Taxpayer Help and Education

Frequently Asked Tax Questions And Answers

Keyword:   Home Based Business
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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, 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. Use Form 4562, Depreciation and Amortization to compute the depreciation for the portion of your computer used for investment purposes. You cannot claim section 179 expensing of the computer since it is not a business asset.

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I have a home office. Can I deduct expenses like mortgage, utilities, etc. without deducting depreciation so that when I sell this house, the basis won't be affected?

If you have qualified business use of your home that entitles 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 is reduced.

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Does a household employer have to pay social security and Medicare for all household employees if only one employee makes more than $1,200 in the year?

No. The employer only has to pay social security and Medicare tax for the employee(s) who receive $1,200 or more in wages for the year. If the amount paid to any employee in a calendar year is less than $1,200, no social security or Medicare tax is owed. 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

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 of 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.

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Is an employer identification number (EIN) required if the husband and wife are the only persons working in the business?

If both of you are sharing in the income and expenses, you are a partnership and each would receive a Form 1065, SCHEDULE K-1 for determining your self-employment income. If you work for your spouse, you should be receiving a Form W-2, subject to withholding of taxes and the owner would claim the wages as a deduction. Both a partnership and a sole proprietor with an employee require an EIN.

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Does a small company need a tax ID number?

A sole proprietor who has no employees and who files no 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.

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How do I apply for an employer identification number (EIN)?

To obtain an EIN, you must complete Form SS-4, Application for Employer Identification Number. After you have completed the Form SS-4, you can get the EIN by mail, FAX, or by phone. The instructions for Form SS-4 provide both an IRS service center address and a phone number for Tele-TIN. For more information, refer to Tax Topic 755, Employer Identification Number (EIN) - How to Apply, or Publication 1635, Understanding Your EIN.

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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 on the instructions to Form SS-4, Application for Employer Identification Number.

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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, unless the new owner already has an EIN,
  • 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.

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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 Secretary Treasurer signs the statement, if it is a corporation, or the managing member, if it is a limited liability company.

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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, 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.

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How do you distinguish between a business and a hobby?

Generally, a hobby is an activity that is carried on for personal pleasure or recreation. It is not an activity entered into with the intention of making a profit. In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

  1. You carry on the activity in a businesslike manner
  2. The time and effort you put into the activity indicate you intend to make it profitable
  3. You depend on income from the activity for your livelihood
  4. Your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
  5. You change your methods of operation in an attempt to improve profitability
  6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business
  7. You were successful in making a profit in similar activities in the past
  8. The activity makes a profit in some years, and how much profit it makes
  9. You can expect to make a future profit from the appreciation of the assets used in the activity

The importance of knowing whether you are involved in an activity for profit or as a hobby is that the amount of expenses you can deduct if the activity is a hobby are limited to the amount of income from the same activity.

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I use my home for business. Can I deduct the expenses?

If you use part of your home exclusively and regularly and, if an employee, for the convenience of your employer as the principal place of business or as a place where you meet or deal with customers, you may deduct expenses for use of part of your home. If you deduct your business expenses on Form 1040, SCHEDULE C, you must figure your deduction on Form 8829, Expenses for Business Use of Your Home, and attach it to Form 1040 with Schedule C. 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).

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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 the 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).

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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, record keeping, 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, Small Business Tax Workshop, Tax Topic 103 , Small Business Tax Education Program (STEP), or mailing the interest form in Publication 1057, Small Business Tax Education Program Brochure, to the nearest IRS Taxpayer Education Coordinator. In addition, the IRS has assembled a business tax kit, Publication 454, Your Business Tax Kit, which contains various forms and publications for persons in business or for those starting a business. Publication 1057 and 454 can be ordered by calling 800-829-1040.

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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 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, Profit and Loss from Business (Sole Proprietorship) or Form 1040, SCHEDULE C-EZ, Net Profit from Business and Form 1040, SCHEDULE SE, Self-employment Tax.
  • Partnerships use Form 1065, U.S. Partnership Return of Income and Schedule K-1.
  • Corporations use Form 1120, U.S. Corporation Income Tax Return.
  • S Corporations use Form 1120S, 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, other forms and publications would come into play.

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If you start your own business and send in your quarterly 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, Profit and Loss from Business (Sole Proprietorship) and a Form 1040, SCHEDULE SE, Self-employment Tax.

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I just started a small business and want to know if I have to file quarterly or at the end of the year?

As a self-employed individual, you must determine if you are liable for making estimated taxes which are paid on a quarterly basis. The estimated tax worksheet is Form 1040-ES, Estimated Tax for Individuals. When you file your income tax return, you include the income from the business on that return. The forms to be filed are the Form 1040, U.S. Individual Income Tax Return, Form 1040, SCHEDULE C, Profit or Loss from Business, and Form 1040, SCHEDULE SE, Self-employment Tax. You may qualify to use Form 1040, SCHEDULE C-EZ, Net Profit from Business.

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Tuesday, 19-Dec-2000 17:52:57 EST