Posts Tagged ‘Small business’

When Should You File Your Tax Return?

January 7, 2014

IRS ReturnThe IRS announced that it would begin accepting individual tax returns (Forms 1040 and 1041) on January 31, 2014.  Business returns (Forms 1120, 1120S and 1065 ) will start being accepted on Jan 13, 2014.  Unincorporated businesses that report their income on Form 1040 Schedule C, Schedule E or Schedule F are not included as business returns so the January 31 date applies.

When is the best time to file your tax return?  There is a simple answer.  That depends.

Many people want to file their returns early to get their refund back as soon as possible.  That is one consideration.  If you have a simple return and really need the money this is probably a good strategy for you.  And yet there are other considerations.

The earlier you file your return, the more months the IRS has to decide if there is something that needs further explanation.  More months of exposure to IRS examination.

And the later you file, the more returns are already in the audit pipeline when yours arrives.  This may reduce your audit exposure (but no guarantees).  Many of our clients pay their tax when they file their extension on April 15 but wait until October 15 to file the actual return for this very reason.

Look at all your personal factors and then decide what is best for you.  If you have a question, contact a tax professional.

Big Numbers Attract Attention

September 6, 2013

Rising incomeAccording to the IRS, there were approximately 23.4 million individual income tax returns that reported nonfarm sole proprietorship activity, a 1.8-percent increase from 2010. Profits reported on these returns rose to $282.6 billion in 2011, a 5.6-percent increase over 2010.

These numbers sound impressive until you break them down to the individual level.  If we divided the total amount of the profits by the total number of returns, we find that the average business Schedule C shows a profit of less than 12,000 and the average weekly increase in profits was $12.30.   Some businesses were more.  Some less.

Big numbers can draw attention.  Small ones are easy to ignore.  Think about this when you look at your business tax schedule.   What kinds of expenses are drawing the attention of the IRS for audit?  Are they the kind of expenses that could possibly be personal and disallowed on audit?  Hmmmm.

When preparing your taxes, go to the other side of the desk and ask yourself, “If I were an IRS Agent (perish the thought), what things on this return would I look at to audit?”   I’m not saying you should not take the deductions that you are entitled to take.  Far from it.  Judge Learned Hand once wrote “Any one may so arrange his affairs that his taxes shall be as low as possible;”  Good advice.

However, the Roman poet Horace reminds us that “he who is greedy is always in want”.

Good Records – Timeless Advice

September 3, 2013

Luca Pacioli Luca Pacioli*, the father of modern accounting,  wrote:

“If you are not a good bookkeeper in your business, you will go on groping like a blind man and may meet great losses.”

Not only that, but you are dead meat in front of an IRS Auditor.

You don’t need to be an accountant, bookkeeper or tax expert to have good documentation.  The best records system for you is the one you will actually use.

If you have been telling yourself, “One day I will start keeping better records” and then you put it off (yet again), we invite you to visit http://www.MyTaxBuddy.com for a simple and yet flexible system.

Good tax records can support your tax deductions which could gift you with hundreds or thousands in tax savings.

Make today the day you stop your worry and begin gaining deductions.

Listen to Father Luca.

*Luca Pacioli – a 15th century monk, Father of modern accounting and Leonardo DaVinci’s mathematics teacher.  The above quote is from In The Rules of Double-Entry Bookkeeping ( Particularis de Computis et scripturis).

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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