Like it or not, we all need to pay taxes. As fundamental as business is to our society, a certain amount of money is still required by our government to maintain our social order. It would not be a good idea for our military, for example, to be run by a private enterprise. The problem is, many businesses pay more tax than they should. Without getting into a political discussion, the main reason is that tax laws have become more and more complex, causing many well-meaning business owners to miss out on legitimate tax deductions.
If you pay too much tax, it's unlikely that someone from the tax department is going to call you up to let you know you missed some of your deductions. It is only fair, however, that you pay tax on your true income, and that means taking all of your legitimate deductions. If you don't, you're essentially giving your money away.
We won't go too deeply into tax strategy here as that's your accountant's job, but there are a few things to consider that will make your relationship with the tax department a little less painful.
Get the best professional help you can reasonably afford. A good accountant is your best defense against being over taxed. He or she can help you keep up-to-date regarding the various tax deductions available to you.
It's extremely important to keep good records. It's up to you to prove your case to the government, not the other way around, so document and file everything including all tax-deductible receipts. If you are ever audited (if it hasn't happened yet, it probably will one day), you'll be prepared. Again, a good accountant is your best defense.
Separate your business transactions from your personal transactions. Use a separate credit card and bank account for business. If you don't do this already, start immediately.
Create a “tax fund” and never borrow from it to pay your debts. It is important that you have enough money to pay your taxes when the time comes. The government has the power to recover their money in ways no other creditor can, so avoid the hassle and pay your taxes when they are due.
Keep and file all receipts for all tax-deductible expenses. If you are not sure if an expense is a deductible, keep the receipt anyway and ask your accountant later on.
Unless it's obvious, the purpose of each business expense should be written on the back of each receipt. For example, “Prospecting lunch with Ace Corporation's purchasing manager.”
If, for some reason you do not have a receipt for a business expense, document all of the pertinent information on a separate form. You can still deduct a legitimate business expense without a receipt; it's just more difficult to prove.
Other business records worth keeping include, cancelled cheques, invoices, bank statements, credit card statements, payroll records, vehicle odometer readings and so forth. In fact, you will probably want to file all of your Financial Source Documents. Of course, your tax returns from previous years should be filed as well. In the case of an audit, the more information you have to support your deductions, the better.
Generally speaking, you should keep your financial records for a minimum of six years (this number may vary depending on your local regulations). Unless fraud is suspected, you will not be audited on returns filed more than six years ago. If you have any reservations, ask your accountant.
Tax Filing System
Your Tax Filing System will organize your financial documents once they have been entered into your Accounting System.
Who is accountable for filing your financial documents?
List the categories you will use for filing your financial documents. Your Bookkeeper or Controller can do this for you.
What mechanisms or systems ensure that all receipts are collected and filed for all expenses?
Speak with your accountant, and then set up a Tax Filing System. An organized approach will save you and your accountant time, aggravation and money in the long run. This will be especially true if you're ever audited.
In this chapter you should have designed, shared, and made a plan to review your:
- Chart of Accounts (updated as necessary).
- Bookkeeping System.
- Balance Sheet (revised and updated as necessary).
- Income Statements (revised and updated as necessary).
- Cash-Flow Statement (revised and updated as necessary).
- Tax Filing System.