As you plan the launch of your business startup, are you finding yourself in a little bit of sticker shock when it comes to credit card processing fees? Monthly fees, plus a percentage of each transaction, statement fees, and the purchase of terminals and other equipment can quickly take a significant bite out of your profits. Well-known portals like Paypal aren’t any more of a value than traditional card processing.
It’s for this reason that some entrepreneurs are electing to accept only cash. Businesses from restaurants to plumbers to doctors are electing to avoid the high costs of credit cards by taking a retro, old-school approach to payment but this, according to tax professionals and accountants, can invite trouble, especially with the IRS.
Owners running a cash only business have a one in two chance of receiving an IRS audit notice in the mail while those who run a business using alternate form of payments only have a 5% chance. If you plan to run a cash business, here are a few ways to lessen your chances of an audit.
It might sound like a good idea while you’re planning your business, but once you’re faced with the task of documentation, you may rethink your plans. Cash only businesses have to document each transaction, each deposit and withdrawal, and every business expense. Each of these have to not only be documented, but should include details that will allow you to speak to an auditor about any transaction years after they take place. Because you don’t have the detail that comes from a credit card, you will have to supply that manually.
Tax professionals advice clients to keep a daily journal detailing the activities of the business. This, along with a logbook of all appointments will allow you to match the payment you collected with the activity of the business that day.
If you are audited, hire a professional to represent you at the audit. Auditors know the right questions to ask to back you in to a financial corner. Having representation will help you answer questions appropriately with only as much information as they need. A professional won’t show you how to lie but they will help you minimize any additional liability.
A cash only business seems like a good idea to avoid the fees that come with accepting credit cards but the additional documentation and audit probability may cause this model to be more of a liability than an asset. As you plan your business model, talk to others about how they handle payment details.