Be careful with the phrase “It’s a tax write-off”
By Greg Crinion
Businesses pay a variety of taxes – sales, unemployment, social security, income and property, to name a few. Two taxes are especially relevant at this time of year, both of which require proper record keeping.
Every business is taxed by the federal government on its income. The tax is imposed on the revenues received by the business less the business’ expenses that are allowed to be deducted. A business may generally deduct those expenses that are both ordinary and necessary to the business. An ordinary expense is one that is commonly accepted as an expense for that trade or business. A necessary expense is one that is helpful and appropriate for that trade or business.
Contrary to what you might hear on the street, everything is not a tax write-off if you are a business owner. Here are a few examples:
- Personal, family and living expenses are generally not deductible.
- Payments to political parties, candidates and lobbying groups are generally not deductible.
- Fines and penalties for violations of laws are not deductible.
- Even some ordinary and necessary expenses are not allowed – some dues for country clubs and other organizations for pleasure, recreation and social purposes are not deductible.
- Other expenses, such as customer entertainment, are limited in deductibility.
Proper record keeping is key to proving the deductibility of business expenses. Every business is entitled to deduct the allowed costs of operating the business; yet deducting expenses that are not documented or that are not allowed may well be tax fraud. More investigations by the Internal Revenue Service are leading to more discoveries of tax abuses and more criminal convictions. Remember, mobster Al Capone, actor Wesley Snipes and hotelier Leona Helmsley (“only the little people pay taxes”) all went to prison for income tax violations.
The state and local governments collect taxes on the value of property owned by businesses, again including both business entities and sole proprietors. Cities, counties, school districts, and road, flood, drainage, water improvement and municipal utility districts all collect these ad valorem property taxes. Taxable property includes land, buildings, furniture, equipment, inventory, airplanes, boats, vehicles and raw materials used by a business.
Business property is identified and valued as of January 1 each year. Businesses must report their business personal property (this does not include land and buildings) in the spring of each year. A notice of valuation is issued and the business then has a limited time to protest the property included and the valuation of that property.
Businesses must be able to prove the property ownership and the value of that property at the beginning of each year. Not disclosing the personal property owned by a business can lead to serious fines and penalties. False reporting (and intentional omitting of business personal property in the annual rendition) can be criminal. Proper record keeping by a business can enable a business to save money on its ad valorem taxes.
Proper business record keeping serves a final purpose – having an accurate financial record of the business’ profitability. A business that does not match business expenses to business revenues cannot properly plan or evaluate its efficiency and profitability. Sound business decisions cannot be made using inaccurate – or even fraudulent – business records.
Business record keeping is not particularly complex or burdensome, but does require effort and organization. Good business record keeping will enable sound business decision making and allow the business to pay the taxes it owes while claiming all proper deductions. The American taxpayer might appreciate the business that overpays its taxes, but will vilify as a tax cheat the business that underpays what it owes.
If record keeping isn’t your strength, hire a qualified person or firm to help you do it right. It’s not worth the consequences.