Tax Season is just starting, but the folks that are coming into our offices remind me to remind everyone of a few good housekeeping tips that will make the season easy to deal with from the taxpayer’s perspective, and successful in not overpaying income tax due to lack of having proper documentation of legal deductions.
What do we mean? We often feel a pressure during tax season, and angst if you will, to get taxes done quickly once we’ve decided that it’s time to deal with them. Like when you were a kid and you used to hold your breath and eat all your broccoli in two quick bites as a strategy, doing taxes quickly is almost always a bad idea. Hopefully, these tips will make it easy for you to feel calm, cool and collected, as well as process driven, in how you’ll document your deductions if you haven’t kept great books all year long.
Step one: Almost all credit cards now are able to be accessed online. Often your credit card company has tools that automatically will categorize charges such as meals and entertainment, hotel, airfare, and other common categories that are useful in tax preparation. Five minutes learning how to log in to your credit card, setting up passwords, et cetera, can often cut down on hours of searching through credit card statements or receipts. If you don’t know how to log into your credit card accounts, especially the ones you use for business purchases, spend a few minutes setting that up and take that login information with you to see your tax preparer.
Step two: Knowing when you’ve driven for business miles versus personal miles.
If you haven’t kept good mileage records, many people will simply do a “guesstimate” on mileage (yes, we have made that a word now). The problem is that most estimates are low and not high, and you miss deductible mileage. Rather than trying to figure out when and how you drove business miles in January, February, March of 2016, when you don’t remember what you had for breakfast yesterday, could seem an impossible task.
A common sense approach is to figure out what your personal miles are because the things you do personally are often extremely pattern-driven. Example: Every week, John drives his kids to school and then goes to his office, which is deductible. So John measures the distance to the school and the office. It comes out to 22 miles, and then that happens five days a week, 38 weeks a year. These are the non-deductible miles. Then every weekend, they go shopping, golfing, etc. The shopping center is 13 miles away. The golf course is 15 miles away. A fair guess is 15 miles there and back, so 30 miles every weekend are personal miles. Again, do the math, times 52, and you have a total of normal personal miles for your work week and normal personal miles for your weekend activities. Then fit in 1500 bonus miles for things that you haven’t thought of, but that you did. Any family vacations where you drove to Virginia? Add those up for special events miles, also not deductible.
Then, any other miles left are business miles. Rather than guess your business miles used, figure out your personal mile habits and deduct them from the total miles driven. Don’t know your total miles driven? You register your car every year, so check your car registration last year, your car registration this year, there’s your total miles.
Calculating total miles and subtracting personal miles will leave your business miles that are as defendable, as simply guessing your business miles, which is what most people without good records do. Now keep in mind the IRS requires a daily list of miles driven, with a log of who, what, where when and why so that is the only absolutely safe and accepted way to track business miles, but again if you didn’t do that and so your about to guess instead, our way to guess gives you legs to stand on in an audit rather than “I guessed.” After all, if you’re a self-employed business owner, when are you not doing business? It’s likely your business miles are 85% of all your miles every year, and not half or less, which is what people tend to guess.
Lastly, if you’re a receipt keeper then there are tools now for scanning your receipts. The “Neat Scanner” TM is a special scanner you can get on Amazon or at most airports and you can scan any size receipt from anywhere, gas stations, restaurants, invoices and more. It will take just about anything. The Neat Scanner reader will categorize those receipts into totals for your business. It’s a great tool and it’s $99 the last time I looked. Great tool for that shoe box of receipts that no accountant wants to deal with at tax time!
Don’t be in a hurry to do your taxes just because of time. Take the time to figure out proper business models, proper business receipt categories, log into your credit cards and bring good numbers to your accountant, even if you need to go on an extension to do so.