Q:

Subject: Cash Tags

Kerry

Cash tags, does cash have to be taken out of your business to be spent on expenses as cash. Or is all cash spent on expenses regardless of its source deductible as long as you have your receipts saved. Money from savings an example.

Do you have to divulge the source of the cash to use the deduction?

A:

If you are posting cash expenditures made for business related expenses, it doesn’t matter where the cash came from, as long as it wasn’t from unreported taxable cash income. It could be from personal or business accounts.

Depending on the overall size of the cash expenditures for the year, the level of documentation should coincide.  Small amounts shouldn’t be anything to worry about.

However, if you’re getting into thousands of dollars, you need to be prepared to defend the original source of the cash in case IRS were to ever inquire about it.  They actually have audit teams that examine people in businesses that deal primarily in cash to ensure that every penny is accounted for.  Many of those people actually cut their own throats by reporting thousand of dollars more in personal and business expenses than the level of income they are reporting. There are plenty of classic cases of tax fraud where people are living very high on the hog, while reporting very small amounts of income on their tax returns.

IRS auditors are trained to start off from the premise that all money received is taxable income unless the person can prove otherwise.  So if you do come into a large amount of cash that was a gift, inheritance or one of the few tax free sources, you need to be diligent in documenting this fact.

One of the best ways to document cash is with QuickBooks.  Set up a bank account called Cash and show money going in and out just as you do with a normal bank account.  Doing it that way would protect you from IRS accusations of having unreported income.

Good luck.  I hope this helps.

Kerry

Q:

Subject:  Transfers from personal checking into a business shown as income ???

Kerry

I read your tips on Taxguru.org

I have quicken 2008

I have a business in florida selling equipment.  I get paid a salary.

I also have a farm in Tennessee which a rent out  

the problem is every month the farm loses money.
I ever overdraft or pull money from a line of credit or my checking account

This shows as income in cash flow reports.

how can the transfer go from my checking account >  to the “Shareholder Loans.” to the farm,  and if its not income or expeses
what is it   (a liability)?

I guess thats what gets it off the the income statement

If (should) the farm should have its own Quicken file

How does the income flow in and out of my personal checking into the farm when it needs money?

Sorry for the conveluted questions?

Thanks

A:

All of those questions involve very basic bookkeeping procedures.

You are way out of your depth in trying to set up and keep your own books without professional guidance.  You should have a professional bookkeeper set up the Quicken, or better still QuickBooks, files to coincide with each of your tax returns and then either train you how to make the entries for your transactions or take on that task on an ongoing basis.

Your personal professional tax preparer should also be involved in the design of your books to ensure the ability to easily obtain the info s/he needs for each of the related tax returns.

Good luck.

Kerry Kerstetter