Hopefully we are past the media craze about a guest on the Dr. Phil Show. Today we need to talk about what it means to have a cash-based business.
There is nothing wrong with having a business that has a high percentage of payments coming from cash. Beauty salons and food establishments are just a couple of places where paying with cash is common. Even paying expenses in cash is fine. It's all about the documentation.
The IRS knows that it can be tricky (and, admit it, tempting) to not report all cash receipts in your business. They have collected data from thousands of businesses through the decades and they know roughly what to expect when reviewing your tax return. They also collect data about card payments. If card payments are higher than expected then the IRS will send a notice asking you to explain why cash receipts are lower than expected. Unfortunately in this "guilty until proven innocent" scenario you will need to explain why something didn't happen, and proving a negative can be very difficult.
Cash payments means no "automatic" documentation. You won't get a report at the end of the month/year telling you what your cash receipts were. Make sure you record transactions to document everything. Depending on the type of business you run, keep records regularly. If you have a barber shop, log the number of customers and track your daily receipts. If you host parties in a home log sales after every event. Make sure your records add up and match your bank statements.
These details can make the difference between proving your income and having the IRS presume you are underreporting.
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