| Pub. 334, Tax Guide for Small Business |
2005 Tax Year |
Publication 334 - Introductory Material
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.
Are you self-employed?
You are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor.
Sole proprietor.
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.
Trade or business.
A trade or business is generally an activity carried on to make a profit. The facts and circumstances of each case
determine whether or not an
activity is a trade or business. You do not need to actually make a profit to be in a trade or business as long as you have
a profit motive. You do
need to make ongoing efforts to further the interests of your business.
You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business
in addition to your regular job
or business may be self-employment.
Independent contractor.
People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers,
or auctioneers who are
in an independent trade, business, or profession in which they offer their services to the general public are generally independent
contractors.
However, whether they are independent contractors or employees depends on the facts in each case. The general rule is that
an individual is an
independent contractor if the payer has the right to control or to direct only the result of the work and not how it will
be done. The earnings of a
person who is working as an independent contractor are subject to self-employment tax. For more information on determining
whether you are an
independent contractor or an employee, see Publication 15-A, Employer's Supplemental Tax Guide.
Statutory employee.
A statutory employee
has a checkmark in box 13 of his or her Form W-2, Wage and Tax Statement. Statutory employees use Schedule C
or C-EZ to report their wages and expenses.
Limited liability company (LLC).
A limited liability company (LLC) is an entity formed under state law by filing articles of organization. Generally,
a single-member LLC is
disregarded as an entity separate from its owner and reports its income and deductions on its owner's federal income tax return.
An owner who is an
individual may use Schedule C or C-EZ.
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 above) 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.)
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What must I know
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Where to find the answer
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What kinds of federal taxes do I have to pay? How do I pay them?
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See chapter 1.
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What forms must I file?
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See chapter 1.
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What must I do if I have employees?
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See Employment Taxes in chapter 1.
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Do I have to start my tax year in January? Or can I start it in any other month?
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See Accounting Periods in chapter 2.
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What method can I use to account for my income and expenses?
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See Accounting Methods in chapter 2.
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What kinds of business income do I have to report on my tax return?
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See chapter 5.
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What kinds of business expenses can I deduct on my tax return?
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See chapter 8.
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What kinds of expenses are not deductible as business expenses?
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See Expenses You Cannot Deduct in chapter 8.
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What happens if I have a business loss? Can I deduct it?
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See chapter 9.
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What must I do if I disposed of business property during the year?
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See chapter 3.
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What are my rights as a taxpayer?
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See chapter 11.
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Where do I go if I need help with federal tax matters?
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See chapter 12.
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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.
Tax questions.
If you have a tax question, visit
www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.
The following are some of the tax changes for 2005. For information on other changes, see Publication 553, Highlights of 2005
Tax Changes.
At the time this publication went to print, Congress was considering legislation that would provide additional tax relief
for individuals affected
by Hurricane Katrina, Rita, and Wilma. For more details, and to find out if this legislation was enacted, see Publication
4492.
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
driven before September 1, 2005. The rate is 48.5 cents a mile for business miles driven after August 31, 2005, and before
January 1, 2006. 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 $90,000
for 2005. For more
information, see Self-Employment (SE) Tax in chapter 1 and chapter 10.
Domestic production activities deduction. You may be able to deduct up to 3% of your qualified production activities income from certain business activities. For more
information, see Form
8903, Domestic Production Activities Deduction.
Increased section 179 deduction dollar limit. The maximum section 179 deduction you can elect for property you purchased and placed in service beginning in 2005 has increased
from $102,000 to
$105,000. For more information, see Publication 946.
New and revised credits. The following credits were created or revised by recent legislation. Some are effective for tax year 2005 and some for 2006.
See chapter 4 for a
complete list of the credits and the form numbers.
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Alcohol fuel credit.
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Alternative fuel vehicle refueling property credit.
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Alternative motor vehicle credit.
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Biodiesel and renewable diesel fuels credit.
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Credit for increasing research activities.
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Distilled spirits credit.
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Energy efficient appliance credit.
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Energy efficient home credit.
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Investment credit.
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Nonconventional source fuel credit.
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Qualified railroad track maintenance credit.
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Renewable electricity, refined coal, and Indian coal production credit.
The following are some of the tax changes for 2006. For information on other changes, see Publication 553, Highlights of 2005
Tax Changes.
Self-employment tax. The maximum net self-employment earnings subject to the social security part of the self-employment tax increases to $94,200
for 2006.
Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2006 is 44.5 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. You may also have to pay interest and penalties on any reportable transaction
understatements. 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 ($50,000 if from certain foreign currency transactions) 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.
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