The Taxman Cometh looking for Small Business Owners – CRM to the rescue

ID-100100781 by basketmanInsightful article in this weekend’s Wall Street Journal (5/17-18, 2014) entitled Skirting the Investment Tax, by Arden Dale.  New this year is a 3.8% investment tax on profits if business owners can’t document they are playing an “active role” in running their company. To prove to the IRS an “active” involvement in your business you’ll need to be able to show that you spend at least 500 hours on the job annually and produce records that show your work efforts have been “regular, continuous and substantial.” However, if you’re a sole proprietor, as the sole participant it may be easier to prove your case.

Certain businesses, which the IRS considers passive, such as management of rental real estate may be challenged, as rental income is generally considered to be passive. An active owner will need to be able to document more than 750 hours in services related to this type of business.

The key according to Cathy Schnaubelt, a Houston wealth adviser, “is for business owners to maintain scrupulous records to prove that they are active participants in their businesses, in case the IRS issues a challenge.”

Our recommended solution: use a CRM system to proactively, electronically document your client interactions, so you have a complete record of where you spent your time.  CRM systems, when used consistently, will provide a complete record of dates, notes and interactions, from which to document your active role in your business if challenged.

In this case, an ounce of prevention gains you protection against an IRS challenge, while also providing a more efficient way to run your business, by electronically keeping track of your client interactions.


Image: courtesy of basketman /

Dave Oshlag has been helping companies large and small stay organized and focus on the right projects for more than 25 years.  His specialty is saving hours of time wasted on disorganized systems without spending thousands of dollars. He’s best known for enabling massive changes in productivity with tools like W5 Templates that are simple, streamlined and get people organized quickly.

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