Tax season is upon us!  So what do you need to do to make sure you have all the right records in your file cabinet?   Your goal is to be as accurate as possible and keep the necessary documents to substantiate what you claim on your return.  Then should your return ever come up for an audit, you will be assured everything is good to go. 

Tax season is upon us!  So what do you need to do to make sure you have all the right records in your file cabinet?   Your goal is to be as accurate as possible and keep the necessary documents to substantiate what you claim on your return.  Then should your return ever come up for an audit, you will be assured everything is good to go. 

The IRS requires that for a business, 'your record keeping system should include a summary of business transactions'.  This is accomplished through accounting journals and ledgers, which can be done through computerized software or on paper, must show deductions, credits, and gross income by date and type of income and/or expense.  The IRS also requires that you record transactions in a timely manner as they occur.

All the transactions in the ledger should have receipts, check copies, and invoices as back up on file in your records.  The documents to support the entries in your books must contain:

§  date

§  amount

§  amount for business

§  business use or purpose

There are certain items that require additional substantiation such as travel, meals and entertainment receipts.  In addition to the items listed above, these records must include:

·        the business relationship with the persons entertained

·        business benefit gained or expected to be gained

·        type of entertainment

·        travel dates you left and returned for each trip

·        number of travel days spent on business

·        meals during travel that were not directly entertaining for business are not deductible

·        proof that you or your employee was present if the entertainment was a business meal

 

Additional records to hold on to in order to prove your expenses are legitimate business expenses are materials such as your day planner or calendar showing entries for important meetings and your class schedule establishing a set routine for your studio activities, business plans, marketing materials, and tickets and programs for your recitals and performances.  Oil change receipts are important to keep demonstrating that the mileage you are claiming is within a reasonable range.  Having a corporate formation or LLC setup for your dance studio business and maintaining books and ledgers also substantiate business operations for the IRS to support your deductions.

So what is considered deductible?  The IRS does not have a specific list of deductible expenses.  Instead they require that your business expenses be considered 'ordinary and necessary' for the operation of your dance studio.  Expenses that are common and accepted in a dance studio owner’s line of work are 'ordinary' and 'necessary' expenses are those that are helpful and appropriate for work within a dance studio.  Check out the form we have in the forms area of DanceTeacherWeb as a reference for common deductible expenses for dance studios and teachers.

Many of us are afraid to get moving on our taxes for fear we will owe and opt to go after an extension of time to file.  I often find that my clients do not realize that while the IRS gives you an extension of time to file the return, they do not give you an extension of file to pay the return.  This means that if you owe money, you will still accumulate interest and penalties on that money due as of April 15th.  In fact, you are better off to file the return without payment than to avoid filing the return even with an extension. Late payment penalties after April 15th are assessed at .5% once a return is filed instead of at 5%! Don't let tax intimidation waste your money.

With all the records and deductions lined up, you can file your tax return with confidence because you are being proactive with your substantiation.  You will maximize your return with all the deductions you are entitled to and ensure you are able to do what you love and continue to do so.

Jessica Scheitler is the owner of Financial Groove, a full-service, financial consulting, tax service and bookkeeping firm, which strives to bridge the gap between creativity and business.  Jessica has extensive expertise handling tax preparation, accounting processes, consulting and bookkeeping for dance studios, independent artists, dance companies and entertainment throughout the United States.  As a graduate with honors from Marymount Manhattan College in New York City, Jessica has parlayed her Bachelor of Fine Arts in Choreography and minors in Arts Administration and Mathematics into a specialized career in arts accounting and business management.  For more information about her visit www.FinancialGroove.com