Archive for August, 2013

Good News. Bad News.

August 31, 2013

When buying furniture and equipment, the Internal Revenue Code Section 179 allows a business an option to write off the total cost in the year purchased. This is true whether or not you have made all the payments for the purchase.  So if you bought it on Good News Bad Newscredit you can still get the deduction. That is the good news. And that is the bad news.

The good news is that the deduction reduces your current year taxable income and possibly your tax.

The bad news is that you may need the deductions more in a future year.  And the deduction may be limited depending on your income.  And the rules have some twists and turns.  And, if you sell it, all the proceeds are taxable.

Don’t presume that it is best to take the deduction this year. Ask your Tax Professional.  More good news,  you now have enough information to ask some intelligent questions.

And, of course, you must keep good records.

Hint – Make a folder for each of your large purchases that have a warranty.  Put a copy of the receipt, warranty and instruction book in the folder.  A few months ago, I received a new part for my office chair because I could easily put my hands on the warranty and receipt.


Oh yeah. I’ve got it.

August 16, 2013

I Got ItWhen the IRS calls and decides that they want to audit your business records, you will want to be sure they are credible long before you get “the letter.”

Credible means that you have receipts and other documents from your suppliers and vendors along with your notes made “at or near” the time of the activity.

And when the Auditor or Agent asks for something, you will want to be able to say “Oh yeah.  I’ve got it.”  That way they know you have excellent records and it could significantly shorten the length and intensity of your audit.

If you have to go home and “find” the records, there is a question as to the accuracy and authenticity because you might have created the records after the IRS asked for them (not that anyone would do that, of course).  Herman Wouk once said “Income tax returns are the most imaginative fiction being written today.” Don’t let this be your return.

Vehicle deductions , travel and meals must also be documented and logged.  The information required for these deductions are specifically referenced in the Internal Revenue Code and are a favorite target of the IRS because most people don’t know what is required and don’t have the required records.

We had a client that thought they didn’t need to keep receipts because they had entered the information into their accounting program.  The IRS disallowed thousands of dollars in deductions because those third party records and the proper notations were not available on the first appointment. And the IRS Agent camped out at our office to check almost everything.

Don’t let this happen to you.  Keep good business records and keep them now to maintain your tax deductions.  Credible records don’t happen by accident.

If you are looking for a simple online record-keeping system that you can use from your smartphone or computer, may we recommend our simple system –  In the time it takes to answer an email, you have done your tax recording.  So simple you can start right now.  Don’t put it off and pay more tax because of poor records or no records.

IRS Questions Small Business Income

August 11, 2013

Rising income

The IRS has been sending out letters to small business owners that they may have under-reported their income. This is the same kind of letter that you might get from Publishers Clearing House – You may be a winner.  But you had better respond to the IRS letter.

Since the credit card companies have been issuing Forms 1099K to report the amount of money customers have paid by credit card, the IRS has been using these numbers to compare to data on the tax return.  Is the amount charged above or below the norm for this type of business?  Is there enough non-credit card sales reported?

This can obviously cause problems, especially if your customers want cash back in the charge transaction.  Now the business has a charge for more than the amount of the actual sale.  This could cause problems when IRS is doing their comparisons.  And requires a new level of record-keeping nightmare for the small business.

Always report all of your income.  Always.  As a worst case scenario, if the IRS took you before a jury of your peers to determine your guilt or innocence, many of the jurors will be employees and have no way to under-report their income.  However, I would challenge you to find 12 people who have never pushed a deduction.

Thoughtfully prepared records are your first and best line of defense with the IRS.  The better your records, the shorter your audit.

If you choose to be aggressive, do it on the expense side. (We are not making any recommendations here.  Aggressive tax positions are a personal choice.)

Just remember this – Pigs get fat.  Hogs get slaughtered.

An Ounce of Prevention

August 3, 2013

Ounce of Prevention

I was at an IRS Appeals hearing the other day and the Appeals Officer made an interesting comment to me.   He said “You know, we disallow more deductions because the person could not provide substantiation for the deduction than we do because they could not establish a business purpose.”

That got me to thinking that most people spend more time and energy wondering what they can deduct instead of documenting what expenses they do have.

We understand that you may not know all the things you can deduct.  The tax law is complicated and it changes every day.  Even a “Tax Expert” learns new things as the law changes or is reinterpreted.

So if you are unsure as to whether or not you can deduct something, go ahead and keep the receipt and record it.  If you later find out that you could have deducted that expense, then you may not be able to because you don’t have the records.

On the other hand, if you find out later that you cannot deduct that expense, there is not harm done.   Just remove the receipt or reclassify the expense as a personal expense.

As Ben Franklin once said  “An ounce of prevention is worth a pound of cure.”


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