You asked for this with 250 Likes!

As promised, here's how to avoid the NASTY situation with the IRS described below.

Don't fall prey to a sideways situations on an IRS AUDIT of your side hustle!

and AVOID PENALTIES!
Step 1 - Use the right tax treatment on your transactions.

Learn some tax or hire someone.

I'm not promoting myself here because I'm not currently taking clients.

I don't tinker with my car's powertrain or grow my own penicillin to fight a sinus infection.

Hire a tax person.
It doesn't cost that much and they usually pay for themselves in stuff you would miss.

@DaveRamsey even says this and who is cheaper than him?!

If you just have to DIY, then learn some tax. Take a little course. Read a book. Not recommended, but might be better than nothing.
The biggest place I have seen audits go sideways is people just booking things completely wrong:

-Putting charitable contributions on their schedule C.
-Accidently writing off asset purchases.
-Taking advice from their cousin.

Step 1 - Don't do that stuff. Hire or be smart!
Getting Step 1 right is your most important step in your AUDIT DEFENSE:

The IRS algorithm is looking for odd things. The wrong treatment on your tax return just sticks out.

When the agent shows up and you don't have a tax person/don't know tax, you are at their mercy.
Step 2 - Books!

Once you know how the basics of your business should be treated for tax, then actually keep good books!

Maybe you've got Step 1 right, but your return still looks weird.

If you were an auditor, how would you view the follow examples?:
1) Taxpayer produced a Profit and Loss report and Balance Sheet upon request that were professionally prepared, while walking me through key transactions.

2) Taxpayer had no financial statements and said they have been meaning to get to that?
It doesn't have to be fancy, but your tax return requires a Profit & Loss statement for your business and sometimes a Balance Sheet.

If you can't produce these from your own books, it gives the auditor no confidence in your numbers.

If you can, you stand out in a good way.
You don't have to become an expert in QuickBooks.

It's probably not worth your time.

Again, you can hire that out!... or you can use a spreadsheet.

You can literally copy the lines of your business tax return - Schedule C in the US or whatever Profit & Loss you have in...
...other countries.

Have a tab for each line.

Every time you spend something, put it in the tab you think it goes.

Have the tabs total to the front page.

Write a little description.

You can even do it once a month off your bank & credit card statements.
You can either learn how each item could be treated or you tax person can tell you very quickly!

Step 2 - Just keep some basic books!
Step 3 - Records

Imagine these scenarios:

1) Taxpayer claimed $10,000 of mileage deductions in a personal car, but when asked for support replied, "business driving and stuff."

2) Taxpayer claimed $7,893 of mileage deductions in a personal car. When asked for support...
...took me to glove box of his truck and produced a mileage log with dates, miles driven, and a description of each trip. (This could also be an app on your phone.)

Have receipts of invoices for major purchases or large categories of small purchases.
None of this has to be fancy, just organized!

It doesn't have to be in paper. Electronic is fine.

Just in general, have a system that is easy for an auditor to understand.

Keep these records for 7 years. It's not hard if they are electronic, but back them up!
Step 4 - Be prompt!

When most people get a letter from a tax authority, they put in back in the envelope and wait until it is due.

Call someone right away that knows how to handle it.

I'm free to Money Twitter. If the IRS comes knocking, ping me right away. Don't wait!
In Summary, if you were an auditor, who would get a better audit?:

1) Someone who could explain their taxes (or hired someone who could), that had good books, good records, and was prompt.

OR

2) Someone who didn't understand their taxes, had no books and records, and was late?
Be prepared and avoid a NASTY tax assessment that you don't need.

It's actually pretty easy if you follow my four steps.

If you found value in this, please RT to your friends. I would love to help them all.

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More from @AskForTaxAdvice

9 Oct
How to get to ZERO income tax.

This will cover ANYONE in the WORLD.

HUGE VALUE THREAD!

THIS IS MY CURRENT TWITTER MAGNUM OPUS.

Bookmark this, print it out, mark it up, don't try to get through it all today, and for f*ck's sake RT it so EVERYONE can benefit!!!

***THREAD***
Section 1: The basics

Income tax is based on income

Your wealth, your sales, and your ad spend don't have income tax.

Your income/profit does, BUT not all income is taxable.

So first, if you want to get to ZERO income tax, you need to get to ZERO TAXABLE INCOME.
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There are two ways.

Subject yourself to jurisdictions that do NOT tax income.

OR

Only have income that your jurisdiction does NOT tax.
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***Thread***
Buy your fixer-upper house to flip.

Move in.

Make repairs and upgrades. Do whatever you do when you flip a house.

Stay exactly two years (or more).

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Repeat every two years.

It's called the home sale exclusion.
Think about it...

If your sole income is from flipping residential real estate, you could have a 0% tax rate (US).

Insane!

Q: How many times can I do this?

A: Once every two years. No lifetime limit.

If this was valuable to you, please RT so your friends can see it, too.
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Tax Loophole Alert

Employ your child in your business.

Teach your child a skill and save $1,000s of tax per year!

***Thread***
If you own a business and there are jobs your child can do for it, employ them and pay them.

Your child gets to be part of the family business and learn skills.

You get a deduction.

Typically they are in lower tax bracket than you, if they pay tax at all.
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You hire your 14 year old to send out cold emails and set up sales calls.

You pay an hourly rate, which ends up being $10k per year in wages.

You deduct $10k, which saves you the following:

-Fed Income Tax: 24%
-State Income Tax: 5%
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If you own a business, chances are you are having A LOT of meals that could be deductible that you are not deducting.

For a meal to be deductible, it needs to meet the "ordinary and necessary" test.

-"Ordinary" simply means that it isn't lavish and customary in the industry.
If you work in sales, is a steak dinner with a client "ordinary?

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If you have a "working lunch" with your business partner to talk about next quarters goals, does that have a profit motive?
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Some vacations might have airfare, lodging, and food costs in the $1,000s or more.

When I'm on vacation, I like to be on vacation, but I know how most of us on Money Twitter are...
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You might even be there looking at property to buy and rent out.
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How to make your child a $5 millionaire,

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deductions for you,

on an amount less than your bar tab...

***Thread***
You need to be a business owner to do this.

You need to employ your child to do this so they can contribute to a ROTH IRA.

There are a few things you can employ your child to do.

On easy example is being a "model" in your business marketing materials. Think happy family pics.
Create an employment contract with your child for being in your marketing materials.

Pay your child $6,000/year (must be a market rate of pay). This is deductible to your business so net a couple $100/month.

Contribute this money to a ROTH IRA in your child's name.
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