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Need Some Deductions for 2012?
Don't overlook these!
Updated for 2012
Audit Proofing Your Income and Deductions:
Audit-Proofing Your Income and Deductions is a Four-Step Process:
- Set up a separate business checking account (never commingle business and personal transactions).
- Keep an accurate and complete set of books and records.
- Retain all documentation supporting your business transactions and items of income and deductions included on your tax returns.
- Keep your books and supporting documentation that apply to each tax year separately (never commingle documents and records of two or more tax years).
Following these four steps make it easier to prepare financial statements, tax returns, and sail through an audit (heaven forbid this should happen).
Common Mistake Made By Self-Employed Persons
The first step in audit-proofing your business transactions is keeping your personal and business transactions separate. This means, at a minimum, you should open a separate business checking account. Using one credit card only for business transactions is also a good idea.
I've seen some websites advise that it's perfectly O.K. and very convenient to commingle business and personal transactions if you have a very small business. True, this can be done, but it's a sloppy and unprofessional way to start out.
Treat your business like a real business, not a hobby.
Maintaining a clear record of your business transactions will:
- Make it easier to prepare financial statements.
- Provide the information you need to manage your business.
- Allow you to complete your tax returns more efficiently.
- Provide support for items reported on your tax returns.
- Facilitate an audit of your business transactions.
Important Records
- Business checkbook
- Daily summary of cash receipts
- Monthly summary of cash receipts
- Daily check disbursements journal
- Monthly summary of check disbursements
- Daily petty cash disbursements journal
- Monthly summary of petty cash disbursements
- Depreciation worksheet
- Employee compensation record
- Monthly bank reconciliation
- Record of inventory purchased for resale
- If you're a manufacturer:
- Record of raw materials
- Record of work-in-process
- Record of finished goods
Documents Supporting Income
- Sales slips
- Invoices
- Register tapes
- Deposit slips
- Credit card receipts
- Credit card statements
- Sales receipt book
- Bank statement
Documents Supporting Expenses
- Cancelled checks
- Receipts for petty cash disbursements
- Invoices
- Credit card receipts
- Credit card statements
- Debit card receipts
Next:
Your Books and Records How Long Should You Keep Tax Records? Periods of Limitations; Retaining Property Records; Retaining Tax Returns
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