- Font:
- +
- -
Many Americans often ignore or quickly say "No" when asked whether they want a receipt, but not small-business owners. Is this because they spend hours upon hours organizing them during the year and look forward to turning them into their accountant? Um, not necessarily. Savvy business owners simply know how to keep receipts because if they don't, their tax return could be in peril. The reality is: Receipts are audit protection and we have to take that seriously.
This past year Betty Ong, a real-estate broker in Northern California, was another casualty of tax court and lost to the Internal Revenue Service. Ong deducted thousands of dollars for travel, meals, entertainment, automobile and cellphone expenses, but like many small-business owners, didn't keep the strict substantiation requirements of the IRS. While Ong was able to produce books and records proving the expenses were incurred, she failed to show receipts, notes and documentation that the expenses were business related. In the words of the court, the only evidence she presented to support the business purposes of her expenses was her "own broad self-serving testimony and uncorroborated notes."
Sadly, Ong is just one of many business owners who don't keep proper records and lose in audits or tax court every year. The reality is that you may be entitled to these deductions, but if you don't follow the rules, you could be left out in the cold. Here are some basic tips:
1. Keep all receipts.
This point cannot be overstated. I was recently helping a client
with an audit recently 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.
Related: How to Keep Your Zen During Tax Season
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.
Related: How the IRS Classifies Independent Contractors
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."
Related: 10 Questions to Ask Before Hiring a Tax Accountant
Copyright © 2013 Entrepreneur.com, Inc.
“ ”