Starting a Business Internal Revenue Service

If so, make sure you file the right tax returns for the year you close. And if you have employees, you must also deposit payroll taxes. The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

You will use the information provided on this form to figure the amount of income tax to withhold from your employee’s wages. Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA. You withhold part of these taxes from your employee’s wages and you pay a part yourself.

General Business Credits

The city is paying the principal and interest with the annual payments made by the property owners. Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. You should increase the basis of your property by the amount of the assessment. However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid.

Starting or Ending a Business 3 Internal Revenue Service

If you file the statement early, the election becomes effective in the month of the tax year your active business begins. To elect to amortize startup or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. You may also be required to attach an organizational costs election statement (described later) to your return. A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment.

Business Bad Debts

Next, subtract the cost of goods sold (line 4) from net receipts (line 3). Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Inventory at the Starting or Ending a Business 3 Internal Revenue Service end of the year is also known as closing or ending inventory. Your ending inventory will usually become the beginning inventory of your next tax year. The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts.

If you make this election, you must maintain adequate records to support your deduction. Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. The election applies to the tax year you make this election and all later tax years.

Prepare Your Taxes

You can deduct the remaining debt as a bad debt if and when it becomes worthless. If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation.