March 19, 2024

Archives for May 2015

Be Better Next Time Around!

It’s done! Finally, filed my taxes just in time for the deadline of April 15. This year, I got upset with myself as it took way too much time to get it done. It was not the actually online completion of the interview return preparation, but getting all my backup documents ready to enter in the software that caused my mood to be dismayed.

Check off what's done!

Check off what’s done!

Many people that know me think I’m organized and have everything neatly filed away. Until a certain extent that is correct. I have a filing system for all paper statements and invoices. I also have a filing system on my computer, but I have to admit that they are not very effective if you print everything at the time that you file the income tax return.

 

Keep For 3 Years

Since you have to keep receipts, statements, invoices and other documents to support your income and your expenses for at least 3 years, there is a lot of paper to keep. The IRS prefers hard copies of the supporting documents. If you, like me, are a single business owner it is easier to keep the required paper backup for Schedule C details. However, if you have staff that you pay or a production manufacturing, inventory and other real store features, you will use an electronic accounting system that will produce reports.  This does not mean that you than can shred all invoices and other papers that are important for tax evidence.

An alternative to keeping paper copies is to scan all receipts, tickets, checks, etc. and keep the supporting materials in digital format. This works well if you do regular back-up of the computer files and keep them in a safe location. Whatever medium you use, it needs to be able to produce any document that the IRS asks for in case of an audit. The IRS has the right to go back for 3 years or longer depending on the reason for the investigation. More details can be found in the following publications:

Starting a Business and Keeping Records

Travel, Entertainment, Gift and Car Expenses

 

Organize Your Stuff

This weekend I explored some online suggestions for implanting a more effective system. Here is what I found in my research of this topic. It is important to look at the significance of the document. Original certificates (birth, marriage, citizenship, school, etc.) need to be in a safe place. This also applies to insurance documents.  Best is to scan them first, so you have a backup that is always accessible, and then put them in a fireproof safe at your house or in a lock box at your bank.

Next, all statements from utilities, decide to go paperless, so you can access them on the website and download into a folder either on your computer or in the cloud. Statements from bank accounts, credit cards, or retirement accounts can be handled in similar fashion. However, if you have big ticket items that have a warranty or payments for large incidental events such as a wedding, a hard copy can provide a proof of payment that you can keep with the invoice.

To go digital, might be a bit of work to set it all up, however, this is probably the easy part. If you rather have paper copies, you need to set up a large filing box or a drawer file cabinet that can keep hanging folders. Store the files that you frequently use in the front and those that keep important records for occasional need more in the back.

What about all those receipts that you need to keep as supporting documents? If you do not want to keep them in a shoe box, then you might want to sort them in the different expenses that are reported on schedule C. Here is a list of expense categories that an entrepreneur, small business owner or internet marketer can deduct. Depending on the kind of business and the volume of transactions you can have all or just a few. Choose the ones that make sense and add the others during the year. I will explain each more in depth in a future blog post.

 

Expense Categories on Schedule C:

Advertising

Car/truck

Commissions and fees

Contract labor

Depreciation

Employee Benefit Program

Insurance

Interest for mortgage

Legal and professional services

Home office

Supplies

Licenses and taxes

Travel, meals and entertainment

Utilities

Wages

 

One way to be neat and organized!

One way to be neat and organized!

What System Suits You

The filing system can be simple and does not have to cost a lot. One method is to use envelopes for each category. Personally, I found an unused accordion file folder that I will use for 2015. These expanding file folders come in all forms and sizes and are not very expensive either. You now can file the receipts as soon as you get them, or collect them and sort them once a month if that suits better.

For many people the burden of keeping receipts is a task that often turns into a search for misplaced and missing items. Since many savvy business persons have smart phones, it is much easier to download an app and then make a picture of the receipts on the go. Some Expense Trackers are only for Apple iOS and others only for Google Android system. Some are free and others have a small monthly fee. Besides organizing all receipts and payments, these apps also help to keep tab on what  you spend. If you do not have a fancy phone to download apps, many offer web based programs too. And if this is still too cumbersome, pen and paper or an excel workbook can serve the same purpose.

I hope this information gave you some ideas on how to prepare and organize tax supporting documents more efficiently. If you have a tip on how to keep track of all business expenses, feel free to comment.

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