Memo – Is Your Income Mostly CASH? Follow These Steps To Legitimize Your Business And Stop Worrying

To listen to the podcast version of memo click here —> Podcast Version

I get calls every day with many varied income tax and business related questions. Quite often, people ask me how to account for their cash transactions, both income and expenses. It is interesting that clients in this situation sometimes feel insecure or worried to be using cash to pay vendors or to be receiving cash as income.

If you are one of those Cash-Based Professionals, I urge you to call me immediately on 732-673-0510. Hopefully yesterday will be the last day that your cash transactions caused you anxiety.

So, I first want to say that this is completely normal and many businesses deal in mostly cash. So, if you are worried I want you to stop being so. All we need to do is work together to properly account for cash transactions just as we would as if they were coming directly from a bank account and then file tax returns for you like everyone else does. 

If you want to be a 100% legitimate tax payer and report all of your income to the government, which I strongly urge, then you should not be afraid to deposit your cash income in the bank and also to pay your business expenses out of that bank account. 

By filing accurate tax returns, there are many tremendous benefits for people who have been apprehensive to file accurate returns in the past. 

1. Ability to obtain your own credit. You will be able to use that verifiable taxable income to get mortgages, car loans, and credit cards. 
2. You avoid criminal tax evasion charges.
3. The elimination of feelings of being illegitimate and hiding in the shadows.

If you cannot or will not deposit your cash in a bank, we still can properly account for your income and expenses, and report your income on your tax return as if you were using a bank. I’ll get to that in a moment.

Here are the main reasons why people would transact business in cash:

1. They have an aversion to banks.
   1. This occurs more often than you think. Although I urge clients to deposit their money in a bank, and explain how deposit accounts are insured with the FDIC, some of them don’t take my advice. I am mostly concerned about theft if someone keeps cash, I am never judging their decision. 
2. Their industry transacts in mostly cash. 
   1. Believe it or not, there are many industries that transact mostly in cash, but those numbers are decreasing.
   2. Again, I cannot stress enough that your transacting in cash should not worry you in the least. 
3. Some banks are reluctant to take cash or other deposits from industries they fear are breaking the law, such as cannabis dealers. 

Now that I have hopefully dispelled some of your fears, let’s discuss how you should be handling your accounting, and subsequent income tax filings. 

1. Every U.S. Citizen must report 100% of their income from all sources.
2. The most important thing you need to do, like all businesses do, is to keep proper accounting records. 
3. So your cash transactions need to be itemized, and supporting documents kept, just as as if they came out of a bank account.
   1. Let’s say you are taking in cash as income and paying bills with cash.
      1. You simply need to maintain the details of those transactions as if that money was in a bank account. For example, you could keep a spreadsheet called “Cash On Hand” and use that as a ledger of your running remaining cash balance. Or you can have a “Cash On Hand” account in Quickbooks or other accounting package.
         1. When you take cash as income, you put a deposit entry in your spreadsheet or Quickbooks.
         2. When you pay a vendor in cash, you enter a withdrawal or disbursement entry which includes all the details as if you had written a check. 
      2. This spreadsheet can easily be made to keep a running balance of your cash on hand or even better Quickbooks will do that for you.
   2. Now, at year end, you would give me that spreadsheet or Quickbooks file just as my other clients do, and we can use that to develop your annual profit and loss to prepare your tax returns.
   3. You would want to get receipts and invoices from the people you are paying with cash as if you paid them with a check. This is a very important step. The IRS would disallow expenses if you don’t have legitimate invoices to back up your expenditures. I understand that some vendors may not want to give you a receipt or invoice. Understand, again, that those expenses, under audit, would be added back to your income and disallowed.
   4. Issue 1099s at year for any vendor you paid more than $600, regardless of how you paid them. 
   5. Any vendor you pay should give you a completed and signed form W9. This reflects their name or business name, and their social security number or federal identification number. This information is used to complete your 1099s at year end. 
   6. You also need to keep detailed supporting records, receipts, invoices, etc.
   7. One note about paypal. This can and should be accounted for like any other bank account or cash account and included with the year end information you provide me so I can prepare your tax returns.

To restate my main point of this memo, even if you take cash in your business, and pay expenses with cash, you are still a legitimate business, and you simply need to properly account for your business’ transactions and file accurate returns at year end. 

Of course, me and my team are here to assist and support you everyday. 

Questions? Concerns? Call me on (732) 673-0510. I promise all calls and your information are kept completely confidential.

Click here to request a consultation or ask me a question.

Please reach out to me without hesitation with any tax, business or accounting question, and to schedule a consultation.

Tax Laws are complex.

It is very easy to make mistakes that can incur penalties.

Do you have a Tax, Accounting or Business Question?

Call Me Immediately. (732) 673-0510.

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ignoring your Phone Calls and Emails?

Call Me Immediately. (732) 673-0510.

Remember,

“If We Aren’t Working For You, Then You Aren’t Working At Your Best”

Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com

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