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Bookkeeping
Practices |
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Often
referred to as one of the certainties of life, taxes and
the Internal Revenue Service are to be dealt with at least
once a year; quarterly if you are paying estimated self
employment or small business taxes. There is no reason
to fear the IRS unless you are being less than truthful
about your filings or are making honest mistakes. Either
way, you may be headed for an audit. Audits usually result
because of an inconsistency on your return such as excessive
expenses or deductions in relation to the amount of income
reported.
The IRS can audit returns from up to three years ago and
up to six if the error results in more then 25% of the
tax liability. If you compound the penalties and interest,
it pays to be honest and accurate when it comes to the
IRS. This section will focus on things you can do to reduce
your profile in the eyes of the IRS.
Bookkeeping Practices
The single most valuable thing you can do to avoid run-ins
with the IRS is keep accurate records. This includes all
expenditures both personal and for business. Try to keep
your business records separate from your personal records.
It is very common for these to cross, especially if you
are deducting expenses for a home office or vehicle. Keep
every single receipt personal or business. Also keep copies
of any checks you receive prior to taking them to the
bank. More than likely you will receive 1099 reported
income statements from your clients. You will want to
check the amounts against the checks written. A sure fire
way to be audited is to have a discrepancy in the amount
of income you report and the amount your clients report.
Also, it's a good idea to report all income.
Home Office
If you are working out of your home, you are entitled
to a deduction for business use of home. Make sure you
meet the IRS's requirements for home office. Your home
office must be your principal place of business or where
you meet and deal with clients. It must also be used exclusively
for business. You can deduct a home office if you are
an employee but only if the use of the home office is
for the convenience of your employer. If you meet the
requirements, you are entitled to some nice deductions:
real estate taxes, mortgage interest, rent, utilities,
insurance, depreciation, painting and repairs. Be careful
not to lump in that new lawn mower or dishwasher, those
are personal expenses and are not allowed.
Dedicated Business Accounts
Consider opening a checking or credit account dedicated
to just your business. This can greatly reduce the amount
of bookkeeping and the fees and interest are deductible.
Keep Track of Expenses
As mentioned in the Bookkeeping Practices, keep track
of all business related expenses as well as those from
your household that apply. Keep every receipt, at the
end of the day put them in an organizer so they are easy
to itemize. You will need to add them all up for your
yearly tax statement. Dedicate time to organizing your
records either weekly or monthly. Doing a little as you
progress through the year will give you a picture in progress.
Prepare a year end statement itemizing all of your expenses
and income. You should not be in for any surprises if
you have been calculating your costs as described earlier
in this module. Ask your tax preparer what you can do
to make preparing your tax statement easier and more accurate.
There are some great software packages that make keeping
records very simple and even hook into online banking.
These software offer extensive reporting with charts and
graphs and make categorizing expenses for your home and
business very easy.
QuickBooks
- $20 - $500
Peachtree
- $100 - $1,000
Microsoft
Money - $20 - $80
Indexes of accounting software:
Find Accounting
Software
Tucows
Shareware Index |
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