Tax season—two little words that manage to stir dread in business owners across the nation. Most of us small business owners know it is necessary to keep all documentation when spending money. Whether it is a software purchase, office supplies, or lunch at a networking event, receipts need to be kept and noted with the intent for the purchase. Receipts are audit protection, and one of the more serious aspects of owning a business.
But what good is a receipt if you can’t find it or have no idea what it’s for?
Organizing your receipts is an important aspect of owning a business, and organizing them with an easy-to-navigate system is even more important. The more work done before tax season, the easier it will be for your accountant to prepare your tax documents for annual filing. The preparation work includes organizing your documents.
Imagine you haven’t organized your receipts at all during the year (maybe you’ve already lived this nightmare). Do you have time to wade through a year’s worth of bank statements and receipts to match them up and categorize each expenditure appropriately? The answer to that question for most is a resounding no.
So how do you keep your receipts organized all year long to make tax season a breeze? Here are a few tips you can implement to make tax season no big deal.
1. Start by Keeping All Receipts.
Yes, keep every single receipt…even the coffee receipt from McDonald’s for the networking meeting you attended.
If you are audited, the auditor will request all the receipts.
But, Lorie, my chances of being audited are really low.
You may think your chances of being audited are low, but a slim chance doesn’t equate to no chance. There is no guarantee you won’t be audited. And if you are, you’ll wish you’d have kept all your receipts.
You could argue the Cohen Rule, that you can use other credible evidence, or rely on IRS Publication 463 which states you don’t need to keep receipts for expenses under $75. But, if you are being audited it will not work to your advantage to not cooperate with the auditor. And, it won’t be to your advantage to argue these rules with him. He knows the rules too. Arguing can cause the auditor to dig deeper than maybe he would have intended at the onset of your audit. Is it worth it to you?
Now that you know you have to keep all your receipts, you’re probably wondering how you’re going to keep track of what each receipt was for. How do you back up each expenditure as a legitimate expense for your business?
2. Take Notes.
Write directly on the receipt. Declare on it in ink the purpose behind the amount you’ve spent. This is an especially helpful tip for all receipts related to dining out and entertainment. Is it for a meal at a networking event? Write that on the receipt. After all, can you remember who you took to dinner six months ago? How about last year? What about three years ago?
Some purchases are easy to remember: a new computer or printer for example. But don’t take anything for granted. Assume that you’ll forget because eventually you probably will.
3. Remember Receipts Fade.
Most receipts are printed on thermal paper. What does this mean? It means the information originally printed on the receipt will fade and eventually disappear. To preserve the information on the receipt, scan it. Keep an electronic copy of your receipts.
In some instances, the IRS can audit you six years back. The IRS allows you to scan and store your receipts electronically knowing that thermal paper images fade over time. So, even if you could produce the Office Depot receipt showing your computer purchase five years ago, the receipt being legible is another story. Scanning to your computer is a good step; backing your computer up to the cloud or an external hard drive is the ideal solution.
Just remember a backup is only a backup. That means it should never become the only file to contain that information. You should keep the original file somewhere separately than the backup. Otherwise, there’s no point in having a “backup.”
4. Take a Picture.
Don’t like scanning your receipts? Take a picture with your phone! Great solution! There are a ton of Android and iPhone apps that will store that scanned image. Many smartphones are already connected to a cloud service that will automatically store your images. Don’t forget to take the next step and go in and organize those images.
Also, you’ll probably delete the original file from your phone since storage is limited. Don’t take for granted your image files will live forever in the cloud. Make a backup.
5. Make Your Planner a Business Journal.
Like you don’t already have enough to do, I know. But this can be a simple task by using a good calendar in Outlook or Google. If audited, the auditor can ask for a printout of your calendar. There are many good reasons, legal and otherwise, to keep a detailed schedule of your day. Develop a habit of spending 10 minutes at the end of the day updating your calendar to include an accurate picture of your day, including where and how much money spent.
Written documentation for your mileage and money spent is the best defense you can have on hand to justify the deductions on your taxes.
6. You Need More Than a Bank Statement.
Bank statements, credit card statements, canceled checks—these are important, but without receipts, the IRS will consider them useless. Your credit card statement showing you spent $523 at Office Depot could be for movies and technical gadgets and not a business-related expense like paper and other office supplies. Details are critical for an IRS audit.
7. Document, Document, Document.
This means staying away from cash transactions. Write a check. Swipe your card. Keeping good bookkeeping records and documentation for an audit makes cash the kiss of death. Cash is hard to track, easy to spend, and almost impossible to reconcile with receipts. You’ll either end up claiming something you shouldn’t, or you’ll miss out on an opportunity to claim something you should.
Debit and credit cards are a better option to use for tracking expenses, along with the receipts.
8. Implement a System.
Implementing a system for maintaining your receipts will eliminate headaches if you are audited. They will also eliminate headaches at tax time; your accountant won’t legally be able to get you all the deductions you deserve without documentation.
Take the first 7 suggestions and implement those one at a time if it feels too overwhelming to implement them all. Implement a different system than that suggested (as long as it includes keeping receipts digitally). Whatever you do, just implement a system! It’s the best strategy for maximizing your tax return and minimizing your risk of being penalized by the dreaded IRS.
For help implementing these steps, or if you’d like to hand the whole thing over to someone who will keep it all organized for you, contact us!