The Tax Tug-O-War
For all the negative statements that people make about the IRS, it must be admitted that they have clearly mapped out their rules in over 90k pages of tax code. They have established a relationship with taxpayers that could be likened to the old kids’ game of tug-o-war. Let us discuss what that means to us as taxpayers.
In this game, the IRS has clearly stated that their intention is to collect as much tax money from taxpayers as they can. And the taxpayer’s intention is to keep as much money as possible. You might like to know that the IRS has indicated that they will let taxpayers win the tug-o-war if they will play by IRS Rules. But please not that winning the tug-o-war does not mean that you do not have to pay taxes, it means that you get to pay less taxes.
Since most of you reading this are business owners, what does it mean to play by IRS rules? Here are some key examples that business owners must abide by:
Have a properly structured business—Set up an entity with a Federal EIN and conduct all business within that entity.
Keep your business and personal assets completely separated—Have separate bank accounts and credit cards for business and personal, and run all payments and income through the proper accounts. If you must lend money to your business, or your business lends money to you, create loan documents, and record any and all transactions that take place between business and personal, so that you have a legitimate paper trail.
File for all the tax deductions for which you legally qualify—It is okay to be a little aggressive in your tax filings, but make sure that you can make a case for all your deductions.
Keep careful records of both income and expenses—Carry notebooks or obtain an app for your phone that allows you to enter such things as mileage and purchases, and scan receipts immediately upon occurrence. These electronic tools that have been approved by the IRS for record keeping can save you massive amounts of time in organization of tax receipts.
Conduct your business like a business, not a hobby—There are different rules for operating a hobby that produces income vs. operating a business. Tax losses are not allowed with hobbies. Make sure you understand the difference, and if you are operating a business, make sure you follow the rules that separate you from being a hobbyist.
Properly file your tax returns, using the right forms—Although it seems redundant, the IRS has several forms and worksheets that are used to help in filling out actual tax return forms. Improper submissions in your tax return create red flags that can lead to unnecessary review of your tax submissions.
Check and recheck your work before submitting tax returns—If the IRS discovers multiple errors in your work, they will look for even more errors. Doing it right the first time will save you and the IRS a lot of headaches. And remember, they are likely to take their headaches out on you.
Work with professionals such as accountants who are familiar with your type of business—The cost of working with highly qualified accountants and tax professionals is low compared to penalties. Also, interview your potential tax professionals to make sure that they have experience working with the type of business that you operate, whether that is real estate, a service business, network marketing, etc.
Remember that it is up to you to win the tax tug-o-War by legitimately claiming every deduction that is allowed. Best wishes, and Happy Tugging!