All the Work is in the Preparation

Anyone who has painted a room or two will probably give you one nugget of advice: the secret to a good paint job is in the preparation. Actually applying the paint (the fun part) doesn’t take that long. What eats up the time is everything you need to do before you start rolling on the beige hue you selected after hours of looking at paint chips. Looking for the right color is one of those preparatory steps. Another is clearing the room or covering furniture with drop cloths. Then there’s the taping of the window frames, base boards, etc.

You get the idea. All the work happens before you pry the lid off of the can. A successful tax outcome is a lot like painting a room. There is some prep work that needs to be done to get you in the best possible tax position.

Your Books and Records: That Little Innocent-Looking Signature Line

Every time you sign a tax return (called a “jurat”) you are certifying a few things that would keep you up at night, or at least give you pause, if you thought about it. Inherent in that innocent-looking signature line (whether electronic or otherwise) is that your books are in order. This means that your accounting records are organized to a degree that enables you to make reasonable confirmation that the books and records on which you are basing your return are reliable enough to support the number on each line of the tax return.

This is the taxpayer’s responsibility, not the tax preparer’s. In fact, tax preparers are practically prohibited from digging further into your books that is necessary to complete a tax return. Their only obligation with regard to your records is to ask you questions if something doesn’t look right or if there is not enough information for them to complete the return.

This rule is there to ensure taxpayers are not able to hide behind their preparers and that they are accountable for their tax liability. So while it may seem that tax preparers are skirting around their responsibility, this is not the case. They are only complying with laws and rules applicable to them.

So, knowing this perhaps disturbing piece of information, are you ready to sign the jurat? If not, it’s better to start sooner rather than later shaping up your record keeping. Some questions to ask yourself:

  • If you have a business return to file, do you categorize similar expenses and revenues in the same way?
  • If you deduct travel, meals, and entertainment, are you aware of the limitations per tax rules? There are regulations that limit, for example, the amount you can deduct for a hotel room based on the location. Meals are generally only 50% deductible. If you mix leisure and business trips, there are several pieces of information you need to track.
  • Do you keep a mileage log if you use a car for business? You must have a mileage log kept contemporaneously, meaning you record the miles, business purpose, date, and odometer readings just after you complete the trip.

These are just a few things involved in helping you live up to signature on that little jurat. In other words, this is the prep work for painting the room. If you don’t do the upfront work, the result will not be very good.

Next Up

My next letter will get into a little more detail about the substantiation requirements for some popular tax credits and deductions. In other words, the evidence you must have to take benefit from the tax break.

Until next time, happy painting!

SHAMROCK vCFO Services in Naperville, IL specializes in helping small and medium size businesses with strategy, taxes, accounting, and financial performance management. Steve Shamrock left big companies to help smaller ones energize the economy.