August 17th, 2017 | By: The Startups Team | Tags: Management, Productivity
“Would you like a receipt?” We hear this question so often in daily life, we almost just tune it out with an automatic “No thanks.” But, keeping track of your receipts is actually very important, especially for small business owners and entrepreneurs. This is because if your tax returns are audited they need to be able to meet the strict substantiation requirements of the IRS.
Mark J. Kohler, author of The Business Owner’s Guide to Financial Freedom, notes “It’s true that you could argue what’s called “the Cohen Rule,” that you can use “other credible evidence,” or rely on IRS Publication 463 which says that you don’t need to keep receipts for expenses under $75, but why get into a fight? Arguing with the IRS can cost you a lot more time and money than just keeping your receipts.”.
And relying on bank or credit card statements isn’t enough because while they provide proof a total purchase, they don’t show the itemization and detail the IRS requires. So, now that we know why it’s important to keep our receipts, how do you keep all those little bits of information organized?
The first habit to get into (especially if you’re trying to organize your receipts for taxes) is making a small note of the business purpose on the receipt. Whether you jot the note down immediately or set aside time at the end of the day, week, or once a group of purchasing is done (at the end of a business trip for example), you’ll want the purchases to be fresh enough in your mind that you can label them correctly.
Be sure that you make the note something that will allow you to categorize the expense easily later on. Simply writing “dinner” may not be enough to jog your memory if you’re audited a year later. But, a note like “Dinner Meeting w/Apex Inc.” will be a clear indicator of a business expense no matter how much time has passed.
If the expense is obvious or recurring, like the monthly purchase of printer paper and stamps for the office, a note may not be needed. However, if there are both personal and business charges on the receipt, you’ll want to underline or highlight the business expenses and note a separate total.
For many people, part of the frustration of organizing receipts comes from sorting, filing, and storing all those bits of paper. So, skip the bulky accordion files and boxes by organizing your receipts electronically.
Fortunately, there are plenty of options for going green. There are relatively inexpensive receipt scanners available at any office supply store, or you can simply take a picture of the receipt with your phone (and send it to your amazing virtual assistant to organize for you!). Just remember to get a clear picture of the entire receipt and ensure you can see the date, address of the business, and total purchase amount.
Storing your receipts electronically protects you from the possibility of ink fading or damage that makes the text unreadable. This also makes them more easily searchable as you can keep the files clearly labeled on your computer by year and category. Then you can find or print out only the ones you need, and you can keep them for as long as you want. But, be sure to backup all your info in case of computer meltdowns, viruses, and other cyber hazards.
Now that you’ve captured all of this data, the next step is getting it organized by category. This will make tax time a breeze, and allow you to refer back to any transaction without hunting through tons of files. Here are some examples of common categories for tax deductible purchases:
Another crucial step in organizing your receipts is to stick with the process consistently. Try to keep expenses separated by paying with a “business only” credit card or bank account when possible, and avoid paying in cash.
You may tweak your system in small ways over time (by trying a new app or management system for more convenience), but using the same overall method of keeping the receipts, capturing the info, and categorizing them each year will keep your information consistent, reliable, and easily accessible to you.
Remember, it’s been scientifically proven that it only takes 2 months to form a new habit, so start your journey toward organized peace of mind today. Your future self will thank you!
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