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Chapter 12: Your Business and TaxesTaxpayer Identification Number
The ID number for individual taxpayers is their social security number. If you are operating as a sole proprietorship, you can continue to use your social security number for your business. However, if you operate as a partnership or corporation, you must have a separate employer ID number (EIN) to use as your taxpayer identification number. In addition, sole proprietors must have EINs if they pay wages to one or more employee or are required to file any pension or excise tax returns.
To obtain an EIN, use Form SS-4, and file it with the Internal Revenue Service. You should do this as quickly as possible when starting your business because it may take thirty to sixty days to get the EIN. Between applying and receiving the number, you can simply put "applied for" on any official correspondence that would require this number.
Now that you have formed your own business, you are subject to all sorts of new regulatory constraints, including recordkeeping. Unfortunately, entrepreneurs are notoriously poor recordkeepers. Yet to justify and preserve many of the deductions that you will attempt to receive as benefits from operating your business, records are a necessity. In addition, you will find that, as your company grows larger and becomes subject to other regulations and/or potential lawsuits, keeping accurate corporate records is necessary to prove your positions.
Records monitor how your business is actually doing. Records can be used for inventory control and to determine which products and services may need to be either increased or decreased. At some point in your business growth, you will likely need to borrow money. All lenders require accurate financial statements of your business. It would be impossible to construct accurate profits and losses of your company without having consistent records.
As your business begins to develop, you will receive money from a variety of sources. Your records will need to identify specifically where this money has come from and whether or not it is income or contributions of capital.
Without adequate records, this money could be improperly allocated, and thus, you would be required to pay income tax on money that has come into the business and should have been nontaxable.
Last, you will need the records to prepare your tax return. If you ever are audited by the IRS, the records will establish the deductibility of any item. Failure to have proper records will allow the IRS to reconstruct the potential deduction in a manner that is less favorable to you.
What Type of Records Are You Required to Keep?
The law does not require any specific type of records to keep. You should adopt a system that is best suited for you and that you feel will clearly show your income and expense deductions. One area of concern to the Internal Revenue Service when they are reviewing a business is travel and entertainment deductions. Consequently, a business should be careful to maintain accurate records in this area. For special assistance on the rules and regulations governing these kinds of deductions, you should refer to Publication 463, Travel, Entertainment, and Gift Expenses (call 800 TAX FORM). In addition, you may want to consider ordering Publication 917, Business Use o f a Car. These publications are available free from the IRS and clearly disclose the type of deductions that are allowed and the records that are necessary to preserve those deductions.
Another area of great concern to the Internal Revenue Service is employment taxes and income tax withholding. Once you have employees, your responsibilities heighten with the IRS, and you should take great care to pay the appropriate tax and to withhold the correct amount of money from an employee. I would recommend that you maintain separate files on each employee showing his or her name, address, and social security number. In addition, you should use a table to show the amount of wages earned and the amount of withholding done for each employee. You also should keep the W-4 forms that establish the number of allowances your employees elected to take based on their individual circumstances.
As your corporation begins to expand, you will begin to acquire assets such as furniture and machinery. You must keep records about these assets to depreciate them and take deductions, along with reporting gain or loss when you actually sell the asset. As a general guideline, your records should show:
1. When and how you acquired the asset
2. Purchase price
3. Cost of any improvements
4. Whether you amortized or expensed the deduction (Section 179)
5. Deductions taken for depreciation
6. Deductions taken for casualty losses
7. How you use the asset
8. When and how you disposed of the asset
9. Selling price
10. Expenses of sales
It is always advisable to keep separate receipts for any assets purchased and to maintain those records for any audit review. How long should you keep the records? The Internal Revenue Service has no set guidelines for the length of time you are required to keep business records. The general rule is that you must keep them as long as necessary to provide backup information that the Internal Revenue Service might need. That statement being vague and unhelpful, the most prudent method is to keep the records for the duration of the statute of limitations, the time during which you can amend your return to claim a credit refund or the IRS can assess additional tax, which is generally the later of three years after the date your return is due or filed or two years after the date the tax is paid. Returns filed before the due date are treated as filed on the due date. The Internal Revenue Service has three years from the date you file your return to assess any additional tax. If you file a fraudulent return or no return at all, the IRS has a longer time to assess the tax.
You must keep employee records at least four years after the date taxes become due or are paid, whichever is later. This includes all of the records previously discussed, maintaining a separate file on each employee...