How To Have Airtight
Documentation For The IRS
The sound of the word ‘Audit’ makes home business owners shudder. There is a nasty rumor that home business owners who file a Schedule C have an increased chance of being audited. Research shows that simply isn’t true.
The truth is that there is a lot of fraud committed with home businesses. People file their taxes claiming a home business when they do not actually have one. There are other instances of people inflating numbers or under-reporting income. Unless there is some huge red flag that would trigger an audit, your chances of getting audited are not greater than the next person.
Let’s say that your number is up, and you get audited. If the IRS asked for documentation to support your deductions, how would that look for you? Would you say, ‘Oh, let me go to this file and grab it’ OR would you have a stroke, because you have no idea where anything is? Would you be confident that your documentation is iron clad?
As a tax professional, I can tell you that the majority of home business owners fail with documentation. It’s that failure that will cost you thousands of dollars each year. Understand that when it comes to the IRS, you are guilty until you prove yourself innocent.
Here’s how to have airtight documentation for your expenses! Do you remember the 5 W’s and H from school – who, what, when, where, why, and How [much]? If your documentation answers all those questions, you’re on track to shut that audit down!Grab your copy of 5 Frequently Overlooked Tax Deductions for Home Business Owners… Click To Tweet
Let’s say you’re a Direct Sales Consultant and you take your best customer, Frank Smith, out to lunch to show him your newest widget. Here is what your documentation should look like:
Who? – Client – Frank Smith
What? Lunch meeting
When? February 21, 2017 noon
Where? Mack’s Sandwich Shop, 123 Main Street, Your Town, State
Why? Show Frank the newest widget for his business
How much? $37.00 + $10.00 tip = $47.00
Regardless of whether or not you actually made a sale, or if Frank decided that he didn’t want to try to newest widget, the lunch is still a business lunch and is still 50% deductible – even if you only paid for your own food. You must provide the receipt (original or copy), and all of the above information. In the event of an audit, this would be airtight documentation!
The mistake home business owners make is that they assume all this information is unnecessary. They also assume that a charge on their credit card is sufficient documentation. It is not. You must have the receipt, or a copy, with all of the above information to stand up to the IRS.
Research also shows that a whopping 85% of home business owners overpay in taxes. Not being able to claim expenses, because of lack of documentation, is just one of the reasons!
Wanna know what else you might be missing? Grab of a copy of the 5 Frequently Overlooked Tax Deductions for Solopreneurs and Home Business Owners.