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Published March 2006 What
to know before signing Many business owners delegate their income-tax return preparation to a professional, for good reason. A good accountant will help keep the auditor away and make the most of your business deductions, possibly saving thousands of dollars a year. But sometimes accountants speak a strange language called “accountantese,” barely understandable to the average person. Common phrases include “Maintain adequate records to substantiate all items of income and deductions” and “Review your return before filing to verify its completeness.” What exactly does that mean? Maintain adequate
records Income: Make sure each cash receipt is identified so that bank deposits can be reconciled with your tax return. Some receipts may not be income, such as loans and transfers. The deposit slip should clearly indicate the nature of the receipt. Keep supporting documentation for large receipts not included in income.
Deductions: Clearly identify all cash outflow. Keep copies of invoices, receipts or comparable documents for all business expenses, including independent contractors, repairs, equipment or furniture purchases, and travel and entertainment expenses. If you use a car in the business, keep records of business and total miles, regardless of whether you use the standard or actual expenses method. As with receipts, not all cash outflows represent deductions. Items such as loan repayments and transfers should be clearly identified. The IRS has issued a revenue procedure for businesses that maintain records using an electronic storage system. If your system meets IRS requirements, you may destroy paper records. However, always consult with an expert before doing so. Review your return
Do a two-year comparison of both income and balance sheet — note large changes from the prior year and why they may or may not make sense. Think about what might be missing from the return. Are there any deductions not showing up, such as a retirement plan contribution accrual, or perhaps the new Domestic Production Activities Deduction? If everything appears correct, and nothing seems to be missing, then you can go ahead and sign the return. Remember, even if you delegate the tax preparation to someone else, you are still liable for any extra tax in case of an audit. On top of that, consider penalties, interest and more professional fees to straighten it all out. Keeping good records and reviewing your tax return can save you time, money and headaches down the road. Mary Decker is a CPA, Certified Financial Planner and a principal of Hascal, Sjoholm & Co., a full-service CPA firm in Everett. She specializes in tax and estate planning. She can be reached online at www.hascal.com or at 425-252-3173. |
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©
2006 The Daily Herald Co., Everett, WA
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