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Columns by June Walker: IPs Face Unique Tax Challenges Tax Deductions Are There For The Taking You Say You're Self-Employed -- Will the IRS? Criteria for Self-Employment Do You Have a Business or a Hobby? Proving That You're a Business Keeping Records -- It's Not Just for Taxes Three Ways to Expand Your Business Deductions Can I Deduct Disneyland and Other Questions Mixing Business with Pleasure and Other Gray Areas Quicken for IPs Courses That Qualify Training You Can't Deduct Getting There is Half the Battle Taking Deductions on the Road Getting Credit and Taking Allowances Advertising: Do It, Then Deduct It The Subtle Art of Advertising Deductions Billy Bridesnapper's Start-up Saga Starting Up and Shutting Down Start-Up Wrap-Up Giving Gifts, Taking Deductions

Keeping Records -- It's Not Just for Taxes IPs grumble, grumble, grumble about the detailed records our meddling Uncle Sam requires them to keep. Yet many IPs, once they start keeping good records, realize that they now have a resource to help them monitor their business. Good records can tell an IP not only how his business is doing, but can also help predict how it may do next year. Records can provide information on everything from gross income figures to a client's favorite restaurant. Serious professionals -- even clowns, whose profession is being silly, and astrologers, who should not need records to look into the future -- would keep many of the government-required records even if the income tax were abolished. There are non-tax reasons why an IP might need detailed records of his business. The examples that follow, by no means an exhaustive list, should get you thinking about the ways that good detailed business records may benefit your financial situation -- business and personal. Getting a Loan Whether you apply for a business or personal loan, a mortgage for a new home, or one to refinance your present home, the lender will want to see your business records. If you don't want to show business records, you may be able to get a "no-doc" loan (no income-verification documents required), but it's going to saddle you with a higher interest rate. Mortgage companies are adopting new methods that give the IP a more level playing field with salaried workers. But it's still standard practice that, all other things being equal, Elmer Employee has a better shot at any kind of loan than Ivan Independent. Even if Mr. Employee makes less money, the lending institutions tend to think of his salary as more dependable and more predictable. (Maybe they haven't heard of downsizing.) Lenders tend to get nervous thinking that Mr. Independent is more likely to run into hard times when the cash flows out instead of in, which might cause him to fall behind in the repayment schedule. In most instances in which Mr. Employee would have to show a W-2, the IP would have to confirm his income via a federal Schedule C (Profit or Loss From Business tax form). If the loan were applied for later in a calendar year, Elmer Employee would have to show a pay stub with year-to-date earnings, and Ivan Independent would have to show a year-to-date profit-and-loss statement, often required on an accountant's letterhead. College Financial Aid When applying for student aid for yourself or your child, you will be required to complete financial aid forms. You must have records that provide the correct information to fill out these forms accurately. You cannot guess. If you estimate because your records are incomplete, you will be asked to submit a revised application when your records are complete. Very often you will be required to submit documents to substantiate the information you provided. False or misleading information on a federal request for college aid can subject you to a $10,000 fine or a prison sentence or both. Grants If applying for a grant for any kind of project, you may need to show your project expenses to date as well as expected research and other costs necessary to complete the work. Court Cases Records are the very lifeblood of litigation. In a divorce, proof of income -- or lack of it -- is often required when debating a division of assets, amount of alimony or child support. Just as an ex-spouse-in-waiting must prove her $70,000 assistant manager salary via a W-2, an IP must show by means of accurate records that even though a project was sold for $75,000, the net income was only $10,000. If you are a plaintiff in a negligence case in which you were injured, and your suit includes reimbursement for lost income, your business records are essential. You'll need them to show your income over past years and to prove that you would have earned even more in succeeding years had you not been laid up in traction for months. Insurance Without sufficient records there is no way to substantiate a loss for insurance purposes. Without proof of the cost, depreciation or value of a computer or a camera, how will you get your insurance company to reimburse you if you lost those items in a burglary or a fire? You'll have trouble enough even with the records. If you have umbrella coverage for your business or liability for your home, keep the old policy records for past years, in case someone files against you claiming injury in a past year. The records ought to be kept for as long as your state's statute of limitations is in effect. The same goes for auto insurance. Past-Due Accounts When trying to collect from a delinquent client, accurate records are indispensable in arguing your point. For instance, if you've not received final payment because the company that owes you the money changed bookkeepers and your invoice has been put in the "paid-in-full" bin or the circular file, you should be able to show any partial payments received, when and for how much. You may have to prove your expenses to a client in order to get full reimbursement. Warranties Most warranty agreements are inflexible about expiration dates. If your laser printer dies a week before the warranty runs out, it helps mightily to be able to prove the purchase date to the manufacturer. A general note on record keeping: This isn't the place -- actually it's not the column -- about how to keep records. But here's a preliminary comment on a future subject. Of course you wouldn't throw away your birth certificate, marriage certificate, will, divorce decree, Social Security card, passport, various licenses, title to your automobile, or insurance policies. It's best if all these records are organized in a filing system of your own devising. But if you lack any sense of organization, at least keep them all in one place, not divided among your kitchen drawer, summer home, attic, bedroom closet, car, and office desk. That's called the "sloppy spouse system" and is hazardous to your mental health. In fact, getting better at record keeping is a lot like going to a therapist. You have to want to get better. You have to make an effort. And you have to do it every week.   (c) 2000 June Walker. All rights reserved. We'd love to hear your feedback about this column, or put you in touch with June Walker if you like. You may also like to see her biography.