Credit cards may be commonplace, but some small-business owners still prefer cold, hard cash. The SBA points out that cash-only businesses may cut down on invoicing and other overhead expenses, as well as fraud associated with credit cards.
Cash transactions, however, do not leave much of an audit trail. This may be why cash-only businesses have a 50 percent chance of triggering an IRS audit (vs. 5 percent for businesses that accept other types of payment).
Consider the following to minimize your audit risk.
1. Go heavy on details. Because cash transactions do not create an audit or “paper” trail, you will have to establish one yourself. Create a ledger with entries for every transaction coming in or going out of your business. Make liberal use of the memo field if you use accounting software. You may have to give the IRS a detailed account of any transaction up to six years after it occurs. Include enough detail to meet that requirement.
2. Cross-reference transactions. Along with your detailed ledger, carefully log appointments, mileage, and the nature of your trips, entertainment expenses, and conferences. Date everything and create a system to cross-reference expenses in your ledger. The goal is to provide the IRS with complementary data to substantiate your claims.
3. Report large receipts of cash. If, in a 12-month period, your business receives more than $10,000 in cash from a single buyer within the United States or a U.S. Territory, the IRS requires that you complete Form 8300. Note that the IRS considers a cashier’s check, sometimes called a “treasurer’s check” or “bank check,” to be cash.
4. Report cash payments to contractors. Most payments to an individual independent contractor that exceed $600 (during the course of a year) require that you file a Form 1099-MISC, regardless of your form of payment. These payments should appear in your ledger and are deductible as a business expense. Do not make “under the table” cash payments.
5. Reconsider your accounting practices. The end of cash payments may be coming soon — or so implies author David Wolman in his book The End of Money: Counterfeiters, Preachers, Techies, Dreamers — and the Coming Cashless Society. As electronic forms of payment become more commonplace, customers expect to be able to pay with a credit or debit card at most businesses. They may find it inconvenient to carry cash and, as a result, elect to take their business elsewhere.
The good news: Accounting software painlessly imports credit card payments, making the documentation process easier than creating spreadsheets and manually entering all business transactions. In addition, interchange fees associated with credit cards may be lower than the cost of maintaining cash-related records, and it’s cheaper and easier than ever to accept credit cards, with services such as QuickBooks GoPayment.