Entrepreneurs and small business owners are forever trying to keep up with the unending alterations to tax requirements and paperwork. Believe it or not, the IRS is feeling the strain as well. Between 2001 and 2010, there were a total of 4,430 revisions to the U.S. tax code — that’s more than one change a day. And everyone is struggling to keep up with the constant revision to the revenue rulebook. These days, in an expensive effort to stay out of trouble, almost 90% of small business owners hire professionals to take care of their tax returns.
If you are unable to afford to hire a professional at this time, get ready to get up to your elbows in tax code. Filing your own taxes is becoming akin to a full time job for entrepreneurs. And the IRS is cracking down on small business owners, again. In 2006, they audited almost 18,000 small business (those making less than $10 million). Now, they are especially on the lookout for high dividend payments to owners and low salaries. If at all possible, bring someone in to take the stress off your shoulders, and to help you pay the correct amount to the IRS.
Here are a few basics that every small business owner should adhere to:
1. Hire a professional to do your taxes, or at least have someone look them over.
2. File tax returns on time, within twelve months on the end of your accounting period.
3. Explain and break down big numbers so no questions need to be asked.
4. Account for loan account transactions.
5. Distinguish correctly between personal and company spending.
6. Only take deductions that apply to you, best not to get too creative.
7. Keep receipts for all company purchases and write offs.
8. Claim tax credits wisely and sparingly.
9. Be organized before tax season — have everything ready in advance.
10. Disclose absolutely everything.
The best thing you can do to ensure an accurate tax return is to keep accurate records. Organization is key. Receipts need to be filed accordingly, not just kept in a huge manila envelope. There is a device called Neat Receipts that allows you to scan receipts directly into a computer. Then you can put them into separate folders, like travel or office supplies, to make life a bit easier if you ever do get audited. And realize that often with entertainment receipts, the IRS wants to know who was present and what business was discussed. They take special scrutiny with anything that could be deemed as fun.
The IRS will often contact business owners by mail before they do a full blown field audit. Consider this a chance to prove yourself an organized and worthy business owner, and provide them with proof of anything they are curious about. Oftentimes, if they receive sufficient documentation, an audit will never take place. And if you have only recently started taking proper care of your business’s finances, consider this a way to keep the IRS from looking into past, and possibly less organized and meticulous, years taxes.
About the Author
Samuel Guinen is a small business owner who likes blogging about, but not paying, taxes. He is a frequent contributor for the EllsworthLawGroup.