In this segment I will continue with tips on how you can best manage your money, take the most deductions legally possible and avoid being audited.
An important area for you to take advantage of is your cash receipts for your expenses. Here is an example of a cash receipt for an expense—you stop for $15 worth of gas and get a receipt.
Often, when I first meet agents, they tell me they have not kept track of their cash receipts for expenditures.
Sometimes people say they forgot to ask for a receipt, sometimes they say they did not feel comfortable in asking for a receipt.
It is important to keep in mind that every receipt you get is worth big bucks to you.
Depending on your tax bracket each cash receipt is worth from 25% to 50% of the expenditure you incurred. Let’s say you spent $100 for a business expense. The receipt is worth from $25 to $50 in tax savings to you.
Imagine how many thousands of dollars, each year, all of your cash receipts can add up to in tax savings.
Should you get every receipt you possibly can? You betcha’.
What type of cash receipts should you be on the lookout for? The answer to that is everything you believe may be related to your business.
If you are ever not sure if an expense is deductible save it for your tax preparer to decide. Just put a question mark on the receipt and when you have your taxes prepared give those questionable receipts to your preparer. If in doubt do NOT throw out the receipt, it could be worth money to you.
You can deduct all of the costs of running your business. These costs are known as business expenses.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. An example of this would be expenses incurred in connection with holding a broker’s open.
A necessary expense is one that is helpful and appropriate for your business. An example of this would be the purchase of business cards. An expense does not have to be indispensable to be considered necessary.
There are two types of expenses—expenses fully deductible in the current year and capital expenses. Capital expenses are generally for items such as equipment.
For capital expenses, you may have to take a portion of the expense over a number of years. This is referred to as depreciating the asset.
An example, of this is the purchase of a computer. Normally you would have to take a percentage of the computer’s costs over a number of years.
There is a section in the Internal Revenue Code which allows you to choose between depreciating the asset or deducting all of the expense in the current year.
In preparing my clients’ tax returns I analyze the effect of each of these two methods to see which approach is more beneficial for my client.
