As promised, we’re back with more great tips from Jean Grady of TaxJeanie.com for small business and freelancers. Last week we tackled Tax Tips for Small Businesses and Freelancers, and this week we’re diving into recordkeeping — which when done properly will help you take better advantage of those tax tips!
Now, if you’ve ever seen the film STRANGER THAN FICTION, it provides a perfect example of how NOT to store your business records.
You probably already knew that you need a better system for your business records, but Jeanie’s here to offer us some more specific direction on the best practices for storing our business records.
Why are Business Records Important?
It’s vitally important to keep records for your small business in order for the following reasons:
- Monitor the progress of your business
- Prepare financial statements
- Identify the source of your receipts
- Keep track of deducible expenses
- Prepare your tax returns
- Support items reported on your tax returns
What Business Records Do I Need to Keep?
The law doesn’t have any specific requirements as long as you choose a system that is suited to your business and clearly shows your income and expenses. Electronic records are acceptable as long as you can index, store, preserve, retrieve and reproduce the electronically stored books and records in a legible format.
While there are no specific requirements, here’s a list of supporting documents you’ll likely want to keep.
- Gross Receipts
- Cash register tapes
- Bank deposit slips
- Receipt books
- Credit card charge slips
- Forms 1099-MISC
- Canceled checks
- Cash register tape receipts
- Credit card sales slips
- Canceled checks
- Cash register tapes
- Account statements
- Credit card sales slips
- Petty cash slips for small cash payments
How Long Should I Keep My Business Records?
The IRS is once again frustratingly vague: You must keep your records as long as they may be needed for the administration of any provision by the IRS. However, the rule of thumb is to keep your documents for seven years after your taxes are filed and paid. Never get rid of records if you have not yet filed your tax return for the year.
Consulting with a tax professional can help you strategize exactly what records are important for your business. As I said last week, Jeanie’s been a huge help to me in getting my finances in order for my own small business. If you’re in the market for a great tax pro with a small business or freelance focus, give Jeanie a call at 816-525-1411, or visit her website at www.taxjeanie.com for more information.
It’s that time of year again when taxes are on everyone’s mind, whether you’re a business owner or not. If you’re feeling stressed this year, now’s the time to get your ducks in a row so that you’re better prepared next time around. And to help you do that, I asked the tax pro Jean Grady of Tax Jeanie (how cute is that?) to give us some guidelines for small business owners and freelancers.
Tax Deductions for Small Business
When you own a small business, you get to deduct money you spend running and growing that small business. Here are a few items you might not have considered.
If you use your car for business, you can deduct some of the costs of keeping it on the road. You can either keep track of and deduct your actual business-related expenses, or you can deduct 55.5 cents (for 2012) for each business mile driven. One caveat: if you use your vehicle for both business and pleasure, you need to keep careful track of how the vehicle is used by maintaining a log that details the total miles your vehicle is driven in addition to the business miles.
If you pick up the tab for a meal or coffee with current or potential customers, you can deduct 50 percent of the cost. The rule here is that the meeting must be “directly related” to or “associated with” the business, and business must be discussed immediately before, after or during the entertainment. On the receipt or bill, always make a note of the specific purpose for the meeting, and file it safely in case of an audit.
If you use a home computer partially for business, you will be able to deduct a percentage of the cost of the computer. Keep a log of business versus personal time. If you have two computers, you can designate one for personal use and one for business use. Cell phones fall under the same set of rules. Tally up your business calls at the end of the month and determine the percentage of time you used it for business purposes — that’s what you can deduct. Lastly, the first phone line in your home is never deductible, but, if you have a second phone line in your home for business use, it can be deducted in full.
When you travel for business, you can deduct the costs of transportation, car rental, taxis, lodging, meals and tips, shipping, business materials, clothes cleaning, telephone calls and technology charges. If your trip is split between business and pleasure, in most cases you can still deduct your expenses as long as the primary purpose is business. You can even take your family along, but you can only deduct your own expenses.
This is one of the biggest red flags for an IRS audit, but there’s no reason you shouldn’t take the deductions as long as you qualify. Here are the rules.
The area of your home used for business must be used regularly and exclusively:
- As the principal place of business (including administrative use — see below for more details)
- As a place to meet with clients in the normal course of business, OR
- In connection with the business if it is a separate structure not attached to the taxpayer’s personal residence.
There are two exceptions to this rule:
- Storage of inventory of product samples if:
- Inventory or product samples are stored for the business.
- Business is a wholesale or retail business.
- Home is the only fixed location of the business.
- Storage space is used on a regular basis.
- Space used is separately identifiable space.
- The taxpayer operating a day care service in the home may deduct a portion of the dwelling even if it is not set aside exclusively for the business.
As for administrative use, a home office will quality as a principal place of business if:
- The office is used exclusively and regularly for administrative or management activities of a trade or business, AND
- There is no other fixed location where the taxpayer conducts these activities.
If you meet these qualifications, you can deduct a percentage of the cost of operating your home, including utilities, insurance on the home, some repairs, mortgage interest, real estate taxes and even depreciation if you own the home. If you are renting, you can deduct a percentage of the rent payments. Discussing your situation with a tax professional who is well-versed in small business deductions is the best way to ensure you’re getting the deductions you’re qualified for — and not taking any that you don’t, which could hurt you down the road.
Overlooked Business Expenses
Those are the major categories of business deductions, but here’s a list of often-overlooked business expenses:
- CDs, DVDs, books, magazines and other media related to business skills
- Bank service charges for the business account
- Business gifts (deduction limited to $25 per person per year)
- Casual labor and tips
- Office supplies
- Online computer services related to the business
- Parking and meters
- Seminars and trade shows
- Taxi and bus fare
- Long distance phone charges on your personal line
Get Tax Help From a Professional Accountant
If you’re looking for an accountant or tax pro, I can tell you that Jeanie has been a massive help to me personally as I’ve grown my small business. If you’re in the market for an experienced, business-minded and super-nice-to-work-with accountant, give Jeanie a call at 816-525-1411, or visit her website at www.taxjeanie.com for more information. We’ll be back next week with more tips from Jeanie on recordkeeping for small businesses!