Maintaining a good system for keeping tax records is essential for any small business owner. Proper tax records will save you stress come tax time, bring you larger deductions, and keep you prepared in the face of a potential audit down the line. Tax records consist of any proof of payment for expenses related to your business, which then help substantiate your tax claims and qualify you for deductions.
Knowing what you can deduct from your tax bill can give you a sense of the types of records you should keep. The IRS allows you to deduct costs that routinely show up in your industry and expenses such as:
• Business Expenses
Keep track of every payment you make that is relevant to running your business. This includes advertising, benefits programs, utility and phone bills, rent, legal services, memberships to professional associations, publications, insurance, office supplies and more.
• Auto Expenses
You can either deduct for every business-related mile on your car or claim a flat standard mileage rate — a specific dollar amount for each mile you drive — that you can multiply by your business mileage to find your deduction.
While using this standard rate is easier, you are likely to get a larger deduction by tracking your actual mileage, plus fees from tolls and parking. Technology has made tracking mileage a lot easier in recent years through mileage tracking apps like MileIQ. For a starter guide on which apps to use, check out this list of recommendations.
• Meals and Entertainment
Meals must relate directly to your business to be deductible and they cannot be excessive. The IRS limits this deduction to 50 percent of the cost of the meal. For your records, keep all receipts and include the business reason for the event, the amount paid, time and place, type of entertainment (meal, etc.), and occupations of those accompanying you.
• Travel Expenses
Payments you make while traveling for business can be deducted as well. Keep track of the amount you spend on meals, lodging, and transportation. For these records, be sure to log the dates of travel, the city, and the reason or business benefit for each expense. Cleaning, laundry, telephone, fax, and Wi-Fi are also deductible.
Proper tax records will save you stress, bring you larger deductions, and keep you prepared in the face of a potential audit.
Tips and Tricks for Proper Recordkeeping
Knowing what payments to keep track of is only half the battle — now that you know what you should be logging, it is important to keep it organized. Make tax season a little easier by following these tips:
• Use Software
Having reliable accounting software is important for keeping all your records in order and easy to analyze. Look into software like QuickBooks, Xero, or Wave by using comparisons like this one from Investopedia.
• Keep Source Documents
You should store all receipts, payment slips, and other business-related papers in a safe filing location. It is also best to keep scanned copies of these papers on a hard drive for back up. Thankfully, there are many receipt scanning apps that have made it much easier to keep track of your transactions. This list of recommendations from HubSpot can help you find the right app for your business.
• Use Bank Statements for Electronic Payments
These days, a lot of electronic transactions have eliminated the need for paper receipts. For credit cards and e-payments, keep your bank’s financial statements as a source document. Look for the amount transferred, payee name, and date of the transfer.
• Stay Up-to-Date Each Month
Taking the time to consult your records at the end of each month is an easy way to ensure that your records are kept properly. It is better to sit down with your records once a month than to find yourself missing a necessary document the week before the tax deadline.
• Consult a Tax Professional
It is always a good idea to have a tax professional you can consult for your small business. Experts like these can catch anything you may have missed for lack of extensive knowledge of tax codes.
You should store all receipts, payment slips, and other business-related papers in a safe filing location, with scanned copies as backup.
Good Recordkeeping Can Save You Trouble
When in doubt, it is better to save something you may not need when it comes time to file than to find you need something you threw away. Remember that the IRS provides resources and reading that you can access to ensure that you’re filing taxes properly. Finally, while we offer this initial guide as a helpful first step in understanding your tax records, always consult a tax professional when managing your specific tax situation.*
With a little preparation, tax season can be a breeze. Maximize your deductions as an entrepreneur and save yourself a headache this year by building good recordkeeping habits today.
*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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