Build a documentation system.

No matter what form of business entity you have ('S' corporation, 'C' corporation, LLC, or, God-forbid, a sole proprietorship, you need three separate and distinct tax records. Permanent Files, Regular Files, and A daily diary.

Permanent Files: These include your prior year's tax returns, stock purchases and sales, equipment purchases, and sales and similar entries. Generally, you want to keep any record that relates to more than one tax year in your permanent file. If you purchase property, your permanent files should include the purchase documents, closing statements, deeds, and other expenses related to the purchase.

Regular Files: These include time sheets, invoices for part-time help, receipts, invoices, canceled checks and other corroborative evidence.

Daily Diary: Your daily diary, which can be your appointment book, is the focal point of your documentation system. This is especially true if you operate a personal service business. The smaller the business is the more important this information becomes. Your daily diary should include: All of your appointments, Where and when you travel, Where you go by automobile, and Where and when you entertain business contacts.

2. Use Three-Part Checks

Keep a separate business checkbook and use three-part checks. Regardless of your business form, whether a corporation or sole-proprietorship (Ugh), the three-part check is necessary to build good, easy to use records in your regular files.

a) Send part one, the original of the check to the vendor.
b) Staple supporting evidence (receipts or invoices) to part two and file it alphabetically in the vendor file.
c) Put part three in a numerical file for later viewing by the IRS (did somebody say audit??) and reference by you.

3. Keep form 1099 Information Separate

If you have both W-2 and 1099 income, keep your 1099 information separate. This includes the source(s) and amount of 1099 income and all of your business expenses.
4. Keep a separate Tax log or Diary

To complete your documentation system, you must keep a separate tax log. This consists of a permanent record that is separate from the receipts you keep for each item. I'll list the major business expenses below and give examples of the documentation you should keep.

Home Office Deduction - You should take several pictures of your office (showing that it is separate from your living area) and keep them in a permanent file. You should also keep the printout from your realtor showing comparable cost of office space in your area.

Meals Out - You should answer the following five questions. Who? What? When? Where? Why? You can go high tech (an excel spreadsheet), low tech (a yellow pad) or medium tech (a word processing document). At the restaurant, I make a quick note on the credit card receipt. Three of the questions are already answered, so the note often looks like this "Fred regarding his LLC". After returning from the restaurant, I give the receipt to my bookkeeper or assistant. She transfers the information from the receipt to the tax log. (You may choose to do this yourself) Now my meal records are audit-proof.

Auto Mileage - The log should contain the following information: Date, starting mileage, ending mileage. Once again, you can use any level of technology you prefer.

Travel - Keep your plane tickets, parking and cab receipts (esp. if over $75), and the workbook or literature provided to you by the seminar promoter. I also use the 5 question log above to document my travel expenses.

Supper Money - If the cost of the meal is less than $75, you don't need to keep a receipt. Because I often use the supper money deduction on my teleclass nights, I always put the teleclass info in my calendar. I usually pay cash for the meal and reimburse the money after the fact.

I enter my cash outlays regularly and every month or so, I have my book keeper cut me a reimbursement check. Keeping a good documentation system is a worthwhile investment. It makes you conscious of the deductions you would otherwise miss, it keeps you organized and it keeps you audit-proof. That's a great combination.

Article Source: http://www.articles-galore.com

I have spent years studying the tax code looking for ways to help people lower their tax bill and keep more of what they earn. I have uncovered several tax deduction strategies that can be used by anyone to slash their tax bill and save thousands of dollars each and every year.Drew MilesFind Out More:www.freetaxstrategies.com

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