Tax Considerations When You’re a Cash-Only Business
For many small business owners, our first encounter with cash-only business was tips from our paper route, pizza delivery or table waiting gig. We encountered first-hand how tricky (and let’s be honest – tempting) it is to accurately report all of your income. If we were unlucky, we also saw how tax codes can be less than friendly or forgiving in areas where pocketing unreported cash is so common or easy.
If your business runs mostly on a cash basis, the trick is to prove enough of what you report is true that the IRS doesn’t bother to check on the rest. There are right ways and wrong ways to do this. According to our experts…
Do Log Appointments
With a service business, logging appointments shows the tax agents where your income comes in from. If you work 8-hour days and have 5 hours accounted for with regular, tracked appointments, you present a better picture than if you claim to be making 5 hours’ worth of income every 8 hours. Investigators might ask what you do with those other three hours.
While you’re at it, make similar notes about any and all cash outflow. The more detailed the information, the better you can prove you spent the cash you say you spent, and the better your situation.
Don’t Ignore Industry Averages
Those “assumed tip income” tables for wait staff aren’t just made up out of thin air. They’re based on the average income of wait staff in specific positions in specific regions. Although the IRS won’t assume your business makes a certain amount of money, if you report substantially less than that amount, it’s a red flag. Know your averages, and be prepared to explain outlying performance.
Don’t even think about underreporting if you’re doing better than the mean. Lying about your income is bad news, and carries fines big enough to kill your business even if you stay out of jail.
Do Make All Other Paperwork Perfectly in Order
Especially payroll and other highly taxed transactions. The more all the non-cash-only aspects of your business are in order, the less scrutiny your cash receipts are likely to receive. Keeping track of all cash and non-cash transactions in business bookkeeping software is one way to make yourself do this reliably.
While you’re at it, spend the time (or money) to audit your paperwork to make sure all things match. What you catch, you’ll know was a reporting error. What the IRS catches, they might assume was intentional.
Don’t Live Above Your Means
The IRS specifically looks at the lifestyles of people with cash businesses as possible signs of underreporting income. If you’re showing just $2,000 profit per month, and driving a $200,000 car, the revenue agents will ask you to show how you got that vehicle legitimately.
Don’t even think about paying for obviously personal expenses out of the company cash drawer. Everybody gets a little creative with the grey areas like the occasional “business” lunch, but don’t make a traceable habit of making the company your piggy bank.
Do Show a Profit
Cash-only businesses are at higher risk for auditing. Businesses that make no profit after several consecutive years are also at a higher risk. The combination of the two can bring all kinds of unwanted attention. Note that the IRS guidelines don’t just say “not showing a profit.” They call out not showing a profit without taking steps to correct that.
While you’re at it, confirm that your personal accounts are in line with the profits you show on your tax return. If you’re posting losses every year, but personally increasing your bank balances, that’s another red flag the IRS will give some attention.
Don’t Skimp When Tracking Deposits
A small example in point: you have two cash deposits of $500 on your statement. One is for services rendered, the other is refund on a deposit for a venue you rented the month before. Tracked closely with good annotation, it’s easy to prove what each deposit is. Without the tracking, the IRS has no reason to assume that second $500 isn’t more income.
Don’t even think about commingling company cash with your personal cash. This opens you up to all kinds of confusion, and to new kinds of cash liability. If you have to carry two wallets – one for you, one for the business – do that. It’s that important.
Do Keep a Journal
This can be a spiral notebook, a spreadsheet, a pad of receipts or any other method by which you record every transaction – and if possible, every major interaction – for your business. It’s okay if you make two copies – a rough version during business hours, and a clean copy when you enter it into your books. Just make it as complete as possible.
While you’re at it, consider tighter cash control systems for your company in general. The looser cash handling is in cash-only businesses; the more likely otherwise honest employees are to help themselves to an “unofficial pay raise.”
As with all things tax-related, this advice is only that – advice. For the real facts as they apply to your business, we recommend contacting a professional accountant or tax attorney who can examine the details of your situation and give you the best possible instruction. If money’s a problem to get that started, a Kabbage small business loan or line of credit can help.