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Frequently Asked Tax Questions And Answers
Keyword: Home Based Business
11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
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.
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year beginning after 2002 and before 2006 to $100,000. The new
law also expanded the definition of Code Section 179 property to include off-the-shelf
computer software. See Code Section 179 for the expanded definition. If the business use falls
to 50% or less in a later year, these tax benefits may be subject to recapture.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
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.
Note: 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, How to Depreciate Property.
References:
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, How to Depreciate Property, Publication 544, Sales and Other Dispositions of Assets, and Publication 587, Business Use of Your Home.
References:
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 $1,400 in
the year?
No. The employer only has to pay social security and Medicare tax for the
employee(s) who receive $1,400 or more in wages for the year. If the amount
paid to any employee in a calendar year is less than $1,400, 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, 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.
References:
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.
References:
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.
References:
How do I apply for an employer identification number (EIN)?
By Telephone or Mail 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, 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.
Online You may also apply online. Once an EIN has been
successfully completed and submitted, an EIN will be issued. Use the attached
linked for processing instruction Apply
Online.
Through Your State OfficeSome states participate in
a program called the Fedstate Federal Employer Identification Number (EIN)
project. This allows you to apply directly from your state. Visit the attached
link to determine if your state take part in this program Fedstate
Program.
For more information, refer to Tax Topic 755, Employer Identification
Number (EIN) - How to Apply, or Publication 1635 (PDF), Understanding
Your EIN.
References:
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 1-800-829-1040
or refer to Tax Information for Business. This can be found on the IRS website
www.irs.gov under Businesses.
References:
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.
References:
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.
References:
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.
References:
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.
References:
I use my home for business. Can I deduct the expenses?
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.
Your use of the business part of your home must be:
Exclusive (see *exceptions below),
Regular,
For your trade or 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 trade or business, or
A separate structure (not attached to your home) you use in connection
with your trade or business.
Additional tests for employee use. If you are an employee
and you use a part of your home for business, you may qualify for a deduction
use. You must meet the tests discussed above plus:
Your business use must be for the convenience of your employer, and
You do notrent any part of your home to your employer
and use the rented portion to perform services as an employee.
Whether the business use of your home is for your employer's convenience
depends on all the facts and circumstances. However, business use is not considered
to be for your employer's convenience merely because it is appropriate and
helpful.
*exceptions
You do not have to meet the exclusive use test if either of the following
applies.
You use part of your home for the storage of inventory of product samples.
You use part of your home as a day-care facility.
Form 1040, Schedule C (PDF) filers calculate
the business use of home expenses and limits on Form 8829 (PDF) . The deduction is claimed on line 30 of Schedule C. Employees
claim deduction for business use of home as an itemized deduction on Form 1040, Schedule A (PDF) .
For more information refer to Tax Topic 509 , Business Use of
Home, or Publication 587 , Business Use of Your Home
(Including Use by Day-Care Providers).
References:
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, Business
Use of Your Home (Including Use by Day-Care Providers).
References:
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).
References:
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.
References:
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) or Form 1040, Schedule C-EZ (PDF), Net Profit form Business and Form 1040, Schedule SE (PDF), Self-employment Tax .
References:
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?
The Federal Income Tax return is filed annually. As a self-employed individual,
if after deducting withholding and credits you expect to owe $1,000.00 at
the end of the year, you should make estimated tax payments on a quarterly
basis. Form 1040-ES (PDF) , Estimated Tax
for Individuals , will assist you in determining if estimated tax payment
are due and how they are paid.
When you file the income tax return at the end of the year, you include
the income from the business on the return. The forms to be filed are Form 1040 (PDF), U.S. Individual Income Tax Return , Form 1040, Schedule C (PDF), Profit or Loss from Business Form 1040, Schedule SE (PDF), Self-Employment Tax .
If estimated tax payments where made during the year, they will be claimed
on the individual income tax return as payments. See the Form 1040, Line 62.
References:
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