We have discussed some of the lesser-known tax relief deductions that are available to you as a business owner. If you apply these strategies and convert many of your personal expenses into legitimate business deductions, you can have a HUGE impact on the financial well being of your business. Lowering your expenses makes it easier to become free of financial burden and get out of the rat race!
For those of you who are in serious debt, the money that you can save by paying the right amount in taxes (instead of over-paying) can be used to accelerate down your debt. Just imagine how good it would feel to keep thousands of dollars more of your income from the IRS and become completely debt free! 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 develop an effective retirement planning strategy.
Yet, learning about getting additional tax relief is only the first step of the process. You absolutely need to maintain the proper documentation in order to justify taking these tax deductions. If you don't properly document your deductions, you risk losing them in the event of an unexpected audit. Keeping good records can be the difference between an audit being a stressful catastrophe or just a minor inconvenience.
With all the court TV shows that are on, you are probably familiar with the concept of "Burden of Proof." Simply put, we are innocent until proven guilty. In other words, it is up to the state to prove us guilty, until then we are assumed to be innocent. However, when it comes to justifying your tax relief deductions, the burden of proof is on YOU. IRS examiners are not required to help you keep your records. It is your responsibility to prove and properly document them. The consequences can be some rather stiff penalties:
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 relief deduction;
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 business tax relief deduction on your Schedule C.
Yet an amazing thing happens 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 legitimate documentation system. Here are some simple Strategies to Master the Records Requirements (and have fun in the process of maximizing your tax relief deductions). Keep in mind that you easily delegate this work by teaching it to your assistant (C.A.) or book keeper.
No matter what form of business entity you operate under ('S' corporation, 'C' corporation, LLC, or, God-forbid, a sole proprietorship) you will need three separate and distinct tax records. Permanent Files, Regular Files, and A daily diary.
These include your prior year's tax returns, 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 expenses that are related to the purchase.
These include time sheets, invoices for part-time help, receipts, invoices, canceled checks and other corroborative evidence.
Your daily diary, which can be your appointment book, is the focal point of your documentation system. This is especially true if you operate a personal service business. The smaller the business is the more important this information becomes. Your daily diary should include: All of your appointments, Where and when you travel, Where you go by automobile, and Where and when you entertain business contacts or partners.
Keep a separate business checkbook and use three-part checks. Regardless of your business form, whether a corporation or sole-proprietorship (Ugh), the three-part check is necessary 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 supporting 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.
If you have both W-2 and 1099 income, make sure to keep your 1099 information separate. This includes the source(s) and amount of 1099 income and all of your liable business expenses.
To complete your documentation system correctly, keep a separate tax log. This consists of a permanent record that is separate from the receipts you keep for each item. I'll list the major business expenses below and give examples of the correct documentation you should keep and use.
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 space in your area.
Meals Out You should always answer the following five questions. Who? What? When? Where? Why? You can go high tech (an excel spreadsheet), low tech (a yellow pad) or medium tech (a word processing document.)
At the restaurant, I make a quick note on the credit card receipt. Three of the questions are already answered, so the note often looks like this "Fred regarding his LLC". After returning from the restaurant, I give the receipt to my bookkeeper or assistant. She transfers the information from the receipt to the tax log. (You may choose to do this yourself) Now my meal records are legally audit-proofed.Car Mileage The log should contain the following information: Date, starting mileage, ending mileage. Once again, you can use any level of technology you prefer to use.
Travel Keep your plane tickets, parking and cab receipts (esp. if over $75), and the workbook or literature provided to you by the seminar promoter. I also use the 5 question log above to legally document my travel expenses which can add up to be very beneficial in tax savings.
Supper Money If the cost of the meal is less than $75, you don't need to keep a receipt. Because I often use the supper money tax relief deduction on my teleclass nights, I always put the teleclass info in my calendar. I usually pay cash for the meal and reimburse the money after the fact.
Here is an example of cash reimbursement log I use.
Date
Description
Amount
6/21/06
Computer for Home Office
$325
6/25/06
Business Lunch with Mike (Marketing)
$47
6/30/06
Ticket to Atlanta for Wealth Conference
$275
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 a very worthwhile investment. It makes you conscious of all the tax relief deductions you would otherwise miss, it keeps you organized and it keeps you audit-proof. That's a great combination of tax relief savings.
Sincerely,
Drew Miles, The Tax Saving Attorney
To learn more tax saving strategies, please see our Tax Relief page.