Your Own Business
The Records that IRS will Request in the Event of an Audit
A business has "books" of record. All cash receipts and cash disbursements are in journals which clearly reflect the operation of the company daily and month by month. A real business can produce a General Ledger and Trial Balance -- (these are accounting terms and basic to GAAP (Generally Accepted Accounting Procedures) -- they are the least you should have, not the most).
Very few businesses operate successfully without an accountant. Think of that like a gun without bullets. Looks like a gun but can't act like a gun. BANG BANG.
If your business has a loss for more than two years, AND you do not have an accountant on retainer preparing your books and records, IRS may infer that you are not taking the steps necessary to grow the business or show a profit. It is a fair assumption. If you have decided that you cannot afford an accountant, there is a strong possibility that you have doomed your business to tax liabilities (payroll and income) and tax problems.
QuickBooks and Peachtree are not true accounting systems and they are NOT a substitute for an accountant. In the entire time QB has been on the market we have not seen any records that were accurate or representative of the true Balance Sheet and Income Statement of a company. You need to be a QB expert to do it and that does not mean that the accounting aspect and opportunities are correct.
Still with us? You are truly awesome.
What things are and what they are NOT
Employee Benefit Programs: NOT any of your personal medical or childcare expense. Only the amount you pay on behalf of an employee, under a written plan, is deductible. As a self-employed person you are not an employee. BUT, your wife may be your employee??
Insurance: NOT your own health insurance or any life insurance even if you have the life insurance for a business purpose. Sometimes lenders require it.
bp>Interest Other: If you borrow money for the business or use a credit card for busines, this is the one. The catch (isn't there always a catch?) is that you need to be able to show a paper trail between the interest and the business expense. The best way to make that easy: keep business funds and loans separate from other money. Co-mingled funds create confusion.
Taxes: Okay, this is very important. Do NOT list any estimated tax payments you made for your own income taxes. They are not deductible here. If you paid sales, use, and amusement tax that is INCLUDED (as it should be) in your Gross Income, this is the place to list the expense.
Retirement Plans: Keogh's (there is no such thing anymore), SEP's, SIMPLE 401k (don't do it), SIMPLE IRA's (the new SIMPLE 401k) and profit sharing plans, AND all the confusion in between.
If you do not have a "Keogh"-type plan (new combo profit sharing-401k) opened by 12/31/12, it is too late for 2013.
Why not open the plan(s) for 2013 now? I know, no one says, "Let's do this at the first available moment…" Thinking about it? Send liz an email at firstname.lastname@example.org. It is not too late for a SEP (Simplified Employee Pension). You can contribute a maximum of 20% of your "net income from self-employment" after reduction for 1/2 of your social security and medicare tax."
The drawback of a SEP is that you have to 100% cover any and all employees and they "vest" 100%. That means the money you put in AND any earning on that money are immediately owned by the employee even if they quit tomorrow.
Is this the first year of a new business? Do you have desks, chairs, computers, phones, fax machine, copier, file cabinets, cell phone, etc. that you owned prior to 2012? If so, work up a list with fair market values and the percent of business use. If you acquired any of the above (they are called "assets".), contact Liz and ask for her First Year of Business Form.
Kiddie Payroll: The last tax break left to the average non-wealthy American. Do you have children who work for your business (sort mail, word processing, answer the phone, clean the office, etc.)? Do they explain the computer to you, show you how the Internet works, deliver things for you, give you better instructions and advice than a textbook? If so, their labor has a value.
You may pay a child, under 18 years of age, without incurring ANY payroll taxes on that payroll. That means there is no Social Security, no Medicare, no state unemployment and no federal employment. What? Yes, you may pay a child over the age of 18 too. You have to pay all the employment taxes in their case.
For children under the age of 18, with no other income, a W-2 income from you of up to $5,000, would not be subject to federal or state income tax. Talk to Liz.
The desire to save the cost, and effort, of writing checks on a weekly, or bi-weekly basis, could endanger an otherwise legitimate deduction AND compromise the entire classification as a business. It is the old "if it walks like a duck and talks like a duck" analogy.
In Summary - What Makes a Business Look like a Business
- Money Invested
- Profit Motive!!
- Legal Business
- Separate Entity
- It's Own Bank Account !!