As a newly minted, self-employed small business owner, you are headed on an exciting adventure. You’re making business plans, trying to get your company off the ground, and incurring expenses and receipts as you do so.
If you’ve noticed your filing cabinet is overflowing with paper receipts, that’s actually a good sign. It means you’re keeping receipts, something that is especially important for tax purposes. If these receipts are for business expenses and you want to claim them as deductions when you file your tax return, they are considered business records and should be available at all times for inspection by the Internal Revenue Service (IRS).
Haven’t been saving your receipts? Be sure to start saving your receipts moving forward. For any previous receipts, contact your credit card issuers and processors, your bank, suppliers, and whoever else you might have conducted financial transactions with to obtain duplicate receipts.
You’ll also need the receipts to fulfill other formal business obligation, such as:
- To prepare your income tax return as a business owner
- To prepare financial statements like profit and loss statements and balance sheets
- To substantiate any tax deductions
Below, we’ll provide you with everything you need to know about organizing your tax receipts, including quick ways to update your filing system so that everything is paperless.
Our advice: Keep digital records
Most of our daily activities are online nowadays, so why not add record keeping to the list? The good news is that the IRS accepts scanned or digital receipts when it comes to tax filing. There are just a few requirements to make sure that your digital filing system is in compliance:
- You should keep the electronic storage system (e.g., hard drive, flash memory, or an app) for as long as deemed necessary to uphold tax laws.
- The electronic storage system that you choose should be able to index, save, retrieve, and make copies of the receipts.
- The digital copies of receipts and tax documents must clearly and accurately retain the same details as the originals.
The IRS defines an electronic storage system as “any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media.” Going by that definition, you may decide to purchase a scanner (available at any office supply store) and an external hard drive or a flash memory card to back up receipts you scan into your phone or computer. Or you may prefer to keep written records, which can easily be added to a spreadsheet to help with better organization. Whatever you decide, though, make sure you capture details from the entire receipt. This includes the date, address of the business, and the total purchase price.
Alternatively, you may use a receipt-tracking app to organize and save your receipts. Below are apps and portable receipt scanners designed for small businesses and freelancers.
Wave Receipts is a receipt-tracking app that can be accessed from your phone or computer. It can be synced with any cloud-based expense-reporting software and export data to various accounting tools like Excel. The best part is that this app has a free version, making it accessible for small businesses and freelancers just starting.
If you are an iPhone or iPad user and have an Evernote account, you’ll like this app. The Evernote Scannable app allows you to preview the scan and retake photos to ensure you’re getting clear and accurate images. It’s also a cloud-based app, which means you can access your receipts online from anywhere.
Aside from scanning receipts, the Shoeboxed app also allows you to track your mileage expenses. You can even use the app to categorize which expenses are deductible for tax-reporting purposes.
VuPoint Magic Wand
The VuPoint Magic Wand is an on-the-go, portable scanner. You can use it as a desktop scanner, but it also comes with a detachable wand that you can take with you when you’re on the go. This scanner can’t be synced digitally, but it comes with a micro SD card for storage and access.
Epson Workforce DS-30
The Epson Workforce DS-30 is a multi-purpose portable scanner that allows you to scan receipts and other documents. It easily connects to your Windows or Mac computer with a USB. Once uploaded to your computer, your receipts are searchable. The scanner also syncs to cloud-based services like QuickBooks.
The Clear Scanner app has built-in OCR capability. It’s a very technical term that means your receipts are captured clearly. This scanner allows you to save your receipts as PDFs or JPEGs. It also can connect with Google Drive, Evernote, and Dropbox.
Going digital might be the best way to keep your receipts. Not to mention, there are numerous receipt-tracking apps and scanners to choose from. The list above is only an example of products and services available. Feel free to do your own research to find one that works best for you.
Get in the habit of taking notes
One of the perks of working for yourself, aside from keeping your own hours, is being able to take business expenses. If you meet a client for a lunch meeting, you can deduct the amount as an expense come tax time. However, if you are presenting the IRS with only a receipt from a restaurant without any notes about the purpose of the meal, you can see why that could become a problem.
For every business expense you claim, you should be able to substantiate it with a combination of supporting documents. This doesn’t only refer to receipts and invoices, and you may be asked to provide other information, such as who attended the meeting and the purpose of the meeting.
This is why you should get in the habit of taking notes. You can add these notes directly to the receipt before taking a photo, scanning, or organizing receipts in a file folder. Just make sure you jot down enough information to recall what the expense was for months later.
Aside from the platforms listed above, you can use Microsoft Excel or Google Sheets to log your expense receipts and any notes you want to include. Some useful information you want to make a note of include:
- Total paid/cost
- Expense category (e.g., rent, travel expenses, office supplies, marketing)
Categorize each receipt
While you’re getting in the habit of tracking your receipts and taking notes, why not categorize your receipts as well? Doing this will save you a lot of time come tax time. Below are different business expense categories you may come across as an independent contractor, consultant, or freelancer.
- Advertising and marketing expense: This category can include the cost of your business cards, posters, website development and maintenance, and monthly fees to job boards, such as Upwork or Contena.
- Office supplies: Receipts for subscriptions to Microsoft Office and other office materials may be included in this category.
- Rent: If you rent an office space or lease equipment for your business operation or if your business is based from a home you rent, those belong to this category.
- Phone and internet expenses: Make sure you have the itemized statements you receive monthly for your internet access, home phone or fax, and mobile phone bills.
- Travel expenses: You may want to discuss the requirements of a travel deduction with your accountant. But for categorization purposes, you may include airfare, baggage and shipping, car maintenance expenses, gas, mileage, tolls, parking, rental, cab fares, accommodations, and meals during travel.
- Licenses and fees: File receipts for business licenses, professional license fees, trade association dues, and other fees you may incur in this category.
- Educational expense: If you attend any seminars or professional development courses to learn more about how to run your business and improve your skills, you may include such expenses in this category. Again, you may want to discuss the criteria set out by the IRS on educational expenses with a tax professional or certified public accountant (CPA) before you claim it on your tax return.
- Legal and professional fees: If you used an attorney and an accountant to set up your limited liability company (LLC), include the receipts and invoices you’ve paid for their services in this category. This also covers bookkeeping fees and other professional consultant fees as long as they’re directly related to your business.
Don’t rely on other records
There’s a huge emphasis on receipts when it comes to taxes because it’s one of the few documents the IRS deems a viable supporting document. More specifically, these documents include sales slips, paid bills, invoices, store receipts, deposit slips, and canceled checks. Note that bank statements and credit card statements are not allowed, so be sure to keep this in mind when debating whether to throw out a receipt.
Make tax time a breeze
With these tips, you’ll approach the next tax season with more confidence and peace of mind, thanks to your digital records of carefully categorized business receipts. Clear and accurate receipts are the perfect antidote to the headaches of an audit.