We are humans and unlike computers we have a limited capacity to retrieve and recall information. So let’s not depend a lot on our memory when it’s about keeping a track of endless number of financial transactions. The goal is to focus importance of proper documentation and keeping a note of income and expenses all through the year to avoid scrambling when tax season rolls around.
Here are 7 tips to help you take care of your taxes all year long and avoid sudden April 15th stress:
- Why Maintain Records? Having the requisite documents in place to support and validate the transactions is very important, especially if you are availing deductions on your income. The IRS might want to check if the deductions you claim are genuine. Sometimes they would like to conduct a letter audit to satisfy their doubts, wherein they will ask you to send in the supporting documents. It would save you a lot of trouble during the audits if you maintain good records.
- How to Maintain the Records? The IRS does not mandate any specific method of maintaining records. You can hold handwritten papers and hardcopiesor soft copies of all the necessary documents. Scan the handwritten receipts and invoices, name them sequentially and store them on your computer.If you are maintaining records electronically, discarding the physical documents is still not a wise thing to do.
- Open a Checking Account. A checking account, also known as transactional account offers higher liquidity to small businesses. Having a checking account to receive and make payments is a great way to keep an account for every dollar that comes into and goes out from your business. You will have a running tally of your daily revenue and expenses. Checking accounts usually don’t offer attractive interest rates, but they certainly make your life simpler.
- Maintain an Auto Log. If you have a car and use it for business purpose, you should maintain a log of your mileage. Just keep a binder in the car’s glove box. Whenever you finish the trip relating to your business, jot down the details of your trip, such as date, mileage and purpose in the log before you step out of the car. You can download the auto log from 1040Return.com for free.
- Maintain an Entertainment Log. Sometimes you might have to entertain the clients and have meals in the course of your business. These expenses are deductible. The IRS requires you to maintain records of entertainment expenses as well.You can download the meals and entertainment log from 1040Return.com and use it to note down the entertainment expenses.
- Maintain Old Tax Returns. The IRS does not mandate the number of years for which you should maintain copies of tax returns. It can conduct audits and go as far back in time as they want if they suspect a fraud. In cases of extreme frauds the IRS usually does not go beyond 6 years, such frauds being very difficult to prove. We recommend you to retain copies of tax returns and supporting documents for six years. It will help you prove that your deductions are justifiable and taxes are correctly paid should you receive an audit notice from the IRS. Another way the copies of your previous tax returns come handy is by facilitating you prepare the tax returns for the current year. You can refer to them and remind yourself of the previously reported income and deductions availed.The odds of missing out on any item reduce drastically.
- Maintain Records of Your Home. You should have a copy of the settlement sheet when you buy a new home since it is the proof of the price you paid for it. If you sell your home, the gains you made are subject to tax. If you have spent on home improvement, keeping a log the expenses will help you avoid tax bites. Keep records of any casualty losses that your house suffers. You can deduct them as well unless they are reimbursed by the insurance company. Cash inflows and outflows take place throughout the year. Why struggle during the tax season? Take a couple of hours every week to organize and update your records and we are sure that the next tax season will be like a breeze for you.
Waiting until the last minute to deal with tax season always proves to be a stressful hassle. Save yourself the pain and worry by handling your taxes bit by bit all year long.