There is a famous quote that goes “in the world; nothing can be said to be certain, except death and taxes.” And when it comes to being a business owner, not keeping your receipts organized for tax purposes can also mean death – for your business. Unfortunately, many people find this out the hard when they get audited by the IRS.
The harsh reality of tax law means that even though you might be entitled to taxable deductions if you don’t keep those deductibles organized, not only will you not receive them, you might end up getting a fine or worse.
Organizing receipts, however, is not just in case you get an audit. It also makes your life easier and saves you lots of time when you have to file your yearly taxes. To help ensure you are ready and organized, here are some essential tips.
#1 Categorize and file
It’s essential to have a good filling system in place for receipts. This allows you to file new receipts easily and retrieve older when needed. The better organized you are, the more time you will save when tax time comes around.
There are two parts to effectively organizing receipts. The first is to categorize them according to type. Some common categories for tax deductibles include: Check out a full list here.
- Advertising and promotion
- Bank fees and loan interest
- Legal and professional fees
- Meals and entertainment
Once you have your categories outlined the next steps to create folders to file your receipts. Purchase several folders (you will find them in any office supply store) and label each of them by category. Then, place receipts in their appropriate folder.
When putting receipts in folders, place them in chronological order. Put recent receipts in the front of the folder and older ones at the back. You can also do it in inverse order, newer to the back, and older to the front. However, regardless of the order you use, make sure to keep it consistent across all folders.
#2 Add notes
Get into the habit of writing a little note on each receipt about its business purpose. This is really important for dining and entertainment expenses and other on-off purchases. You can write the note immediately, or set some time aside at the end of each day or week. However, the sooner you do it, the better, as the purchase will still be fresh in your mind.
Be descriptive when writing your notes so that you can accurately recall the nature of the expense. For example, don’t write ‘lunch’ instead write ‘lunch with Billy from WordEX.’ This way, even if you get audited years later, you will remember exactly what you purchased.
#3 Scan or Photograph
The IRS can go up to six years back during an audit. However, there is a chance that the ink on some of those old receipts might fade, and if that happens, the IRS won’t give you a pass. This is why it’s a good idea to have a digital copy of all your receipts.
You can take a picture of receipts with your phone, or you can buy a receipt scanner, which you can find in most office supply stores. When photographing or scanning, capture the whole receipt and ensure the date, purchase amount, and the business name and address are clearly visible.
Just like with physical receipt folders, organize your digital copies by category and date, so that they are easily searchable and retrievable. In addition, it’s a good idea to keep a back-up of these digital copies just in case the hard-drive crashes, or you lose the USB key where they’re stored.
#4 Statements and canceled checks don’t count
Some business owners make the mistake of thinking they can use bank and credit card statements or canceled checks as proof of purchases; however, the IRS needs the actual receipts.
Your credit card statement might show that you spent $800 at Best Buy, but the tax man (or woman) will want to see the items you purchased, just to make sure you didn’t buy an Xbox or some other gadget that has nothing to do with your business.
#5 Avoid using cash
Cash is hard to track, both for IRS and also for you. If you have lots of cash purchases, you will find it difficult to reconcile your spending with receipts. If possible, it’s much better to use a credit or debit card for business expenses. You can then easily combine your statements with your receipts.
Over to you
For the IRS, everything is black and white; there are no grey areas. If you don’t have your receipts organized and accounted for, they won’t take it easy on you. Saying the dog ate some receipts won’t fly.
However, the good news is that being organized is not hard; you just need a system in place that allows you easily file, retrieve, and account for every last receipt. You do that, and the IRS will be happy, and you won’t be stressed when it comes time to make your tax returns.