation changes to a partnership or a sole proprietorship, or
- An individual owner dies, and the estate takes over the business.
This list is not all inclusive. Please refer to the website www.irs.gov under Business, then Employer ID Numbers.
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If I have an employer identification number (EIN) and do not need it, how can I revoke the EIN?
If you do not need to retain your EIN and wish the EIN to be revoked, you can write to the Entity Control Unit at the IRS Service Center where you would normally file your returns and make that request. Make sure that either the President or other Principal Officer signs the statement, if it is a corporation, or a managing member, if it is a limited liability company, or a general partner, if it is a partnership.
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Do businesses have to obtain the taxpayer identification number (TIN) from vendors and keep it somewhere on file?
In general, businesses are required to obtain the TIN from vendors if they are required to file any return, document or other statement that calls for the taxpayer identification numbers (TINs) of other taxpayers. Form W-9 (PDF), Request for Taxpayer Identification Number and Certification, can be used to make the request. The business should also maintain the verification of these numbers in their records.
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12.7 Small Business/Self-Employed/Other Business: Income & Expenses
How do you distinguish between a business and a hobby?
Since hobby expenses are deductible only to the extent of hobby income, it is important to distinquish hobby expenses from expenses incurred in an activity engaged in for profit. In making this distinction, all facts and circumstances with respect to the activity are taken into account and no one factor is determinative. Among the factors which should normally be taken into account are the following:
- Whether you carry on the activity in a businesslike manner
- Whether the time and effort you put into the activity indicate you intend to make it profitable
- Whether you depend on income from the activity for your livelihood
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
- Whether you change your methods of operation in an attempt to improve profitability
- Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
- Whether you were successful in making a profit in similar activities in the past
- Whether the activity makes a profit in some years, and how much profit it makes
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity
Additional information on this topic is available in section 1.183-2 (b) of the federal tax regulations.
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I use my home for business. Can I deduct the expenses?
If you use part of your home exclusively and regularly, as your principal place of business or as a place where you meet or deal with customers, you may deduct expenses for use of part of your home. If you deduct your business expenses on Form 1040, Schedule C (PDF), you must figure your deduction on Form 8829 (PDF), Expenses for Business Use of Your Home, and attach it to Form 1040 with Schedule C. For more information refer to Tax Topic 509, Business Use of Home, or Publication 587 (PDF), Business Use of Your Home (Including Use by Day-Care Providers).
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I use part of my living room as an office. Can I take a deduction for business use of my home?
In general, if you use a part of your home for both personal and business purposes, no expenses for business use of that part are deductible. Exceptions apply for qualified day-care providers and for the storage of inventory or product samples used in your business. For additional information on business use of your home, refer to Tax Topic 509, or Publication 587 (PDF), Business Use of Your Home (Including Use by Day-Care Providers).
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12.9 Small Business/Self-Employed/Other Business: Starting or Ending a Business
I am starting a small business. What assistance can IRS give me?
If you are starting or already have a small business and need information on taxes, recordkeeping, accounting practices, completing Federal business and employment tax returns, and meeting other Federal tax obligations, there is help available. Much of the assistance is free. The service is called Small Business Tax Education Program, or STEP. Go to Around the Nation for seminars in your area or check out Tax Info For Business on the IRS web site. You can find out more about this program for small business by referring to Publication 1066 (PDF), Small Business Tax Workshop, or Tax Topic 103 , Small Business Tax Education Program (STEP).
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I want to start my own business. Do I need a business license?
The IRS does not require or issue business licenses. Whether or not the particular type of business or service you provide is regulated by licensing requirements is a question for your state, city, or local government agencies. To access the state you need to direct your question to, please go to our Alphabetical State Index.
How do I find out about whether or not my business needs to collect sales tax?
Your question is a state tax question. Your state revenue department should provide information regarding sales tax to you. To access the state you need to direct your question to, please go to our Alphabetical State Index.
What forms do you use when you have a small business?
The annual income tax forms that you would use to report you business activity to the IRS would depend on the type of entity you operate your business under.
- Sole Proprietorships use Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ (PDF), Net Profit from Business and Form 1040, Schedule SE (PDF), Self-employment Tax.
- Partnerships use Form 1065 (PDF), U.S. Partnership Return of Income and Schedule K-1.
- Corporations use Form 1120 (PDF), U.S. Corporation Income Tax Return.
- S Corporations use Form 1120S (PDF), U.S. Income Tax Return for an S Corporation.
- Limited Liability Companies use one of the choices above according to their structure. If you hired employees to work in your business, if you are liable for excise tax, or heavy highway vehicle use tax, other forms and publications would come into play.
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If you start your own business and send in your quarterly estimated income taxes, must you also file a personal income tax return at the end of the year?
If you have $400 or more of net profit from your business, you will have to file a Form 1040 with a Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship) and a Form 1040, Schedule SE (PDF), Self-employment Tax.
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I just started a small business and want to know if I have to file my income taxes quarterly or at the end of the year?
For income taxes you will likely file annually, but you may have to pay quarterly. As a self-employed individual, you must determine if you are liable for making estimated taxes which are paid on a quarterly basis. The estimated tax worksheet is Form 1040ES (PDF), Estimated Tax for Individuals. When you file your income tax return, you include the income from the business on that return. The forms to be filed are the Form 1040 (PDF), U.S. Individual Income Tax Return, Form 1040, Schedule C (PDF), Profit or Loss from Business, and Form 1040, Schedule SE (PDF), Self-employment Tax. You may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business.
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