A few weeks ago I wrote about the importance of recordkeeping and how it eases a lot of the burden and frustration come tax time. I addressed it as more of an issue with one’s personal taxes, though. This time, however, although I wish I didn’t have to say it, I have also seen all too many cases when businesses were much too lax with the records they keep. This can present an even bigger problem than with one’s personal records, for if you cannot document business expenses, you are potentially losing legitimate deductions on your taxes and costing yourself money.
So in this vein, I first want to state that keeping bank and credit card statements is not enough. Sure, this proves that you spent some money, but does not prove what you spent it on or why you needed it. Now this doesn’t mean throw away your statements, though, for they are key in a three-pronged approach for the documentation you want to keep to legitimize your expenses.
You see, those statements may not prove what you spent money on, but they do prove that money was spent on something. This is still key to prove that you paid the money and aren’t trying to pass off something a friend or family member paid for (or making something up completely) as an expense you paid for.
Beyond that, though, you need to keep the receipts you receive when you spent that money. That will show what the money actually went to. Don’t just stuff them in your pocket, though, and forget about them for six months, for you will want to be able to remember why the money was spent. This may not be so difficult if you’re, let’s say, a contractor who bought some supplies at Home Depot; those will not be too difficult to track back to the job you were working on at the time. But if you are at a lunch meeting with a business associate, exactly who you were with and what you were discussing is not going to be so evident from the receipt itself. Just jotting down some notes to that effect on that receipt when you get it can help this issue.
The third piece of documentation you will want to hold onto are any invoices you receive. With that, you can further justify some of the money that came out and is shown on those bank statements, and show exactly what it paid for. If you are able to have all three of these pieces of documentation for one expense, it gives you all the necessary backup to prove that you spent what you said you spent and what you spent it on.
Even with that, though, this does not automatically make a business expense. Please remember that just because you have a business does not mean that every expense you ever have is for your business. The groceries for your family still are just groceries for your family. This is the reason that I always recommend having a separate business banking account, as it can automatically help alleviate the confusion between what is or is not a business expense.
Finally, I know that none of this is fun; it is the part of running a business that is a drain and feels like you are not doing the things that you wanted to do when you started the enterprise. You want to make sure that that enterprise is running at peak ability, though, and part of that is keeping control of your records
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I almost cannot believe that I am writing about such things again after just discussing some of the ramifications of Hurricane Harvey last week. Since then, though, Hurricane Irma arrived to carve its own path of destruction.
I do not want to go into the same levels of discussion that I did last week, but just let it be known that my heart continues to hurt for those who have been affected, but still sends out good hopes and well wishes for those whose lives have been affected.
I do want to say, though, that much like with Hurricane Harvey, the IRS is offering similar help to those newly affected, and have set up a website, located here, with all the pertinent information. Please pass that along to anyone you know who could benefit from having that knowledge.
In the midst of all these unfortunate events, though, we continue to see stories about those who do what they can to help others in need. Combine that with our remembrances of 9/11 this week, and we can be a little heartened by what we can endure, and what others will do to help us in that quest.
And since I have to tie this into something financial or tax-related in some way, I will take a little time now to give a reminder that what makes for a charitable tax deduction is not simply monetary donations, but can include expenses incurred while working for a charity.
So first off, remember that all of these deductions to be valid must involve a qualified charity. Granted, most of them are, but it never hurts to check, especially when starting a relationship with a new group, and ensure that the organization is legitimate. It is important to note that for a charitable contribution to be deductible, it must be made to such a group as an entity, and not earmarked to be set aside for a specific person or family.
Second, if you do substantial charity work for such a group and travel for it, many of those expenses can be deducted if you have not already been reimbursed for them. One thing many do not realize is that this can even include working with local organizations. If you use your car at a time for the express purpose of helping that charity, then you can even use a standard mileage rate in claiming a deduction. This will probably be easier than keeping track of exact expenses, but you will still want to keep a reliable record of this type of travel as you go, noting your mileage.
And of course, this can include longer and farther trips, too. A slight warning here, though, that the trip must involve a genuine and substantial duty to the charity and cannot be deducted if a significant portion of it was for recreation or vacation. If a trip does qualify, though, then such as expenses as air, rail and bus transportation, lodging costs, meals and certain transportation costs while at your destination become deductible.
It is a wonderful thing that there are people who give so much of themselves and their time to such noble pursuits, and it is also wonderful that they get these little bonuses for the good work that they do.
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This is a different type of blog than I usually write, and I am thankful for that. Sometimes, though, unavoidable tragedies happen, and they have to be mentioned. Unfortunately, one of those times is happening now, and will be happening for a while, as the areas affected by Hurricane Harvey move through their recovery phase.
These times shock us with trying images as we see levels of devastation that defy imagination. At the same time, though, they also bring us inspiring images. We get to see the levels of human will that can be reached when a community bands together to help each other and return their lives to as close to normal as possible. We also get to see the level of human compassion reached when those from afar do what they can to achieve the same lofty goals.
So before going through many of the implications of this, I first just urge everyone to donate to the cause if you can. I know that many of the times I write about giving to charities, it is in relation to how it affects your tax picture, but moments like this are reminders of the human reality behind it. Good is done by giving to others who find themselves in need. Sometimes we only think of these things as numbers, but it is so much more than that.
At the same time, though, the IRS has put out a notice to be wary of those putting together scams and only pretending to be gathering money for the cause. There are plenty of obviously reputable charities doing good works, though, so please don’t be that wary. Just remember that if something feels fishy, it probably is. But all those other groups out there who don’t feel fishy, the charities that you we see doing great things, they are worthy of our attention.
Let it also be known that the IRS has announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of the storm and their families. I don’t want to get into the minutiae of it here, but know that more information on this, and much of the other information in this blog, can be found at the IRS Hurricane Harvey Information center located online here. There is also a program where employees can forgo vacation, sick, or personal leave time in exchange for their employers making donations to charitable organizations working to help those affected by the disaster.
I think there are a couple of other highlights from the tax realm that are worth noting. First is that those affected get some tax relief in how long they have to file certain individual and business tax returns, as well as in making certain tax payments. This includes an additional filing extension for individual taxpayers with valid extensions that run out on October 16 and businesses who were to have filed on September 15.
Also, the IRS has waived a diesel fuel penalty for the entire state of Texas.
Granted, all this is far down on the list of importance for those who have had their life upended by something totally out of their control. But in those times, hopefully enough pieces of light can come together to start making life bright again.
It is inevitable that technology will continue to move forward, giving us access to more information and allowing us to do more things by ourselves than ever before. This will affect everyone, though in many different ways. Personally, my profession has seen a shift with more people preparing their own taxes with the proliferation of do-it-yourself tax software.
Of course, it is both not surprising and a bit self-serving for me to say that I don’t think this is the greatest strategy for people to employ. It may also be a bit hypocritical, for I’m sure there are some (former?) travel agents who would tell me that I do not find the best deals when I book my own trips on the internet. Still, there is a recent story that shows the potential dangers of tackling the tax code alone.
This case concerns an insurance consultant who used software to prepare his returns. The IRS believed he claimed too many deductions. This led to the consultant saying he had evidence to prove some, while blaming his tax software for “luring him” into claiming others.
Now if you are actually interested in the details of the case, feel free to read the linked article from taxadviser.com. In this space, however, I want to look at it from a larger view.
First, I don’t question that tax software is made by designers with good intentions. They do not want to produce a product that leads to people filing incorrect or fraudulent tax returns, for they would not remain in business long with that tactic.
Also, I think that this software can help many people with simple financial situations quickly and easily file a legal return. If your financial picture is not complicated, there are an easy series of questions that could be asked to fill out the necessary forms and have it be a less painful process than actually reading over the actual IRS forms and instructions by yourself and going at it completely alone.
As this article shows, however, not everyone has such an easy tax picture. And if you are not 100 percent sure on any question the software asks or on any deduction you’re claiming … well … let’s just note that the case in question involved a claim of a net operating loss of $185,673 that the IRS disallowed all but $142 of. That’s the type of mistake that can haunt someone for years. Now I don’t know if there was any willful, or at least optimistic, reading of what the tax software said, but this is not the type of mistake any credible tax preparer would have allowed.
I don’t think that the only danger in tax software is the possible claiming of deductions to which you are not entitled In fact, I think the biggest danger when filing a return is such a manner is that you will miss deductions for which you legally qualify. You see, no matter what questions the computer asks, it cannot understand your situation in the same way as another person, someone who can better understand you as an individual, and not just as some answers on a flowchart.
Either way, allow this to be a cautionary tale, even if self-serving.
I know that I am one of the few people out there who actually doesn’t mind (and maybe even enjoys?) looking ahead to the next tax season, but I know that I am not the only person who could benefit from thinking about it.
Just think about how every tax season feels, with that persistent feeling of how much of a pain it is to gather all the necessary paperwork. Now I certainly understand that there are a number of forms you will not have for months, but there are some things that you can start gathering now, you know, before you toss some pertinent receipts in your next cleaning binge. I cannot possibly overemphasize the importance of good recordkeeping. Any tax audit can be a hassle, and most likely comes with some fear, but if you kept good records, retained all necessary documentation, and have your return prepared by someone trustworthy (you know someone like that, don’t you?), then you can simply prove that what you reported is correct, and soon forget that it ever felt like an issue.
Tax issues and audits become real frightening, however, when those things aren’t in order. I mean, you can convince yourself (and any tax software) that you handled everything correctly, but you are not going to be able to convince an IRS agent that your interpretation of the rules trumps the government’s view. Furthermore, even if you did have a correct understanding of how the numbers work, they can be thrown out if you cannot prove where your numbers came from. And if your numbers get thrown out, chances are that it will result in a higher tax bill.
So if you know that you do not have everything ordered in a way that will lessen your stress come tax time, this is the time to start doing so. If you have a pile of receipts hanging around in an envelope somewhere, start going through them so you know you have the ones you need. Or if you haven’t been keeping them, and you know you should, well you at least still have about four months to start doing so. And if you’re not sure what to keep, keep anything you have a question about. You will always be happy to have saved too much than to have kept too little.
There is then the idea of what to do with the records you are keeping, though. Maybe you are keeping everything you should, but do not have any sort of bookkeeping system in place, and know that things would be easier if you already had concrete numbers to work with at the end of the year. Well, again, there are four months to set that up, which is more than enough time to get a system in place that will remove that stress.
Finally, many people have had changes in life or changes in income that will alter your tax picture. When that happens, it is worth taking the time to be sure you understand what that will mean to your final numbers so that you can plan for it.
All of this comes back to planning and diligence, two areas that we pride ourselves in specializing in. So if you need any help with these, please don’t hesitate to contact us … while there is still time to make it really meaningful.
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