Daniel Martinez is busily cutting hair at The Executive Barber Shop in San Francisco?s Mission Terrace neighborhood when I call to ask what it's like to operate an all-cash business.
?It?s great,? he says, the sound of scissors clicking in the background. ?It is really just me, so it?s easy to keep track of. I?ve been doing it since I opened in 2003.?
Martinez is one of many small-business owners nationwide who accepts only cash, a group that includes some bars, restaurants and medical offices. While it may expedite the accounts receivable process, the lack of an automatic paper trail can also come with a few downsides, namely drawing the attention of the IRS.
According to Anthony V. Diosdi, tax attorney at?Moskowitz LLP?in San Francisco, cash-only businesses have a 50-percent probability of getting audited while companies that accept alternate forms of payment have just a 5 percent probability. If much or all of your business is transacted in cash, here are a few tips for staying in the good graces of the taxman.
Keep a journal.?A daily journal is essential to good bookkeeping. Record every transaction that goes in and out of your business, recommends Karla Dennis, founder and CEO of?Cohesive, a tax consultancy in Cypress, Calif. The journal doesn?t have to be fancy. Use a Microsoft Excel spreadsheet or a physical notebook. Just make sure to date each entry. This extends to expenses, too.
Watch your deposits.?Cash businesses can get into trouble when confusion happens between bank account deposits and refunds. Diosdi offers the example of a short-term apartment rental. An owner may take a deposit from a potential renter and then deposit the amount in their bank account. If the renter then backs out of the agreement, the deposit it returned.
?The IRS can look at that deposit and classify it as income if you aren?t careful,? he says. ?Two or three years down the line when you get audited, you won?t remember the circumstances of the deposit and withdrawal. You need to keep a record.?
Log appointments.?Nicole Rhodes and her business partner Darnita Mitchell are sticklers for documentation. As co-owners of The Beauty Box Hair Salon in Long Beach, Calif., they operate an all-cash business and not only write down transactions, but also keep a calendar of appointments as a good cross-reference should the IRS come calling.?Appointments also apply outside the office. Entertainment expenses can be deducted if properly reported, Diosdi says, so the next time you treat a client to dinner, take note of whom you entertained and the business purpose of the meeting.
Get detailed with receipts.?Keeping receipts isn?t enough. The IRS wants to know what you spent your money on and how it went toward your business. As Dennis explains, it is important to categorize expenses. Instead of writing ?Home Depot,? for example, log the category of goods purchased.
If audited, get a professional.?Finding yourself on the receiving end of an audit notice doesn?t have to be the end of the world, says Dennis. As long as you have the proper documentation for your all-cash business, you?re golden. But if you don't have your house in order, it's time to go into?damage control mode. Diosdi recommends looking back at your year and trying to recreate a log as close as you can.?From there, call a professional. Dennis guards against facing the IRS alone as agents can ask somewhat misleading questions.
?You may not be aware that your answers to things could back you into a corner,? she says. ?Bring in someone to help you that knows what the IRS is looking for.?
Do you operate an all-cash business? What are your strategies for staying on the good side of the IRS?
Photo credit:?iStockphoto/Thinkstock
http://www.openforum.com/articles/tax-tips-for-cash-only-businesses?extlink=em-openf-SBdaily
by:?Katie Morell
Independent writer and editor?/?Member since 2011
Katie Morell is an independent writer and editor based in San Francisco specializing in business, travel and human interest topics.?
Her work has appeared in USA TODAY, Hemispheres, The Writer, Destination Weddings & Honeymoons, Chicago Tribune, Chicago Sun-Times, and many others.
Katie is a member of the American Society of Journalists and Authors (www.asja.org), and a graduate of Michigan State University's School of Journalism.
katiemorell.com
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