Organize Receipts for Taxes |

Tax Filings are Easier When You Organize Receipts Year ‘Round

It’s best to keep on top of your small business tax paperwork year-round, but, don’t worry; you still have plenty of time to get organized for your future filing if you start now. Since each expense that you incur during the year is likely to represent taxes that you don’t owe to the IRS, it pays off to closely keep track of all money spent on your business.

The following tips will help make that tax filing easier while creating a system that you can use from this point forward. While I’m not a tax expert, and I don’t even play one on TV, I use these methods, so I can attest to the fact that they really help.

Identify Which Receipts You Need

Keep in mind that paper receipts are not needed for every type of expense, as long as you have valid electronic records. That said, you’ll feel more confident when you retain too many receipts, rather than too few. When retaining receipts, it’s a good idea to immediately note the purpose of the expenditure right on it. To avoid loss, affix small paper receipts to a larger sheet of paper.

Keep in mind that a canceled check alone does not provide the evidence you need. The following is probably not a comprehensive list of the receipts that you must save, but it includes the items that apply to most small businesses:

  • Office supplies and equipment: When you run out to buy emergency paper clips and other office-related incidentals, retain that receipt. Similarly, it’s a good idea to print out copies of online orders that include product costs and taxes paid. Of course, you can often return to your online account at vendor sites for evidence, but I it’s easier to retain printouts at the time of purchase. Then, note the payment information when the time comes.
  • Home-related expenses (for home-based businesses): If you run your business out of your home, then you can write off a portion of your home costs, generally based on the percentage of your home used to operate your business. Keep receipts for all home repair costs, and it’s probably a good idea to retain copies of bills for utilities, water, refuse pickup, and more.
  • Business travel and entertainment: Whether you regularly travel on business, or if you just occasionally take clients to lunch, you want to retain receipts for every expense that you incur. Make sure that you note the purpose of the event, including dates and the people whom you treat to a meal.
  • Equipment costs and depreciation: Rather than writing off the full cost of much of the equipment that you buy, you may have to write it off over time. As the IRS explains, you need to understand when depreciation applies, and when you can write things off in full when you buy them. Either way, you need evidence of the original price paid.

Develop a Maintenance System Right Now

There is no time like the present to start adding sanity into your life. If your receipts are currently stuffed in a shoe box, clear off a large table. Then, sort them into categories, based on where they will go on Schedule C or elsewhere on your tax return.

You already identified the receipts that you need to save, but you may still have questions about how the IRS wants you to classify each expenditure. Be sure to check out the IRS information about deducting business expenses. It never hurts to do other online research — as long as the sources are reliable.

If you use software to prepare your own tax returns, you will probably find a great deal of advice on the software company’s website. Since the software typically offers a question-and-answer method for entering your information, you will speed up the filing process by having the information properly-organized.

Of course, if you use a tax accountant or service to file, be sure to ask them for tips on how to organize your information. Perhaps you will even save a bit of money if they can get through your filing more quickly.

Record Expenses Throughout the Year

Don’t wait for the year to end to start recording every expense. Even the small ones quickly add up to noticeable tax savings. If you operate a really small business, you might be using spreadsheets, but most businesses benefit greatly from a bona fide bookkeeping system like QuickBooks.

It takes much more time to enter all your expenses at year-end, rather than doing it throughout the year. For one thing, receipts are easy to misplace and forget when you wait too long.

You can do this daily, weekly, or monthly. After trying them all, I found that entering them daily is painless. For me, even waiting a week makes it seem like work.

Everything Counts

When preparing receipts for your next tax filing, understand that every allowable deduction counts, as long as you can prove it. If you have ever heard that the IRS can penalize taxpayers who don’t take every allowed deduction, this simply makes no sense.

Naturally, the IRS expects a full accounting of all income, and they probably already have records of most of it. Still, they are unlikely to care if you neglect to offset that income with every expense. Since I’m no tax expert, I know that I’ve missed taking a few deductions along the way. So far, I’ve seen no IRS representatives at my door to hand me extra cash — or to arrest me for not taking deductions.

If you’re concerned about a potential small business tax audit, don’t worry needlessly. Based on a number of details, the historical small business audit rate is generally less than two percent. Keep your receipts and other applicable paperwork well organized, and hold on to it for the required IRS time period. If you receive an audit letter, you might want to get professional help; but, if you decide to go it alone, you will rest easier, knowing that you have proof of every expense that you claimed.