Information for Sole-Proprietors
What is a Business
A trade or business is generally an activity carried on to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need to make ongoing efforts to further the interests of your business.
You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business may be self-employment. Publication 334, Tax Guide for Small Business
An accounting method is a set of rules used to determine when and how income and expenses are reported. Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item.
You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. After that, if you want to change your accounting method, you must generally get IRS approval.
Kinds of methods. Generally, you can use any of the following accounting methods.
- Cash method.
- An accrual method.
- Special methods of accounting for certain items of income and expenses.
- Combination method using elements of two or more of the above.
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.
Business and personal items. You can account for business and personal items under different accounting methods. For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items.
Two or more businesses. If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. They are separate and distinct only if you maintain complete and separate books and re-cords for each business.
Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases.
Income-Under the Cash Method
Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. If you receive property or services you must include their fair market value in income.
Constructive receipt: You have constructive receipt of income when an amount is credited to youraccount or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it.
Delaying receipt of income: You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. You must report the income in the year the property is received or made available to you without restriction.
Debts paid by another person or canceled: If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. If you receive income in this way, you constructively receive the income when the debt is canceled or paid.
Expenses-Under the Cash Method
Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. This includes business expenses for which you contest liability. However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs (uniform capitalization rules).
Expenses paid in advance: You can deduct an expense you pay in advance only in the year to which it applies.
Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.
Income-Under the Accrual Method
General Rule: Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy.
The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services.
Estimated income: If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination.
Change in payment schedule for services: If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference.
Advance payments for services: Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. However, you cannot postpone including any payment beyond that tax year.
Advance payments for sale: Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. An agreement includes a gift certificate that can be redeemed for goods. Treat amounts that are due and payable as amounts you received. You generally include an advance payment in income for the tax year in which you receive it.
Expenses-Under the Accrual Method
Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply.
1. The all-events test has been met. The test has been met when:
- All events have occurred that fix the fact of liability, and
- The liability can be determined with reasonable accuracy.
2. Economic performance has occurred.
Economic performance: You generally cannot deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred.
Keeping inventories: When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. (See more information under Combination Method-Inventories below)
Special rule for related persons: You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person’s gross income. Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants.
Combination Method: You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. However, the following restrictions apply.
- If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. You can use the cash method for all other items of income and expenses.
- If you use the cash method for figuring your income, you must use the cash method for reporting your expenses.
- If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income.
- If you use a combination method that includes the cash method, treat that combination method as the cash method.
Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. However, certain qualifying businesses (defined next) can use the cash method of accounting even if they produce purchase or sell merchandise.
Qualifying Taxpayer Defined:
- Your average annual gross receipts for each prior tax year ending on or after December 31, 1998, is less than $1,000,000. The average annual gross receipts is figured by adding the gross receipts for that year and the 2 preceding tax years and dividing the total by 3.
- Your business is not defined as a tax shelter.
Materials and supplies that are not incidental. If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year.
Items included in inventory. If you are required to account for inventories, include the following items when accounting for your inventory.
- Merchandise or stock in trade.
- Raw materials.
- Work in process.
- Finished products.
- Supplies that physically become a part of the item intended for sale.
Valuing inventory. You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items.
Inventory valuation rules cannot be the same for all kinds of businesses. The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Your inventory practices must be consistent from year to year.
Uniform Capitalization Rules
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for the production or resale activities. Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.
Activities subject to the uniform capitalization rules. You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit.
- Produce real or tangible personal property.
- Acquire property for resale (sell inventory).
- These rules do not apply to the following property.
- Your indirect costs of producing the property are $200,000 or less.
- You use the cash method of accounting and do not account for inventories.
- Personal property you acquire for resale if your average annual gross receipts are $10 million or less.
- Property you produce (manufacture) if you meet either of the following conditions.
There are special methods of accounting for certain items of income or expense. These include the following.
- Amortization, discussed in chapter 8 of Publication 535, Business Expenses.
- Bad debts, discussed in chapter 10 of Publication 535.
- Depletion, discussed in chapter 9 of Publication 535.
- Depreciation, discussed in Publication 946, How to Depreciate Property.
- Installment sales, discussed in Publication 537, Installment Sales.
This section primarily explains business income and how to account for it on your tax return and what items are not considered income.
If there is a connection between any income you receive and your business, the income is business income. A connection exists if it is clear the payment of income would not have been made if you did not have the business.
You can have business income even if you are not involved in the activity on a regular full-time basis. Income from work you do on the side in addition to your regular job can be business income.
You must report on your tax return all income you receive from your business unless it is excluded by law. In most cases, your business income will be in the form of cash, checks, and credit card charges. But business income can be in other forms, such as property or services.
Bartering: Bartering is an exchange of property or services. You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else.
Items that are NOT Income
- Appreciation: Increases in value of your property are not income until realize through sale or other taxable disposition.
- Exchanges of Like Kind Property: If you exchange your business property solely for property of a like kind to be used in your business, no gain or loss is recognized. This does not apply to inventory.
- Sales Taxes: State and local sales taxes imposed on the buyer are not income. They still need to be accounted for property, however.
Accounting for Your Income
Income paid to a third party is income taxable to you if earned by you. You cannot avoid tax by having the income paid to a third party.
Cash discounts on expenses can be accounted for by either reducing the total amount of the purchase or by using a discount income account as long as the chosen method is applied consistently every year.
Trade discounts that reduce the amount customers owe to you are netted against income on the Schedule C.
Insurance proceeds or another type of reimbursement for a casualty or theft loss must be subtracted from any calculated loss. You cannot deduct the reimbursed part of a casualty or theft loss.
Advance payment for sales (including gift certificates) are generally included in income in the year which you receive it. Exceptions to that rule are allowed if you keep detailed records about gift certificates sold and redeemed and your accounting method is accrual or combination.
Sale of Business Assets
The sale of business assets is a reportable transaction. The sales price is reduced by any basis remaining after current and prior year deductions (depreciation). Any gain may be treated several different ways. If gain is the result of depreciation taken the gain is taxed as ordinary income. If there is gain greater than the prior depreciation extra gain is taxed as capital gains. If some of the gain is the result of taking a Section 179 deduction in a prior year and the asset is still within its useful life the portion of the gain related to Section 179 may be included on the owner’s Schedule C and subject to self-employment taxes as well as income taxes.
Insurance proceeds or any other reimbursement must be reported when calculating business gains or losses related to thefts and casualties. If the loss is related to business personal or real property, for tax purposes, such events are treated like a sale to an unrelated third party and any remaining basis is deducted against the sales proceeds to calculate the overall gain or loss.
Cost of Goods Sold
If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts. However, to determine these costs, you must value your inventory at the beginning and end of each tax year.
Beginning Inventory: Inventory at the beginning of the year is generally equal to the closing inventory from the end of the prior year. Any differences must be explained.
Donation of Inventory: If you contribute inventory, the amount you can claim as a contribution deduction is the small of its fair market value on the day you contributed it or its basis. You must remove the amount of your contribution deduction from your inventory and reduce your cost of goods sold.
Purchases: If you are a merchant, use the cost of all merchandise you bought for sale. If you are a manufacturer or producer, this is the cost of all raw materials or parts purchased for manufacture into a finished product. Purchase returns and allowances reduce total purchases.
Merchandise withdrawn from sale: If you withdraw merchandise for your personal or family use, use must exclude this cost from the total amount of merchandise you bought for sale. This amount reduces purchase and increases owner drawing.
Cost of Labor: Labor costs are usually an element of cost of goods sold only in a manufacturing business. In a manufacturing business labor costs include both direct and indirect labor costs based on the relationship to the manufacturing process.
Materials and supplies: Materials and supplies used in manufacturing goods are charged to cost of goods sold. Those that are still on hand at the end of the year are treated as deferred charges (supplies inventory) and are deductible when they are used.
Overhead Expenses: The overhead expenses you incur as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold.
Ending Inventory: Ending inventory is the value of your closing inventory, including the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses. Your ending inventory will usually become your beginning inventory on your next tax year. The dollar amount of ending inventory will reduce your total cost of goods sold deductible in the current year as it represents items you had not sold during the year and have available to sell in the future.
You can deduct the costs of operating your business. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
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. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
Bad Debts: If someone owes you money related to the operation of your business, which you cannot collect, you have a bad debt. You can take a bad debt deduction for these amounts only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year.
Car and Truck Expenses: Please refer to Deducting Auto Expenses under General Tax Information under Articles of Interest at www.cynthiaharelsoncpa.com
Employees’ Pay: You can generally deduct the pay you give your employees for the services they perform for your business. The pay may be in cash, property, or services. To be deductible, your employees’ pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. In addition it must be both reasonable and for services performed. As a sole proprietor you cannot deduct your own salary or personal withdrawals as you are not considered to be an employee of the company.
Fringe and Employee Benefits: Certain fringe and employee benefits are not includible in the employees’ gross pay, but are deductible to the company. Included but not limited to:
- Accident and health plans
- Retirement and other qualified employee benefit programs
- Educational assistance
- Dependent care assistance
- Group-term life insurance coverage
- Cafeteria plans
Other fringe benefits may be includable in the employees’ gross pay. Including but not limited to:
- Memberships in country clubs or other social clubs
- Tickets to entertainment or sporting events
The tax treatment of each type of fringe or employee benefit has specific rules, and if you have any questions about the types of benefits you provide or would like to provide we encourage you to give us a call.
Insurance: You can generally deduct premiums you pay for insurance related to your business except for the following:
- Self-insurance reserve funds are not deductible, but actual losses may be deductible.
- Loss of earnings. You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability but overhead insurance that pays for business overhead expenses you have during long periods of disability cause by an injury or sickness are generally deductible.
- Life insurance or annuities. You generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if the business owner is directly or indirectly a beneficiary regardless of who the policy covers.
- Life insurance to secure a loan. Premiums for a policy on the business owner’s life to get or protect a business loan are not a business expense.
- Health insurance for the owner may be deductible as Self-Employed Health Insurance on the front of form 1040, but are not included as a business deduction on Schedule C.
Interest: You can generally deduct all interest on debts related to your business. Interest relates to your business if you use the proceeds of the loan for a business expense. It must meet the following requirements as well:
- You are legally liable for the debt.
- Both you and the lender intend the debt be repaid.
- You and the lender have a true debtor-creditor relationship.
If a loan is part business and part personal, you must divide the interest between the personal part and the business part.
Taxes: You can deduct various federal, state, local, and foreign taxes directly attributable to your business including but not limited to:
- State tax on gross income (not net income) directly attributable to your business are deductible on Schedule C. (Oregon income taxes allocated to your business income are NOT deductible on Schedule C)
- Employment taxes paid and an employer are deductible on Schedule C.
- Self-employment taxes for the owner are not deductible on Schedule C, but are deductible on line 27 of form 1040.
- Personal property taxes imposed by a state or local government on personal property (equipment) used in your business is deductible on Schedule C.
- Real estate taxes paid on business property are deductible on Schedule C.
- Sales tax paid on services or purchases should be included as part of the cost of the service or property and treat it the same way as the expense it is related to.
- Excise taxes on gasoline, diesel fuel, and other motor fuels used in your business are generally included as part of the cost of the fuel, however you may qualify for a credit or refund for federal excise tax you paid on fuels used for certain purposes.
Travel and Entertainment Expenses:
Travel Expenses are ordinary and necessary expenses of traveling away from your home for your business. You are traveling away from home if both of the following conditions are met:
- Your duties require you to be away from the general area of your tax home substantially longer than an ordinary day’s work.
- You need to get sleep to meet the demands of your work while away from home.
If these conditions are met you may be able to deduct the following (but not limited to) expenses:
- Transportation costs between your home and your business destination.
- Taxi, commuter bus, and limousine taken between your transportation destination and your hotel, or between the hotel and your work location while away from home.
- Meals and lodging related to the trip
- Cleaning including dry cleaning and laundry while on your business trip
- Tips related to allowed expenses
Tax Home is generally your regular place of business, regardless of where you maintain your family home. It includes the entire city or general area in which your business is located. If you are unsure about what would be your tax home versus your residence, give us a call to discuss.
Reimbursing Your Employees for Travel and Entertainment Expenses: You can generally deduct the amount you reimburse your employees for travel and entertainment expenses. The treatment of the reimbursement depends in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Under a nonaccountable plan all reimbursements are to be included in an employee’s W-2 and subject to payroll taxes which can add costs to both you and your employee. If you reimburse these types of expenses give us a call to discuss these differences.
Meals Expenses: You can deduct the cost of meals in either of the following situations:
- It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business (see the rules under Travel Expenses above)
- The meal is business-related entertainment (see the rules under Entertainment Expenses below)
Entertainment Expenses: Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the following tests:
- Directly-related test
- The entertainment took place in a clear business setting, or
- The main purpose of the entertainment was the active conduct of business, and
- You did engage in business with the person during the entertainment period, and
- You had more than a general expectation of getting income or some other specific business benefit.
- Associated test:
- The entertainment is associated with your trade or business and
- The entertainment directly precedes or follows a substantial business discussion.
You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. You cannot deduct expenses that are lavish or extravagant under the circumstances. Like meals, entertainment expenses are subject to a 50% limitation on deductibility.
Further reading available in IRS Publication 463, Travel, Entertainment, Gift and Car Expenses.
Business Use of Your Home:
You may be entitled to deduct a portion of your expenses for the cost and upkeep of your home subject to certain requirements. To qualify to claim expenses for business use of your home, you must meet the following tests:
- You use of the business part of your home must be:
- For your business, and
- The business part of your home must be one of the following:
- Your principal place of business
- A place where you meet or deal with patients, clients, or customers in the normal course of your business, or
- A separate structure (not attached to your home) you use for a purpose related to your business.
Exclusive Use: To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. There are two exceptions to this requirement if your home is used in either of the following two ways:
- For the storage of inventory or product samples
- As a daycare facility.
Regular Use: To qualify you must use a specific area of your home for business on a continuing basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that are for any other purpose.
Principal Place of Business: You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. To determine your principal place of business, you must consider all the facts and circumstances.
Your home office will qualify as your principal place of business if it meets the following requirements:
- You use it exclusively and regularly for administrative or management activities of your business.
- You have no other fixed location where you conduct substantial administrative or management activities of your business.
Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors:
- The relative importance of the activities performed at each location.
- If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location.
If you are considering a deduction for an office in the home it might be advisable to come and speak with us in advance to make sure all of the qualifying rules have been met.
Further reading available in IRS Publication 587 Business Use of Your Home
Other Deductible Business Expenses:
May include (but aren’t limited to):
- Bank fees
- Donations to business organizations
- Education expenses
- Energy efficient commercial buildings deduction expense
- Impairment-related expenses
- Licenses and regulatory fees
- Repairs that keep your property in a normal efficient operating condition
- Subscriptions to trade or professional publications
Expenses you cannot deduct as a business expense:
- Bribes and kickbacks
- Charitable contributions
- Demolition expenses or losses
- Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs
- Lobbying expenses
- Penalties and fines you pay to a governmental agency because you broke the law
- Personal, living, and family expenses
- Political contributions
- Repairs that add to the value of your property or significantly increase its life, these costs are capitalizable (added to the depreciable basis)
Further reading available in IRS Publication 535, Business Expenses
All that being said about business expenses it is necessary to say the definition of a business expense first must qualify as “ordinary and necessary”. The determination of what is ordinary and necessary for your business rests with the owner. The tax preparer may question some of the transaction categorizations, but ultimately the buck stops at the owner’s door. The information you provide to your tax preparer is assumed to be categorized as you intend it to be. In determining what is a qualified business expense it important to also be reasonable. If you have given consideration your expenses, can substantiate the business relationship and justify your conclusion in relation to the general rules noted above it is likely the tax authorities will allow it.
If you have questions about how you are classifying items we would be happy to have a conversation, preferably prior to the end of the calendar year.
Please do not use your business categories for personal (non-business) expenses. We do not review all transactions in your records to determine what should and shouldn’t be there. Do no rely on us to do your categorizing; we only see a small snippet of information related to a transaction in your records if we look at a particular item. We can’t be relied on to know the full detail, and as a result will err on the side of conservative and eliminate any item that we feel is questionable. If you need to run personal expenses through your business books please use specific categories for this that are not used for business items.
Everyone in business must keep records. Good records will help you monitor the progress of your business, identify the source of receipts, keep track of deductible expenses and support the items reported on your tax returns. Your business records must be available for inspection by the IRS in the event the IRS examines your return.
There are many forms of books and records and the one you choose should be suitable for your needs, and give you the information necessary to run your business. In order to accurately prepare your tax return your records must be complete and accurate.
To assess the completeness and accuracy of your amounts a tool used is to reconcile your bank account. This will validate all inflows and outflows through your bank accounts are accounted for. It is recommended you also reconcile your credit card accounts for the same reason. It will help assure the detail included in your records is complete, however, it will be necessary for the owner to review the transactions to verify the accuracy of the detail in each income and expense category (account). If you are using a software package such as Quicken or QuickBooks, review the detail included in each account. The information on the report is only as good as the information that went into the system.
If your business handles cash either as income or as payment for expenses you will need to take extra care to see these transactions are properly entered into your system.
Expense category names are very flexible. Generally the number of accounts necessary will depend on the information the owner wishes to get from the system. Other than a few specific items such as equipment purchased, meals and entertainment, and travel, most items can be grouped however the owner would prefer. Consistency in the categorization of expenses will also help with ensuring complete and accurate records.
If you provide your tax preparer with a copy of a Quicken or QuickBooks file they will check to see that bank accounts and credit card accounts are reconciled. If the accounts aren’t reconciled we may look closer at the detail, and possibly request a year end bank statement to look for reasonableness. If there are unusual items on the profit and loss they will research what might be causing it. If inventory has not been adjusted at year end we will request the year-end inventory valuation. We will look at the prior year to see how close it is to the numbers provided the year before. We are not looking at every transaction in your records. We are not assuring the information in the records is accurate. We are taking your records and looking to see if it is reasonable based on the prior year and other information we may have and preparing your tax return.
Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and cancelled 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. Keep them for as long as your books and records are subject to review from the tax authorities (4 to 8 years), or as mandated by law (payroll records must be kept 10 years).
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.
Form 1099-MISC. Use form 1099-MISC, Miscellaneous Income to report certain payments you make in your trade or business. These payments include the following items:
- 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. (Unless the payments are to certain corporations)
- Rent payments of $600 or more, other than rents paid to real estate agents.
- Prizes and awards of $600 or more that are not for services.
- Royalty payments of $10 or more.
- Sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment.
Form W-2. You must file Form W-2, Wage and Tax Statement, to report payments to your employees.
Form 8300. You must file Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. Cash includes U.S. and foreign coin and currency. It also includes certain monetary instruments such as cashier’s and traveler’s checks and money orders. See Publication 1544 for more information.
All business returns include questions about being required to file 1099 forms and actually filing 1099 forms, so business owners need to review their records each year and file required 1099 forms so these questions can be completed accurately.
Please know if you have any questions on any items in this document we would be happy to meet and discuss with you.