Archive Records According to Tax Laws
Income tax filing season can be a trying time for small business owners, and in a recession, even more so.
One of the biggest pitfalls owners are likely to encounter is a perennial one: poor record-keeping that not only makes it hard for them to complete their returns, but also to know where they stand financially. Another common problem is keeping up with changes in the tax laws, especially for state and local governments that are now looking for ways to increase revenue.
Ask tax professionals what their clients struggle with, and haphazard books and ledgers is often the first answer. Many business owners don't know how much money they have on hand, how much they owe and what their customers or clients owe them.
Some business owners use their checkbooks and credit card bills as their records. But it's a problem when they can't locate all their check registers or all of their bank statements.
Others are even more disorganized, with boxes or piles of invoices, receipts and canceled checks that need to be sorted. These owners are in danger of missing out on important deductions and can end up overpaying the government. Or, if the government questions a deduction, you could lose it if you don't have documentation.
The answer is to use a computer application to keep your books, one that interfaces with tax preparation software.
The solution for many owners in this plight really should be getting help, whether it's a bookkeeper to take care of ledgers and a tax professional to handle returns, or both.
Badly kept records are a particular problem for owners with home offices or who use cell phones and/or vehicles for both personal and business reasons. They need to keep good personal and good business records.
The IRS allows owners with home businesses to deduct a portion of expenses including mortgage interest, repairs, utilities and insurance, and unless taxpayers have invoices and receipts, they can't compute the deduction accurately. Similarly, you can deduct a portion of what you pay out on cars, cell phones and other items with dual purposes, but you need to keep track of when a car, for example, is driven on personal errands or to meetings with clients. At this point, after the year has ended, it's hard to reconstruct that information.
Another problem for many owners is keeping up with all the changes in the tax laws - and not just at the federal level. Many states have laws that differ from the Internal Revenue Code, and owners need to be aware of them.
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