11 {{ upvoteCount | shortNum }}
11 {{ upvoteCount | shortNum }}

Tax Reporting - Do you need to prove your expenses?

by JD Nunes
9 replies
Most Internet marketers have expenses on top of their gross income, so in the end they are left with a net profit usually lower than that. But for tax purposes, do you need to PROVE all the details? I mean, can you just report your net profit as your income and be done with it? If you have thousands of transactions, for example, and near as many occurrences of expenditure, it would be a nightmare to document every little detail.
#expenses #prove #reporting #tax
  • Profile picture of the author Dave Rodman
    Banned
    If you know your net profit, why wouldn't you have the detail anyways? How'd you come up with the number?

    For most people, their CPA will want to see something. If your CPA doesn't necessarily want to see it to claim it, then the IRS might if you get audited.

    But you don't really need to "prove" anything unless the IRS is asking.
    {{ DiscussionBoard.errors[3156618].message }}
  • Profile picture of the author JD Nunes
    Well I mean, would you need to send receipt copies or something of every single expense to prove it? Would they need to see PayPal payment emails proving that you spent a certain amount of money on expenses?
    {{ DiscussionBoard.errors[3156626].message }}
    • Profile picture of the author Bekah Howard
      Originally Posted by JD Nunes View Post

      Well I mean, would you need to send receipt copies or something of every single expense to prove it? Would they need to see PayPal payment emails proving that you spent a certain amount of money on expenses?
      Do you need to send in proof, no. Do you need to keep records of all income and expenses, yes.

      The IRS has different accounting requirements for different levels of "businesses". If you are a sole-proprietorship or partnership then all you are required to keep is semi-detailed lists (but all-inclusive) (i.e. daily sales, daily paypal fees, any subscriptions for web-hosts, etc) with the expense or income, the amount, and the date. As soon as you incorporate your business, the required accounting becomes a lot more complicated and usually needs to follow GAAP Standards.

      The IRS website has the accounting requirements listed if your not sure where you fall on the scale.
      {{ DiscussionBoard.errors[3156662].message }}
      • Profile picture of the author kindsvater
        Originally Posted by Bekah Howard View Post

        The IRS has different accounting requirements for different levels of "businesses". If you are a sole-proprietorship or partnership then all you are required to keep is semi-detailed lists (but all-inclusive) (i.e. daily sales, daily paypal fees, any subscriptions for web-hosts, etc) with the expense or income, the amount, and the date. As soon as you incorporate your business, the required accounting becomes a lot more complicated and usually needs to follow GAAP Standards.
        This is not quite correct. IF you have a c-corporation or a partnership where a partner is a c-corp AND your gross receipts exceed $5 million, then you cannot use the cash accounting method most small businesses use.

        In other words, no issue for 99% of all Warriors. Per the IRS:
        "No single accounting method is required of all taxpayers. You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. In addition to your permanent books of account, you must keep any other records necessary to support the entries on your books and tax returns. "
        Publication 538 (3/2008), Accounting Periods and Methods

        For example, keeping a record of your War Room expense as a tax deduction is the same for any business regardless of their entity structure.

        As for "proving" your expenses, you normally do not have to prove anything with the tax return. However, if your return is audited then you need to be prepared to meet the basic standard of showing they are reasonable and necessary.

        The bigger the deduction the more care should be made in keeping documentation. Even handwritten notes if needed - since audits usually do not happen til years later. Keep in mind a receipt document is not needed to prove an expense - but it sure makes life easier!
        Free Tax Tip: If I am ever concerned about an expense, such as vague receipt, I will copy it and write on it explaining exactly what it is for. Example: if you buy a business book from Wal-Mart write on the receipt what book you bought and why, as otherwise a Wal-Mart receipt looks like a personal expense.
        A CPA will typically want to take each expense and trace it back to a source document. That's a good practice to have when deciding what documents to keep on a day to day basis.
        Signature
        {{ DiscussionBoard.errors[3156790].message }}
    • Profile picture of the author donhx
      Originally Posted by JD Nunes View Post

      Well I mean, would you need to send receipt copies or something of every single expense to prove it? Would they need to see PayPal payment emails proving that you spent a certain amount of money on expenses?

      You don't need to send in receipts with your tax forms. They need to be well organized, however, in case you are audited. In that case, they want to see the paper trail for both income and expenses.
      Signature
      Quality content to beat the competition. Personalized Author Services
      {{ DiscussionBoard.errors[3156686].message }}
      • Profile picture of the author Alexa Smith
        Banned
        If other countries are anything like the UK, you don't normally need to prove your expenses, but you do need to be able to prove your expenses on request (usually with a bit of notice, rather than very suddenly), and may be asked to if they've changed dramatically, as a proportion of income, from the previous year's figures.

        (Always good to keep a copy of your previous tax returns, because "they" have copies!).

        I'm not complaining, but this is a slightly weird question to ask without even saying which country you're asking about or having your country in your profile: I don't show mine, either, it's true, but I'm not the one asking about tax reporting!

        Seriously, you'll get more helpful answers if you say where you live.
        {{ DiscussionBoard.errors[3156699].message }}
        • Profile picture of the author JD Nunes
          Originally Posted by Alexa Smith View Post

          If other countries are anything like the UK, you don't normally need to prove your expenses, but you do need to be able to prove your expenses on request (usually with a bit of notice, rather than very suddenly), and may be asked to if they've changed dramatically, as a proportion of income, from the previous year's figures.

          (Always good to keep a copy of your previous tax returns, because "they" have copies!).

          I'm not complaining, but this is a slightly weird question to ask without even saying which country you're asking about or having your country in your profile: I don't show mine, either, it's true, but I'm not the one asking about tax reporting!

          Seriously, you'll get more helpful answers if you say where you live.
          lol, I'm in the USA. I say "Planet Earth", because when it all comes down to it, nations are imaginary concepts, and we are all naturally sovereign conscious beings.
          {{ DiscussionBoard.errors[3156749].message }}
          • Profile picture of the author Alexa Smith
            Banned
            Originally Posted by JD Nunes View Post

            lol, I'm in the USA. I say "Planet Earth", because when it all comes down to it, nations are imaginary concepts, and we are all naturally sovereign conscious beings.
            LOL, fair enough, then ... lucky you weren't asking about the Martian tax authorities: they're little green men, I heard, and have a statutory right of entry to your home to inspect your accounts on Mondays, Wednesdays and Fridays ...
            {{ DiscussionBoard.errors[3156757].message }}
  • Profile picture of the author cadirondo
    Im having to do my online tax assesment form now and it is DOING MY HEAD IN! I don't even understand the questions in all honesty. The amount of head scratching that is going here will soon lead to me going bald!
    {{ DiscussionBoard.errors[3156781].message }}

Trending Topics