Cash Business Tax Advice

November 12, 2019

We’ve previously looked at tax zapper software. One observation we can make is that cash-based businesses certainly have special needs. Cash-based businesses, such as restaurants, convenience stores and cannabis dispensaries typically need special protections to ensure proper tax compliance. This is because these businesses often have difficulties keeping track of their sales. What’s more, these businesses are at a heightened risk for audit investigation. Accordingly, they need to be certain that can prove their sales and deductions with records and documentation.

Cash Business Tax Underreporting

State governments, including New York, are aware that many cash businesses under report business income and pocket sales tax. This is why cash businesses come under investigation more than other businesses. State tax audits are similar to IRS audits when it comes to tax collection. That is, they focus their efforts in areas which are likely to yield the best dividends. And this means focusing on those businesses which are most likely to violate sales tax laws.

In this post, we will give basic cash business tax advice and offer best practices. If you are a small business owner and operate or manage a cash-based business, you should take this tax advice to heart. Make no mistake, even if you install the best record keeping software or go the extra mile to comply with the tax codes, you are still at a higher risk of audit. Again, this is simply because of the statistical likelihood that you underreport income.

Keep Duplicates

One of the best ways to ensure that you will be able to substantiate your sales is by keeping two accurate copies of your books. Every receipt or transaction record should be duplicated so that you have an extra set in the event that one set is ever lost. This may seem like a very intuitive, overly-simple piece of advice, but it’s really quite important. The most common problem which cash-based businesses run into is failing to keep adequate records. This can be avoided by keeping duplicates. Be sure to store your duplicates in a safe place which allows for quick and easy retrieval. When state auditors knock on your door, having duplicates will prevent you from ever becoming nervous.

One case we’re currently dealing with would benefit from adequate cash payment records. In this ongoing matter, the client made numerous payments from cash on hand and reported them to the Internal Revenue Service as tax deductible expenses. The problem is that while the IRS recognizes that businesses operate on a cash basis, its agents aren’t willing to accept a tax return with less than adequate supporting documentation. In our ongoing case, the client is currently facing a civil fraud penalty of 75% of the underpayment.

Employ a Competent Accountant

Another reason that a cash business runs into tax issues is because they fail to hire and keep a qualified accountant or CPA. Hiring an accountant may seem like an unnecessary expense, but the truth is that the services of an accountant are really essential. This is especially the case for a business with substantial cash transactions. Cash-based businesses need special help in keeping track of all income and expenditures, particularly cash payments.

Suppose that your business receives a visit from the New York State tax authorities; if you have an accountant, you’ll have all your documents ready and in place. You’ll be able to substantiate your sales to the satisfaction of the authorities. This alone will make the expense of the accountant worthwhile. Plus, many accountants will be able to help you cut costs, take advantage of obscure deductions, and do other things to save money. Accountants can help virtually all businesses, but cash-based businesses will find them particularly useful.

It Helps When Quickbooks Matches Your POS System Data

One recent case we had related to an Upstate New York restaurant owner. It seems that while he had a competent CPA prepare his sales tax returns based on his Quickbooks information, the Quickbooks data didn’t accurately reflect his Point of Sale, or POS system data. Whether this was intentional or not, we don’t know. Suffice it to say, however, that we thought he was lucky to not face either criminal charges or an extension of his 16 month audit based on fraud charges.

Hire an Attorney for Sales Tax Compliance

Sales tax laws are often very complicated. This is definitely the case for sales tax laws in New York State. One way a cash business can help itself is to hire a competent tax attorney. A tax attorney will be conversant with New York sales tax law and can advise the business on how to remain in compliance. The State of New York is serious when it comes to enforcing its sales tax laws. Being charged with sales tax evasion is something that no business wants to experience. Cash-based businesses are at a heightened risk for this charge just because of the large number of cash transactions, and so it’s a wise idea to invest in a tax attorney.

Don’t Install Tax Zapper Software

This may seem like another “no brainer,” but it’s also worth emphasizing. No matter what any tax zapper sales agent tells you, don’t buy and install it in your cash-based business. Tax zapper, aka “sales suppression” software, is a technology that creates a phony set of books in addition to your actual set. The zapper software is installed on your register and can delete or omit certain transactions from your books. Businesses sometimes then use the faulty records to underreport their sales tax obligation.

Zapper Software is Widely Available

This software is sold by technology companies throughout the country and across the globe. Zapper software salespeople tout the merits of the software, but you should resist any urge to buy and install it. Even if you never use it for nefarious purposes, it’s best to simply avoid it altogether. If the New York State tax authorities become aware of it, that in itself creates a whole set of very unfortunate problems. In the words of former First Lady Nancy Reagan: just say no.

Reach Out to MC&C for More Information

Cash-based businesses have unique challenges and issues when it comes to tax compliance. These businesses need to go the extra mile in order to prevent any unwanted complications. At Mackay, Caswell & Callahan, P.C., we regularly handle cases related to federal and New York State audits. We are very familiar with NY sales tax compliance issues, NY state business tax debt, and other related topics. If you’re a cash-based business and you need tax counsel, reach out to us. One of our top New York City tax attorneys can assist you with more information.

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