By Jo-Ann Weiner, EA, CFE, NTPI Fellow, J.L. Weiner & Associates, LLC
With the tax-filing deadline now upon us, it’s never too early to start thinking about and working toward the next tax season. In fact, early in the year is the perfect time to review, plan and implement simple measures to benefit you when you file your 2017 returns.
When it comes tax time, you’ll need to gather the records you have kept for your business in order to prepare your tax return. Review your records regarding your total income and expenses. Do you have the records needed to correctly arrive at your income and expenses? Are the records thorough and organized? Do you have a record of your business mileage and other deductible expenses? Review your expenses to ensure you are deducting everything you are entitled to.
Remember, it is preferable that the records to establish these items be maintained all year, rather than trying to figure out the amounts at the end of the year from portions of records. Therefore, make it a practice to keep records as expenses are incurred and as income is earned during the year.
It is not enough to give your bookkeeper amounts of the expenditures and forget about the item. You must also keep the backup records to establish how the amounts for the expenditures have been arrived at. Keep similar expense receipts together. Be sure your bookkeeper is thorough and posts expenses to the proper account. Do testing periodically to be sure.
When your tax returns are prepared, keep the proof, i.e. invoices for the income and expense items with the return so you will not be caught off guard in the event of an income tax audit.
It is appropriate to keep your business records separate from your personal records. Do not co-mingle business and personal funds. Keep your business bank account separate from your personal bank account.
Once you set up a process for maintaining records, it can be used over and over each year. Know that the process can be improved each time you need to in order to meet new requirements.
Take a look at your total income and expenses to determine whether you increased, maintained or decreased your net profit from the prior year. Establish a goal you would like your business to aspire to next year and determine what you need to do to accomplish that goal. Do you need to invest time or funds in one area or another? Do you need to obtain a line of credit? Making decisions early in the year gives you time to achieve your goals.
When making large acquisitions for your business, take a look at the rules regarding what needs to be depreciated or what can be expensed and deducted in the year. There are IRS regulations governing these decisions. Use those as guidance where you can in making decisions regarding acquisitions.
Review Before Signing
Review your tax return for accuracy prior to approving it to be filed. Review that your income has been properly reflected. For example, in the case of a cash basis Schedule C with gross receipts, make sure you review, can explain and agree with how the gross receipts were arrived at. Total your business receipts—if your bank account deposits exceed reported gross receipts, determine why and if needed, correct the gross receipts on the return. In most cases, the difference is something non-taxable such as a reimbursement. Keep a record of the non-taxable difference for future reference. Remember, all income needs to be on deposit or accounted for—that is a question you will be asked if ever audited. Do you deposit all your income? You do need to deposit all income or if you don’t, keep very good records of your income. If you receive cash that is not on deposit, the question becomes, has all the income been reported?
Extensions to File
Remember, if you are planning to file your return late, an extension to file, Form 4868, needs to be filed in a timely manner. If you file a Schedule C or an 1120 C Corporation, the due date is April 15th but moves when that date falls on the weekend. Note 1065 partnership and 1120S filers have a different due date. It is important to know the Form 4868 extension is an extension to file not an extension to pay. If you owe taxes, the amount owed is still due and needs to be paid on time even if an extension to file has been made.
Keep Copies of Tax Returns and Records
You need to keep your tax returns and the records that relate to those returns for at least three years from the date the return is filed or due, whichever is later. There are longer periods the returns and records should be kept for. An excerpt from IRS guidance regarding records maintenance follows:
Period of Limitations that apply to income tax returns:
1. Keep records for 3 years if situations (4), (5) and (6) below do not apply to you.
2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.
7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Records relating to capital acquisitions should be kept for the life of the property. There are many records that should be kept indefinitely, for example, birth certificates, marriage certificates, wills, stocks and bonds. Keep your records in a safe place and not co-mingled with other things.
IRS publishes guidance. Put the topic or question you have in your browser and look for the IRS.gov guidelines. Be sure to ask your tax professional for guidance as well.
For more information on the author and her company J.L. Weiner & Associates, visit http://jlweiner.com.