Keep personal separate from business – Create a separate checking account, use a separate credit card, separate PayPal account, etc. By keeping it all in only one account it simplifies the recording and strengthens your position with the IRS. They may keep out of your personal stuff.
Documentation – Keep customer invoices, deposit detail, vendor invoices, detailed credit card receipts, online receipts and bank statements for at least 4 years. Bank statements and credit card statements alone do not meet IRS standards. If you amend your return you may need to keep 7 years. To reduce space and maintain the integrity of the print on credit card receipts, scan your documents.
Software – Invest in a good software accounting system. It will save time and provide support for your tax return.
Fixed Assets – For equipment used in the business, keep documentation on how much you paid, description of what you purchased and the date you placed it in service until 3 years after you dispose of the item.
Cash and barter transactions. They count. The IRS has ways to determine if you are under reporting your income. If you pay cash for something – take a picture, keep the ad – document it.
Labor – Make sure that all “independent contractors” meet the IRS criteria. If you pay more than $600 a year, report what you paid them on an annual information form 1099misc. Hire a payroll processor to insure compliance and prevent tax penalties.
Business use of vehicle – Always keep detailed records on your business mileage and total mileage on your personal or business-owned vehicle, noting business miles to where and business reason and total mileage for each month. You have the option of using actual costs or a standard mileage rate.
Customer meals – Document who you met with and business reason on the detailed receipt that specially lists the date, amount and what was included. A credit card receipt for the total will not meet the documentation required. Only 50% is tax deductible.
Entertainment – Tickets to a ball game, golfing fees and fishing jaunts are no longer deductible. Meals associated may be if separately invoiced.
Home office – Space must be exclusively, used regularly and connected with a profitable business to be tax deductible.
Sales & Use tax – Whether you collect it or not you will be responsible for it.
This is a basic guideline. Each taxpayer should seek independent advice from a tax professional based on their individual situation. The burden of proof is on you, not the IRS. Be Informed – Ask questions, be curious and become familiar with the tax rules surrounding your business. Ignorance will not avoid IRS penalties. You are ultimately responsible.
