The purpose of this
publication is to provide
general information about the
federal tax laws that apply to
small business owners who are
sole proprietors and to
statutory employees.
A sole
proprietor
is someone who owns an
unincorporated business by
himself or herself. However, if
you are the sole member of a
domestic limited liability
company (LLC), you are not a
sole proprietor if you elect to
treat the LLC as a corporation.
A
statutory employee
has a checkmark in box 13 of
his or her Form W-2, Wage and
Tax Statement. Statutory
employees have to use Schedule C
or C-EZ to report their wages
and expenses.
To use this publication, you
will generally need the
following forms.
- Form 1040 and its
instructions.
- Schedule C or C-EZ
and its instructions.
See chapter 12 for
information about getting these
forms.
Husband and
wife business.
If you and your spouse
jointly own and operate an
unincorporated business and
share in the profits and
losses, you are partners in
a partnership, whether or
not you have a formal
partnership agreement. Do
not use Schedule C or C-EZ.
Instead, file Form 1065. For
more information, see
Publication 541.
Exception.
If you and your spouse
wholly own an unincorporated
business as community
property under the community
property laws of a state,
foreign country, or U.S.
possession, you can treat
the business either as a
sole proprietorship or a
partnership. The only states
with community property laws
are Arizona, California,
Idaho, Louisiana, Nevada,
New Mexico, Texas,
Washington, and Wisconsin. A
change in your reporting
position will be treated as
a conversion of the entity.
This
publication does not cover
the topics listed in the
following table.
What you
need to know. Table
A (shown later)
provides a list of questions
you need to answer to help
you meet your federal tax
obligations. After each
question is the location in
this publication where you
will find the related
discussion.
Table A. What You
Need To Know About
Federal Taxes
(Note.
The
following is
a list of
questions
you may need
to answer so
you can fill
out your
federal
income tax
return.
Chapters are
given to
help you
find the
related
discussion
in this
publication.)
|
What
must I
know
|
|
Where to
find the
answer
|
|
|
|
What kinds
of federal
taxes do I
have to pay?
How do I pay
them? |
|
See chapter
1. |
|
What forms
must I file?
|
|
See chapter
1. |
|
What must I
do if I have
employees?
|
|
See
Employment
Taxes
in chapter
1. |
|
Do I have to
start my tax
year in
January? Or
can I start
it in any
other month?
|
|
See
Accounting
Periods
in chapter
2. |
|
What method
can I use to
account for
my income
and
expenses?
|
|
See
Accounting
Methods
in chapter
2. |
|
What kinds
of business
income do I
have to
report on my
tax return?
|
|
See chapter
5. |
|
What kinds
of business
expenses can
I deduct on
my tax
return?
|
|
See chapter
8. |
|
What kinds
of expenses
are not
deductible
as business
expenses?
|
|
See
Expenses
You Cannot
Deduct
in chapter
8. |
|
What happens
if I have a
business
loss? Can I
deduct it?
|
|
See chapter
9. |
|
What must I
do if I
disposed of
business
property
during the
year? |
|
See chapter
3. |
|
What are my
rights as a
taxpayer?
|
|
See chapter
11. |
|
Where do I
go if I need
help with
federal tax
matters?
|
|
See
chapter 12.
|
IRS
mission.
Provide America's
taxpayers top quality
service by helping them
understand and meet their
tax responsibilities and by
applying the tax law with
integrity and fairness to
all.
Comments
and suggestions.
We welcome your comments
about this publication and
your suggestions for future
editions.
You can email us at
*taxforms@irs.gov. (The
asterisk must be included in
the address.) Please put “
Publications
Comment” on the
subject line. Although we
cannot respond individually
to each email, we do
appreciate your feedback and
will consider your comments
as we revise our tax
products.
You can write us at the
following address:
Internal Revenue Service
Business Forms and
Publications Branch
SE:W:CAR:MP:T:B
1111 Constitution Ave.
NW, IR-6406
Washington, DC 20224
We respond to many letters
by telephone. Therefore, it
would be helpful if you
would include your daytime
phone number, including the
area code, in your
correspondence.
The following are some of the
tax changes for 2004. For
information on other changes,
see Publication 553, Highlights
of 2004 Tax Changes.
Standard
mileage rate. The standard
mileage rate for the cost of
operating your car, van, pickup,
or panel truck in 2004 is 37.5
cents a mile for all business
miles. For more information, see
Car
and Truck Expenses
in chapter 8.
Standard
mileage rate available for small
fleets. Beginning in 2004,
the business standard mileage
rate can be used for as many as
four vehicles that you own or
lease and use simultaneously.
Self-employment tax. The
maximum net self-employment
earnings subject to the social
security part (12.4%) of the
self-employment tax is $87,900
for 2004. For more information,
see
Self-Employment Tax
in chapter 1.
Increased
section 179 deduction dollar
limit. The maximum section
179 deduction you can elect for
property you purchased and
placed in service beginning in
2004 has increased from $100,000
to $102,000. This amount will be
adjusted for inflation for 2005.
For more information, see
Publication 946.
Schedule C-EZ
expense limit increased to
$5,000. You may use Schedule
C-EZ instead of Schedule C if
your expenses are $5,000 or less
and you meet the other
requirements shown in Part I of
Schedule C-EZ.
The following are some of the
tax changes for 2005. For
information on other changes,
see Publication 553, Highlights
of 2004 Tax Changes.
Self-employment tax. The
maximum net self-employment
earnings subject to the social
security part of the
self-employment tax increases to
$90,000 for 2005.
Standard
mileage rate. The standard
mileage rate for the cost of
operating your car, van, pickup,
or panel truck in 2005 is 40.5
cents a mile for all business
miles. For more information, see
Car
and Truck Expenses
in chapter 8.
Accounting
Methods. Certain small
business taxpayers may be
eligible to adopt or change to
the cash method of accounting
and may not be required to
account for inventories. For
more information, see
Inventories in
chapter 2.
Reportable
transactions. You must file
Form 8886, Reportable
Transaction Disclosure
Statement, to report certain
transactions. You may have to
pay a penalty if you are
required to file Form 8886 but
do not do so. Reportable
transactions include (1)
transactions the same as or
substantially similar to tax
avoidance transactions
identified by the IRS, (2)
transactions offered to you
under conditions of
confidentiality for which you
paid an advisor a minimum fee,
(3) transactions for which you
have, or a related party has,
contractual protection against
disallowance of the tax
benefits, (4) transactions that
result in losses of at least $2
million in any single tax year
or $4 million in any combination
of tax years, (5) transactions
resulting in book-tax
differences of more than $10
million on a gross basis, and
(6) transactions with asset
holding periods of 45 days or
less and that result in a tax
credit of more than $250,000.
For more information, see the
Instructions for Form 8886.
Photographs of
Missing Children
The Internal Revenue Service
is a proud partner with the
National Center for Missing and
Exploited Children. Photographs
of missing children selected by
the Center may appear in this
publication on pages that would
otherwise be blank. You can help
bring these children home by
looking at the photographs and
calling 1-800-THE-LOST
(1-800-843-5678) if you
recognize a child.
