Keeping good financial records is as important a task as any for every business regardless of size. Retaining and organizing transactions relating to both income and expenses will help you manage your cash flow and make sound business decisions. Additionally, it can provide peace of mind and protect you in case of an audit.
It’s critical that entrepreneurs ensure that we take advantage of every tax situation,” says Denise Winston, founder of Money Start Here, a financial education company. “That means treating receipts like cash, not trash,” she says. “Think about it: each $100 business expense receipt could be worth up to $50 when it comes time to filing your taxes, depending on your tax bracket.”
To help insure you pay the lowest possible tax allowed by law we have a few recommendations for keeping good records.
Designate a place for receipts: Train yourself to naturally put receipts in a box or envelope instead of on a table or car dashboard where they can be easily lost.
Track your mileage: Keep a small notebook in your auto and note the beginning and ending mileage, date, destination, and purpose of each trip you drive for business. You will need a mileage log to claim auto expenses regardless of how many gas receipts you collect.
Use what you’re comfortable with: Bookkeeping is a necessary evil for every business. That doesn’t mean you have to invest in expensive and complex software. Base your accounting system on what you’re comfortable with. Using paper journals can work just fine for some small businesses just starting out. If you have a computer, chances are you have Excel. Take a beginner class or view YouTube videos on how to use valuable functions like sum, average, and data sorts. These functions will save you a tremendous amount of time and can be learned in just a few minutes.
Outsource your accounting: Of course as your business grows you will need to have a computerized system like QuickBooks. Outsourcing your books to companies like Tarm Tax Services can save you from having to purchase these systems yourself, while providing greater efficiencies in time and accounting.
Retain your records: The length of time you should keep a document depends on many factors. The IRS says “you must keep your records as long as they may be needed to prove the income or deductions on a tax return.” Most employment records must be kept at least 4 years. Income and expense receipts should be kept a minimum of three years and generally tax records should be maintained three to seven years from the due date or date last paid. Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Keep in mind that if the IRS suspects fraud or you fail to file a return it may be necessary to prove income and expenses for as many years back as they deem necessary. Some records should therefore be kept indefinitely.
Preserve your receipts: Many receipts are printed using thermal ink. These receipts will fade over time making them difficult to read and eventually useless. Keeping them in a dark dry place will help preserve them a little longer. If the receipt has already faded try holding the receipt at arm’s length and point a hair dryer at it to heat up the paper. Use the highest setting for the hair dryer to get the maximum amount of heat.