No matter how good your tax professional is, if you don't provide all of the necessary information and figures, your return will be wrong. And, any tax return that is done wrong will fail an audit if exposed.
Undocumented cash income, inventory mistakes, overlooked deductions, and missed benefits are common within this industry. Some of these errors increase your federal tax bill; others shortchange your future. Self-employed people 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 to survive an audit.
Tax Tip 1 – Without receipts, you will always fail an IRS audit. When every expense and all income has a paper trail you nearly always survive an audit. Tax returns should be kept for a minimum of 10 years, and tax receipts for at least 6 years.
Tax Tip 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 clients are never considered inventory, allowing for the immediate deduction of all business supply expenses. However, many stylists supplement their bottom line by selling hair products or other goods 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 beat an IRS inventory audit.
Tax Tip 3 – Overlooked deductions mean you put less money into your own pocket, and pay too much tax. Even though you create a paper trail each time you use your debit card, credit card, or write a check, it's not an easy trail to follow at tax time.
And, trying to figure out that paper trail three years later, when you need to produce your receipts for an audit, will be nearly impossible. Because your business is small, when you work from actual receipts it's easier, faster, and everything you need to fight an audit is always ready, should you be called upon to explain your deductions to the IRS.
Tax Tip 4 – Anyone who does not stay current on IRS laws will miss out on tax benefits. Tax laws change every year, sometimes offering huge savings for only a short period of time. Even if you do your own taxes, it is wise to speak with a tax professional occasionally, just to keep up on new tax credits and planning opportunities.
Tax return preparation begins on January 1st for the profit-minded independent business person. Starting early is a good way to increase your odds of surviving an audit. Learning how the IRS sees the industry where you make your self-employment income will show you how easy it is to cut your tax bill while growing your business.