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 tax return that is done wrong will not pass an audit if exposed.
Undocumented cash income, inventory errors, missed deductions, and lost profits are common within this industry. Some of these mistakes add to your federal tax bill; others disappoint their future. Self-employed people can take advantage of the same IRS rules that large corporations use, allowing them to lower their tax bill without cheating on their taxes.
The following tips will help freelance hair care professionals survive an audit.
Fiscal Council 1 – Without receipts, an IRS audit will always fail. When all expenses and income have a paper trail, 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.
Fiscal Council 2 – All items purchased or created for resale are considered inventory by the IRS. Inventory expenses can only be deducted when that inventory is sold.
Products used on customers are never considered inventory, allowing immediate deduction of all business supply expenses. However, many stylists supplement their earnings 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.
Fiscal Council 3 – Missed deductions mean that you put less money in your own pocket and pay too much tax. Although you create a paper trail every time you use your debit card, credit card, or write a check, it is not an easy trail to follow at tax time.
And, trying to figure out 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, working with actual receipts is easier, faster, and everything you need to fight an audit is always ready, in case you are asked to explain your deductions to the IRS.
Fiscal Council 4 – Anyone who is not up to date with IRS laws will miss out on tax benefits. Tax laws change every year, sometimes offering big savings for a short period of time. Even if you do your own taxes, it is wise to speak with 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 lower your tax bill while growing your business.