Are you overwhelmed and don’t know where to start to keep accurate bookkeeping notes, records, and documentation?
We help businesses across the nation with their bookkeeping and accounting needs, allowing them to focus on other areas of their business. We've created this guide to help business owners keep proper records and guide you on the IRS requirements to ensure that your receipts, mileage logs, and documentation that are accepted and viable. We will also offer a few suggestions on the best apps available to make this process a whole lot easier as well.
Keeping and maintain proper accounting records is a must when running a successful business! Why?
Benefits of Keeping Proper Records, Receipts, and Documentation
The data can help you to easily monitor and get a better insight into your business.
It helps you maximize the expenses and reduce tax obligations.
The output data helps you know where you need to improve to grow your business.
Your books will be tax ready and be able to be filed without delay.
Essential in case of an audit.
Allows you to generate financial statements in a timely manner making it easier to apply for loans, and/or provide crucial information for potential investors.
Allows you to keep track of cash flow which is crucial in order to meet financial obligations, such as paying salaries and vendors.
What do you need to keep records of?
Income – invoices, sales receipts
Expenses – receipts including charitable contributions
Bank and Credit Card Statements
Sales tax returns and reports
Previous tax returns
Loan Agreements
Large asset purchase documentation
Canceled checks
Form W-2, 1099-MISC, W-9
Mileage logs
Home expenses needed to calculate deductions if you have a home office
Cash and online 3rd party payment system transactions
E- Commerce and other Point of Sale platform reports
Sales tax returns
Insurance information
Private purchase information: This includes any amount of business funds used for personal purchases.
Salary and Payroll tax returns and reports
Inventory and valuation method records
The recommended time frame to keep records according to the IRS, either digitally or hard copied, is 7 years. This is in case of an audit or any amendments that might be needed, such as claiming additional credits if warranted.
So, How Do You Keep Accurate Records?
1 – Choose an accounting platform such as QuickBooks Online or Xero
Gone are the days of shoebox receipts, manual logs, and even some excel spreadsheets. There are so many opportunities for mistakes to happen when there are no double checks in place. Online systems are the best as they automate transactions, allowing you to run reports and produce the data you need. Financial reporting becomes easy to generate allowing you to closely monitor your income, expenses, cash flow, inventory, assets and liabilities on a timely and efficient basis. This saves you time and makes the information easily accessible.
Accounting platform recommendations:
This is Balance Keepers Bookkeeping preferred accounting platform.
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Cloud based accounting platform making it easily accessible to business owners anywhere you go. Allows accountant and/or bookkeepers to easily connect to the business account.
Has a mobile app for on the go use.
Offers 1 freelancer and 4 business account tiers offering a wide range of features depending on the business needs. https://quickbooks.intuit.com/pricing/
Integrates with many business apps such as Meelio, Gusto, Knowify, etc…
Allows you to upload receipts right to the platform.
Sales Tax Center
Included a mileage log.
Extra services offered such as inventory management and payroll solutions.
A great alternative to QBO and entirely cloud based
Cloud based platform suitable for smaller business although it has less reporting capabilities that QBO and Xero offer, but the cost is free.
2 - Create a schedule
Running a business is time consuming. It’s easy to put aside office tasks in favor of running the operating side of things. Unfortunately, If you let things pile up, it will be challenging to update all the information at the end of the month because some receipts may get lost, and other documentation may get misplaced. Having a schedule helps you set aside time to check and manage your books. Set an appointment time and add it to your calendar. This helps you stay updated on all the changes in your business accounts and update the records where necessary.
3 – Keep track of receipts by digitizing recordkeeping
Business owners can deduct federal, state, local and foreign taxes as a business expense.
But what is considered a business expense?
They are the costs incurred to run a business. According to the Internal Revenue Code, the business expense must be deemed ordinary and necessary to be deducted from business revenue.
Ordinary: the expense is common to the industry and used commonly in the trade.
Necessary: the expense is needed to run the business. Ex: legal, job supplies, advertising, etc…
Documentation and receipts are needed to prove this.
A receipt must contain the following:
The amount of money spent
Date of transaction
Vendor name
Description and purpose of the expense
What happens to the deduction / expense if the receipts do not contain this information?
Case Example: The IRS disallowed a self-employed business owner many deductions because they only had PayPal receipts as evidence.
The PayPal receipt consisted of the amount, the date of transaction/payment, and the vendor’s name, but did not have the description of the service performed.
The court favored the IRS for lack of evidence showing that the expenses were both ordinary and necessary.
(Brown v. Commissioner, No. 16604-19 (Tax Ct. 2021)
The good thing is now with a simple picture, you can digitize your receipts and no longer will have to worry about accidently throwing away or destroying these documents.
Digitized Receipt App Recommendations:
Ensure your records, receipts, and documentation are safe and easily accessible by uploading them on your Google drive. You will be able to share these receipts with your bookkeeper and/or accountant and attach them to transactions in your accounting platform.
Upload receipts directly to your QBO account by using the mobile app.
Cloud based file hosting service and storage. First 2 GB of storage is free https://www.dropbox.com/plans
4- Keep track of mileage
A big deduction for business owners are automobile expenses.
There are 2 ways of keeping track – both that require precise record keeping and use of a mileage log.
Actual Expenses: requires more recordkeeping for expenses such as the following:
Gas
Maintenance
Insurance
Depreciation records
Registration
Tires
Lease payments
Other auto expenses not mentioned above.
The total amount of these expenses will be multiplied by the number of actual business miles used.
Standard Mileage Deduction: 2020 - .575 cents/mile 2021 - .56 cents/mile
Keep track of parking and tolls as these expenses are deductible using both methods.
Keep a mileage log that includes the following
Amount of miles for each business trip
Time and date of each trip
The destination for each trip
Purpose of the business trip
Your Vehicle’s starting and ending mileage for each trip
The IRS will disallow the deduction if proper reporting is not kept.
Case Example: A business owner kept track of her auto expenses. She constantly drove to meet with her clients and operated her business from her car. She kept a mileage log that showed the date, the start and end point destination for each trip, the reason for the trip, odometer readings, and total miles.
The IRS still disallowed these expenses, and the court agreed because there was not enough detail in the reason for trip. The business owner had simply wrote “business” as the reason. The IRS requires more specifics. There were also some other discrepancies in the log that nulled the use of it.
[Brown v. Commissioner, No. 16604-19 (Tax Ct. 2021)]
Tip: If you start deducting your auto expenses using an actual expense method in the 1st year, you will have to use this method every year, however, if you start deducting your auto expenses using the standard mileage deduction, you will be able to switch methods. It is always best to keep track using both methods to see which will offer a greater deduction at the end of the financial year.
Mileage App Recommendations:
All plans now include mileage tracking
Will assist in tracking your mileages by automatically capturing your drives and adding details such as tolls, parking, and your trip's purpose. The app sends you weekly reports. It offers a free trial of 40 free trips, and after that an annual cost of $59.99 per year.
If you have many drivers, you should choose Mile IQ for teams.
5 - Bank and credit card account monthly statement reconciliations
The transactions in your accounting books need to reconcile with those in your bank account. This ensures that every expense is accounted for and documentation is easily managed. Accounting platform systems such as QuickBooks Online, allow your bank and credit card account institutions to connect enabling all transactions to automatically sync.
Once, in the system, the transactions will should be categorized to their respective accounts.
Ex: Graphic design bill categorized into the advertising expense account
Tip: Upload your receipts to you accounting platform, such as QBO. You will be able to match the receipt with the transaction. All the information needed for taxes, audits, and loan applications, etc.. is stored in one place and easily accessible.
At the end of the month, any cash logs, bank and credit card accounts must be reconciled with the records in the company books. This will ensure that no transactions are unaccounted for leading to maximum tax deductions at the end of the fiscal year.
6 - Speak to an Accounting Professional
Tracking and maintaining your records is easier now than ever before. However, it is always advisable to consult with accounting specialists to ensure that your business is maintaining accurate records, ensure maximized deductions, and make sure all transactions are properly categorized. Contact an accounting specialist at Balance Keepers Bookkeeping for a free consultation.
great advice!
Everyone starting a business needs to learn about this. Thanks for sharing, it's super informative!