15 Mar 7 Tips for Organizing Receipts for Tax Time
Sometimes receipts end up in all sorts of odd places. They fade away inside your wallet or purse. They can get stuffed in a random desk drawer “for sorting later” or they are stuck under a couch cushion.
Did you get the picture? And here comes tax time…
You scramble all over the place, trying to find the receipt for that business lunch you had two months ago.
Receipts are important documents that substantiate business transactions. Keeping them allows you to prepare accurate and complete records, which would then help you:
- Track the progress of your business
- Prepare financial statements
- Prepare tax returns
- Support items reported on #2 and #3 above when you get audited
According to the IRS, aside from receipts, here are some of the other supporting documents that you should keep to prove your business transactions:
- Gross receipts – This pertains to the income received from the business. Examples of documents are cash register tapes, sales slips, deposit slips, receipt books, and invoices.
- Purchases – This are items being bought to be sold to customers. In cases of manufacturers, this includes the cost of raw materials being manufactured into finished goods. Supporting documents include invoices, canceled checks, proof of electronic payments, credit card receipts and statements.
- Expenses – This pertains to costs incurred (other than purchases) in carrying the business. To be tax deductible, a business expense must be both ordinary (common and accepted in your field of business) and necessary (helpful and appropriate for your field of business). Examples of documents that support expenses are canceled checks, proof of electronic payments, invoices, cash register tapes, credit card receipts and statements. These documents should show the amount paid and a description of how it became an expense for business purposes (supporting evidence such as business conference flyers, calendar entries, and other materials would also be helpful in proving that a trip to Hawaii was indeed for business and not a vacation).
- Assets – These are properties such as furniture and machinery that are used for business. If the asset has a useful life that extends beyond the year it was placed in service, you need to spread and deduct the cost over those years through depreciation. If you sell an asset, you also need to support the resulting gain or loss. Documents such as purchase invoices, sales invoices, and canceled checks serve as a basis for this information.
- Employment Taxes – For those with employees, there are specific requirements related to recordkeeping of employee details, wages, tips, taxes withheld, tax returns, etc.
Given the importance of receipts and these other documents, it is crucial to keep them organized and stored in a safe place. Here are some tips on how to do just that:
- Choose a filing system. Whether you use color-coded folders, binders, or envelopes, make sure that your system is simple to follow and efficient enough to enable you to easily access it when you need to add new documents or retrieve them later on. This way, there would be higher chances of you sticking to the system.
- Create categories for your expenses and label your filing system accordingly. You can organize by year and type of income/expense that makes sense to you based on your major business transactions. You can also use the expense line items indicated on your tax return forms as reference for easier tallying at tax time (for example, “Advertising,” “Rent,” “Repairs and Maintenance,” and “Utilities”).
- File your receipts under the correct category at the end of each day. If possible, file the receipts as you spend or as you receive them so you avoid misplacing those documents. File chronologically (newest on top), and make notes on the nature of the expense and the relationships involved (as in the case of meals) so you won’t forget the pertinent business details justifying the expense.
- Make digital copies and back up your data. Receipts fade over time. Taking photos or scanning them provides you with a digital copy that would last longer. The IRS can ask for records for up to six years after filing, so having the protection of a digital backup would be much better. For consistency, you can organize the electronic copies in the folders just the same way you filed and categorized your hard copy receipts. Make sure to label the files properly, so you can easily search for them in the future. Files can get corrupted and prone to data lost. It’s best to back up your digital copies to your cloud or external drive periodically.
- Update your records regularly. Set a regular schedule for recording your income and expenses. That way, you can use the amounts from your meticulously filed documents to track business performance, and you can avoid cramming come tax time. Also, depending on the volume of receipts that you accumulate, regular recordkeeping will allow you to move the prior period’s folders/binders/envelopes into a box after recording, and then replace these with a new set for the current period, thereby reducing clutter.
- Document expenses on the go. If you don’t want to spend a lot of time scanning and saving individual receipts, you can make use of cloud-based software such as QuickBooks Online, which allows you to take photos of receipts on the go and then automatically matches and categorizes these for you to maximize your tax deductions.
- Improve your system as you go along. You’ll find that your system might need tweaking as you go along. Make adjustments to suit your business needs, but remember to consistently stick to the overall objective.
As auditors often say, “If it’s not documented, it’s not done.” So stay disciplined. Diligently keep, organize, and record your receipts all year round, and reap the benefits come tax time.