I want to congratulate all those business owners that did more in their business in 2010. You set a goal to increase your clientele, get more referrals and attend more training seminars. You even took a business trip in a vacation location. All these things were done but, (wait for it) you did not properly document those events. If you don't have proper documentation then all the work you did to increase your productivity in your business will increase your bottom line, however it will also unnecessarily increase your tax liability. Proper documentation answers the questions who, what, when, and where. Who were you with? (client , potential client , prospect, a referral). What was the purpose for the meeting? (to gain a client, to gain a referral, to show appreciation for a referral, to introduce a new product or service). When did this take place? (date and time) where did it take place? (location).
I have receipts, isn't that enough? Having receipts is a good start but, it only proves that you purchased something (the what). Receipts do not show intent. Remember the IRS needs proof that you intended to make a profit. Without proof of intent you only have a hobby. Trust me hobby's are expensive and a liability. In any economy liabilities are not good.
How do I keep good records to keep the IRS off my back?
A good old fashion day planner is the least expensive way to keep track of you daily progress in your business. If you have a smart phone, i pad or samsung galaxy, there are many free apps that allow you to accomplish the same thing as a day planner. Do not go out and buy an expensive device for the purpose of keeping track of your daily business
Keeping track of your business in this manner will allow you to see how close you are to reaching your goals for the week. You will be able to look back at your week and determine if you needed to keep doing what you were doing or if adjustments needed to be made. This is critical to your business. If you do not know how far you have gone in your business You will not be able to determine how far you have to go to reach your goals
Proper record keeping on a daily basis keeps the IRS from deciding your business is a hobby. Once the IRS determines your business conducts it self as a hobby all business deductions are denied and penalties and fines follow. The IRS will also look back through all your tax records.(this is allowed because they have determined that you have defrauded the government by under stating / under reporting income).
I can not emphasize this point enough. Proper documentation is key to keeping the IRS from penalizing you with fees and bringing down the audit hammer.
Remember, tax preparation is a daily endeavor so happy tax season.
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