In my last blog, I discussed basic tax rules that any small business can use. Today let's look at some procedures and ways to keep your taxes in order and hopefully avoid an audit.
Do not comingle money. You need a separate business checking account, and you need to deposit all money from the business into that account. Money can then be transferred to your personal account. This helps maintain an accurate record of business income for tax purposes.
Get a business credit card. Designate one credit card as a business card and use it only for this purpose. The card does not need to be in the business' name, but it is better if it is. Business credit card interest is 100% deductible.
Keep logs: Retain every year your appointment book or calendar. Notations can provide backup information for things like business mileage, telephone expenses, and business trips.
Keep all receipts: Keep every receipt related to your business. Similarly, make sure to keep all cancelled checks. In the event of an audit, you will be asked to provide them.
Keep your independent contractor records up to date: Because you need to issue a 1099 to anyone to whom you paid $600 or more during the year for business services, it is important to keep accurate records all year long. Don't wait to get their address and social security number, both of which must be included on the 1099 form. It is best to get that information when you hire the person.
While all of these procedures can help you avoid an audit, the fact is, small businesses are nevertheless audited regularly. How then do you avoid an audit? First of all, don't over-deduct. Be careful of deducting every possible expense, no matter how tangential.
Moreover, you should try to avoid showing a loss. Now, losses do happen and they must of course be reported. But a business that shows a loss for several years in a row is a business that should be out of business. If it's not, something's fishy.
Finally, be careful about how you use the home office deduction as that is one deduction that is ripe for scrutiny. Before you can deduct expenses for using part of your home in a business, you must meet three stringent requirements:
- You must “regularly use part of your home exclusively for a trade or business.” As long as you are using part of your home for business on a continuing, rather than haphazard, basis, you qualify.
- The use must be exclusive. Exclusive means just that — exclusive. Any personal, non-business, use would disqualify you.
- Your home must be the principal place for your business, or you must meet patients, clients or customers there, or you must use a separate structure on your property exclusively for business purposes.
Be prepared to back up anything you do say in your tax return just in case you are audited. And again, keep every receipt. They can go a long way to getting you out of a jam should an audit arise.
(For even more business tips and strategies, check out the new podcast on iTunes that I am doing in conjunction with Greatland called Small Business Success with Steve Strauss, Powered by Greatland.)