It's the season when we're busy enjoying holiday festivities and making lists of all the tasks to complete before the close of another year. During this time, remember this checklist that will help wrap up your annual business activities. Diligent record keeping is a good proactive measure to prepare for the possibility of a future audit by the IRS. It can help you save time and the headache of trying to retroactively recover documentation if you ever get audited.
These five tips can help business owners avoid tax problems down the line:
- Gather bank records: While most banks offer online access to account history and activity, there may be a limit on how far back customers are able to retrieve online statements. Meanwhile, the IRS can go back up to three years to audit your tax returns. If you require statements from your bank that are beyond what's available online, retrieval fees could apply. So it's a good idea to print your bank records at the end of the year.
- Preserve your receipts: Supporting documentation for your tax returns can also include receipts for business purchases during that year. Because many receipts are printed on thermal paper, the ink can potentially fade away over time. To prevent loss or damage of your receipts, scan and save electronic copies on your computer or save them in an online folder in the cloud. If you've been using a credit card to make business purchases, review your statement and note which purchases are business-related (such as travel, meals, etc.) so you can have a record of all your business expenses.
- Record your mileage: A common audit trigger for the IRS is mileage that is outside of the typical parameters for your line of business. For example, if you are a marketing consultant and your mileage expenses are comparable to that of an over-the-road truck driver, then that might raise a red flag. Accurately establish the number of miles driven for business in a 12-month period. There are apps such as MileIQ that can help you track mileage throughout the year. If you forgot to record the mileage at the beginning of the year, you could also request a Carfax report that documents service dates and odometer readings. It's also a good practice to get your car serviced at the beginning and end of each year to have a record of miles driven in a 12-month span.
- Document gambling wins and losses: Gambling establishments are required to report winnings to the IRS on a form W2-G. However, gamblers are expected to document their own losses. Many professional gamblers get in a bind when they have poor record keeping. Failing to account for losses throughout the year hinders a gambler from expensing the losses. Gamblers should keep a detailed diary to accurately document their losses.
- Consult with a professional: Tax returns with mistakes are subject to accuracy- related penalties, unless the return is prepared by a CPA or tax attorney. However, not everyone wants to pay the fees CPAs or tax attorneys may charge for tax return preparation. If you are preparing your own return, get it reviewed by a tax professional before filing. Tax laws are always subject to change and it's better to catch mistakes on the front end.