The
tax law requires All business owners to keep accurate and complete business
records that clearly reflect income and expenses. The tax law also requires
specific records be kept that document and substantiate various expenses
reported on the tax return.
Failure
to comply with the tax law could result in the IRS disallowing the deduction
and also subject the taxpayer to additional taxes, various penalties, and
interest charges.
Below
are some record keeping rules all business owners should follow for various expenses that are often
high audit targets.
Automobile
Records (Appointment Book, Calendar, Automobile Use Log etc.)
Date-Date of each business
use of the vehicle.
Place-Destination by name of state,
city or town.
Total Mileage-Total mileage broken
down into business mileage & non-business mileage.
Business Purpose-Business reason or
nature of business benefit derived or expected to be derived.
Business Relationship-Occupations or
other information about persons visited such as, name, title, &
organization which establishes the business relationship.
Business
Gifts
Date-Date of each gift.
Amount-Total cost of gift.
Description-Description of gift
item.
Business Purpose-Business reason or
nature of business benefit derived or expected to be derived.
Business Relationship-Occupation or or
other information about recipient, such as name, title, & organization
which establishes the business relationship.
(Note: The tax deduction allowed
for business gifts is limited to $25 per recipient per year)
Entertainment
& Meals
Date-Date of each entertainment
& meal or use of qualifying facility.
Place-Name and address of place of
entertainment/meal.
Amount-Total amount of each
expenditure.
Business Purpose-Business reason or
nature of business benefit derived or expected to be derived, and, the nature
of business discussed.
Business Relationship-Occupations or
other information about persons entertained such as, name, title, &
organization which establishes the business relationship.
(Note: The tax deduction allowed for
entertainment & meals is limited to 50% of the total allowed expenditure).
(Other deduction limitations also apply to certain entertainment).
Travel
Away From Home Overnight
Date-Dates of departure and return
and number of days attributable to business activities.
Place-Destination by name of state,
city, or town, (or foreign country, if applicable)
Amount-Amount of each separate
expenditure for travel, local transportation, lodging, entertainment, meals,
and other incidental expenses.
Business Purpose-Business reason for
travel or nature of business benefit derived or expected to be
derived.
Business Relationship-Occupations or
other information about persons visited such as,name, title, & organization
which establishes the business relationship.
Casual
& Contract Labor
Each
year, every independent contractor MUST provide a completed Form W-9 Request
For Taxpayer ID Number
Contractor's
bill/invoice detailing date work was performed and a description of work completed
on each project.
Proof of payment (canceled check, credit
card statement)
Form 1099-Miscellaneous Income to
the contractor
NOTE: Even though you may not be
required to issue a Form 1099, doing so will document and substantiate you
business expense
CLIENT
COSTS INCURRED: Are either reimbursed or not reimbursed.
Client
Costs ARE Reimbursed. (Reimbursed Expenses ARE Taxable Income)
Date-Date expense was incurred
Description- Description of expense
incurred
Amount-Amount of each expense
Amount-Amount of each reimbursement
Business Purpose-Business reason or
nature of business benefit derived or expected to be derived, and, the nature
of business discussed.
Business Relationship-Name and
business relationship of the party for whom the expense was paid for.
Client
Costs ARE NOT Reimbursed. (Client cost is a Deductible ordinary & necessary
business expense)
Date-Date
expense was incurred
Description- Description of expense
incurred
Amount-Amount of each expense
Business Purpose-Business reason or
nature of business benefit derived or expected to be derived, and, the nature
of business discussed.
Business Relationship-Name and
business relationship of the party for whom the expense was paid for.
Supporting
Documents AND Proof of Payment
Bank
Statements
Credit
Card Statements
Canceled
Check
Electronic
Funds Transfer Confirmation
Vendor
Invoices & Receipts/Work Orders/Purchase Requests
1099's
Expense
Record Logs
Other
Employees
& Independent Contractors
If you
hire employees, you MUST do the following-failure to do so could result in
substantial penalties and interest charges.
1-Have
every employee provide you with a completed Form I-9 (Employment Eligibility
Verification)
2-Have
every employee provide you with a completed Form W-4 (Employee Withholding
Allowance Certificate) (this should also be updated every year with each
employee)
If
you hire independent contractors, you MUST do the following:
1-Have
every independent contractor provide you with a completed Form W-9 (Request for
Taxpayer Identification Number).
2-Give
every independent contractor a Form 1099-Miscellaneous Income at the end of the
year.
(even if an independent contractor
is not required to be issued a Form 1099 Miscellaneous Income Statement, by
doing so you will protect yourself if you are ever audited and the IRS requests
documentation and substantiation of your deduction for this expense).
This article was
written by Donald M. Scherzi, CPA, CFP,
LLC
Mike Lupo, SCORE Counsel
Visit us at: www.scoresouthflorida.net
