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Publication 334 2003 Tax Year

Publication 334
Introductory Material

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

Introduction

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 on ordering 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 may 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.

IF you need information about: THEN you should see:
Commercial fishing Publication 595
Corporations Publication 542
Direct selling Publication 911
Farming Publication 225
Partnerships Publication 541
Passive activities Publication 925
Recordkeeping Publication 583
S corporations Instructions for Form 1120S

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 may 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. Please put “Publications Comment” on the subject line.

You can write us at the following address:


Internal Revenue Service
Business Forms and Publications
SE:W:CAR:MP:T:B
1111 Constitution Ave. NW
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.

Important Changes for 2003

The following are some of the tax changes for 2003. For information on other changes, see Publication 553, Highlights of 2003 Tax Changes.

Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2003 is 36 cents a mile for all business miles. For more information, see Car and Truck Expenses in chapter 8.

Self-employment tax. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax is $87,000 for 2003. For more information, see Self-Employment Tax in chapter 1.

Self-employed health insurance deduction. Beginning in 2003, the self-employed health insurance deduction percentage increases to 100%. For more information, see Insurance in chapter 8.

Additional depreciation. You may be able to claim an additional 50% special depreciation allowance for property acquired after May 5, 2003. For more information, see Depreciation in chapter 8.

Increased section 179 deduction dollar limit. The maximum section 179 deduction you can elect for property you purchased and placed in service beginning in 2003 has increased from $24,000 to $100,000. This amount will be adjusted for inflation for 2004 and 2005. For more information, see Publication 946.

Inclusion of off-the-shelf computer software as eligible section 179 property. The types of property that qualify for the section 179 deduction have been expanded to include off-the-shelf computer software purchased and placed in service beginning in 2003. For more information, see Publication 946.

Important Changes for 2004

The following are some of the tax changes for 2004. For information on other changes, see Publication 553, Highlights of 2003 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.

Self-employment tax. The maximum net self-employment earnings subject to the social security part of the self-employment tax increases to $87,900 for 2004.

Standard mileage rate available for small fleets. Beginning in 2004, the business standard mileage rate may be used for as many as four vehicles that you own or lease and use simultaneously.

Important Reminders

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. 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, (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 year or $4 million in any combination of years, (5) transactions resulting in book-tax differences of more than $10 million in any year, 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.

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