All businesses and individuals filing tax returns have to justify their financial records. You have to provide documented proofs of your income and expenses, which will decide your tax obligation. It’s easier for large and established businesses to keep their income and expense track records, but things get cluttered with small businesses, usually. Often small business owners and individuals fail to provide a satisfactory record of some expenses which they could easily claim as a tax-deductible expense.
Why you should keep the Records?
Simply put, it becomes an obligation, more than a need, when it comes to record-keeping. If you run a business or file tax returns as an individual and don’t have records to prove the returns, what’s it worth? Additionally, record keeping can help you with your business organizing, planning, and legal compliance. Your tax liability will be lower with proper expense records.
What Should You Record?
You need to record all transactions related to your income or expense in any form. Prepare your financial statements according to standard IRS and GAAP guidelines. These statements should clearly identify your income sources and provide a record of expenses.
Business and Personal Expenses:
If you work from home and use a portion of your house for work-related tasks or spend in relation to your business, you need to apportion these expenses. You can also record some business-related ordinary expenses such as gifts, travel, non-entertainment means, etc. up to certain limits. IRS allows for vehicle depreciation, travel, non-entertainment meals, and gifts related to business up to certain provisions.
Tax Deductions without Records:
You can add your expenses without a receipt as a tax-deductible expense, but you still need to back it up with the record. You can only add expenses that you spent on certain items listed in IRS provisions up to certain corresponding limits. Your bank or credit card statement must back the expense claim incurred.
You can claim tax relief on all expenses related to your income both personal and business. For that, you need to justify the expenses with records and receipts.
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