Owners of unincorporated businesses have more complex filing requirements than most individuals.  Proper documentation and accounting of income and expenses is critical not only to tax return preparation but in event the your return is examined (audited) they will be your lifeline!

There are special rules that all small business owners should be aware of:

• The IRS has stringent recordkeeping requirements regarding cars and trucks used in business.  You must be able to produce written evidence (i.e. a mileage book, trip reports, etc.) if your return is examined.  You must make a declaration on your tax return whether or not you have the evidence to back up your deduction.
• For business meals and entertainment you must keep a log, diary or other written account of who was in attendence, the business purpose of the meal or entertainment, the business relationship between you and the others in attendance, the location and the date the expense was incurred.
• Laptop computers and cell phones are considered "listed property" which requires you to have evidence listing the times they were used both for business and personal purposes.  Only the business-use portion is deductible.
• Payments to unincorporated subcontractors, attorneys, accountants, advisors, etc. that total more than $600 per year must be reported on Form 1099-MISC to the recipient by January 31st the following year.  They must also be filed with IRS by February 28th.
• Use caution when classifying workers.  The IRS and DOR have begun an "information exchange" program.  This program is being used to weed out businesses that improperly treat bona-fide employees as independent contractors, thereby failing to pay employment/unemployment taxes and excluding those employees from health and retirement fringe benefits.  Business owners who are unsure whether they have hired employees or contractors are strongly urged to contact me with any questions or concerns.  Even unintentional misclassifications can result in significant penalties, interest and additionally assessed taxes at both the federal and state level.
• Additional caution should be taken in the event the business activity generates tax losses.  The IRS generally will allow 2 losses out of 5 tax years.  If losses continue, the business may be considered a hobby and losses then become non-deductible personal losses.  Many businesses have two or more losses in their early years due to start-up expenses, investments in equipment, lower revenues, etc.  To ensure that your business is not reclassified as a hobby, take extra steps with your books to be able to show that you ran the operation in a business like manner.  Be able to prove that you advertised, consulted with accountants or attorneys, created a business plan, changed your business plan to try to make your business profitable, etc.

Why do small business owners pay more in taxes than wage earners?
Wage earners pay into Social Security and Medicare through withholding at a rate of 7.65%. Their employer then "matches" the employee's contribution and sends that money off to the IRS. Self-employed taxpayers must pay with their tax return not only the same 7.65% that wage earners do, but also the employer match. Therefore, for every $100 in profits approximately $15 will go to Social Security and Medicare taxes (combined this is known as self employment tax). This tax is IN ADDITION TO the ordinary income tax paid on their profits.
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What documents do I need to have my taxes prepared?
In order to have your taxes prepared please be ready to provide (a) gross receipts or sales; (b) categorized expenses; (c) a list of equipment, machinery and other durable assets purchased; (d) mileage information or actual expenses related to your business vehicle(s) and (e) the cost of your ending inventory (if applicable).
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What vehicle expenses are deductible ?
All ordinary and necessary expenses are deductible based upon the percentage it was used for business. These include gasoline, insurance, repairs, depreciation, car washes, OnStar fees, registrations, inspections, excise tax and interest on vehicle loans.
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Tracking all those car expenses is a pain... is there a simpler way?
In most circumstances you can elect to use the "standard mileage" method. By using this method you are allowed $0.55 per business mile driven in 2009.
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If I use the standard mileage method does that mean I don't need to keep records?
Yes and no. You do not have to keep receipts for operating expenses using the standard mileage method. You do need to keep a written record of the business use of your vehicle regardless of what method you use to deduct your automobile expenses.
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I heard that I don't have to declare the income if it was paid in cash. Is this true?
Absolutely not. All income (whether received in cash, by check, credit card, or even bartered for other services is taxable and reportable. Failure to report cash transactions is tax fraud punishable by monetary penalties or even jail time.
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I was told that I could not deduct anything I paid for in cash. Do I have to always pay by check or credit card?
It's a good idea but it is not a requirement. If you must pay by cash then be sure to get a receipt whenever possible. If it is not possible to obtain a receipt, keep a diary or ledger detailing the cash payments. Note however that I strongly discourage paying individuals in cash for services rendered.
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I think my employer is treating me as an independent contractor incorrectly. Do I have any recourse?
Getting "1099'd" is common practice in some industries. Whether you are an employee or a contractor comes down to several factors too numerous to mention here. However, you always have the option to request the IRS review your worker status. Contact me for more information.
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Aren't home offices a huge red flag to the IRS?
Self-employed taxpayers are more likely than wage earners to be audited simply because many under-report their income. Claiming a home office deduction does not significantly raise your chances of being audited. If you meet the requirements to deduct a home office I suggest you take advantage of the deduction.
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Do I need to bring in all of my receipts, statements, canceled checks, etc. in order to have you prepare my taxes?
NO. Unless you do not intend to do your own bookkeeping and want to pay me to do it (of course, this will significantly increase your tax preparation fee)! But you must bring to your appointment a spreadsheet or other recap of your income, categorized expenses, automobile information and equipment purchases. (See the link in the upper left hand corner of the page for a worksheet). Please note however that newly prescribed IRS Due Diligence requirements means that extraordinary expenses (for example, a roofer declaring $75,000 in income and $15,000 of office expenses) may be asked by me to provide details and receipts if the deduction looks unusual given the taxpayer's business.
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I need to save for retirement. What can I do besides a Traditonal or a Roth IRA?
Small business owners can set up a SEP-IRA (Simplified Employer Pension) and contribute up to 20% of your net earnings from self-employment (up to $49,000 for 2009). Contact Dave for additional details.
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What records should I keep in case I am audited?
You can never have enough documentation if you are audited. Retain register tapes, sales slips, guest checks, customer invoices, deposit slips, etc. to document income. Save canceled checks, charge card receipts, bank/credit card statements, invoices, statements, receipts, work orders, etc. to document business expenses. Keep an up-to-date mileage log for your vehicle expenses. When representing taxpayers before the IRS I have never lost a case because I walked in with TOO MUCH documentation!
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