Here are 3 simple tips for keeping proper records:
1. Whenever you buy anything for your business, keep the receipt!
Not only will this make record keeping a lot simpler, but if you are ever audited (having your tax return reviewed in detail by the IRS), you can prove your expenses, and save yourself money.
2. Write down all your expenses and income as they happen.
As your business grows, you’ll have more and more activities to keep you busy. The last thing you’ll want to do each April 15 is to organize your records for the year. So, it’s a good idea to write down all your financial activities as they happen. You’ll find preparing your taxes will take much less time if you are organized.
3. Learn how to save money on your taxes.
As you learn about taxes, you’ll find that there are many deductions (expenses that reduce your income, and therefore your taxes) you can take that are not obvious. When using your home office, you may be able to deduct (at least partially) repairs you make around the house, utilities, your home’s value at the time you start your business, and more.
The more you know about taxes, and the more organized you are in keeping records, the more time and money you’ll save at the end of every year!
What happens if you don’t keep proper records?
Individuals with small businesses are the most likely to have their tax returns audited by the IRS. If you don’t have a receipt, you will likely lose the deduction and owe the IRS money.
And while an audit does not have to be feared, you should be prepared – the more organized your records, the easier it will be to prove your case.
If you don’t have one, get a file box and some folders at your local office supply store (these supplies are deductible, so keep your receipts!) and create a filing system for your business. Put all your receipts in the proper folders, and put them in a safe place.
Another way to save yourself time is to record all of your business transactions – expenses and income – on a spreadsheet on your computer. Keep a column for income, advertising, supplies, etc. You don’t need to be a computer expert. But keeping accurate, organized records will help you save time when you fill out your taxes at the end of the year.
And it can help you plan, by giving you a snapshot or your financial progress whenever you need it.
Which may come in handy when you need to place ads, borrow money – or take a much needed and well-deserved vacation!
Have a Federal Tax issue you are dealing with? The Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic can consult with you to provide advice regarding your IRS tax issues, and/or potentially act on your behalf for FREE if you qualify for assistance (come to a clinic intake session)!
Jim Floyd is the Staff Enrolled Agent at the Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic.
As an Enrolled Agent, Jim is a federally-licensed tax practitioner with unlimited rights to represent clients before the Internal Revenue Service. This means he is unrestricted as to which taxpayers he can represent, what types of tax matters he can handle, and which IRS offices he can represent clients before. Enrolled agent status is the highest credential the IRS awards.