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No matter how good your tax professional is, if you don’t provide all the necessary information and figures, your return will be incorrect. And, any tax return that has been falsified will fail the audit if uncovered.
Undocumented cash income, inventory mistakes, overlooked deductions and lost profits are common in this industry. Some of these errors increase your federal tax bill; Others cut short your future. Self-employed people can take advantage of the same IRS rules used by large corporations, allowing them to reduce their tax bill without cheating.
The following tips will help self-employed hair care professionals avoid an audit.
Tax Tip 1 – Without receipts, you will always fail an IRS audit. When there is a paper trail of every expense and all income, you almost always avoid an audit. Tax returns should be kept for at least 10 years and tax receipts for at least 6 years.
Tax Tip 2 – All items purchased or made for resale are considered inventory by the IRS. Inventory expenses can only be deducted when the inventory is sold.
Products used on customers are never considered inventory, allowing an immediate deduction of all business supply expenses. However, many stylists supplement their bottom line by selling hair products or other accessories to their clients. Knowing how to track inventory 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 – The itemized deduction means you end up with less money in your pocket and pay a lot more in taxes. Even though you create a paper trail every 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 trace that paper trail three years later when you need to present your receipts for an audit will be nearly impossible. Because your business is small, it’s easier, faster, and always ready with whatever you need to fight off an audit when you work from actual receipts, should you need to be called to explain your deductions to the IRS. Needed
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 a short period of time. Even if you do your own taxes, it’s wise to speak with a tax professional occasionally, just to keep up with new tax credits and planning opportunities.
Tax return preparation for the profit-minded independent businessman begins on January 1st. Starting early is a good way to increase your odds of surviving an audit. Learning how the IRS views 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.
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