Starting a business can be truly exciting. You are pursuing your dreams and have become your own boss. Obviously, it is also incredibly hard work and an exercise in coming to expect the unexpected. One thing that you can count on is just how much time you are going to spend on record keeping.
Efficiently keeping records is essential to running a business. Not only is it important from a professional standpoint (i.e. keeping appointments, calendars, or customer and client records), but it is also essential for HR purposes and bookkeeping. As a tax attorney who has helped individuals and businesses for over two decades, I can attest that recordkeeping is an essential skill to hone for tax purposes.
Keep Records of Your Expenses
If you run a business, you will want to make use of every tax advantage legally available to you. This is simply good business practice. One of these advantages is to report all “ordinary and necessary” business expenses, as allowed by Internal Revenue Code § 162. It is necessary to be accurate and thorough when reporting business expenses in your tax return. This is because over-reporting expenses is a common basis of IRS tax audits.
One proven method to be sure that your return is accurate is to keep records of your expenses. This is so that you can support your tax return if asked for further information. Significantly, it is recommended practice to utilize a physical or electronic journal and ledger system. A journal lets you log the date an expense occurs, and to specify how it was business related. A ledger is where the aggregate numbers from all of your journals are totaled.
It is essential to log an expense the same day it occurs, otherwise relying on our memories weeks or months later will lead to inaccurate records. A journal is also where receipts and supporting documentation should be kept. For travel, food, entertaining expenses, and personal vehicle use, a thorough journal with receipts will demonstrate to the IRS that you are running a professional operation.
In addition, if you have employees or utilize independent contractors, you must keep accurate payroll records. This includes documenting all salaries, paid leave, pension benefits, and insurance benefits. While it may be costly, it is worth the money to invest in specialized software for accounting and payroll purposes.
Contact a Tax Attorney for Your Business
If you are starting a business, you should speak to a tax attorney. It is incredibly important to get your business off to the right start, and to not fall into bad habits. I can provide you legal advice that ranges from setting up your business and limiting your liability, to tax advantages and best practices in tax preparation, to IRS disputes. I have been a tax attorney for over twenty years and have a Master of Law Degree (LLM) in Taxation, and a license to practice in the United States Tax Court. Contact The Law Offices of Robert S. Thomas at 847-392-5893 or visit our website today.