Self-Employed Business Owners Using Installment Loans
Business Owners Saving Money via Overseas Accounts
Small business owners are using installment loans to fund their businesses. The recession has affected every consumer, from the individual to the business owner. Fortunately business owners have some leeway in financing and savings. Many small business owners are shelving money away into overseas investment vehicles and using loans to cover expenses.
It’s probably a wise decision to move money into safe accounts overseas, but it is also a growing concern of the IRS. Historically, business owners who transfer money overseas tend to underreport their business income and the IRS is not unaware of the tactic. Studies are showing that there is a serious difference between what a taxpayer should pay and what they end up paying at tax time. In fact, according to Chris Wagner, commissioner of the IRS’ Small Business Operating Division, the total difference on average is about $345 billion annually. He also added that the number is mostly due to small business owners underreporting their revenues.
The Small Business Operating Division
The Small Business Operating Division is responsible for policing the 41 million self-employed taxpayers and nine million small business owners in the U.S. Although there is a lack of jobs in the U.S., this department of the government is not skimping on extra help. By the end of 2009, the Small Business Operating Division is estimated to have an increase of 4,000 more people, which includes 1,100 revenue agents and 1,100 revenue officers. Agents are tasked with investigating criminal violations and officers focus on noncriminal investigations and collections. The groups are working together to close up the underreporting gap in the small business and self-employed sector of the taxpaying public.
In particular, the division will be monitoring people who file a Schedule C. This type of filing is used by the self-employed or sole proprietorship business. Their filings that include deductions for auto use, home office expenses, meals and entertainment will be examined closely in the 2010 tax year.
What Small Business Owners Can Do to Protect Themselves
Let’s face it, small business owners are under a lot of pressure these days. They are working hard to make their companies work smoothly by sorting through payroll, managing installment loans, dealing with vendors, watching inventory and handling promotions. They don’t have time to worry about the IRS coming into the fray. So what can a small business do to protect itself? Prepare!
What to Be Aware of Throughout the Fiscal Year
The main things that catch the attention of auditors are: meals/entertainment, home office deductions, automobile usage and travel. So the simple answer to protecting yourself is to save receipts for all of these categories. When it comes to meals and entertainment, the cut off is $75. Any meal or entertainment deduction over $75 has to have a receipt as proof it was a business expense. The receipt needs to include the date, address, name of the restaurant or entertainment venue, cost, people in the party and the business topic discussed.
Concerning travel and auto, business owners also need to have proof. With travel, that means all bills and checks that were paid and the reason for the travel. With automobile costs it will include having proof of business miles. Many people avoid any audit questions by carrying a tape recorder to record the miles driven and the purpose of the journey. They then transcribe the tapes for any questions. Finally, when dealing with home office expenses, have a diagram of the office involved and a picture with the date clearly visible. This should prove that the owner is working, on that date, in that particular office. There is also a “regular and exclusive” rule when it comes to home offices. If the office is used as anything other than an office, business owners lose their eligibility to deduct for it. All business owners should keep the above records for three years, because that’s how long the IRS has to audit them. For example, a 2010 tax return can be audited through April 15, 2014.
Records and Proof are a Business Owner’s Necessity
In the end, it’s up to the business owner to have records and proof for any deduction he or she wants to make. For the self-employed who are sending money overseas, having records is even more important. Under the FBAR, or Foreign Bank Account Reporting Act, business owners are required to post all savings, including overseas money. For this reason, owners are still encouraged to use the normal tools for paying bills such as installment loans, short term loans or credit cards while they build cash equity. But they are also cautioned to get their records straight, have proof and know the laws of deductions.