|
Recordkeeping
If the IRS or a
state tax agency examines
your tax return, you may be asked to document the items reported on your
return. If you can not produce the requested documents you may have to
pay additional tax, penalties and interest. Typically, expense documents are the most common documents requested. Deductible expenses
require a document (receipt) showing a description of the expense, amount, payee’s
name, check number, and the date paid.
Charitable
contributions need a document showing the name of the organization, the
amount, and the date of the contribution. Contributions of $75 or more for which you receive
some goods or services, require a receipt describing the value of the goods
or services received. Contributions of personal property require a written
receipt from the organization showing a reasonable description of the
property; and you are responsible for identifying the fair market value of
the property contributed.
Deductible child
care expenses need to be supported with the name, address, and taxpayer
identification number (Social Security Number or federal tax number) for all persons and organizations that provide care
for your dependent(s).
Employee and
business expenses are deductible when they are ordinary and necessary, while
not being extravagant. The most often
audited business expenses are vehicle expenses, meals, entertainment, cell phone,
travel, and
office-in-home expenses. Good records for
these expenses include:
-
A mileage log with
dates, destinations, business purposes, and miles driven. See the example
below.
-
Receipts
including the business purpose for meals and entertainment.
-
Phone records
indicating who was called and the business purpose, or verification that
the phone is used exclusively for business.
-
A business travel
log indicating nights away from home, the business purpose, and location.
-
Square-footage of
an office-in-home used exclusively for business.
A good
recordkeeping system can be in many different forms. It is important to
establish a system that is efficient and easy for you to use. Most
importantly, it needs to be complete.
For more reading see
IRS Publication 552
Recordkeeping for Individuals.
Here are some examples for
recordkeeping:
Mileage Log
A good mileage log needs to be
something convenient for you to use. Many people use a small notebook kept
in the vehicle to record the trips along with an envelope for all related
expense receipts. A log is necessary for business owners and employees
driving for work related trips.
Here is an example of what needs to
be in your mileage log:
|
|
Starting
Odometer: |
26,520 |
| |
|
Date |
Destination |
|
Purpose |
Miles |
|
1/5 |
Office Store |
|
Office Supplies |
6 |
|
1/5 |
Thompson's Res.- Kuna |
|
Site Survey |
44 |
|
3/8 |
Blueprints R Us |
|
Pick-up Documents-Markos |
15 |
|
4/14 |
Wilson, Harris & Co |
|
Payroll Reports |
12 |
| |
|
|
|
|
|
12/31 |
Year-End Total Business Miles |
77 |
| |
|
|
Ending Odometer:
|
29,560 |
|
Equipment Used for Business & Personal Use
The tax laws say when an asset is used for
business and personal use the cost of the asset has to be allocated between
business and personal use. Therefore it is necessary to document your
claim of how much the asset is used for business. For example if your
computer cost $1,000 and you use it one-third of the time for business, you
would be able to deduct $333.33 for the computer. But you need some time of
record documenting your business use.
Example Computer Use Log
|
| Date |
Purpose |
|
Project |
Time:Minutes |
| 4/14 |
Design |
|
Thompson's Blueprints |
12 |
| 5/1 |
Personal |
|
|
45 |
| 6/10 |
Billing |
|
Thompson's Residence |
10 |
| |
|
|
|
|
| 12/31 |
Total Time |
|
|
67 min |
| |
Business Time |
|
|
22min |
| |
Business Percentage |
|
|
33% |
| |
|
|
|
|
Cell Phones
For audit purposes, an auditor most
often asks for monthly phone bills and then asks the taxpayer to
substantiate each call as business or personal. Other than the obvious
tedious task of doing that every month, it can be preferable to establish that a (cell)
phone is required for business purposes and the minimum monthly fee is
deductible regardless of business/personal ratio. Any additional charges
would have to be substantiated to claim them as business expenses.
Example Cell Phone Log
| Date |
Number |
|
Project |
Time:Minutes |
| 3/10 |
344-1355 |
|
Thompson |
2 |
3/11 |
867-5309 |
|
Personal |
25 |
| 3/13 |
344-1355 |
|
Smiths |
10 |
| |
|
|
|
|
| |
Monthly Total Time |
|
|
37 min |
| |
Business Time |
|
|
12min |
| |
Business Percentage |
|
|
32% |
| |
|
|
|
|
Year-end Summary of Personal Expenses
To summarize personal
deductible
expenses, simply list your expenses like this:
| Medical Expenses |
$ 2,560 |
| Job Related Expenses |
$ 225 |
| Education Expenses |
$ 3,000 |
| Cash Donations |
$ 520 |
| |
|
Year-end Summary of Business Expenses
You can
help your accountant to quickly complete your tax return by totaling your receipts and records into a summary page.
Example Business Income & Expenses Summary for
a Year
| |
Sales |
|
65,000 |
| |
Materials Purchased |
22,000 |
|
| |
Contractors Paid |
600 |
|
| |
Storage Rent |
25 |
|
| |
Equipment Fuel |
125 |
|
| |
Cell Phone Service |
1,200 |
|
| |
Total Expenses |
|
23,840 |
| |
Net Profit |
|
41,160 |
| |
|
|
|
| |
|
|
|
| |
Total Business Miles
|
77 |
|
| |
Total Vehicle Miles |
3,040 |
|
| |
|
|
|
| |
Total Nights Away from Home |
23 |
|
| |
Assets Purchased |
Cost |
Use |
| |
Computer & Printer |
1,000 |
33% |
| |
Cell Phone/ PDA |
325 |
32% |
| |
|
|
|
End
|
