As we mentioned last time, tax time is coming up rapidly, and many are scrambling to get a handle on all their deductible items. We talked about the wrong way to organize for tax time, so now’s the time to start thinking about the right way t prepare your paperwork for your bookkeeper or C.P.A.
The key to organization in any instance is planning, and planning is a process you practice, and keeping filings and deductible items is no different. You can save headaches for your self in terms of lost time and money just by creating an action plan for 2017 that will help your C.P.A. process your taxes that much faster. C.P.A. Mark J.Kohler recommends seven great steps that will help keep you organized for tax time & keep you covered in case of an audit:
1. Keep all receipts.
This point cannot be overstated. I was recently helping a client with an audit in which the IRS agent asked for every receipt to support my client’s travel expenses taken during the year. 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.
2. Make notes on receipts about their business purpose.
This is an especially great idea for dining and entertainment expenses. It can be easy to remember why you bought a fax machine (Do people still buy fax machines?), but it could be a lot harder to remember who you went to dinner with at Red Lobster three years ago and what the business purpose was.
3. Scan receipts and keep them at least six years.
Yes, the IRS can come knocking for documentation and audit you up to six years back in some cases. However, hoping that the ink on your Home Depot receipt hasn’t faded away is a whole other issue. The IRS allows taxpayers to scan receipts and store them electronically. But keep a back-up, because crying about your hard drive crashing isn’t going to help you any more than “My dog ate my receipts.”
4. Take a picture with your smartphone.
With today’s technology, it’s easy to say “Forget the receipt, I’ll just make a note on the receipt and then take a picture of it”. This is a great idea and there are a whole host of apps for the iPhone and Android that can help you better track your expenses.
5. Keep a daily business journal.
A daily journal for your business may sound like overkill, as if you weren’t all busy enough. However, it can be simply accomplished by keeping a good calendar in your Outlook or Google Calendar. I was in an audit representing a taxpayer about two years ago, in which the auditor actually asked for a printout of my client’s Outlook calendar to substantiate various deductions being claimed. Several good legal and other reasons to keep a detailed schedule of your day exist, even if you add these details at the end of the day.
6. Don’t rely on credit-card statements and canceled checks.
These are important, yet insufficient without receipts. The IRS may see that you spent $422 at Staples, but it doesn’t know what you bought. It could be movies and useless technical gadgets, and not the computer paper and supplies you expensed them under. For bookkeeping purposes, these records are fantastic, but the detail is critical for an IRS auditor.
7. Stay away from cash.
Using cash for expenses seems to be the absolute death-nail for my clients trying to keep good bookkeeping records and documentation for an audit. Cash is hard to track, easy to spend, and nearly impossible to reconcile with receipts. Stick to debit and credit cards to better track your expenses and then combine them with receipts.
It’s no secret that audits will continue to only increase and the rules will be only more strictly enforced. The best course of action for small-business owners is to be prepared with a better set of books and receipts for all of their expenses, staying one step ahead of the “tax man.”