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Record-Keeping Reminders for Businesses

Business Diary. It’s a good idea to keep a business diary, both to substantiate business meetings and trips and to keep track of expenses you can’t get receipts for, such as EZPass use and subway rides. If you lose your records (for example, if they are destroyed in a fire or flood,) many expenses can be reconstructed through your business diary. If you keep your diary on a computer or Palm Pilot, print it out at the end of the year and keep the printout with your tax documents.

Income. You are responsible for accurately reporting all your income, whether or not you receive 1099 forms. Some payers issue 1099 forms, but not all do. Payments in cash or by barter are still income and need to be reported. Barter income is reported at the value of the goods and services you received in exchange for your services. To make sure you include all sources of income, record your income in a sales journal. You may also want to make copies of checks you receive and staple them to your bank deposit slip. Also be sure to document all nontaxable receipts/deposits. This could be you or another investor puts into your business, loan proceeds, etc. If you cannot substantiate the source and nature of the cash receipt, in an audit it will be deemed to be income.

Expense Receipts. Get and keep receipts for all business and personal deductible expenses. Credit card statements should be used only as a backup to your actual receipts. (If you make purchases over the internet, print out the email receipts for these purchases.) Checks written to individuals are never sufficient documentation; you will need a receipt or invoice from the person.

Paying Independent Contractors and Issuing 1099-MISC Forms. If you have a business and have paid any individual or other unincorporated entity $600 or more during the calendar year for services, goods, or rent, you must issue them a 1099-MISC form. You must issue a 1099-MISC for legal fees of any amount.

All businesses, including sole proprietors, are required to issue 1099s.

Barter income is also reported on a 1099-MISC. The value of the barter you report for the recipient is the value of the goods or services you provided. If you are a single-member LLC, the 1099 should be issued with your social security number, not your EIN.

Payroll and Employees. Many business owners think that if someone works for them on a temporary or part-time basis, they are automatically independent contractors. This is not true. There are many factors in determining whether or not someone is an employee or an independent contractor, but the major issues are control, location, equipment used and who is at risk for the work (i.e. will the person not get paid if the work is done badly.) If the person you are hiring does not have his/her own business – other clients, an office, advertises, etc. – there’s a good chance he/she will be considered your employee, especially if the work is done on your premises. Speak with me if you have questions.

Workers compensation. Unlike disability insurance, workers compensation insurance also applies to independent contractors who work on your premises or attend meetings on your premises. Always ask to see their insurance certificates. If you cannot document that they have their own insurance, you will have to pay it, and if you fail to pay it, the penalties can be substantial.

Health insurance. W-2 forms for S corporation shareholders must include the amount of any health insurance and long-term health insurance paid on behalf of the shareholders in Box 1 of each shareholder’s W-2 and coded in Box 14 as health insurance. Health insurance does not include supplemental insurance such as AFLAC plans.

For your employees, starting with 2012 W-2 forms, you must report the amount you, as the employer, paid for health insurance for each employee in Box 12 of form W-2. The health insurance premium paid is coded DD. It is not taxable to the employee.

Meal Expenses. Annotate your receipts for meals with the name and company of the person you entertained and the business you discussed. Entertaining your colleagues or co-workers is deductible only if the meal had a business purpose and if you pay for everything. Your own meal expenses are deductible only if you are out of town on a business trip of sufficient length to warrant a meal. Meals purchased while you are working in your office or on call are not deductible. Going to lunch with colleagues or clients when everyone pays for his/her own meal are not deductible.

Business Use of Your Car. You do not have to keep odometer readings for every business trip you take, but you do have to record your trips, including miles. Whenever you take a new trip, you should document the mileage with the odometer readings; you can use that mileage for subsequent trips to the same destination. If you don’t want to keep a separate auto log, note the trips in your business diary.

Business Use of Your Telephone. In order to deduct any of your home telephone or cellular telephone expenses, document all the business calls you are charged for, noting with whom you spoke and what business you discussed. Basic telephone service charges are not deductible unless the telephone is used exclusively for business.

Gifts. The deduction for business gifts is limited to $25 per recipient per year. This amount has not changed for decades and probably will not change any time soon. You may give gifts costing more than $25, but $25 is all you may deduct, so you must keep track of how many gift recipients you had during the year, as well as the gifts you purchased.

Sales and Use Tax. It is important to reconcile your sales tax returns to your income tax returns.

However, sales tax is reportable on an accrual basis, even if you report your income tax on a cash basis. This means you may be paying sales tax on items you’ve billed but have not yet collected. If your business services are subject to sales tax, any barter income should be included on your sales tax returns.

Use tax is another name for sales tax, but it is paid by the purchaser rather than collected by the seller. Remember that you must pay use tax on any purchases made for your business if the vendor did not collect sales tax. This includes anything you purchased for your own business use – from electronic and computer equipment to office supplies to gifts for clients. If you are registered as a NYS sales tax vendor, the use tax is calculated and paid on your sales tax return. If you are not required to register as a sales tax vendor and don’t file sales tax returns, you must file Form CT-130.

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