Now that (nearly) everyone has filed their taxes, it is a good time to look back and find out what you could have done better. After all, I have many tax prep meetings with business owners during which they come to the realization that they could be deducting more expenses than they are.
The best way to keep this from happening is to be diligent about recordkeeping. After all, it’s one thing to have a receipt from a meal that you claim is for business, but if you can’t tell someone who you dined with and what you discussed that was business related, the IRS could disallow it as a deduction.
Even though tax season had me thinking about some of these things already, this recent article also highlighted some of the same issues In that story, a taxpayer believed he was keeping good track of his mileage by having a Microsoft Outlook calendar where he recorded his travels. And on the surface, this sounds great. It is a living document that he can both add to and look back upon when needed. Unfortunately, the purpose of all those travels was not also recorded, instead making it largely useless.
When thinking about best practices here, there is no clear answer. After all, the digital calendar idea sounds great, but failed. It would have been outdone by a notebook in a car’s glove compartment with a log of dates, odometer readings, and purposes for the trips. Digital records may seem safer and more ready-to-use, but they are no good if not used correctly.
Start then with thinking of a system that you can diligently follow. If the immediacy of the notepad in the car works for you, use it. It still may be a good idea to convert it to something digital on a regular basis, but taking information down as you actually do it helps make sure you are recording all of those possible deductions and not missing anything. If you can’t imagine being so analog, though, your phone has a spot for notes on it, too, and you can use that as a notepad.
Granted, if you are doing a lot of business travel, you are not going to want to hand a notepad to your tax preparer as a final document. This information can be moved to a spreadsheet or other financial software, though, to become more manageable and usable. A lot of the breakdowns I see, though, are due to a lack of that immediacy in recording so that middle step can still be helpful. When you are attempting to recreate travels through receipts, you are bound to miss something.
And sure, this all sounds like a pain. But what causes more pain, doing some good recordkeeping (and once you establish a habit out of, it won’t even feel that bad) or seeing a bill come tax time that you know you could have lessened?
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