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Tax Deduction Basics
Responsibility
I have heard many people say, “My CPA does my taxes!” They are expressing their situation accurately, but, for the wrong reasons. Many people delude themselves into thinking that by filling out a tax form a CPA provides some type of ‘cover’ for them. That is not the case. A CPA files taxes based on the numbers provided them and those number are the complete responsibility of the tax filer. YOU ARE RESPONSIBLE FOR YOUR EXPENSE DOCUMENTATION!
Sandy Botkin, a former IRS Attorney in Washington, DC, and the foremost authority on tax benefits for home based entrepreneurs, claims that saying, “My CPA takes care of my taxes” is like saying “My dentist takes care of my teeth.” Try not brushing your teeth or flossing between visits to your dentist and see how that works out for you. The same thing can be said regarding your taxes and documentation.
When I meet someone that feels this way, I know I am listening to someone suffering from an avoidance disorder I call “Docuphobia”. This is the irrational fear of documentation and stems from the idea that it is REALLY HARD to document everything and that it will take too much time.
 That is exactly what the IRS wants you to think. If you don’t document properly you WILL pay more in taxes than is necessary and that is a good thing to them.There are literally millions of sufferers of “Docuphobia”. You may be one. They stuff receipts in a box, envelope, ‘shoebox’, pocket, glove compartment or many other ‘cubby’ holes thinking they will be able to recreate their records sometime in April.
In the mean time their records are lost, fade or are forgotten, all of which are expensive. Sufferers lose hundreds, if not thousands, of dollars a year in legitimate tax deductions. The saddest part of this is the task they fear and avoid, documenting expenses, does not have to be difficult or time consuming. It only requires a few minutes a week and can be as easy as making a phone call.
Can you take a picture with your phone? Can you attach and email that receipt from your phone? If you can, there is no reason for you to stuff them in a box somewhere. Email them to your ExpenseDocs account and store them there until the weekend and then login to your account and categorize them in a matter of a few minutes. It is too easy and takes away the old excuse, “It is too difficult.”
And, maybe best of all, at tax time a few clicks of the mouse and your expense record is ready in seconds. You can then give it to your CPA, because we all know he/she “takes care of my taxes!” The difference is your complete documentation, including a receipt, mileage and written statement if needed is all chronologically stored for you and available in case of an audit.
Deductibility
Many small and new business owners aren’t sure exactly what they can deduct. This is understandable since there is such an extensive tax code and people are naturally scared of the IRS because of the horror stories we have all heard.
To help us understand the general principal regarding legitimate tax deductions afforded business owners, i.e. what is deductible, the Internal Revenue Code says;
162 (a) In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, http://www.law.cornell.edu/uscode/26/usc_sec_26_00000162----000-.html
It’s simple, right? You can deduct ‘ALL THE ORDINARY AND NECESSARY EXPENSES PAID OR INCURRED… IN CARRYING ON ANY TRADE OR BUSINESS,”. I have provided a link so that you can view this for yourself.
There are several things to remember, however.
First, you MUST be “carrying on a(ny) trade or business”. DO NOT treat your business like a hobby. The IRS will always look for reasons to disallow your legitimate tax deductions and one of the biggest tools at their disposal is our own lack of understanding.
 Second, you MUST have the “intention of making a profit.” Uh, why else would you get into business? Unfortunately for us honest folks, there are people that start businesses with only one goal in mind, to defraud the government of taxes owed. They put all of us under the microscope which causes us to be afraid, even though we have no reason to be.So where do we start taking care of business.
Begin by doing the little things that demonstrate your intent is to be in business.
Get a dba or set up a corporate structure with your state. A sole prop or partnership is very simple to start and may be the best way for you to get up and going in the short term. Be sure to get a free consultation with a CPA or lawyer to find out what best suits your needs.
There are several other requirements that you will want to do in order to set your business up on sound footing. They do not take more than a few hours of time and a few dollars to set up and it will safeguard your investment in money, time and effort. If you need some guidance on steps to take to create a business identity click HERE.
Example – You are health conscious and have a passion to help others find healthful solutions for their lives, so you buy a license for a distributorship with a direct marketing health business. You go through the steps to validate your business presence in the community as outlined HERE. Is that all you need to do in order to claim business deductions when filing; will that be enough to satisfy the IRS if you are ever audited?
No. You must be able to demonstrate that you are working the business (a minimum standard of five hours a week has been established in court) and striving to make a profit by your efforts, as mentioned above, is imperative. It cannot be a hobby. The IRS says it succinctly by saying you MUST have the “intention of making a profit.”
 Additionally, when dealing with the IRS you MUST provide adequate documentation. This means you have a journal (day planner or calendar) of contacts, meetings and communications, receipts, canceled checks, etc. and a mileage log. In the case of entertainment expenses you will be required to have a written summary of the expense. Without this type of documentation even the smallest deductions will likely be disallowed in the case of audit.If, however, you keep these records, it will prove to anyone with a question, that you have worked the business relentlessly with every intention of making a profit. After all, you have the documentation to prove it.
So, let me ask a question. Why are you in business? Isn’t it to make money?
Will saving money on your taxes add money to your pocket? Absolutely! So why aren’t you documenting your expenses adequately?
The answer; it can be difficult and time consuming. Keeping track of everything is a hassle when you have four different ‘books’ or ‘journals’ to keep track of; the day planner, mileage log, receipt and written statement. All of them can be misplaced and lost. Then where are you?
With ExpenseDocs you have everything you need in one place and it is very easy to fill out a simple form online to categorize everything. Then, it is stored electronically, backed up daily and ready in case you need your proof. No lost day planner, receipt or mileage log here.
Start today with ExpenseDocs, and if not with us, then with someone. It is too important and too costly not too.
Use promo code SAVE for a 25% discount on your service. Click HERE to register.
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