A few weeks ago I wrote about the importance of recordkeeping and how it eases a lot of the burden and frustration come tax time. I addressed it as more of an issue with one’s personal taxes, though. This time, however, although I wish I didn’t have to say it, I have also seen all too many cases when businesses were much too lax with the records they keep. This can present an even bigger problem than with one’s personal records, for if you cannot document business expenses, you are potentially losing legitimate deductions on your taxes and costing yourself money.
So in this vein, I first want to state that keeping bank and credit card statements is not enough. Sure, this proves that you spent some money, but does not prove what you spent it on or why you needed it. Now this doesn’t mean throw away your statements, though, for they are key in a three-pronged approach for the documentation you want to keep to legitimize your expenses.
You see, those statements may not prove what you spent money on, but they do prove that money was spent on something. This is still key to prove that you paid the money and aren’t trying to pass off something a friend or family member paid for (or making something up completely) as an expense you paid for.
Beyond that, though, you need to keep the receipts you receive when you spent that money. That will show what the money actually went to. Don’t just stuff them in your pocket, though, and forget about them for six months, for you will want to be able to remember why the money was spent. This may not be so difficult if you’re, let’s say, a contractor who bought some supplies at Home Depot; those will not be too difficult to track back to the job you were working on at the time. But if you are at a lunch meeting with a business associate, exactly who you were with and what you were discussing is not going to be so evident from the receipt itself. Just jotting down some notes to that effect on that receipt when you get it can help this issue.
The third piece of documentation you will want to hold onto are any invoices you receive. With that, you can further justify some of the money that came out and is shown on those bank statements, and show exactly what it paid for. If you are able to have all three of these pieces of documentation for one expense, it gives you all the necessary backup to prove that you spent what you said you spent and what you spent it on.
Even with that, though, this does not automatically make a business expense. Please remember that just because you have a business does not mean that every expense you ever have is for your business. The groceries for your family still are just groceries for your family. This is the reason that I always recommend having a separate business banking account, as it can automatically help alleviate the confusion between what is or is not a business expense.
Finally, I know that none of this is fun; it is the part of running a business that is a drain and feels like you are not doing the things that you wanted to do when you started the enterprise. You want to make sure that that enterprise is running at peak ability, though, and part of that is keeping control of your records
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