John Randall Shores, CPA, PA
Certified Public Accountant
Pensacola, Florida
850-444-9979

BUSINESS DOCUMENTATION

The following are just a few of the business documentation requirements that need to be followed to insure adequate documentation is available to support your tax returns. Please remember the Chinese Laundry motto, "no tickie no washie", the lack of adequate documentation can result in costly tax bills if your tax return is examined by the Service (IRS).

1. SALES DOCUMENTATION AND SALES TAXES

    
Each sale should be supported by a sales invoice or cash register tape showing the amount of sales and the sales taxes collected if it is a
    taxable transaction. A daily sales cash settlement sheet should be completed each day and summarized on a monthly basis. The nature of
    daily sales sheets and monthly recaps will depend on the nature of each business. We provide a variety of Excel spreadsheets to meet  
    these requirements.

    Please remember, the business collecting sales taxes in the State of Florida must remit to the State the actual taxes collected and not a
    calculated amount based on the tax rate in your county (i.e. 7.5% for Escambia County). The Florida Department of Revenue's website is
    located at www.myflorida.com/dor. You should visit their site and review the specific information that applies to your business. Do not
    assume your product is exempt without confirming that fact first.

2. SUPPORT OF PURCHASES:

    Please remember a cancelled check alone is not adequate documentation of a disbursement. A vendor invoice showing the date of  
    purchase, the product or service being purchased and the sellers name and address should be shown on the invoice. Different types of
    disbursements require specific documentation, remember the settlement statement from the purchase of real estate should be kept for at
    least seven years after the sale of the real estate.

3. SUPPORT OF PAYROLLS 

    A Form W-4 (Employee Withholding Allowance Certificate) should be obtained from an employee on the first day of employment. The social
    security number on this form should be confirmed to the employee's official social security card.

    Records of date and time worked and hours paid should be kept along with the detail of deductions from wages (withholding, FICA,          
    Medicare, etc.) We provide our clients with a quarterly Excel spreadsheet for accumulating payrolls if the client does not maintain 
    computerized payrolls. For clients who maintain their accounting on our computer, we provide several different payroll print-outs that 
    support your payroll calculations.

4. INDEPENDENT CONTRACTORS

   
The Service (IRS) has task forces that monitor the abuse of Forms 1099MISC and the use of independent contractor status in an effort to 
    reduce the employer's payroll tax costs. Many small business will try to classify employees as independent contractors to avoid the 
    employer's matching portion of FICA and Medicare, plus savings on State Unemployment and FUTA Federal Unemployment taxes as well  
    as Workmen Comp insurance costs.

    There are only two specific occupations that are considered in the IRS Regulations to be independent contractors, those occupations are
    Insurance Sales and Real Estate Sales and occupations associated with the sale of real estate (i.e. appraisers, surveyers, etc.).

    On the first date of work on a contract a signed Form W-9 (Request for Taxpaper's Identification Number and Certification) should be
    obtained from all independent contractors. The EIN (Employer Identification Number) or Social Security Number should be independently
    verified for accuracy.

    While many other occupations can be considered as independent contracts, payments to these vendors have to meet certain requirements
    to qualify for independent contractor status. Remember the following:

    a.) Independent contractor work based on a signed contract. Without a signed contract, the Service (IRS) may consider the worker as 
        being an employee.
    b.) Independent contractors work for a variety of businesses and not solely for one business. When an individual receives only one Form 
         1099MISC that accounts for all of his earnings for a year then the Service (IRS) may consider the worker as being an employee.
    c.) An independent contractor is not supervised by company management.  The contractor works under the terms of his contract and the
         company does not have the right to fire the contractor, if he is performing properly under his written contract.
    d.) In general, if a company retaining an independent contractor treats the contractor as an employee (i.e. pays for health insurance,
         provides retirement, provides workspace, cellphone, etc.), the Service (IRS) may consider the contractor as an employee.

   Incorrectly classifying an employee as an independent contractor can be very costly if discovered by the Service (IRS). The penalties and
   interest can frequently increase the taxes assessed by 25 to 50% or more. Further, the employer is required to pay the taxes that should
   have been withheld from the employee including backup withholding. The total of this mistake can double the cost of the amount paid to the
   independent contractor. Further the Service (IRS) will make the adjustments for the last three years that have not expired under the Statute
   of Limitations.

   If you have any doubt regarding a specific individual you should consult your CPA. Frequently these issues are discovered when an
   employee classified as an independent contractor is fired and files for unemployment. The results of an audit by the Florida Department of
   Revenue will be forwarded to the Service (IRS).

5. RESIDENTIAL RENTAL PROPERTY - AVOIDING FLORIDA SALES TAXES

   Rent received from the renting residential property in Florida is exempt from Florida sales taxes, after the first six months.  To avoid a
   liability for Florida Sales Taxes in the first six months, a minimum six month lease should always be obtained on residential rental property.

   Where there is not a initial six month lease, residential rentals for the first six months are considered as temporary living (i.e. motels, etc.)
   and subject to sales taxes.

6. TRANSACTIONS BETWEEN SHAREHOLDERS AND CLOSELY HELD CORPORATIONS

    It is particularly important for majority shareholders in a closely held corporation to adequately document their dealings with the corporation 
    they control. Probably the two most common dealings a shareholder may have with a corporation they control includes:

    a.) Loans by shareholders to their corporation. For such transactions to be considered valid for tax purposes by the Service (IRS), the
         interest rate must be a market rate for the type of loan being made and the collateral being given. Loan documents should be prepared
         and the collateral being received should be encumbered with the appropriate liens.

    b.) Rent of a business location from a majority shareholder. When a majority shareholder rents a business building to a corporation he 
         controls, a lease should be prepared at a lease rate that is appropriate for the local market.

7. CASH TRANSACTIONS AND BANK ACCOUNT CLEARINGS

    
Businesses which receive large amounts of cash for their sales should pay particularly attention to their control of cash being received and
    how that cash is managed within the company's bank accounts.

    Most taxpayer's are not aware that all U.S. banks and financial institutions report a variety of information at the end of each year to the
    Internal Revenue Service.  One of the critical bits of information reported are the "clearings" or "deposits" to all of a taxpayer's accounts
    (both businesses and individuals).  

   Through a computer analysis program the Service (IRS) compares the total clearings (deposits) for a taxpayer to the gross income reported
   on their tax returns. When deposits to all accounts for a taxpayer become 100 to 200% greater than the adjusted gross income on the 
   taxpayer's return, the potential for audit is greatly increased.  Please remember do not move money from one bank account to another
   and back again for no real purpose. 

   IF YOU DEAL WITH LARGE CASH TRANSACTIONS: If you receive large amounts of cash in your sales transactions, remember FORM
   8300 must be filed for all cash transactions of $10,000 or greater. Consult with your CPA for filing this form.

QUALIFICATION OF ABOVE COMMENTS: THE ABOVE COMMENTS ARE ONLY A PARTIAL LIST OF IMPORTANT DOCUMENTATION AND SUPPORT REQUIREMENTS FOR TAX RETURN. PLEASE CONSULT YOUR CPA ON SPECIFIC ISSUES RELATIVE TO YOUR BUSINESS. JOHN R. SHORES, CPA PROVIDES A FREE HAND OUT WITH A MORE DETAIL LIST OF IMPORTANT BUSINESS DOCUMENTATION LISTS. PLEASE CALL 850-444-9979 FOR A FREE COPY.
 
   








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