IRS Audit Red Flags continued
Thursday 30th of December 2010 10:39 AM
Other things to keep in mind...
7. Complex Expenses/Transactions
You have complex investment or business expenses or other transactions on your tax return.
8. Rental Property
You have rental expenses on your tax return.
9. Prior/Related Audit
Once audited and found to owe taxes, you can expect to continue to be audited.
New Year's Bookkeeping Resolutions #4: Timely Taxes
Wednesday 29th of December 2010 09:32 AM
As the year is coming to a close, tax time might seem like a fuzzy, distant event that you don’t need to focus on quite yet. However, readying your equine business’s tax information in preparation for filing your 2010 return should be at the forefront of your mind as you are closing down the books. The last thing you want is an unpleasant surprise come April.
Resolution #4: I will get my 2010 tax information to my accountant before March 1, so he/she won’t have to file an extension.
Depending on your organization system, this resolution may be really easy or extremely difficult. If your company isn’t using a small business accounting system and uses overstuffed file folders or boxes to store papers and receipts, then this will be a huge mountain to climb. Many small business owners have this sort of haphazard record-keeping because they're so busy with all the other facets of running the business and/or they can't stand the tediousness of the job. If this sounds familiar, don’t wait until March or April to get a handle on things.
Close out your books this month and run your year-end financial statements. Get caught up on all of your receipts and paperwork. Hire someone to help you if you can’t find the time yourself. The sooner you can get your tax information organized and sent to your accountant, the better off your business will be. April 15th is not the time to be asking your CPA questions about your taxes. You want to have plenty of time for your tax preparer to complete your return and address any concerns you have. Falling back on an extension is not the answer, as you are not delaying tax liabilities interest free. If a tax liability is owed to the government, interest will be due on any amount not paid by the original April deadline.
Save yourself, your equine business and your accountant from a massive headache and organize your tax information at the beginning of the year for the prior year’s filing. It will be more beneficial and possibly save your company money in the long run.
IRS Audit Red Flags continued
Monday 27th of December 2010 11:38 AM
And some more...
5. High Itemized Personal Deductions
You have large amounts of itemized deductions on your tax return that exceed IRS targets.
If your itemized tax deductions on your tax return exceed a target range as set by the IRS, the chances of being audited by the IRS increase. This is especially true if you claim large cash contributions to charities in relation to your income on your tax return. This does not mean that you should not take tax deductions on your tax return that you are entitled to, but you should realize that your chances for an audit increase if your tax deductions exceed the averages for your income level.
6. Tax Shelter Losses
You claim tax shelter investment losses on your tax return particularly if one or both taxpayers have high income from other sources. The IRS will question whether there is an attempt to use the horse business as a tax shelter.
IRS Audit Red Flags continued
Friday 24th of December 2010 11:37 AM
Additional Red Flags to keep in mind...
3. Cash used routinely in your business
You own or work in a business which receives cash and/or tips in the ordinary course of business. Lesson income is definitely an example of a cash business so be sure that your tracking includes a list of checks/cash received and insure those amounts match your bank statements.
4. High Wages
As for the higher earners, returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns with earnings of $1 million or more.
IRS Audit Red Flags
Wednesday 22nd of December 2010 11:35 AM
It is possible that sometime during your life you will endure the unfortunate experience of going through an IRS audit.
As an equine business it is almost certain that you will go through an audit at least once (and more likely multiple times in your life.)
How does the IRS choose who to audit? We will be posting for the next couple weeks some things that signal “red flags.”
1. Self Employment
The IRS believes most under-reporting of taxable income and abuse of tax deductions occurs among those who are self employed so they are audited by the IRS more frequently than employees. The temptation with some who are self employed is to deduct personal as well as business expenses on their tax return. Be sure there is a true business purposes for each expense.
The audit rate for self employed entities is greatest among sole proprietors. In 2008, a sole proprietor with gross receipts of between $100,000 and $200,000 had an audit rate of 3.9%. To minimize your risk of audit, consider changing your entity. You can, for example, incorporate and use S corporation status. The audit rates on S corporations, even if they are one-owner entities, are dramatically lower than the rates on sole proprietorships (S Corp audit rate was only 0.4% in 2008).
2. High Business Expenses
Your business expenses are large in relation to your income on your tax return or show losses continually, year after year.
New Year's Bookkeeping Resolution #3: Goals
Wednesday 22nd of December 2010 09:31 AM
Most large corporations have set clearly articulated goals with a plan on how to achieve them. Having a business on a smaller scale still means you need to set goals in order to grow to the next level. Your equine business success depends on your ability to set and achieve goals.
Resolution #3: I will set goals and create an action plan to reach them.
December is a great time to sit down and focus on what you want your business to achieve in 2011. If you don’t know where to start, use the simple tool of SMART goal setting. It’s a five step process that will give you an actionable plan on how to attain your goals.
Specific – A goal of “get more business this year” isn’t as powerful as “obtain 3 new equine clients every month.” Once you have a focus, it’s much easier to concentrate your energies and develop a plan of how to achieve the desired outcome.
Measurable – Set goals with concrete numbers so you can easily tell if you are on track or not.
Attainable – Your goals should challenge you, but they should not be impossible. It’s ok to dream big as long as you have one foot firmly planted in reality.
Relevant – With the on-going changes to the economy, keep your goals aligned with the current conditions. It wouldn’t be relevant to set a goal of increasing sales by 50% if you are in a recession and a couple new competitors have opened in your market.
Time-Based – Goals and objectives become nice ideas when you don’t tie specific time frames to them for achievement. Regardless of the type of goals, create an action plan to accomplish them by time period such as monthly, quarterly, etc.
Once your business goals are SMART, break down each goal into a specific set of tasks and activities to accomplish your goals. It’s important to periodically review your goals and make adjustments if necessary.
New Year's Bookkeeping Resolutions #2: Budgets
Wednesday 15th of December 2010 08:29 AM
Now that you’ve made your commitment to maintain accurate financial records for the year with resolution #1, it’s time to think about your budget. When you established your equine business, you probably took great pains to create a detailed business plan, but in order to carry it out and keep on track, you need a budget.
Resolution #2: I will create a budget and measure my results against the budget.
A budget is a translation of your business plan into numbers with a detailed plan of future receipts and expenditures - essentially a projected income statement. At the start, you can use your budget to validate the activities you have planned for the coming year. Will you be able to afford additional staff? Do you need to expand your facilities or purchase new equipment? When will be the best time to start your new marketing campaign? Do you have a period where the business is slow and making ends meet is a challenge? Knowing what all your business activities will cost and when such expenses will occur will help prevent any unexpected surprises that could lead to financial problems down the road.
Once the period for which you have budgeted is completed, you can compare actual results with anticipated goals. Take the time to make this a regular part of your business routine. You don't have to do anything elaborate - just compare your budgeted figures to your actual results. Then, ask yourself why the numbers are different. If some of your expenses, for instance, are higher than you expected, do you need to look for ways to cut them or has business increased? If your sales aren't on track, what has happened to cause the difference? Use the information constructively, so that you can make adjustments immediately, if needed, and improve your next budget.
When you complete your budget, you will have one of the most effective management tools of all -- a benchmark that you can use each and every month to check your progress towards your business goals.
New Year's Bookkeeping Resolutions You Should Make - Part I
Wednesday 8th of December 2010 09:25 AM
The New Year is upon us and it’s time to start thinking about some resolutions to make 2011 easier and more productive for your equine business. This will be the first in a series covering resolutions you should make to get your business finances in order and keep them that way for 2011. The first resolution is extremely important to your business’s financial health.
Resolution #1: I will accurately maintain my financial records every month.
Most likely, when you first considered starting your equine business, you went through the proper steps of researching the market, gathering information and creating a business plan that you used in order to get start-up funds. Unfortunately, for many new business owners, they get caught up in the excitement and demands of new ownership and often fail to keep accurate records. Don't let that be your story as well.
Financial record keeping is certainly not one of the more glamorous aspects of running a business and with the constant effort to grow and increase sales, business owners will often ignore financial matters and leave them to the last minute. This is fatal and, in fact, one of the main reasons businesses fail. Accurate accounting records and reports are vital to the successful operation of any business, including your equine business.
The key to keeping accurate records is to record your transactions as they occur. Waiting until the end of the month (or year for that matter!) only makes the task more difficult with paperwork getting misplaced, transactions forgotten and paperwork mounting up making the task overwhelming. Up-to-date records help you see what is really happening in your business, where your money is going, why cash flow might be a problem, how much profit you are actually making, etc. Knowing these facts in real time can help you operate more efficiently and profitably.
Although it may take a bit of time and effort to go through your company checkbook, take inventory and review bank statements, it will be well worth it to catch up on your paperwork. Make the commitment now to start your record keeping off right in 2011.
Small Business Tax Deductions Not to Miss
Wednesday 1st of December 2010 10:30 AM
Tax deductions for your equine business can save you a great deal of money, but you have to know what is allowable. Make sure you are aware of some of the commonly overlooked deductions you are entitled to in order to take full advantage. Follow the rules the IRS has established and take every legal deduction you can. If you don’t take the deduction, the IRS won’t do it for you! Here are a few deductions that are often missed:
You can deduct up to $5000 of start up expenses in the first year of operation. If it cost you more than that, you can expense the remainder over 15 years.
If you use your vehicle for business, and most in the equine business do, you can use it as a deduction based on the standard mileage rate or your actual expenses. You will have to keep track of all your expenses and how much you used your vehicle for business, but this also allows you to claim depreciation on the vehicle.
Section 179 of the IRS Code allows you to deduct as much as $250,000 of any money you spend for business equipment in 2010. But move fast as the write-off is going down 90% in 2011.
Incorporate some client and vendor meetings with your vacation, and you can deduct travel expenses like transportation, lodging and food. If you travel with family and they aren’t part of the business, you can only deduct a portion for yourself (another good reason to hire family members!).
Employ Your Children
If your child will be heading to college soon or is already in college, hire them to work for you instead of giving them tuition money. They can use their earnings to pay for college. The money that you would have spent to pay for college (and get no tax benefit) gets distributed as taxable income to your child (in a low bracket), and it’s a deduction for you.
Don’t always assume that your tax preparer will find all the deductions you are entitled to. Investigate what deductions are allowable, so you can plan your tax year accordingly and end up on the positive come tax time.