No matter how good your tax professional is, if you don’t provide all the necessary information and figures, your return will be incorrect. And, any poorly done tax return will fail an audit if exposed.
Undocumented cash receipts, inventory errors, overlooked deductions, and lost profits are common within this industry. Some of these errors increase your federal tax bill; others disappoint your future. Self-employed individuals can take advantage of the same IRS rules used by large corporations, allowing them to lower their tax bill without cheating on their taxes.
The following tips will help self-employed hair care professionals survive an audit.
Tax Council 1 – Without receipts, you will always fail an IRS audit. When every expense and every income has a paper record, it almost always survives an audit. Tax returns must be kept for a minimum of 10 years and tax receipts for at least 6 years.
Tax Council 2 – All items purchased or created for resale are considered inventory by the IRS. Inventory expenses can only be deducted as that inventory is sold.
Products used on customers are never considered inventory, allowing for immediate deduction of all business supply expenses. However, many stylists supplement their results by selling hair products or other products to their clients. Knowing how inventory is tracked will keep non-deductible inventory costs to a minimum and show you how easy it is to pass an IRS inventory audit.
Tax Council 3 – Missed deductions mean you put less money in your own pocket and pay too much tax. Although you create a paper record every time you use your debit card, credit card or write a check, it’s not an easy record to follow at tax time.
And trying to decipher that paper trail three years later, when you need to submit your receipts for an audit, will be next to impossible. Because your business is small, when you work with actual receipts, it’s easier, faster, and everything you need to fight an audit is always ready, should you be called to explain your deductions to the IRS.
Tax tip 4 – Anyone who does not keep up with the IRS laws will miss out on tax benefits. Tax laws change every year, sometimes offering great savings for a short period of time. Even if you do your own taxes, it’s still wise to talk to a tax professional from time to time, just to keep up with new tax credits and planning opportunities.
Tax return preparation begins January 1 for the independent for-profit business person. Starting early is a good way to increase your chances of surviving an audit. Learning how the IRS views the industry in which you earn your self-employment income will show you how easy it is to reduce your tax bill while growing your business.