Begin by building your documentation system. There are more than 300 tax deductio available to smal
Begin by building your documentation system. There are more than 300 tax deductio available to small busine owners. By converting many of your personal expe es into legitimate busine deductio , you can have a HUGE impact on you financial well being.
For example, lowering your expe es makes it easier to become financially free (or as Robert Kiyosaki says it "Get out of the Rat Race").
For those of you who are in debt, the money you save by paying the correct amount i tead of over-paying your taxes can be used to accelerate down your debt. For those who are looking for ways to put more into a retirement plan so that their financial future is secure, you can use the tax savings to fund your retirement.
Yet, learning additional deductio is only part of the proce . You have to maintain the proper documentation in order to su tantiate these deductio . If you don't properly document your deductio , you risk losing them in the event of an audit.
The Burden Of Proof
With all the court TV shows that are on, most people are familiar with the concept of Burden of Proof. Simply put, in a criminal case, we are i ocent until proven guilty. In other words, the burden of proof is on the state to prove our guilty.
However, when it comes to justifying your tax deductio , the burden of proof is on YOU, the taxpayer. IRS examiners are not required to help you keep your records. It is your re o ibility to prove and properly document them. The co equences of not following the tax laws are huge penalties. For example:
a) One-half of one percent a month delinquency penalty during the period that you fail to pay the proper amount of taxes
b) 20% of underpayment attributable to negligence or disregard of the rules or did not have a reasonable basis for the tax deductio
c) 75% of any underpayment attributable to fraud
d) You may not deduct some of the interests paid to the IRS, if they were due to a busine tax deduction on your Schedule C.
Tax Deduction Log
Yet an amazing thin ha e when you keep a tax log or tax diary. The burden of proof shifts from you, back to the IRS. I have heard story after story of IRS auditors cutting an audit short once the taxpayer has presented them with a complete tax log and documentation system.
Here are some Strategies to Master the Records Requirements (and have fun in the proce of maximizing your tax deductio ). Keep in mind that you easily delegate this work by teaching it to your a istant (C.A.) or book keeper.
1. Build a documentation system.
No matter what form of busine entity you have ('S' corporation, 'C' corporation, LLC, or, God-forbid, a sole proprietorship, you need three separate and distinct tax records. Permanent Files, Regular Files, and A daily diary.
Permanent Files: These include your prior year's tax retur , stock purchases and sales, equipment purchases, and sales and similar entries. Generally, you want to keep any record that relates to more than one tax year in your permanent file. If you purchase property, your permanent files should include the purchase documents, closing statements, deeds, and other expe es related to the purchase.
Regular Files: These include time sheets, invoices for part-time help, receipts, invoices, canceled checks and other corroborative evidence.
Daily Diary: Your daily diary, which can be your a ointment book, is the focal point of your documentation system. This is e ecially true if you operate a personal service busine . The smaller the busine is the more important this information becomes. Your daily diary should include: All of your a ointments, Where and when you travel, Where you go by automobile, and Where and when you entertain busine contacts.
2. Use Three-Part Checks
Keep a separate busine checkbook and use three-part checks. Regardle of your busine form, whether a corporation or sole-proprietorship (Ugh), the three-part check is nece ary to build good, easy to use records in your regular files.
a) Send part one, the original of the check to the vendor.
b) Staple su orting evidence (receipts or invoices) to part two and file it alphabetically in the vendor file.
c) Put part three in a numerical file for later viewing by the IRS (did somebody say audit??) and reference by you.
3. Keep form 1099 Information Separate
If you have both W-2 and 1099 income, keep your 1099 information separate. This includes the source(s) and amount of 1099 income and all of your busine expe es.
4. Keep a separate Tax log or Diary
To complete your documentation system, you must keep a separate tax log. This co ists of a permanent record that is separate from the receipts you keep for each item. I'll list the major busine expe es below and give examples of the documentation you should keep.
Home Office Deduction - You should take several pictures of your office (showing that it is separate from your living area) and keep them in a permanent file. You should also keep the printout from your realtor showing comparable cost of office ace in your area.
Meals Out - You should a wer the following five questio . Who? What? When? Where? Why? You can go high tech (an excel readsheet), low tech (a yellow pad) or medium tech (a word proce ing document). At the restaurant, I make a quick note on the credit card receipt. Three of the questio are already a wered, so the note often looks like this "Fred regarding his LLC". After returning from the restaurant, I give the receipt to my bookkeeper or a istant. She tra fers the information from the receipt to the tax log. (You may choose to do this yourself) Now my meal records are audit-proof.
Auto Mileage - The log should contain the following information: Date, starting mileage, ending mileage. Once again, you can use any level of technology you prefer.
Travel - Keep your plane tickets, parking and cab receipts (e . if over $75), and the workbook or literature provided to you by the seminar promoter. I also use the 5 question log above to document my travel expe es.
Su er Money - If the cost of the meal is le than $75, you don't need to keep a receipt. Because I often use the su er money deduction on my telecla nights, I always put the telecla info in my calendar. I usually pay cash for the meal and reimburse the money after the fact.
I enter my cash outlays regularly and every month or so, I have my book keeper cut me a reimbursement check. Keeping a good documentation system is a worthwhile investment. It makes you co cious of the deductio you would otherwise mi , it kee you organized and it kee you audit-proof. That's a great combination.
For example, lowering your expe es makes it easier to become financially free (or as Robert Kiyosaki says it "Get out of the Rat Race").
For those of you who are in debt, the money you save by paying the correct amount i tead of over-paying your taxes can be used to accelerate down your debt. For those who are looking for ways to put more into a retirement plan so that their financial future is secure, you can use the tax savings to fund your retirement.
Yet, learning additional deductio is only part of the proce . You have to maintain the proper documentation in order to su tantiate these deductio . If you don't properly document your deductio , you risk losing them in the event of an audit.
The Burden Of Proof
With all the court TV shows that are on, most people are familiar with the concept of Burden of Proof. Simply put, in a criminal case, we are i ocent until proven guilty. In other words, the burden of proof is on the state to prove our guilty.
However, when it comes to justifying your tax deductio , the burden of proof is on YOU, the taxpayer. IRS examiners are not required to help you keep your records. It is your re o ibility to prove and properly document them. The co equences of not following the tax laws are huge penalties. For example:
a) One-half of one percent a month delinquency penalty during the period that you fail to pay the proper amount of taxes
b) 20% of underpayment attributable to negligence or disregard of the rules or did not have a reasonable basis for the tax deductio
c) 75% of any underpayment attributable to fraud
d) You may not deduct some of the interests paid to the IRS, if they were due to a busine tax deduction on your Schedule C.
Tax Deduction Log
Yet an amazing thin ha e when you keep a tax log or tax diary. The burden of proof shifts from you, back to the IRS. I have heard story after story of IRS auditors cutting an audit short once the taxpayer has presented them with a complete tax log and documentation system.
Here are some Strategies to Master the Records Requirements (and have fun in the proce of maximizing your tax deductio ). Keep in mind that you easily delegate this work by teaching it to your a istant (C.A.) or book keeper.
1. Build a documentation system.
No matter what form of busine entity you have ('S' corporation, 'C' corporation, LLC, or, God-forbid, a sole proprietorship, you need three separate and distinct tax records. Permanent Files, Regular Files, and A daily diary.
Permanent Files: These include your prior year's tax retur , stock purchases and sales, equipment purchases, and sales and similar entries. Generally, you want to keep any record that relates to more than one tax year in your permanent file. If you purchase property, your permanent files should include the purchase documents, closing statements, deeds, and other expe es related to the purchase.
Regular Files: These include time sheets, invoices for part-time help, receipts, invoices, canceled checks and other corroborative evidence.
Daily Diary: Your daily diary, which can be your a ointment book, is the focal point of your documentation system. This is e ecially true if you operate a personal service busine . The smaller the busine is the more important this information becomes. Your daily diary should include: All of your a ointments, Where and when you travel, Where you go by automobile, and Where and when you entertain busine contacts.
2. Use Three-Part Checks
Keep a separate busine checkbook and use three-part checks. Regardle of your busine form, whether a corporation or sole-proprietorship (Ugh), the three-part check is nece ary to build good, easy to use records in your regular files.
a) Send part one, the original of the check to the vendor.
b) Staple su orting evidence (receipts or invoices) to part two and file it alphabetically in the vendor file.
c) Put part three in a numerical file for later viewing by the IRS (did somebody say audit??) and reference by you.
3. Keep form 1099 Information Separate
If you have both W-2 and 1099 income, keep your 1099 information separate. This includes the source(s) and amount of 1099 income and all of your busine expe es.
4. Keep a separate Tax log or Diary
To complete your documentation system, you must keep a separate tax log. This co ists of a permanent record that is separate from the receipts you keep for each item. I'll list the major busine expe es below and give examples of the documentation you should keep.
Home Office Deduction - You should take several pictures of your office (showing that it is separate from your living area) and keep them in a permanent file. You should also keep the printout from your realtor showing comparable cost of office ace in your area.
Meals Out - You should a wer the following five questio . Who? What? When? Where? Why? You can go high tech (an excel readsheet), low tech (a yellow pad) or medium tech (a word proce ing document). At the restaurant, I make a quick note on the credit card receipt. Three of the questio are already a wered, so the note often looks like this "Fred regarding his LLC". After returning from the restaurant, I give the receipt to my bookkeeper or a istant. She tra fers the information from the receipt to the tax log. (You may choose to do this yourself) Now my meal records are audit-proof.
Auto Mileage - The log should contain the following information: Date, starting mileage, ending mileage. Once again, you can use any level of technology you prefer.
Travel - Keep your plane tickets, parking and cab receipts (e . if over $75), and the workbook or literature provided to you by the seminar promoter. I also use the 5 question log above to document my travel expe es.
Su er Money - If the cost of the meal is le than $75, you don't need to keep a receipt. Because I often use the su er money deduction on my telecla nights, I always put the telecla info in my calendar. I usually pay cash for the meal and reimburse the money after the fact.
I enter my cash outlays regularly and every month or so, I have my book keeper cut me a reimbursement check. Keeping a good documentation system is a worthwhile investment. It makes you co cious of the deductio you would otherwise mi , it kee you organized and it kee you audit-proof. That's a great combination.
