Information about Filing a Business Tax Return
Filing a tax return and reporting taxable income is more than just checking a few boxes and signing your name to a form. This may seem obvious, but you must report all taxable income on your tax return. Do you know what types of income are considered taxable to avoid tax trouble? All income is taxable, unless the law specifically excludes it. Income from your business can include many forms, such as cash, checks, or credit card payments, or the exchange of property or services, called bartering.
Business Tax Return and Batering
Bartering is the exchange of one product or service for another, including through the Internet. Both parties must include the fair market value of goods or services received as income on their tax return. With bartering, you must include the value of the non-cash income from the exchange as income.
Supporting Business Income and Expenses to IRS
To support your expenses associated with your purchases, such as the cost of all raw materials or parts purchased for manufacture into finished products, you need to keep a record that shows the amount you paid for these purchases. Proper documentation includes: canceled checks, cash register tape receipts, credit card sales slips, invoices. You also need to verify expenses — the costs you incur, other than purchases, to carry on your business. Your supporting documents should show the amount paid and business purpose, such as, canceled checks, cash register tapes, account statements, credit card sales slips, invoices, petty cash slips for small cash payments. The area of claiming expenses is a potential pitfall for tax trouble; specifically, claiming personal expenses as business expenses.
Keeping Business and Personal Expenses Separate
If you keep your business and personal records separate, you will go a long way to avoid this common mistake. While there are many examples we could go over, let’s look at three top expenses that are looked at very carefully by the IRS. First, home office deduction – many taxpayers work at home these days. If you have a home office, personal expenses are never allowed as a business expense. Business expenses must be kept separate, and good recordkeeping is a must when you have a home office. Next is frequent business vehicle use. Just as it’s easy to mix personal with business use in a home office, business vehicles are also rife for unqualified deductions.
Claiming Business Expense Deductions
This doesn’t mean you can’t claim a business vehicle, but make sure you have a detailed log with the date, destination, and mileage for each trip. And then you don’t include stop offs for coffee or dry cleaning. And finally, travel and entertainment expenses – if you’re self-employed, it’s tempting to claim lots of meals and travel on the Schedule C you file with your tax return. But you can avoid tax trouble by claiming only the proper expenses allowed by the law. Let’s look at the last business expense a bit closer. If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove certain elements of expenses. If you’re claiming business-related trips and entertainment, it’s crucial to keep detailed records and receipts of who was there and event specifics.
Deducting Business Cost of Using a Vehicle
You will be able to deduct the cost of the vehicle you use for business purposes using either a standard per-mileage rate or the actual expense you incur. For additional information on how to prove certain business expenses, refer to Publication 463. In addition to allowing deductions which reduce the amount of taxable income, the Internal Revenue Code provides for business tax credits which can reduce the amount of tax on a dollar-for-dollar basis. You can search www.IRS.gov and enter “business tax credits” in the Search box to find out more information.