Grocery shopping and taxes are not often thought of as having much in common. Yet they are similar in that they both require adequate, often time-consuming, preparation in order to be done efficiently.
Before shopping,
you have the option of preparing a list. Items can be prioritized and a plan
put into place before setting foot in the store. This will save time as there
will be no need to go up and down every aisle looking for inspiration and then having
to go back after realizing that you missed something. A list lessens the chance
of arriving home only to realize that you forgot that one important item that
brought you to the store in the first place.
Time is our most
precious asset and a terrible thing to waste. Even activities as mundane as
preparing for a birthday party or studying for a big exam are more stressful if
you do not give yourself adequate time to prepare. On the flip side, such
events can be rewarding and even fun if you put in the work ahead of time and are
ready for the big event.
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This brings us to taxes. For many, this
topic evokes anxiety and stress and is therefore avoided and ignored. Many
people find it impossible to think of taxes without procrastinating. But taxes,
like all things, is less scary with the proper preparation. While filing may
never be “easy,” it can be made smoother by maintaining financial records
throughout the year. Doing this allows you to simply provide your tax preparer
with the relevant documents, and you will not have to think about this daunting
task again until next year.
Beyond tax
preparation, it is important to keep good records for personal and business
purposes. Properly maintained records can help you manage your costs, analyze
where spending needs to be cut, and even find places where you should
spend more money. In addition, individuals and business owners
often need the documents for legal reasons, such as regulatory compliance and
proof of tax deductions.
The key to
avoiding headaches at tax time is keeping track of your receipts and other
records throughout the year. Whether you use an Excel spreadsheet, an app, an
online system, or even old-fashioned file folders, good record keeping will
help serve as a reminder of the various transactions you have made during the
year.
There are four
essential characteristics to record keeping.
Authenticity: A
record must actually be what it claims to be.
Reliability: A
record must be an accurate and complete representation of the activities it
attests to.
Integrity: The
documents must be unaltered from their original form.
Usability: A
record must be able to be located, retrieved, presented, and interpreted in a
timely fashion.
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There are several advantages of
maintaining good record keeping habits. For instance, when the data is tracked,
you are able to build a bigger picture of the tax situation. This enables you
to prepare for future tax benefits or liabilities that you will need to remit
to Uncle Sam. Set aside the documents in digital and/or paper formats. This
way, everything important is in one place, and come tax time, all you have to
do is retrieve the folder and hand it over to the tax preparer.
In addition,
tracking data ensures that you have clear documentation of being in compliance
with regulatory bodies. Which leads to the next point: You minimize litigation
risks by holding onto these documents.
Furthermore, if
you want to take out a loan, banks often ask for financial statements. These
will be easy to procure if you are on top of your records.
Lastly, and maybe
most importantly, when you have the relevant information in front of you, you
are able to make better decisions in your personal life, and your path to
business success is clearer.
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If the above positive motivators don’t
encourage you to stay on top of your records, here are the not so positive
outcome scenarios:
In the event of a
tax audit, the IRS may want you to provide evidence as to the reason you took a
certain tax position. With no easily available records, you will have to
scramble and try to find the one document that could clear the air. Why make
yourself work under that kind of pressure if all you had to do was place the
paper in the proper tax file when it originally became available to you?
Next, if you are
self-employed, you need to make estimated tax payments on the income you
generated. You can claim the employer’s portion of those estimated payments as
a tax deduction, but only if you have them documented that they were paid and
appropriately incurred. Otherwise, you may face penalties and fines for not
paying the government what they are owed.
Moreover, let’s
say you forgot that you made a purchase for your business. You end up
overstating your income by understating your eligible business expenses and end
up paying more taxes than you were obligated to. This would happen because you
neglected to keep the receipt and therefore forgot to input it as a business
expense.
The year 2020 brought
a novel reason for keeping your tax records straight. It has been an
interesting year, to say the least. COVID-19 has affected everyone to varying
degrees. What has provided some financial relief has been the issuance of the
stimulus checks, the Paycheck Protection Program (PPP) and the Economic Injury
and Disaster Loans (EIDL).
Because the PPP
and the EIDL had limited funds, individuals and businesses needed to have their
financial statements in order and ready to submit to apply for these financial
relief opportunities. The second wave of PPP Loans is now available to small
businesses that can prove they had a 25% loss in one quarter compared to that
same timeframe last year, thus demonstrating to the government that you were
negatively impacted by the pandemic. Those who have their books in order will
find this aspect of the application process easy to navigate. Those who don’t
may miss an opportunity to receive funds.
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Essentially, without proper records, you
run the risk of not being able to claim tax deductions for which you are
eligible, you miss out on opportunities to improve your business’s sales by not
being able to analyze your business trends, you may not be able to take
advantage of loans and grants that are suddenly made available, and you may end
up in legal trouble.
With accurate
records, you can work on your spending habits and explore where you may need to
spend more or less to enable additional growth and success without falling into
debt.
Finally, if a tax
liability is the end result on your return, don’t shoot the messenger. Your tax
preparer is just interpreting and inputting your tax situation based on the records
and information you give him or her. Plan now, be prepared and, come the next
tax season, or if you encounter some unexpected financial event, you will be
ready!
Here’s to a successful and organized 2021.
You
can contact Aviva Hendry, CPA, at Info.fluentfinancials@gmail.com
