Taxpertise

The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn't Want You to Know

Bonnie Lee

• Publisher: Entrepreneur Press
• Year: 2009
• Print ISBN: 9781599183503
• eBook ISBN: 9781613080498
• Topic: Business
• Subtopic: Marketing
• Index: Business

Taxpayer champion and enrolled agent Bonnie Lee puts the IRS under the microscope and uncovers proven methods, and surprisingly simple strategies to minimize your taxable income, maximize deductions, and, ultimately—add thousands back to your business’ bottom line! Do you owe an insurmountable sum to the IRS? Pay pennies on the dollar. Secret formula the IRS uses to determine an acceptable offer is revealed—Page 246 Save tax dollars simply by reorganizing your workspace—Page 17 Stuff tax dollars back into your pocket by fixing errors on your balance sheet—Page 50 Eat tax-free! Some meal expenses are 100 % deductible. Find out what qualifies—Page 56 Got a great hobby you’re turning into a bona fide business? Deduct the losses by following these guidelines—Page 99 Is your home office a red flag?—Page 107 You inherited Grandma’s house. Do you have to pay taxes on it?—Page 121 Can you write off your clothing?—Page 133 Under IRS audit? Learn "audit speak” to deal effectively with the IRS—Page 215

PART I

Getting Organized and Tracking for Taxes

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CHAPTER 1

You Too Can Be Organized

. . . Just Don’t Follow Bob’s Methods

One of my favorite clients is Bob, an elderly, easygoing, old-school kind of guy. He has a furniture refinishing business and still handwrites all of his invoices. He doesn’t cotton to newfangled inventions like cell phones and computers. Bob thinks a web page is a short story about spiders and the internet is a kind of fishing gear. In his shop, under a pile of brochures and dusty paperwork, lies a relic—a turquoise rotary phone. No pressing one for English in Bob’s world.

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Bob is probably the only remaining individual on the planet who buys 12-column ledger paper. He creates a not-so-electronic spreadsheet of his business expenses. By default, he has 11 main categories. The 12th column is where he lists all of his miscellaneous expenses. When Bob brings in his spreadsheet at tax time, I always recalculate the totals because, well, sometimes Bob forgets to carry his one.

And I usually have to ask, “No bank charges on your business checking account?”

“Oh yeah. I guess you ought to put down a couple of hundred for that.” And so it goes; the tax savings from the deductions I uncover always cover my fee.

Are you starting to get the picture? Bob is definitely organized but not effectively organized. And it gets worse.

A couple of days before our tax appointment, Bob sits down with a yellow-lined tablet to list and total what he believes are his deductible personal expenses. He produces dozens of pages filled with itemized categories: groceries, utility bills, birthday gifts to friends and relatives, cat food, dog food, parakeet food, and vet bills. Maybe 1 page out of 20 contains a deduction he can legitimately use on his tax return.

Getting started on the right path to taxpertise and prosperity requires changing the way you do things. It doesn’t matter if you’re a nine-tofiver working for a W-2, a freelancer, a perma-lancer, an independent contractor, or business owner, you need to have systems in place in order to maximize your tax picture and your finances.

And every year, I shake my head and say, “Bob, you can’t deduct any of this.

“Look,” I continue, tearing out the page with prescriptions and medical bills, “this is it, Bob.”

“What about the house payments?” Bob asks.

“See this Form 1098 for mortgage interest? That’s the total there. It also shows how much you paid in property taxes. You don’t have to write all that down for me.” He could have been watching Gilligan’s Island reruns instead of making all his worthless lists.

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I proceed to give him a list of tax-deductible items he should track, but every year it’s the same story. Maybe Bob just doesn’t have anything else to do with his time.

I will give you some organizational skills that are so simple to follow you’ll wonder why you had any trouble before.

YOUR PERSONAL FILES

First, let’s set up your personal files. If you don’t have a spot picked out already, select an area in your home where you can comfortably deal with your paperwork.

(Wait a second, I am reading your mind. You’re starting to think home office write-off, aren’t you? That’s not going to work. A space to handle your personal affairs does not qualify. Better check out Chapter 8 before you get carried away.)

Bear with me as I boot-camp you through a few tips and procedures.

Living without a filing cabinet is like living without a closet. Every shirt, dress, and pair of pants you own has a hanger and a spot in your closet, right? You might toss a dress on a chair after a night at the club; you might leave a trail of socks and undies along the path to bed every once in a while. But eventually you pick up; your clothes have a home, a place they will eventually hang. And so it should be with your paperwork.

It’s really not that tough. Every file folder in the cabinet will be plainly marked with the contents. Everything from utility bills to birth certificates to bank statements can be kept in orderly fashion.

TAXPERTISE TIP

File your paperwork immediately. You’ve got the bank statement in your hand. Open the drawer and slide it into the folder marked “Bank Statements.”

And no cheating. No setting paperwork next to where it belongs. I have an ex-husband who used to do that, which is one of the many reasons he is now an ex. No setting up a to-be-filed box on top of the file cabinet, because it will eventually be fatter than the contents of the cabinet itself. As soon as something as dreadful and boring as filing becomes a major project, it will never get done; you will emit loud, groaning noises every time you enter the room and see the to-be-filed stack.

It takes one second to slide open the drawer and stash a paper in the proper file. Put yourself in the habit of moving that paper from your fingertips to its rightful home.

Go ahead and beautify your filing system using color file folders. Perhaps green folders for vendor files, red for tax files, and blue for bills to be paid. It makes filing a lot faster, too.

If you’re thinking, “I can’t even keep my clothes picked up; how do you expect me to keep track of my paperwork?” my answer is: I understand completely. You are not alone. I have many clients in the same boat, so don’t feel embarrassed. After all, we all have our talents as well as our failings. You should accept this as a part of who you are. But because paperwork is inherent to life on this planet, I offer a solution to the problem: Hire a personal assistant, someone who will keep you organized and handle the paperwork for you. You don’t even have to employ him full time. In fact, you may need only the services of an organizer. This person will set up systems for you (I describe such a system later in this chapter). Then every six months or so, you may want to hire your organizer to attend to any subsequent messes you have created.

If I told you that using my organizing method would save you thousands of dollars a year, would that provide some incentive?

If you don’t want to do that, you will need to make an honest attempt to change your habits. Give it a try.

Every year in January, clear the prior year’s files to plastic storage boxes and set up files for the current year. Documents for transactions that are not taxable events can be stored or shredded depending on your needs.

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STORAGE CONSIDERATIONS

Some files should be classified as permanent and maintained at your fingertips instead of being shredded or going to storage. Others can be stored at the end of each month or year.

Divide a filing cabinet into six sections:

1. Permanent files. (Keep these documents handy. Some of them should go in a safe deposit box.)

• Product warranties

• Real estate escrow packages for properties with active ownership

• Home improvements

• Insurance policies

• Social Security statements

• Birth certificates

• Trust documents

2. Current finances.

• Bills to be paid. (Set up separate file folders labeled with date blocks depending upon the frequency of bill paying, e.g., due 1st–15th, 15th–30th.) It’s nice to tuck bills to be paid away in a drawer rather than face them day after day as they sit on your desk or your countertop. If they are stashed when received, according to due date, bill paying will be less time-consuming. No sorting through stacks of mail you have already looked at—just grab the current file and pay the bills therein.

• Vendor files. Give each vendor you use regularly a separate file; create one miscellaneous file for one-time vendors. Store receipts for paid bills in these files. Organizing by vendor rather than calendar month makes more sense; if you need to refer to a receipt, it’s generally easier to recall the vendor than the date you made the purchase.

• Bank statements. You likely have piles of ATM receipts for everything from grocery stores to gasoline to clothing purchases. Store these receipts temporarily in the “Bank Statement” file. When the bank statement arrives, match up the receipts to ensure accuracy. After matching, move important receipts to the corresponding vendor file. Keep receipts for any items that are tax-deductible or for which you need to prove purchase (rebates, exchanges, or refunds). Toss out the rest.

• Tax file for current year. Throughout the year, toss in any paperwork that is important for the preparation of your income taxes. Some examples include letters from charities thanking you for donations, receipts for tax-deductible transactions, paperwork for retirement plan distributions or contributions, and all those tax documents—W-2s, 1099s, 1098 mortgage interest statements, K-1s, and so on—that arrive in January. Imagine how simple it will be when the day arrives to do your taxes; pull the file and you’re halfway there. And if you’re ever audited, your backup data is at your fingertips, ready to prove your case.

3. Prior year tax return files. Include a copy of the tax return, worksheets, documents from lenders, banks, investment companies, W-2s, 1099s, letters from charitable organizations confirming your donations, receipts for all tax deductions stapled together by category with corresponding adding machine tape confirming the total amount deducted on your tax return. After filing the tax return, store any subsequent correspondence with the IRS and state agency in this file. If you are audited, you simply grab the file and go!

4. Real estate.

• Escrow papers. Mark the outside flap with date of purchase or refinance.

• Homeowner’s insurance policy file.

• Property tax paperwork.

• Home improvements file. Store receipts and pictures of major improvements, purchase of major appliances, and mechanical systems. When you sell your home, you are allowed to deduct these costs from your profit before determining if you have a taxable gain. The totals will be at your fingertips when reporting your home sale on your tax return. Even better to have them handy in the event of audit. In fact, when the home is sold, you will move contents, pictures and all, to the tax file for the year you report the sale.

5. Investments.

• Retirement plans

• Stock transactions, broker file

6. Other files. Depending on your individual situation, you will create files to store other documents.

You may want to scan your documents to computer files rather than keep hard...

Table of contents

• Title Page
• Dedication
• Acknowledgements
• Preface
• Introduction
• PART I - Getting Organized and Tracking for Taxes
• PART II - Cozy Business
• PART III - Business Deductions
• PART IV - Bull and Red Flags
• PART V - Can’t They Just Leave Me Alone?
• PART VI - We’re In Real Trouble Now
• PART VII - Appendices
• About the Author
• Glossary
• Index
• Subscribe to Entrepreneur Magazine
• Copyright Page