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:

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.

Other payee.   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN.

  To get the payee's SSN or EIN, use Form W–9, Request 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 at www.irs.gov.

  

If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. For information on backup withholding, see the Form W–9 instructions and the General Instructions for Forms 1099, 1098, 5498, and W–2G.

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.

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.

Use Schedule SE (Form 1040) to figure your SE tax. For more information, see Publication 533, Self-Employment Tax.

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.

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.

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.

For more information on excise taxes, see Publication 510.

You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return.

Making deposits with coupons.   Mail or deliver deposits with completed deposit coupons to an authorized financial institution unless you make the deposits electronically, as discussed earlier.

  Generally, a mailed deposit will be considered timely if the taxpayer establishes that it was mailed in the United States at least 2 days before the due date. You may be charged a penalty for not making deposits when due, unless you have reasonable cause. See Penalties, later.

  

To help ensure proper crediting of your account, include the following on your check or money order.

• Your EIN.

• Type of tax.

• Tax period for the payment.

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 capital expenses.

You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Other qualifying start-up costs can be recovered through amortization. This means you deduct them in equal amounts over a period of 60 months or more. If you do not choose to amortize these start-up costs, you generally cannot recover them until you sell the business or otherwise go out of business.

For more information on business start-up costs, see chapter 9 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.

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.

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.

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.

Standard mileage rate.   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. You can use the standard mileage rate for a vehicle you own or lease. The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. It is announced annually by the IRS. To figure your deduction, multiply your business miles by the standard mileage rate for the year.

  

Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes.

Everyone in business must keep records. Good records will help you do the following.

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.

Supporting Documents

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.

Gross receipts.   Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents that show gross receipts include the following.

• Cash register tapes.

• Bank deposit slips.

• Receipt books.

• Invoices.

• Credit card charge slips.

• Forms 1099–MISC.

Purchases.   Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following.

• Canceled checks.

• Cash register tape receipts.

• Credit card sales slips.

• Invoices.

These records will help you determine the value of your inventory at the end of the year. See Publication 538 for information on methods for valuing inventory.

Expenses.   Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following.

• Canceled checks.

• Cash register tapes.

• Account statements.

• Credit card sales slips.

• Invoices.

• Petty cash slips for small cash payments.

  

A petty cash fund allows you to make small payments without having to write checks for small amounts. Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment.

Travel, transportation, entertainment, and gift expenses.   Specific recordkeeping rules apply to these expenses. For more information, see Publication 463.

Employment taxes.   There are specific employment tax records you must keep. For a list, see Publication 15.

Assets.   Assets are the property, such as machinery and furniture you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets. Your records should show the following information.

• When and how you acquired the asset.

• Purchase price.

• Cost of any improvements.

• Section 179 deduction taken.

• Deductions taken for depreciation.

• Deductions taken for casualty losses, such as losses resulting from fires or storms.

• How you used the asset.

• When and how you disposed of the asset.

• Selling price.

• Expenses of sale.

  The following documents may show this information.

• Purchase and sales invoices.

• Real estate closing statements.

• Canceled checks.

What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. These include account statements prepared for the financial institution by a third party. These account statements must be highly legible. The following table lists acceptable account statements.

IF payment is by...	THEN the statement must show the...
Check	Check number. Amount. Payee's name. Date the check amount was posted to the account by the financial institution.
Electronic funds transfer	Amount transferred. Payee's name. Date the transfer was posted to the account by the financial institution.
Credit card	Amount charged. Payee's name. Transaction date.

  

Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost.

Recording Business Transactions

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.

• Business checkbook.

• Daily summary of cash receipts.

• Monthly summary of cash receipts.

• Check disbursements journal.

• Depreciation worksheet.

• 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.

Business checkbook.   One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account.

  The business checkbook is your basic source of information for recording your business expenses. You should deposit all daily receipts in your business checking account. You should check your account for errors by reconciling it. See Reconciling the checking account, later.

  Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. You should also note on the deposit slip the source of the deposit and keep copies of all slips.

  You should make all payments by check to document 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 write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment.

  

Use the business account for business purposes only. Indicate the source of deposits and the type of expense in the checkbook.

Reconciling the checking account.   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. The statement balance may not agree with the balance in your checkbook and books if the statement:

• Includes bank charges you did not enter in your books and subtract from your checkbook balance, or

• Does not include deposits made after the statement date or checks that did not clear your account before the statement date.

  By reconciling your checking account, you will:

• Verify how much money you have in the account,

• Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and

• Correct any errors in your bank statement, checkbook, and books.

  

You should reconcile your checking account each month.

  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.

1. 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.

2. 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.

  If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct.

  When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Many banks print a reconciliation worksheet on the back of the statement.

  To reconcile your account, follow these steps.

1. Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Note all differences in the dollar amounts.

2. 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.

3. Prepare a bank reconciliation. One is illustrated later under Sample Record System.

4. Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly.

At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. If you still have differences, check the previous steps to find the errors.

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 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.

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.

5. Annual Summary (Page 22)

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.

7. Bank Reconciliation (Page 23)

Henry reconciles his checkbook with his bank statement and prepares a bank reconciliation for January as follows.

1. Henry begins by entering his bank statement balance.

2. 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.

3. 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.

4. Henry enters his checkbook balance on the bank reconciliation.

5. 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.

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Daily summary cash receipts

2. Monthly Summary of Cash Receipts

	Year20—MonthJanuary
	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

Employee compensation record, annual summary, and depreciation worksheet

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Bank reconciliation

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.

You can also reach us using File Transfer Protocol at ftp.irs.gov.

For help with transmission problems, call 703–487–4608.

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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 sometimes listen in on or record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

Buy the CD-ROM from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders for $22 (no handling fee) or call 1–877–233–6767 toll-free to buy the CD-ROM for $22 (plus a $5 handling fee). The first release is available in early January and the final release is available in late February.

It is available in early April. You can get a free copy by calling 1–800–829–3676 or by visiting the website at 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.

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.