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Focus on finance: Save yourself the scramble

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Column by Cathy Williamson

By Cathy Williamson

Question: I know it seems crazy to want to talk about taxes in May when everyone is just recuperating from April’s deadline, however, I am a new entrepreneur and I want to start things out right and not have to scramble next March, Any advice you can give me would be much appreciated.

Answer: Good for you on being proactive. I’m sure you are not alone in your due diligence regarding your business’ taxes and record keeping. In a word — receipts. Many Americans often ignore or quickly say “no” when asked whether they want a receipt, but not smart 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? 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.

Here are some basic tips:

  • Keep all receipts. This point cannot be overstated. I was recently helping a client with an audit 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 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.
  • Make notes on receipts about their business purpose.

This is an especially great idea for dining and entertainment expenses. It’s easy to remember why you bought a fax machine, 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.

  • 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 saying, “My dog ate my receipts.”

  • Take a picture with your smartphone.

With today’s technology, it’s easy to 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.

  •  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.

  • 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.

  • Stay away from cash.

Using cash for expenses seems to be the absolute death-nail when 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 the number of audits will continue to 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.”

Best of luck in your new business endeavor, it would seem you are already on the right track.

Cathy Williamson is manager of the Lincoln Trail Area branch of the Better Business Bureau. Contact her at (270) 982-1289 or cwilliamson@bbbkyin.org.