It’s always one of the very last things that most people think about when starting a new business, and that is doing taxes. But proper planning is important and a critical component to any home based business, and it will also make doing your taxes a lot easier – while keeping the IRS happy!
Here Are The 3 Top Tips For Keeping Proper Income Tax Records:
1. Whenever you buy anything related to your business, always keep and record the receipt ASAP!
Not only will it make your record keeping a lot easier, but if you ever happen to get audited by the IRS, (having your income tax returns reviewed in detail), you can prove these expenses, as well as saving yourself money. If at all possible, try keeping all purchases on one credit card as you will have the credit card proof of purchase as well.
2. Make sure you record and write down your expenses as well as income as they happen.
As your business starts to grow, you will begin to do a lot of business related activities to keep you busy. The last thing that you want to do on April 15 is to spend the time organizing your records for the past year. So, it’s always a good idea to write down all of your business related financial activities as they happen. You will then find preparing your taxes will take a lot less time if you are organized.
3. Learn how you can save money on your taxes.
As you learn more about taxes as a self employed individual, you will find that there are a lot of tax deductions (business related expenses that reduces your income, and thus your taxes) you can make that you probably previously didn’t know about. For example, when using your home as an office, you will be able to deduct (prorated partially) repairs that you make around the house, utilities, as well as your home’s value at the time that you started your business, and much more. In your first year of business, it’s a good idea to consult with a tax specialist to find out what you can and cannot do.
The more you know and learn about taxes, and the more prepared and organized you will be in keeping proper records, and the more time and money you will save at the end of the year!
What happens if you don’t bother keeping proper tax records?
Individuals who operate small businesses are one of the most likely to have their income tax returns audited by the IRS. So if you don’t keep receipts, you will most likely lose that deduction and end up owing the IRS money.
But while an audit should not be feared, you should however be prepared – the more organized you keep your records, obviously the easier it will be to prove your case.
If you don’t have one already, get a file box or cabinet, get some folders from your local office supply store (deductible of course, keep your receipts!) and create a bill and receipt filing system for your home based business. Make sure you place all the receipts in the proper folders, and store them in a safe place.
Another way to protect as well as save yourself time is to write down all of your business transactions, including expenses and income, preferably on a spreadsheet on your computer or purchase a specialized small business software program. On a spreadsheet, keep a column for: income, advertising, office expenses and supplies, etc. You do not have to be a computer expert to do this. But keeping accurate, organized records will help you in saving time when you fill out your taxes.
Keeping these records can also help you plan, by giving you an exact snapshot of your financial situation when you need it, and it will also come in handy when you need to borrow money or buy capital equipment. Hey, you may even have enough money to take that much needed and well-deserved vacation!