No matter what the IRS does to simplify the tax system, it’s still difficult to understand. You can benefit, however, by making certain that your records are accurate and in order. You don’t have to be a genius at bookkeeping. You simply need to start organizing early and maintain that organization throughout the tax year.
Small businesses are particularly vulnerable at tax time. Often it’s a one-man show and he doesn’t have enough money to hire a full time bookkeeper. Of course, the other problem is he isn’t versed in taxes and even if he was, his time is precious. There’s two ways to approach the problem to make it simpler. They both involve organization. Even if you’re not a business owner, these tips also help you to file.
Remember that taxation is on actual profit you make. The government compares you to the average worker. Everyone has to get to work and home from work. That expense is not deductible. However, if you drive for your job during the day, most workers don’t have to do that and the mileage is deductible.
You have to log your trips, however. Keep a small spiral bound pad in the visor of the car along with a pen. Don’t start your car until you write down the day, the mileage on odometer and note not only where you’re going but also whether the trip is commuting, business or personal. At the end of the week, simply tally up the business miles. Your trip to work or your first appointment and your trip home are commuting and not deductible.
At the first of the year, or as soon as you decide to get yourself organized. Create folders for each type of expense you have, whether you’re in business or not. Business owners need to have several folders. If they manufacture something, they need to track all the expenses for materials to make that product. If they provide a service, they need to track the materials used on a job. These offset the profits of the job and lower your taxable income.
If you own a small business, you’ll want to make a folder for all of the following items that apply to your situation: Advertising, Car and truck expense, Rents and leases of vehicles, Machinery or equipment Rent on other business property, Repairs and maintenance, Supplies, Taxes and licenses, Commissions and fees
Contract labor, Employee benefits, Business insurance, Interest on loans for the business, Utilities, wages, Mortgage interest, Legal or other professional services, Meals, travel and Entertainment (make sure you write the clients name on the receipt),Other expenses not noted such as professional memberships or cost of additional training.
You don’t have to be a business owner to keep files for your expenses. Homeowners can benefit from saving receipts on their improvements. There are energy credits available to offset some of the tax you owe if you qualify. You also should note any mortgage interest. This is particularly important if you purchased a home on land contract, since financial institutions send you a form at the end of the year.
Keep a file for other potential deductions. If you have to take additional classes for your present job, list your mileage to the class and home, the cost of the course, supplies and even any tolls or parking you have to pay. If you wear a uniform, the cost of the uniform is also deductable.
At the end of each month, record your totals either on paper or in a computer program. Save the files and the receipts. If you use the services of an accountant or bookkeeper, take your totals and your files in when they do your taxes. If you don’t, you’ll be ready for that year’s tax preparation and it should only take a short time to complete