If you’re in the habit of deducting business expenses on your taxes, you know the importance of saving receipts. However, saving receipts is not enough if you don’t have an organizational system for them. No one wants to encounter a jumbled drawer full of receipts come April, especially your accountant. Organize those receipts from the outset and tax time will be a breeze.
Which Receipts Need to be Saved?
If you plan on deducting business expenses on your taxes, you will need proof that you incurred the expenses. Therefore, anytime you make a purchase related to your business, you need to save the receipt.
According to the IRS, “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
A professional accountant can help you determine which expenses are deductible. The best course of action is to save all receipts in order to keep all of your options open.
Organizing Your Receipts
It’s tempting to shove all of your receipts in an envelope and pull them out when it comes time to do your taxes—but, oh the headaches that ensue! Instead, be proactive and manage those receipts from the moment you receive them. Think of it as a three-part system:
1. Envelope: Carry an envelope or wallet in your purse or briefcase that is specifically dedicated to receipts. The moment a cashier hands you a receipt, it goes into that envelope for safekeeping.
2. File: Devise a schedule for transferring receipts from your envelope to a file. Some people do this every evening; others do it once a week. Here’s a no-fail filing system:
- Designate a file folder for each month of the year: January 2011 Receipts, February 2011 Receipts, etc.
- Take several blank sheets of paper and at the top of each, write down a category of spending you do for your business. For example, you might have sheets of paper for office supplies, professional development, maintenance, travel, etc.
- As you transfer your receipts to the file, staple it to the corresponding sheet of paper.
3. Data Entry: If you use a financial tracking program, pull out your file at the end of each month and enter each receipt into the system. They’re already categorized, so this should be a simple task.
This receipt system helps manage receipts from the outset to make your business accounting simple. It’s important to keep business receipts on file for six years in case you are audited. By maintaining this organizational system, you’ll ensure that that there are no mistakes on your taxes and it will also help you track and predict your business spending. No more drawers full of crumpled receipts!