Record keeping is the key aspect to maximizing small business tax deductions. Logging your receipts and deductions throughout the year not only allows you to prove your write offs, it also helps you remember them in the first place. Below are a few reasons why record keeping is necessary, as well as a few guidelines on how to log efficiently.
Proof of Deductions
Meticulous record keeping is particularly important to provide proof of the deductions that you are taking for your small business. If audited, you will need to back up every deduction that you have claimed. Receipts, logs, financial statements, invoices and several other documents must be saved.
Working Efficiently with Tax Consultants
Keeping good records comes in handy for 2 different reasons when dealing with a tax consultant. The first being that the less time you spend with your consultant, the less you will get charged. Having your records in order will help to reduce stress and cost. The second reason to keep detailed records is because your consultant may catch something you wouldn't. There are many expenses in small business that you have, but may not know are deductible. Many do not think to include dry cleaning or extra child care as well as several other overlooked deductions when filing their taxes. A tax consultant can help point these out to you.
Keeping Efficient Records
To best keep records for your small business tax deductions, there are a few key steps to take.
- Using the Proper Supplies: Having separate folders or binders for your business car, bills, travel and office supplies can make it easier to maintain. File these binders where they are most convenient for recording. When the binder is in your glove compartment, you can quickly log mileage or save a receipt from gas.
- Labeling and Filing Receipts Properly: On a day-to-day basis you may have several different errands to run for your business. Fueling your car, picking up dry cleaning, wining and dining clients and paying bills, all involve separate documentation. They are also all things that you can include on your small business tax deduction. Immediately labeling the date, details and costs of your errand on the receipt or in the proper folder can save you from having to remember weeks later what you did 3 Tuesdays ago. Forgetting an errand here and there adds up and can cost you.
- Saving Your Documents: While it may seem drastic, it is smart to keep all documentation for your business and taxes for at least 7 years. Within those 7 years you can be challenged on anything you report. Cancelled checks, stubs, bills, receipts and charitable contribution documentation should all be filed and accessible if need be.
- Documenting Big Items: It is important to document every big item from a car to a fax machine. Save receipts when they are bought for tax deduction purposes as well as any other paperwork or warranties that can help you in other ways.