Professional Documents
Culture Documents
US Internal Revenue Service: p911 - 1999
US Internal Revenue Service: p911 - 1999
US Internal Revenue Service: p911 - 1999
2
Internal
Revenue Business Income ................................ 4
Service
For use in preparing Capital Expenses ............................... 6
Recordkeeping ................................... 12
Index .................................................... 19
Important Changes
for 1999
Standard mileage rate. The standard mile-
age rate for the cost of operating your car in
1999 is 321/2 cents a mile for all business
miles driven before April 1. The rate is 31
cents a mile for all business miles driven after
March 31.
Introduction
This publication explains general tax infor-
mation of interest to direct sellers. For exam-
ple, it covers how to treat income, expenses,
and other items related to having a direct-
sales business. It also illustrates two filled-in
tax forms that most direct sellers must file
along with Form 1040. They are Schedule C
(Form 1040), Profit or Loss From Business,
and Schedule SE (Form 1040), Self-
Employment Tax.
home. direct seller who sponsored her. In March, the • Boards of trade
Page 8
• Business leagues 1) You use it exclusively and regularly for
Qualifying for a Deduction the administrative or management activ-
• Chambers of commerce To qualify to claim expenses for the business ities of your trade or business.
• Civic or public service organizations use of your home, you must meet the follow-
ing tests. 2) You have no other fixed location where
• Professional associations you conduct substantial administrative
• Trade associations 1) Your use of the business part of your or management activities of your trade
home must be: or business.
Legal and professional fees. You can de- a) Exclusive (however, see Exception
duct as a business expense professional Alternatively, if you do business at more
under Exclusive use, later), than one location and your home does not
fees, such as fees charged by accountants
or lawyers, that are directly related to your b) Regular, qualify as your place of business based on
business and are ordinary and necessary in these rules, you determine your principal
c) For your trade or business, AND place of business based on the following
the operation of your business. However, if
the charges include payments for work of a factors.
2) The business part of your home must be
personal nature (such as making out a will one of the following:
or the personal portion of your tax return), you 1) The relative importance of the activities
can deduct as a business expense only the a) Your principal place of business, performed at each location.
part of the fee related to your business. b) A place where you meet or deal 2) The time spent at each location if the
with clients or customers in the relative importance factor does not de-
Tax return preparation fees. You can de- normal course of your trade or termine your principal place of business.
duct as a business expense on Schedule C business, or
(Form 1040) or Schedule C–EZ (Form 1040)
the cost of preparing that part of your tax re- c) A separate structure (not attached Place to meet clients or customers. If you
turn relating to your business as a sole pro- to your home) you use in con- meet with clients or customers in your home
prietor. You can deduct the remaining cost nection with your trade or business. in the normal course of your direct selling
on Schedule A (Form 1040) if you itemize business, even though you also carry on
your deductions. Exclusive use. “Exclusive use” means that business at another location, you can deduct
You also can take a business deduction you use a specific part of your home only for your expenses for the part of your home used
on Schedule C or Schedule C–EZ for the carrying on your direct-selling business. You exclusively and regularly for business if both
amount you pay or incur in resolving asserted do not meet the exclusive use test if you use of the following apply.
tax deficiencies for your business as a sole part of your home as your business office and
proprietor. also for personal purposes. • You physically meet with clients or cus-
tomers on your premises.
Samples and promotional items. You can Example. You use a den in your home • Their use of your home is substantial and
deduct the cost of samples you give to your to write orders and do the paperwork for your integral to the conduct of your business.
customers and the cost of promotional items business. The den is also used by your chil- You do not qualify to deduct expenses for
such as posters. You cannot deduct the cost dren to do their homework. You cannot claim the business use of your home if you
of any samples you use personally. any business deduction for the use of the have only occasional meetings or tele-
room. phone calls.
Service charges. You can deduct service
charges you pay on orders for goods. The Exception. You do not have to meet the
service charge can be a flat charge or based exclusive use test if you use part of your Separate structure. You can deduct the
on either the amount you order or the number home for storing inventory or product sam- expenses for a separate free-standing struc-
of customers for whom you order. ples. You can deduct expenses from using ture, such as a studio, garage, or barn, if you
part of your home for storing inventory or use it exclusively and regularly for business.
product samples if you meet all the following This structure does not have to be your prin-
Supplies. You can deduct the cost of order tests. cipal place of business or a place where you
forms, bags, business cards, and other sup- meet clients or customers.
plies you use in your business. However, if
you stock supplies to be used largely in later
• You keep the inventory or product sam-
ples for use in your direct-selling busi- Where to deduct. If you qualify to deduct
tax years, you can deduct only the cost of
ness. expenses for the business use of part of your
supplies you use during the current year. You
must wait until the years you actually use the • Your home is the only fixed location of home, you must figure your deduction on
supplies to deduct the rest of their cost. your business. Form 8829 and attach it to Form 1040. You
If you keep incidental materials and sup- deduct the expenses on Schedule C (Form
plies on hand, you can deduct the cost of the
• You use the storage space on a regular 1040).
basis.
incidental materials and supplies you bought
during the tax year if all three of the following • The space you use is separately identifi- More information. For more information,
requirements are met. able and suitable for storage. including how to figure your deduction, see
Publication 587.
• You do not keep a record of when they Example. Your home is the sole fixed
are used. location for your business of selling cookware.
You regularly use half your basement for
• You do not take an inventory of the
storing inventory and occasionally for per-
amount on hand at the beginning and end
of the tax year.
sonal purposes. You can deduct your ex-
penses for the storage space even though
Travel and
• Your taxable income is clearly reflected this part of your basement is not used exclu- Transportation
by this method. sively for business.
Travel refers to trips you take to places where
you need to spend the night away from home
Regular use. “Regular use” means that you – for example, travel to a distant city to attend
use a specific part of your home for business a business-related function or convention.
on a continuing basis. Occasional or inci- Transportation refers to trips you make in the
Business Use dental business use of part of your home area where you live and work–for example,
does not meet the regular use test even if you transportation to call on customers or make
of Your Home do not use that part for any other purpose. deliveries in your city and its suburbs.
Many direct sellers work out of their own You must be able to prove your expenses
homes and have business expenses for using Principal place of business. Your home of- for travel and transportation. Deductions for
their homes. However, you cannot deduct any fice will qualify as a principal place of busi- travel and transportation are looked at closely
expenses for using your home in business ness for deducting expenses for its use if you when the IRS examines returns. For more
unless you meet certain tests. meet both of the following requirements. information, see Recordkeeping, later.
Page 9
Elaine's expense of delivering items is not • You engaged in business with the person
Travel deductible. Her cost of getting to the bank is during the meal or entertainment period.
If you temporarily travel away from your tax a commuting expense. The fact that she
home on business, you can deduct your or- carries cosmetics does not make her com- • The main purpose of the combined busi-
dinary and necessary travel expenses. You muting expense a deductible business ex- ness and meal or entertainment was the
cannot deduct lavish or extravagant expenses pense. active conduct of business.
or those for personal or vacation purposes.
You can deduct all of your travel expenses You do not have to show that busi-
Two places of work. If you work at two TIP ness income or another business
if your trip was entirely business related. This places in one day, you can deduct the ex-
includes expenses incurred when you attend benefit actually resulted.
pense of getting from one to the other. How-
a seminar, meeting, convention, or other ever, if for some personal reason you do not
function if you can show that your attendance It is not necessary to devote more time to
go directly from one location to the other, you
benefits your direct selling business. If your business than to the meal or entertainment.
cannot deduct more than the amount it would
trip was primarily for business and, while at However, if the business discussion is only
have cost you to go directly from the first lo-
your business destination, you extended your incidental to the meal or entertainment, it
cation to the second.
stay for a vacation, made a nonbusiness side does not qualify as directly related.
trip, or had other nonbusiness activities, you Deductible expenses. If you use your vehi- Example. You are a direct seller of
can deduct only your business-related travel cle in your business, see Publication 463 for women's cosmetics. A state women's organ-
expenses. These expenses include the travel information on how to figure your expenses ization is holding its annual convention in a
costs of getting to and from your business for business transportation. local hotel and you decide to display your
destination and any business-related ex-
products in a hospitality room in the hotel.
penses at your business destination.
You also provide entertainment and give out
Example. You live in and conduct your product samples. You can deduct the cost of
direct selling business from Atlanta and take Meals and the hospitality room and entertainment pro-
vided.
a business trip to New Orleans. On your way
home, you stop in Mobile to visit your parents. Entertainment
You spend $630 for the 9 days you are away Because you are in the selling business, you Not directly related. Generally, expenses
from home for travel, meals, lodging, and may take business associates to lunch or are not directly related if there is little or no
other travel expenses. If you had not stopped entertain them. The cost can be a deductible possibility that you will actively conduct busi-
in Mobile, you would have been gone only 6 business expense. However, there are certain ness. The following expenses are usually not
days, and your total cost would have been conditions that must be met before you can directly related to the conduct of business.
$580. You can deduct $580 for your trip, in- take a deduction for business meals and
cluding the cost of round-trip transportation to entertainment, and you generally can deduct • Meetings at nightclubs, theaters, or
and from New Orleans. The cost of your only 50% of your cost. This section discusses sporting events.
meals is subject to the 50% limit on meals these rules. There are also certain records • Meetings at essentially social gatherings,
mentioned later. you must keep. For more information, see such as cocktail parties.
Recordkeeping, later.
If your trip was primarily for personal rea- • Meetings with a group that includes peo-
sons, such as a vacation, the entire cost of ple who are not business associates at
Meals. Include as meals the amounts spent a place such as a cocktail lounge, country
the trip is a nondeductible personal expense.
on food and beverages and the taxes and tips club, athletic club, or resort.
However, you can deduct any expenses you
on those amounts. Generally, no deduction is
have while at your destination that are directly
allowed unless you or your employee is You may prove that the meal or entertainment
related to your business.
present when the food or beverages are pro- is directly related by showing that you did
For more information, see Publication 463.
vided. have a substantial business discussion during
the meal or entertainment.
Transportation Entertainment. Include as entertainment When meals and entertainment take place
any activity generally considered to provide on a hunting or fishing trip, or on a yacht or
You can deduct transportation expenses for
entertainment, amusement, or recreation. pleasure boat, the conduct of business is not
your business. Generally, business trans-
This includes entertaining guests at night- considered the main reason for the combined
portation is traveling between two or more
clubs; social, athletic, and sporting clubs; business and entertainment unless you show
workplaces in the same day or between your
theaters; sporting events; on yachts; and on otherwise. Even if you show that business
home and a temporary work location. It in-
hunting, fishing, and vacation trips or on sim- was the main reason, you generally cannot
cludes the following kinds of trips you make
ilar outings. It can also include meeting per- deduct expenses for the use of an enter-
in the area where you live and work.
sonal, living, or family needs, such as fur- tainment facility. For more information, see
• Calling on customers nishing a hotel suite or a car to business Entertainment facilities in Publication 463.
customers or their families. However, see Not
• Making deliveries directly related, later, for more information. Associated. You can deduct meal and
• Picking up goods entertainment expenses that do not meet the
directly-related test if both of the following
• Attending business meetings Directly Related apply.
Transportation expenses can include train, or Associated
bus, and cab fares, car rental fees, and the To be deductible, meal and entertainment • The expenses are associated with your
expenses must be ordinary and necessary direct-selling business.
cost of driving and maintaining your car for
business transportation. Meals and lodging expenses of carrying on your direct-selling • The meal or entertainment is directly be-
are not included in transportation expenses. business and you must be able to prove them fore or after a substantial business dis-
as explained later under Proving Your De- cussion.
Commuting expenses. You cannot deduct ductions. Unless certain exceptions apply,
the cost of transportation between your home you must be able to show that they are “di- A meal or entertainment expense is generally
and your main or regular place of work. The rectly related” to or “associated” with the ac- associated with your direct-selling business if
cost of commuting is a nondeductible per- tive conduct of your business. you can show that you had a clear business
sonal expense, regardless of the distance or For more information, see chapter 2 of purpose for the expense. The purpose may
whether work is performed during the trip. Publication 463. be to get new business or to encourage the
continuation of an existing business relation-
Example. Elaine works full time as a bank Directly related. For meal and entertainment ship.
teller. She also sells cosmetics part time to expenses to meet the directly-related test, all
her co-workers at the bank. After her cus- of the following must apply. Substantial business discussion. Whether
tomers select items from a catalog, she sends a business discussion is substantial depends
the orders to the cosmetics company. She • You had more than a general expectation on all the facts in each case. You must show
delivers the items to the bank when she re- of getting income or some other specific that you actively engaged in a discussion,
ceives them from the company. business benefit from the expense. meeting, negotiation, or other business
Page 10
transaction to get income for your business cover charges to a nightclub, rent for a room Situation 3. You sell cosmetics door-to-door.
or other specific business benefit. where you hold a dinner or cocktail party, or To spur sales, you often give away small
The meeting does not have to be for a the amount paid for parking at a sports arena samples.
specified length of time. However, you must are subject to the 50% limit. However, the In this situation, you can deduct the cost
show that the business discussion was sub- cost of transportation to and from a business of the samples. If you purchase samples
stantial in relation to the meal or enter- meal or entertainment activity that is other- separately from the products you sell, you can
tainment. It is not necessary to devote more wise allowable is not subject to the 50% limit. deduct their cost as an ordinary and neces-
time to business than to the meal or enter- If you pay or have an expense for goods sary business expense.
tainment and you do not have to discuss and services consisting of meals, enter- Do not deduct the cost of the same item
business during the meal or entertainment. tainment, and other services (such as lodging twice. If the item was included in inventory,
or transportation), you must make a reason- you cannot deduct it as a business expense.
Business and nonbusiness guests. You able allocation of that expense between the The item will already be part of the cost of
must divide your entertainment expenses be- cost of meals and entertainment and the cost goods sold.
tween business and nonbusiness expenses. of other services. For example, you must
You can deduct only the business part. For make an allocation if a hotel includes one or Gift limit. Do not deduct more than $25 for
example, if you entertain a group of 11 (in- more meals in its room charge. business gifts to any one person during the
cluding yourself)–three business prospects Apply the 50% limit after figuring the year (see the exceptions discussed later).
and seven social guests–you can deduct only amount that would otherwise qualify for a You can deduct only business gifts. Personal
four-elevenths of the expense. deduction. First determine the amount of meal gifts are not deductible.
and entertainment expenses that would be
deductible under the rules discussed earlier.
Expenses for spouses. You generally can- Figuring the limit. A gift to the spouse of a
Then apply the 50% limit to figure the
not deduct the cost of entertainment for your person with whom you are doing business is
deductible amount.
spouse or for the spouse of a business cus- considered a gift to that person. However, if
tomer. However, you can deduct these costs you have independent business connections
Example. You spend $100 for a
if you can show that you had a clear business with both spouses, a gift to one spouse is
business-related meal. If $40 of that amount
purpose, rather than a personal or social generally not considered a gift to the other. It
is not allowable because it is lavish and ex-
purpose, for providing the entertainment. will, however, be considered an indirect gift
travagant, the remaining $60 is subject to the
to the other spouse if it is intended for that
Example. You entertain a business cus- 50% limit. You cannot deduct more than $30
spouse's eventual use or benefit. These rules
tomer. The cost is an ordinary and necessary (50% of $60).
also apply to gifts you give to any other family
business expense and is allowed under the member of a person with whom you have a
entertainment rules. The customer's spouse business connection.
joins you because it is impractical to entertain If you and your spouse both give gifts,
the customer without the spouse. You can both of you are treated as one taxpayer. It
deduct the cost of entertaining the customer's
spouse as an ordinary and necessary busi-
Business Gifts does not matter whether you have separate
businesses or independent connections with
ness expense. Furthermore, if your spouse Giving prizes, awards, and gifts may be an the recipient.
joins the party because the customer's ordinary and necessary part of doing busi-
spouse is present, the cost of the enter- ness as a direct seller. In each of the three Incidental cost. Costs that do not add sub-
tainment for your spouse is also an ordinary situations illustrated next, you can deduct the stantial value to a gift, such as engraving on
and necessary business expense. cost as a business expense. jewelry, packaging, insuring, and mailing, are
generally not included in determining the cost
Lavish or extravagant expenses. You Situation 1. You do your direct selling on the of a gift for purposes of the $25 limit. For ex-
cannot deduct expenses for meals and sales party plan. As an incentive for people ample, the cost of gift wrapping is considered
entertainment to the extent they are lavish or to host your parties, you offer them a variety an incidental cost. However, the purchase of
extravagant. An expense is not considered of gifts. The choice of gift depends on the an ornamental basket for packaging fruit is
lavish or extravagant if it is reasonable con- success of the party–the higher the volume not considered an incidental cost if the bas-
sidering the facts and circumstances. Ex- of sales, the more valuable the gift. ket's value is substantial in relation to the
penses will not be disallowed merely because In this situation, your gift to the host or value of the fruit.
they are more than a fixed dollar amount or hostess is actually payment for hosting the
take place at a deluxe restaurant, hotel, party, and the host or hostess should report Exceptions. The following items are not in-
nightclub, or resort. the fair market value of the gift as income. cluded in the $25 limit for business gifts.
You can deduct the cost of the gift. If you
Your meals. Generally, you can deduct your give hosts and hostesses items from your in- • Items that cost $4 or less, on which your
business meal expenses while traveling away ventory or items you purchase from the com- business name is clearly and perma-
from home for business (other than amounts pany along with goods you sell, their cost will nently imprinted, and which are part of a
which are lavish or extravagant). However, if be included in the cost of goods sold. You number of identical items you widely dis-
you entertain a business customer locally and cannot deduct their cost again as a business tribute. This includes such items as pens,
the conditions discussed earlier are met, the expense. However, if you purchase the gifts desk sets, and plastic bags and cases.
cost of your own meal is deductible only to the separately from the goods you sell, deduct
extent the cost exceeds the amount you their cost as an ordinary and necessary • Signs, display racks, or other promotional
would normally have spent for personal pur- business expense. material to be used on the business
poses. premises of the recipient.
Situation 2. You have several direct sellers • Gifts that must be included in the income
working under you. Because your income of the recipient.
Limit depends in part on their sales, you regularly
You can usually deduct only 50% of your un- meet with them, encourage them, and provide Gift or entertainment. Any item that might
reimbursed business-related meal and enter- them with incentives and support. As an in- be considered either a gift or entertainment
tainment expenses. The 50% limit applies, for centive to make sales, you sometimes offer will generally be considered entertainment
example, to expenses you incur while travel- a prize–such as an evening on the town or and not subject to the $25 limit. However, if
ing away from home on business (whether tickets to a sports event–to the person who you give a customer packaged food or
eating alone or with others), entertaining sells the most during the month. beverages to be used later, they are gifts.
business customers at your place of business In this situation, the prizes you give are If you provide business associates with
or a restaurant, or attending a business actually payments for the winners' selling ef- tickets to a theater performance or a sporting
function, convention, or reception. Exceptions forts. You can deduct the cost of the prizes event and you do not accompany them, you
to the 50% limit are discussed in Publication as ordinary and necessary business ex- may treat the tickets as either a gift or enter-
463. penses. The direct sellers who receive your tainment, whichever is to your advantage.
Taxes and tips related to a meal or enter- incentive prizes must report them as income However, if you go to the event with them,
tainment activity are included in the amount at their fair market value. For more informa- you must treat the cost of the tickets as an
subject to the 50% limit. Expenses such as tion, see Other Income, earlier. entertainment expense.
Page 11
Proving Your Deductions
Not-for-Profit Limit Recordkeeping The IRS may ask you to prove your de-
ductions for business expenses.
If you do not carry on your direct-selling ac-
tivity to make a profit, there is a limit on the You must keep records to correctly
deductions you can take. If the not-for-profit figure your taxes. Your records must Travel Expenses
RECORDS be permanent, accurate, complete,
limits apply, you cannot use a loss from direct For travel expenses, you must be able to
selling to offset any other income you have. and clearly establish your income, de- prove the following items.
This limit applies, for example, if you go ductions, and credits. The law does not re-
into direct selling primarily for the business quire you to keep records in any particular
way. But if you have more than one business, • Each separate amount you spent for
tax deductions you can take. It also applies travel away from home, such as the cost
if you become a direct seller only to allow you you should keep a complete and separate set
of books and records for each business. of your transportation or lodging. A re-
and your friends to buy products at reduced ceipt, bill, or other documentary evidence
rates. generally is required for all lodging ex-
If the not-for-profit limit applies, you must penses. You can total the daily cost of
take the deductions allowed on Schedule A Publication 583 provides information
about setting up a recordkeeping system, the your breakfast, lunch, dinner, and other
(Form 1040). See Limit on Deductions and incidental travel costs if they are listed in
Losses under Not-for-Profit Activities in types of books and records included in a
typical system for a small business, and reasonable categories, such as meals,
chapter 1 of Publication 535 for information gas and oil, and taxi fares.
on how to figure your allowable deductions. sample records.
Do not use a business tax return, such as Publication 463 provides information on • The dates you left and returned home for
Schedule C (Form 1040). the records to keep if you use your car in your each trip, and the number of days spent
business. on business while traveling away from
The following are suggestions for keeping home.
Not for profit. In deciding whether your di- adequate business records.
rect selling is carried on for profit, take into • The destination or area of your travel,
account all of the facts about the activity. No described by the name of the city or town.
one factor alone is decisive. The following are • Keep a business bank account. De- • The business reasons for your travel or
some of the factors to consider. posit all business receipts in a separate
the business benefit you gained or ex-
bank account. Make all payments by
pected to gain from it.
check, if possible. Then both business
• Whether you carry on your direct selling income and business expenses will be
in a businesslike manner and maintain well documented. Entertainment Expenses
complete and accurate books and rec-
ords. • Make a record. Record all your business For entertainment expenses, including enter-
transactions in separate account books, tainment-related meals, you must be able to
• Whether the time and effort you put into and keep a monthly summary of your prove the following.
direct selling indicate that you intend to business income and expenses.
make it profitable. 1) The amount of each separate enter-
• Support your entries. File canceled tainment expense. You may total inci-
• Whether you are depending on income checks, paid bills, duplicate deposit slips, dental expenses, such as taxi fares and
from direct selling for your livelihood. and other items that support entries in telephone calls, on a daily basis.
• Whether your losses are due to circum- your books in an orderly manner and
store them in a safe place. For instance, 2) The date the entertainment took place.
stances beyond your control (or are
normal in the start-up phase of direct organize them by year and type of ex- 3) The name and address or location of the
selling). pense. place you went. Include the type of
If you cannot provide a canceled entertainment, such as dinner or the
• Whether you change your methods of check to prove payment of an expense theater, if the information is not clear
operation in an attempt to improve profit- item, you may be able to prove it with from the name or designation of the
ability. certain financial account statements. place.
These statements must show either a
• Whether you, or your advisors, have the check clearing, a credit card charge, or 4) The occupation or other information
knowledge needed to carry on direct an electronic funds transfer. If the ac- about the people for whom you are
selling as a successful business. count statement shows a check clearing, claiming a meal or entertainment ex-
• Whether you were successful in making it must indicate the check number, pense. Include their names, titles, or
a profit in similar activities in the past. amount, payee's name, and the date the other information sufficient to establish
check amount was posted to the account. their business relationship to you.
• Whether your direct selling makes a profit If the account statement shows a credit
in some years, and how much profit it card charge, it must indicate the amount 5) The business reason for the enter-
makes. charged, payee's name, and the date tainment or the business benefit you
charged. If the account statement shows gained or expected to gain from it and
• Whether you can expect to make a future an electronic funds transfer, it must indi- the nature of any business discussion
profit from the appreciation of the assets or activity that took place.
cate the amount transferred, the payee's
used in your direct-selling business.
name, and the date of transfer. 6) The presence of you or your employee
• Keep your records. You must keep your at a business meal given for a client.
If the IRS inquires about your tax return, you
may be asked to provide proof that your direct business books and records available at
selling activity is carried on for profit. How- all times for inspection by the IRS. You Business discussion. If the entertainment
ever, your direct selling is presumed carried must keep the records as long as they took place before or after a substantial and
on for profit if it produced a profit in at least may be needed in the administration of bona fide business discussion, in addition to
3 of the last 5 tax years, including the current any Internal Revenue law. You should the information in (1), (2), (3), (4), and (6)
year, unless the IRS establishes to the con- also keep copies of your tax returns to above, you must be able to prove all of the
trary. help prepare future returns or file claims following.
If you are starting a business and do not for refunds.
have 3 years showing a profit, you may want • The date, place, and duration of the
to take advantage of this presumption later, business discussion.
Proof of payment alone does not es-
after you have the 5 years of experience al-
lowed by the test. For more information on ! tablish that you are entitled to a tax
CAUTION deduction. You should also keep
• The nature of the business discussion.
postponing any determination that your direct
other documents as discussed in Proving
• The business reason for the meal or
selling is not carried on for profit, see Using entertainment or the business benefit you
Your Deductions, next.
the presumption later under Not-for-Profit gained or expected to gain from enter-
Activities in chapter 1 of Publication 535. taining.
Page 12
• The identification of the people who par- travel costs. Meals should be a separate cat- Kathleen Woods is a secretary for a small
ticipated in both the business discussion egory. Include tips with the costs of the ser- firm. She reports her salary of $15,000 on line
and the entertainment activity. vices you received. 7 of Form 1040.
Kathleen is also a direct seller of house-
Business relationship. If you entertain a Documentary evidence. A receipt or bill is hold cleaning products manufactured and
readily identifiable group of people, you do often the best evidence to prove the amount distributed by Spotless, Inc. She reports the
not have to record the name of each person. of an expense. Documentary evidence is income and expenses of her selling business
It is enough to designate the group. For ex- needed for all your lodging expenses unless, on Schedule C because she is self-employed.
ample, if you entertain all the members of a under an accountable plan, your employer Kathleen uses the cash method of ac-
garden club, an entry such as “members of pays you a per diem reimbursement of no counting and files her return on a calendar-
the Hillcrest Garden Club” is enough. more than the government rate in effect at year basis. She has no employees and does
that time and in that area. It is also generally not keep an inventory of the products she
needed for any other expense of $75 or more. sells. Any products ordered for personal use
Gift Expenses Documentary evidence will ordinarily be are not shown in purchases, sales, cost of
For gift expenses, you must be able to prove considered adequate if it shows the amount, goods sold, or inventory.
all of the following. date, place, and essential character of the Kathleen's customers select the products
expense. For example, a hotel receipt is they want from a catalog listing retail prices
• The cost of the gift. enough to support expenses for business for each item. She places an order with
• The date you gave the gift. travel if it has the name and location of the Spotless every 10 days, at which time she
hotel, the dates you stayed there, and sepa- also pays for her prior order. She receives the
• A description of the gift.
rate amounts for charges such as lodging, items ordered with an invoice payable within
• Your reason for giving the gift or any meals, and telephone. A restaurant receipt is 10 days or, if sooner, with the next order.
business benefit you gained (or expected enough to prove an expense for a business When she delivers the merchandise, she
to gain) from giving it. meal if it has the name and location of the collects the retail (catalog) price for each item.
restaurant, the number of people served, and She can get full credit for any items returned
• The occupation or other information to Spotless within 10 days.
about the person receiving the gift, in- the date and amount of the expense. If a
charge is made for items other than meals Kathleen's cost for each item is 65% of the
cluding name, title, or other information retail price. During 1999, she had total retail
establishing a business relationship to and beverages, the receipt must show that
this is the case. sales of $14,600. She paid Spotless $9,490
you. for the merchandise she received in 1999.
Canceled check. A canceled check, to-
gether with a bill from the payee, usually es- She also received an award of $200 in Janu-
The name of the recipient of a business gift
tablishes the cost. However, a canceled ary for having over $20,000 in total sales in
does not always have to be recorded. A
check by itself does not prove a business 1998.
general listing will be enough if it is evident
that you are not trying to avoid the $25 annual expense without other evidence to show that
limit on the amount you can deduct for gifts it was for a business purpose. Lines 1–3. Kathleen reports $14,600 as her
to any one person. For example, if you buy gross sales on line 1. On line 2, she would
a large number of tickets to local high school Incomplete records. If you do not have ad- enter any refunds she had to give on mer-
basketball games and give one or two tickets equate records to prove an element of an chandise, as well as adjustments made to
to each of a number of customers, it is usually expense, you must prove the element by customers' purchases. Since she has no
enough to record a general description of the providing both of the following. entry on line 2, she enters $14,600 on line 3.
recipients.
• Your own statement, whether written or Line 4. Kathleen uses Part III to figure her
oral, containing specific information about cost of goods sold for the year. She has no
Records the element. inventory at the beginning or end of the year.
You should keep the proof you need for your Therefore, she has no entry on line 35 or line
travel, meal, entertainment, and gift expenses • Other supporting evidence that is suffi- 41 of Part III. She purchased $10,000 worth
in an account book, diary, statement of ex- cient to establish the element. of household products during 1999 for
pense, or similar record. You should also $9,490. (She received trade discounts of
keep adequate documentary evidence that Additional proof. You may have to provide $510.) She enters her net cost of $9,490
will support each element of an expense. to the IRS additional information to clarify or ($10,000 − $510) on line 36. She also enters
You do not have to record information in establish the accuracy or reliability of infor- this amount on lines 40 and 42 of Part III and
your account book that duplicates information mation contained in your records, statements, on line 4 of Part I.
shown on a receipt if your records and re- testimony, or documentary evidence.
ceipts complement each other in an orderly Line 5. Gross profit, $5,110, is the difference
manner. between Kathleen's net receipts of $14,600
Keep your records up to date. Record your on line 3 and the cost of goods sold of $9,490
expenses in your account book at or near the
time of the expense. Entries made later, when Sample on line 4.
you may not remember them accurately, do
not have as much value as entries made at
Filled-In Forms Line 6. Kathleen reports the $200 received
or near the time of the expense. This section will familiarize you with Schedule as a bonus on line 6. She does not include
C (Form 1040), used to report business in- on Schedule C any income not related to her
come or loss, and Schedule SE (Form 1040), direct-selling business, such as income from
Separating expenses. Usually, each sepa-
used to figure self-employment tax. The line investments or her salary. She reports this
rate payment you make must be recorded as
numbers in bold type follow the line numbers income on other lines of Form 1040.
a separate expense. For example, if you en-
tertain someone at dinner and then go to the on the form being discussed.
theater, the dinner expense and the cost of Line 7. Kathleen's gross income from direct
the theater tickets are separate expenses. selling is $5,310, the sum of her gross profit
You must record them separately in your Schedule C of $5,110 on line 5 and the bonus of $200 on
records. If you are the sole owner of an unincorporated line 6.
Expenses of a similar nature occurring trade or business, you must report business
during the course of a single event will be income and expenses on Schedule C (Form Line 8. Kathleen gave her customers sam-
considered a single expense. For example, if 1040) or Schedule C–EZ (Form 1040). If you ples that cost $48. This amount was not in-
during entertainment at a cocktail lounge you own more than one business, or if you and cluded in the cost of goods sold on line 4.
pay separately for each serving of your spouse have separate businesses, you
refreshments, treat the total expense for the must file a separate Schedule C or Schedule Line 10. Kathleen's actual 1999 business
refreshments as a single expense. C–EZ for each business. mileage was 2,100 miles (575 miles from
Some items can be totaled in categories. Samples of Schedule C and Schedule SE January 1 through March 31 and 1,525 miles
You can make one daily entry for such cate- for Kathleen Woods are illustrated on the fol- from April 1 through December 31), and her
gories as taxi fares, telephone calls away lowing pages. (Amounts have been rounded total 1999 mileage was 6,000 miles. She used
from home, gas and oil, and other incidental to the nearest dollar.) her car 35% for business. She uses the
Page 13
standard mileage rate to figure the deduction $326 on this line. She has no deduction for Line 32. Kathleen does not have a loss, so
of $660 [(575 × .325) + (1,525 × .31)]. other utilities because she does not use any she skips this line. If she had a loss and was
Kathleen must also complete Part IV of part of her home exclusively for business. not “at risk” for all her investment in the busi-
Schedule C. ness, she would have to attach Form 6198.
Line 27. This line is for other direct-selling See the Schedule C instructions for the
Line 16b. $280 is 35% of the total interest expenses not listed separately on the sched- meaning of “at risk.”
of $800 paid during the year on Kathleen's ule. These other expenses are listed in Part
car loan. V on page 2. Kathleen paid $35 to her bank
for check printing and account charges for her Short Schedule SE
Line 18. Kathleen spent $260 for various separate business bank account. She paid Kathleen uses Short Schedule SE (Form
office supplies and postage for her direct- $30 to a local business association and $38 1040), because her net earnings from self-
selling business. for a 1-year subscription to a retail sales employment are more than $400 and the total
magazine. She enters these expenses, along of her net earnings plus her wages subject to
Line 22. Kathleen paid $392 in 1999 for or- with the $199 she paid for catalogs, in Part social security and Medicare taxes (FICA) are
der blanks, bags, and miscellaneous selling V. She totals the expenses, $302, on line 48 not more than $72,600.
supplies. and enters the total on line 27.
Line 2. Kathleen enters $2,259, the amount
Line 23. $168 is 35% of the personal prop- Line 28. Kathleen adds all her business de- from line 31 of Schedule C (Form 1040).
erty tax of $480 Kathleen paid on her car in ductions listed on lines 8 through 27 and en-
1999. ters the total of $3,051 on this line. Line 3. Kathleen enters the amount from line
Line 24. Kathleen attended two direct-selling 2, $2,259.
Line 29. Kathleen subtracts her total de-
seminars during 1999. Her travel expenses, ductions on line 28 from her Schedule C
including lodging, were $515, which she en- gross income on line 7. Because her gross Line 4. Kathleen multiplies her net profit by
tered on line 24a. Her meals and enter- business income is greater than her total de- .9235 and enters the result, $2,086.
tainment, subject to the 50% limit, were $200 ductions, she has a tentative profit of $2,259.
and were entered on line 24b. The limit of Line 5. Kathleen multiplies $2,086 (line 4)
$100 is shown on line 24c and the net de- Line 30. Kathleen did not use any part of her by .153 and enters $319 as her self-employ-
duction of $100 is shown on line 24d. home for business, so she does not make an ment tax. She also enters this amount on line
entry here. 50 of Form 1040.
Line 25. Kathleen uses her second tele-
phone 100% for business purposes. She Line 31. Kathleen has a net profit of $2,259 Line 6. Kathleen enters one-half of the
paid $264 for local service on her second (line 29 − line 30). She enters her net profit amount from line 5. She also enters this
phone installed for her business and $62 for here, on line 12 of Form 1040, and on line 2, amount on line 27 of Form 1040 as an ad-
long-distance calls. She enters the total of Section A of Schedule SE (Form 1040). justment to income.
Page 14
OMB No. 1545-0074
SCHEDULE C Profit or Loss From Business
(Form 1040)
E Business address (including suite or room no.) 䊳 1111 Lake Forest Ave., Hometown, VA 22315
City, town or post office, state, and ZIP code
F Accounting method: (1) X Cash (2) Accrual (3) Other (specify) 䊳
G Did you “materially participate” in the operation of this business during 1999? If “No,” see page C-2 for limit on losses X Yes No
H If you started or acquired this business during 1999, check here 䊳
Part I Income
1 Gross receipts or sales. Caution: If this income was reported to you on Form W-2 and the “Statutory
employee” box on that form was checked, see page C-2 and check here 䊳 1 14,600
2 Returns and allowances 2 0
3 Subtract line 2 from line 1 3 14,600
4 Cost of goods sold (from line 42 on page 2) 4 9,490
其
31 Net profit or (loss). Subtract line 30 from line 29.
● If a profit, enter on Form 1040, line 12, and ALSO on Schedule SE, line 2 (statutory employees,
see page C-6). Estates and trusts, enter on Form 1041, line 3. 31 2,259
● If a loss, you MUST go on to line 32.
其
32 If you have a loss, check the box that describes your investment in this activity (see page C-6).
● If you checked 32a, enter the loss on Form 1040, line 12, and ALSO on Schedule SE, line 2 32a All investment is at risk.
(statutory employees, see page C-6). Estates and trusts, enter on Form 1041, line 3. 32b Some investment is not
● If you checked 32b, you MUST attach Form 6198. at risk.
For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 11334P Schedule C (Form 1040) 1999
Page 15
Schedule C (Form 1040) 1999 Page 2
Part III Cost of Goods Sold (see page C-6)
33 Method(s) used to
value closing inventory: a X Cost b Lower of cost or market c Other (attach explanation)
34 Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If
“Yes,” attach explanation Yes X No
35 Inventory at beginning of year. If different from last year’s closing inventory, attach explanation 35
36 Purchases less cost of items withdrawn for personal use $10,000 - $510 (Trade Discounts) 36 9,490
39 Other costs 39
42 Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on page 1, line 4
42 9,490
Part IV Information on Your Vehicle. Complete this part ONLY if you are claiming car or truck expenses on
line 10 and are not required to file Form 4562 for this business. See the instructions for line 13 on page
C-3 to find out if you must file.
43 When did you place your vehicle in service for business purposes? (month, day, year) 䊳 6/ 1 / 98.
44 Of the total number of miles you drove your vehicle during 1999, enter the number of miles you used your vehicle for:
45 Do you (or your spouse) have another vehicle available for personal use? Yes X No
46 Was your vehicle available for use during off-duty hours? X Yes No
Dues 30
Publications 38
Catalogs 199
Page 16
SCHEDULE SE Self-Employment Tax OMB No. 1545-0074
(Form 1040)
Department of the Treasury
䊳 See Instructions for Schedule SE (Form 1040). 1999
Attachment
Internal Revenue Service (99) 䊳 Attach to Form 1040. Sequence No. 17
Name of person with self-employment income (as shown on Form 1040) Social security number of person
Kathleen Woods with self-employment income 䊳 123 00 6789
No Yes
䊲 䊲 䊲
Are you a minister, member of a religious order, or Christian
Yes Was the total of your wages and tips subject to social security Yes
Science practitioner who received IRS approval not to be taxed
䊲
䊲
or railroad retirement tax plus your net earnings from
on earnings from these sources, but you owe self-employment
self-employment more than $72,600?
tax on other earnings?
No
䊲
Are you using one of the optional methods to figure your net Yes No
䊲
䊲
No that you did not report to your employer?
䊲
Did you receive church employee income reported on Form Yes
䊲
No
䊲 䊲
䊲
YOU MAY USE SHORT SCHEDULE SE BELOW YOU MUST USE LONG SCHEDULE SE ON THE BACK
Section A—Short Schedule SE. Caution: Read above to see if you can use Short Schedule SE.
1 Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form
1065), line 15a 1
2 Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),
line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members
of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other
income to report 2 2,259
3 Combine lines 1 and 2 3 2,259
4 Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,
do not file this schedule; you do not owe self-employment tax 䊳 4 2,086
5 Self-employment tax. If the amount on line 4 is:
其
● $72,600 or less, multiply line 4 by 15.3% (.153). Enter the result here and on
Form 1040, line 50. 5 319
● More than $72,600, multiply line 4 by 2.9% (.029). Then, add $9,002.40 to the
result. Enter the total here and on Form 1040, line 50.
Page 17
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You can order free publications and forms, P.O. Box 85074
your tax questions at 1–800–829–1040.
ask tax questions, and get more information Richmond, VA 23261–5074
from the IRS in several ways. By selecting the • TTY/TDD equipment. If you have access
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can select: only evaluates the IRS assistor and does • Internal Revenue Bulletins.
• Frequently Asked Tax Questions (located not keep a record of any taxpayer's name
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• Fill-in Forms (located under Forms & IRS Publication 3207, Small Business
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• Tax Info For You to view Internal Reve- You can get one free copy by calling
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Central Area Distribution Center IRS.
Page 18
Index
L S
B F Listed property ............................. 7
Salaries and wages ..................... 7
Section 179 deduction ................. 6
Business expenses ..................... 7 Free tax services ....................... 18
Self-employed .............................. 2
Business income ......................... 4
Business not for profit ............... 12
M
G Meal expenses .......................... 10 T
Gift expenses ............................ 11 More information ....................... 18 Tax help (See More information)
Gross profit on sales ................... 4
C Tax problems, unresolved ......... 18
Capital expenses ......................... 6 Taxes:
Business ............................. 2, 7
Commission expense .................. 8 N Employment ........................... 3
Commissions and bonuses ......... 5 H Not-for-profit limit ....................... 12
Estimated ............................... 3
Computer ..................................... 8 Help (See More information)
Cost of goods sold ...................... 4 Home meetings ........................... 8 Income .................................... 2
Cost recovery .............................. 6 Home, business use of ............... 9 Self-employment .................... 3
Host or hostess ........................... 2 P Taxpayer Advocate ................... 18
Passenger automobiles ............... 7 Telephone expense ..................... 8
Penalties ...................................... 3 Transportation expenses ........... 10
D Prizes and awards ....................... 5 Travel expenses ........................ 10
Demonstrator products ................ 6 I Professional fees ......................... 9 TTY/TDD information ................ 18
Depreciation ................................ 7 Income from sales ....................... 4 Publications (See More information) 䡵
Direct sellers, defined .................. 2 Information returns ...................... 3 Purchases .................................... 5
Page 19
See How To Get More Information for a variety of ways to get publications,
Tax Publications for Business Taxpayers including by computer, phone, and mail.
General Guides 463 Travel, Entertainment, Gift, and Car 597 Information on the United States-
Expenses Canada Income Tax Treaty
1 Your Rights as a Taxpayer 505 Tax Withholding and Estimated Tax 598 Tax on Unrelated Business Income
17 Your Federal Income Tax (For 510 Excise Taxes for 2000 of Exempt Organizations
Individuals) 515 Withholding of Tax on Nonresident 686 Certification for Reduced Tax Rates
225 Farmer’s Tax Guide Aliens and Foreign Corporations in Tax Treaty Countries
334 Tax Guide for Small Business 517 Social Security and Other 901 U.S. Tax Treaties
509 Tax Calendars for 2000 Information for Members of the 908 Bankruptcy Tax Guide
553 Highlights of 1999 Tax Changes Clergy and Religious Workers 911 Direct Sellers
595 Tax Highlights for Commercial 527 Residential Rental Property 925 Passive Activity and At-Risk Rules
Fishermen 533 Self-Employment Tax 946 How To Depreciate Property
910 Guide to Free Tax Services 534 Depreciating Property Placed in 947 Practice Before the IRS and Power
Service Before 1987 of Attorney
Employer’s Guides 535 Business Expenses 954 Tax Incentives for Empowerment
536 Net Operating Losses Zones and Other Distressed
15 Circular E, Employer’s Tax Guide 537 Installment Sales Communities
15-A Employer’s Supplemental Tax Guide 538 Accounting Periods and Methods 1544 Reporting Cash Payments of Over
51 Circular A, Agricultural Employer’s 541 Partnerships $10,000
Tax Guide 542 Corporations 1546 The Taxpayer Advocate Service of
80 Federal Tax Guide For Employers in 544 Sales and Other Dispositions of the IRS
the U.S. Virgin Islands, Guam, Assets
American Samoa, and the Spanish Language Publications
Commonwealth of the Northern 551 Basis of Assets
Mariana Islands (Circular SS) 556 Examination of Returns, Appeal
Rights, and Claims for Refund 1SP Derechos del Contribuyente
179 Circular PR Guía Contributiva 579SP Cómo Preparar la Declaración de
Federal Para Patronos 560 Retirement Plans for Small Business
(SEP, SIMPLE, and Keogh Plans) Impuesto Federal
Puertorriqueños 594SP Comprendiendo el Proceso de Cobro
926 Household Employer’s Tax Guide 561 Determining the Value of Donated
Property 850 English-Spanish Glossary of Words
583 Starting a Business and Keeping and Phrases Used in Publications
Specialized Publications Records Issued by the Internal Revenue
Service
378 Fuel Tax Credits and Refunds 587 Business Use of Your Home
(Including Use by Day-Care 1544SP Informe de Pagos en Efectivo en
Providers) Exceso de $10,000 (Recibidos en
una Ocupación o Negocio)
594 Understanding the Collection Process
Commonly Used Tax Forms See How To Get More Information for a variety of ways to get forms, including by computer, fax,
phone, and mail. Items with an asterisk are available by fax. For these orders only, use the catalog
numbers when ordering.
Catalog Catalog
Form Number and Title Number Form Number and Title Number
W-2 Wage and Tax Statement 10134 1120S U.S. Income Tax Return for an S Corporation 11510
W-4 Employee’s Withholding Allowance Certificate* 10220 Sch D Capital Gains and Losses and Built-In Gains 11516
940 Employer’s Annual Federal Unemployment 11234 Sch K-1 Shareholder’s Share of Income, Credits, 11520
(FUTA) Tax Return* Deductions, etc.
940EZ Employer’s Annual Federal Unemployment 10983 2106 Employee Business Expenses* 11700
(FUTA) Tax Return* 2106-EZ Unreimbursed Employee Business 20604
941 Employer’s Quarterly Federal Tax Return 17001 Expenses*
1040 U.S. Individual Income Tax Return* 11320 2210 Underpayment of Estimated Tax by 11744
Sch A & B Itemized Deductions & Interest and 11330 Individuals, Estates, and Trusts*
Ordinary Dividends* 2441 Child and Dependent Care Expenses* 11862
Sch C Profit or Loss From Business* 11334 2848 Power of Attorney and Declaration of 11980
Representative*
Sch C-EZ Net Profit From Business* 14374
Sch D Capital Gains and Losses* 11338 3800 General Business Credit 12392
Sch D-1 Continuation Sheet for Schedule D 10424 3903 Moving Expenses* 12490
Sch E Supplemental Income and Loss* 11344 4562 Depreciation and Amortization* 12906
Sch F Profit or Loss From Farming* 11346 4797 Sales of Business Property* 13086
Sch H Household Employment Taxes* 12187 4868 Application for Automatic Extension of Time To 13141
File U.S. Individual Income Tax Return*
Sch J Farm Income Averaging* 25513
5329 Additional Taxes Attributable to IRAs, Other 13329
Sch R Credit for the Elderly or the Disabled* 11359 Qualified Retirement Plans, Annuities, Modified
Sch SE Self-Employment Tax* 11358 Endowment Contracts, and MSAs*
1040-ES Estimated Tax for Individuals* 11340 6252 Installment Sale Income* 13601
1040X Amended U.S. Individual Income Tax Return* 11360 8283 Noncash Charitable Contributions* 62299
1065 U.S. Partnership Return of Income 11390 8300 Report of Cash Payments Over $10,000 62133
Sch D Capital Gains and Losses 11393 Received in a Trade or Business*
Sch K-1 Partner’s Share of Income, 11394 8582 Passive Activity Loss Limitations* 63704
Credits, Deductions, etc. 8606 Nondeductible IRAs* 63966
1120 U.S. Corporation Income Tax Return 11450 8822 Change of Address* 12081
1120-A U.S. Corporation Short-Form 11456 8829 Expenses for Business Use of Your Home* 13232
Income Tax Return
Page 20