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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4055
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am going back and re-organizing supports for an IRS examination. I

Resolved Question:

I am going back and re-organizing supports for an IRS examination.

I have a previously listed misc category with many expenses. I was told that expenses $50 and under do not require supports. Is that true so can I leave those in?

For everything about $50, then I assume it has to be left out unless I can figure out what it is, e.g. from credit card statements, etc., right?

Thanks!
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi, are you talking about all expenses miscellaneous on schedule C ( as a category)? ot are you referring to those expenses specifically titled as miscellaneous" expenses that you can deduct certain of those expenses only to the extent that they exceed 2% of your adjusted gross income ?

NPVAdvisor :

While I'm waiting for you, here's the guidance that IRS puts out on record keeping, who has the burden of proof, what records will suffice, etc. : http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Recordkeeping

NPVAdvisor :

For the full explanation of what's deductible and what is nondeductible expenses refer toPublication 529, Miscellaneous Deductions.

Customer:

Right, regarding schedule C expenses. I'm trying to figure out if all the misc

Customer:

have to be removed or just those above $50

Customer:

as it's hard to tell what they were for

NPVAdvisor :

OK, I'd err (where it's feasible) on listing ... even if you have to attach a statement (you can always say: "see attached") BUT ...

NPVAdvisor :

What's most important is to KNOW what they were and be able to dig into the statement details if they ask fir more

NPVAdvisor :

Tis piece, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Recordkeeping is the best (most user friendly, readable) guideling Ive seen them do on this

NPVAdvisor :

ALSO? everything is relative

NPVAdvisor :

FOr a business that frosses500,000 50 is not much

Customer:

Well, for none of them do I haev any idea.

NPVAdvisor :

then you'll be fine .. what I think you're ding here is deciding how much pre-work you have to do to pre-empt have more work to do... or another meeting

Customer:

Can you explain?

NPVAdvisor :

sure ...

NPVAdvisor :

If you KNOW in your heart and mind that everything's legitimate, then you could go in without doing any more than what you've done (knowing that you can always dig up more detail if they ask for it) ... and you really are getting to the art more than science part (every examiner has a different personality ... and good and bad days, for that matter) HOWEVER

Customer:

for misc, should misc be category on return or is it ok that cpa was grouping into "office"

NPVAdvisor :

Second level up, f you will, is where you have (in your mind and can quickly answer) connected the dots between whats in that $50 liene item and can state it quickly, intuitively .. The third level up, however,.....

NPVAdvisor :

is where you've listed everything on a line and the totals all reconcile to those (less that $50) items

Customer:

"




1:10 PM



is where you've listed everything on a line and the totals all reconcile to those (less that $50) items" means



NPVAdvisor :

They, as you will see when you read through what I've linked don't specify dollar amounts, again, because for a 5 million dollar business 50 is not only miscellaneous, but negligible, minimal

Customer:

to only include those I'm clueless about with $50 or less

NPVAdvisor :

for a company that grosses 100,000, 50 is a pretty big piece of the pie

Customer:

and for the $100+ or $1k ones to detail

Customer:

The business was grossing $500k to $2 mil

NPVAdvisor :

I think that's reasonable

NPVAdvisor :

The learningfrom this (not tryng to be funny, but truly believe this) is that you shyould use quicken or something that makes it easy to essentially list everything AT LEAST by its category

Customer:

and on tax return

Customer:

list a misc category or leave as office?

NPVAdvisor :

Just have the supporIng statement aNd be sure they reconcile... I think if you have office (and it's the bigger category) and then leaving only an even smaller $ for misc is better (again, balanced with the time it takes) ... aGAIN, IF YOU STICK WITH THE sCUEDULE c LINE ITEMS AND ONLY HAVE 1 OR 2 OTHER LINE ITEMS YOUR CATEGORIZING IT THE WAY THEY WANT

NPVAdvisor :

HANG ON A SEC LET ME CHECK SOMETHING....

Customer:

can you explain 'Just have the supporIng statement aNd be sure they reconcile...'?

NPVAdvisor :

If you have a business bank account/card make sure that you can show that the expenses (and the total of the outflows for that account) total up to the same numbers

NPVAdvisor :

Here's how the IRS puts it: "You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement."

NPVAdvisor :

Here's an excerpt from the link I provided:

NPVAdvisor :

Identify source of receipts


You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.


Keep track of deductible expenses


You may forget expenses when you prepare your tax return, unless you record them when they occur.


Prepare your tax return


You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.


Support items reported on tax returns


You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.


 

Customer:

Well based on that , everything even $50 and less I'm not sure on should be removed?

NPVAdvisor :

That's my point it's a;; relative I wouldn't NOT TAKE everything that's egit ... it's just how much youwant to consolidate .. and how much THIS examiner wants to have it broken out

NPVAdvisor :

Here's an example of what can be supporting documentation for consolidate items

NPVAdvisor :

  • Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:


    • Canceled checks

    • Cash register tapes

    • Account statements

    • Credit card sales slips

    • Invoices

    • Petty cash slips for small cash payments



NPVAdvisor :

Aagain, they will refrain form giving you AMOUNTS .. what they will ask for is categories of items that make sense, relative to the reveue GROSS amount you're bringing in

NPVAdvisor :

See this:

NPVAdvisor :
Like Print

What kind of records should I keep?

You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.


Some businesses choose to use electronic accounting software programs to capture and organize their records. In some situations, you will still need to keep original documentation for certain items. The software program you choose should meet the same basic recordkeeping principals mentioned above.


Supporting Business Documents


Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to Publication 583, Starting a Business and Keeping Records.


The following are some of the types of records you should keep:



  • Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

    • Cash register tapes

    • Bank deposit slips

    • Receipt books

    • Invoices

    • Credit card charge slips

    • Forms 1099-MISC




  • Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:


    • Canceled checks

    • Cash register tape receipts

    • Credit card sales slips

    • Invoices



NPVAdvisor :

When they say supporting, that goes back to that idea that you can consolidate (roll-up) items into "office," for example, but you'll need documentation to support that those lines break down to the details above

Customer:

All that I have is Quickbooks

Customer:

showing the reimbursement amount that prior bookkeeper put as Misc

Customer:

business expenses

NPVAdvisor :

Ahhh

NPVAdvisor :

Then I think you do the best you can .... maybe one phone call to the bookkeeper asking what the logic, criteria was for miscellaneous

Customer:

from the old credit card statement

Customer:

but old bookkeeper is not around now

NPVAdvisor :

Might be worth asking/paying tht erson to come in for an afternoon and generate some detail

Customer:

Just not reachable is the issue

NPVAdvisor :

Honestly, if you have real world reason for not being able to get that from an old bookkeeper, AND the totals on the statements total to the expenses reported, the examiner may very well say "that's reasonable."

NPVAdvisor :

That's how they're trains .. to apply the "reasonable person" standard ... that's certainly what's used in court "reasonable person"

NPVAdvisor :

YOu probaly know enough about your busines ton know what that looks like

Customer:

ok, thank you

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4055
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Thanks Jason,

Do go back and take a look at this. It does give you a feel for how they think about it:

Record keeping

中文 | 한국어 | TiếngViệt | Pусский

Why should I keep records?
Good records will help you monitor the progress of your business, prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns.

What kinds of records should I keep?
You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

How long should I keep records?
The length of time you should keep a document depends on the action, expense, or event the document records. You must keep your records as long as they may be needed to prove the income or deductions on a tax return.

How long should I keep employment tax records?
You must keep all of your records as long as they may be needed; however, keep all records of employment taxes for at least four years.

How should I record my business transactions?
Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. These documents contain information you need to record in your books.

What is the burden of proof?
The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them.



Thanks again,
Lane

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