There are five costly tax mistakes consultants make that causes them to pay more money in taxes.
As a matter of fact, around this time each year, many consultants begin to stress, struggle and scramble to get their books for the upcoming tax season.
This stressful state, combined with trying to close the year strong, can be very overwhelming! Several tax mistakes occur when consultants are operating under stress, and their books are a mess.
In this episode, I provided five costly tax mistakes draining money from consultants.
Do you want to pay the IRS more money in taxes?
Of course NOT! Unfortunately many consulting firm owners do because they make costly tax mistakes that can be avoided.
Let us jump into the five costly tax mistakes so that you can correct or prevent them!
Mistake #1 - Not Gathering All Yearly Source Documents.
Listen, the IRS requires all business owners to keep the receipts and source documents of purchases that are $75 or more. By doing this, not only are you in compliance, but you can prove that the purchase is tax-deductible. And let me be crystal clear, your bank and credit card statements are NOT proof! Okay. A bank or credit card statement does not show all the itemized details that the IRS requires.
The IRS states that your income and expenses proof must be clear, accurate, and include all necessary information. The IRS accepts receipts, canceled checks, and copies of bills, to name a few, to verify expenses.
Also, you want to match the source document with the transactions on your bank statement and in your accounting system. And make sure the document has the date, time, amount, and location visible.
I recommend that you scan or photograph your receipts and documents. When you keep your records organized, it will save you time when you file your return.
Mistake #2 - Misreporting The Firm's Income
The income for your business can be received in many forms. Now of course, it is the money your company earned from providing its services or products.
Income is NOT the money you invested in the company. Please understand that the IRS has a system that compares what you report on your taxes against the various 1099 forms they receive.
To avoid penalties and a possible audit, you need to include all income received for the year on your tax return. If you fail to report the correct income, not only will you be responsible for the taxes due but additional penalties for misrepresenting your income can be assessed.
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Mistake #3 - Taking the full 100% Meal Deduction
Under the Trump tax plan, entertaining a client is no longer deductible.
For a meal to be deductible, there are certain critics that you must follow. You must have a scheduled meeting before and after. And most of the conversation must be about business, and your meal companion must be an actual potential client or partner.
Also, to write off your meal expenses, the receipts will need to show the restaurant's name, the location, date, time, who attended the meeting, the total amount paid, and a note briefly explaining the meeting discussion.
I recommend using either your accounting system or a specific business journal to track this information and receipts. It would be best if you made it a habit to keep notes of any important details directly related to a receipt in your firm.
Mistake #4 - Filing Late Taxes
As I mentioned before, tax time can be incredibly stressful when you are attempting to gather 12 months' worth of documents and update your accounting system. If you cannot file your business taxes on time for any reason, you want to file an extension.
Do not procrastinate because this can cost you thousands of dollars in penalties and interest in the end.
Mistake #5 - Not Keeping Records Long Enough
As a virtual CFO for consulting firms across the U.S., I'm often asked me how long I should keep the receipts and source documents for taxes? Many consulting firm owners disregard their receipts or source documents immediately or within one year after filing the tax return.
According to the IRS, you must keep the records that support any income or credits shown on your tax return until the period of limitations for the tax return runs out. Usually, the period of limitation is when you can amend your tax return to claim a credit or refund, or the IRS can assess additional taxes. A great rule of thumb is to keep all documents for at least three years.
Below, I have included additional information directly from the IRS that details in specific cases why you should keep records for 6 or 7 years. Be sure to review that.
Period of Limitations that apply to income tax returns (source)
- Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Now, to further help prevent consultants from making costly tax mistakes is the reason we created this one-time Tax-Ready Bookkeeping Clean-up Special for December only. This special is available for ten consulting firm owners. Click to learn more.
Do you need a qualified accountant to assist with tax preparation and planning?