basic record keeping requirements for tax purposes you must keep: 1.receipts 2.sales slips...

Basic Record Keeping Requirements for Tax Purposes

You MUST keep:1.Receipts2.Sales Slips3.Invoices4.Bank Deposit Slips5.Cancelled Checks6.Other Documents to substantiate – Income, deductions, credits

1

Adequate and complete Recordkeeping

1. Explain items on your income tax return.2. Source documents are your proofs of your

deductible expenses3. Log or diary for deductions for travel,

transportation, entertainment, business gifts4. Time and place

2

IRS Publication 583

Starting a Business and Keeping Records

Order Publications at www.irs.gov

3

How long should records be kept?

• 3 years after the return is due for filed, or, • 2 years from the date the tax is paid,

whichever is later

4

Indefinitely!

1) Change your method of accounting2) Property – basis of original or replacement

property

5

Employee Records

• 4 years after the date on which the tax return becomes due or the tax is paid, whichever is later.

• Publication 15 Employer’s Tax Guide

6

Separate Checking Accounts

1) IRS recommend opening a separate checking account for your business.

7

Accounting Methods

Cash Method – •Report all income in the year you receive it•Deduct expenses only in the tax year in which you pay them

8

Accrual Method

1) Report income in the year you earn it regardless of when you receive the payment

2) Deduct expenses in the tax year you incur them, regardless of when you pay them

3) Business that have inventory for sale to customers must use an accrual method for sales and purchases

9

Publication 538

Accounting Periods and Methods

10

Accounting Computer Software

Quickbooks – www.journeyed.comwww.quickbooks.comFree TrialPeachtree – Staples (rebate)

11

Sole Propietor

• Schedule C or C-Ez• Form 1040• Schedule SE – Self Employment Tax

12

Pub 541 Partnership

1. Schedule K-12. Form 10403. Form 1065

13

LLC

• One person – Sole proprietor• 2 or more - Partnership

14

Form 8832 Entity Declaration

1) 2 or more people --- Partnership2) 1 person business ----Sole proprietor

15

Paid Preparer• You are legally responsible for your tax return• Avoid preparers who claim they can obtain larger

refunds than other preparers• Avoid preparers who base their fee on amount of

your refund• Ask questions and get references• Person’s credentials• Never sign a blank tax return• Will the preparer be around months or years from

now?16

DeductionsEveryday costs of doing business:•Utilities•Office supplies•LicensingAre deductible

17

Travel, Transportation, Entertainment

Traveling overnight away from home:• Public Transportation• Operating and maintaining your car• Meals, Publication 463 (per diem rates)• Lodging• Keep your receipts!

18

Transportation

• Getting from one work place to another in the course of your business

• Not away from home

19

Business Entertainment Expense

• Necessary – you can proof it• Taking your clients out to lunch.• Publication 463, 50% limit

20

CAR (all business)

• Use for business only 100%• Full cost of operating it• Deduct it all

21

CAR (both business & personal)

• Divide expenses on the basis of mileage• Compute a business percentage• Standard Mileage Rate – reduce burden record

keeping.• Business mileage x standard rate, must use the

mileage rate the first year.• Later years you can alternate.• Actual business expense.• Parking fees and tolls are deductible

22

Business use of home

• Maintaining your home as a business expense• Regular use of your home.

1.Mortgage interest2.Insurance3.Utilities4.Repairs5.Depreciation or Rent

23

Other Requirements

A. Store inventoryB. Child Care Business

• Form 8829 & Form 1040• Publication 587 Business use of your home

24

Start Up Costs

• Expense to set up your business• After a 180 months period to deduct• Publication 535

25

Depreciation

• Used in the business• Useful life longer than 1 year• Wears out, becomes obsolete• Deduct over a number of yearsCan not depreciate land

26

Method

• MACRS• Modified Accelerated Cost Recovery Systems

27

Section 179 Deduction

• You can to recover all or parts of the cost of certain qualifying property up to a limit by deducting it in the year you place the property in service

• Disadvantage : cannot take Earned Income Credit and other credits, full exemption and deductions

• Publication 946 How to depreciate property• Publication 535 business deduction

28

Self Employment Tax

• SS• Medicare• When you are employed your employer paid

half and you paid half• When you are Self employed, you pay all

29

Estimated Tax

• Estimated Tax • Use form 1040 ES Worksheet to figure

amount of Estimated Tax

30

Regular use test

• Occasional or incidental

31

Operate your business out of your home

• Home: house, apartment, garage, condo, mobile home, studio, barn, greenhouse

32

Qualifying for a deduction

1. Exclusive2. Regular3. For your businessThe business part of your home must be one of

the following:• Principal place of business• Place where you meet clients• Separate structure

33

Exclusive Use Test

• Use an area for business only• Room or separate identified space

34

Exception to the Exclusive Use Test

• Inventory or product storage• Day-care facility

35

Principal Place of business

• Exclusively and regularly for administrative or management activities

• No other fixed location

36

What are Administrative/Managerial

Activities?• Billing• Books and records• Ordering supplies• Appointments• Forwarding orders or writing reports

37

Business Percentage 2 methods

• Area Method • Number of rooms method

38

Area Method

1. Area Method (square footage)Area used by businessTotal area of your homeExample: Office 240 square feetHome 1200 square feetForm 8829

39

# of rooms method

• Number of rooms Method.The number of rooms used for businessThe total number of rooms• You can use this method if the rooms in your

house are about the same size.• Form 8829

40

Types of Expense

• Business activity: Expenses related to the business activities are fully deductible advertising, taxes, car, salaries, travel

• Use of home:1)Direct: painting, repair in area of business2)Indirect: hoa3)Unrelated:

41

Expenses

• Landscaping• Painting business office• Utilities• Repair to roof of house• Repair to business office• Painting of family room

42

expense

• Real estate tax• Mortgaget interest• Insurance• Rent• Repairs• Utilities an services• Depreciation• Carry forward to future years• Pub 587

43

IRS Training

• www.irs.gov• Click on the Business tab• On the left click on the Starting a Business link• At the bottom click on the Online Learning and

Education Products bullet• Click on the Small Business/Self Employed

Virtual Small Business Tax Workshop

44

Order Publications IRS (free)

How to order publications:•www.irs.gov•Click on the Business Tab•On the right, click on the Forms and Publications link.•In the Order section, click on Forms and Publication by U.S. Mail•In Search box type in the Publication you want to order. Continue with the ordering process.

45