Thursday, May 31, 2007
Tax Time Tune-Up
Developing healthy accounting practices throughout the year will save you when tax season begins
In his 20-plus years as a professional photographer, Louis Lesko managed to avoid the most dreadful word of tax season: audit. That was until last year, when he received notice from the Internal Revenue Service that his 2005 taxes were getting a second look.
Instead of breaking into a cold sweat and panicking over the outcome, the Los Angeles-based photographer called his tax attorney, sent the IRS his end-of-year American Express expense report detailing all of his business transactions, and when time came for the sit-down, he was prepared to answer all questions, thanks to an automated accounting system he uses to record every expenditure.
For the self-employed professional photographer, the list of items to keep track of is endless. But failing to stay on top of your financial books may become a costly mistake. In recent years, the IRS has turned its attention away from large corporations and toward small businesses. The reason is simple. While the IRS can recover more money from big companies, the process to do so takes more time and resources. With small businesses, less money is at stake, but it's easier to recoup.
The key to minimizing your tax burden starts with a few important tips.
Lesko was in and out of his tax audit in 15 minutes. Says the photographer, “They'd ask a question. I'd go to my Quicken file and answer it. Done. This is an opinion, but based on my experience, by virtue of the fact that we're self-employed, at some point you'll be audited. If it looks like you're shifting money around or you have no income and a ton of write-offs, you're going to be scrutinized.”
From an accounting aspect, get into the habit of reconciling your accounts on a regular basis. Whether it's daily, weekly or in some other increment, make sure you find the time. A self-employed photographer can write off a range of expenses—one meal a day, expenses incurred while scouting a location, costs attributed to work-related trips, etc. All of these transactions should be recorded in a bookkeeping system. The rise of online accounting programs such as QuickBooks, Peachtree, MYOB and Simply Accounting speeds along the process more efficiently by categorizing expenses, drawing profit-and-loss reports, conducting self-audited checks to prevent your ledgers from being flagged by the IRS and so on.