August 17, 2017

The Best Way to Organize Receipts

by Marissa Poole

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“Would you like a receipt?” We hear this question so often in daily life, we almost just tune it out with an automatic “No thanks.” But, keeping track of your receipts is actually very important, especially for small business owners and entrepreneurs. This is because if your tax returns are audited they need to be able to meet the strict substantiation requirements of the IRS.

How to organize receipts

Mark J. Kohler, author of The Business Owner's Guide to Financial Freedom, notesIt's true that you could argue what's called "the Cohen Rule," that you can use "other credible evidence," or rely on IRS Publication 463 which says that you don't need to keep receipts for expenses under $75, but why get into a fight? Arguing with the IRS can cost you a lot more time and money than just keeping your receipts.”.

And relying on bank or credit card statements isn’t enough because while they provide proof a total purchase, they don’t show the itemization and detail the IRS requires. So, now that we know why it’s important to keep our receipts, how do you keep all those little bits of information organized?

1. Take Note

The first habit to get into (especially if you're trying to organize your receipts for taxes) is making a small note of the business purpose on the receipt. Whether you jot the note down immediately or set aside time at the end of the day, week, or once a group of purchasing is done (at the end of a business trip for example), you’ll want the purchases to be fresh enough in your mind that you can label them correctly.

Be sure that you make the note something that will allow you to categorize the expense easily later on. Simply writing “dinner” may not be enough to jog your memory if you’re audited a year later. But, a note like “Dinner Meeting w/Apex Inc.” will be a clear indicator of a business expense no matter how much time has passed.

If the expense is obvious or recurring, like the monthly purchase of printer paper and stamps for the office, a note may not be needed. However, if there are both personal and business charges on the receipt, you’ll want to underline or highlight the business expenses and note a separate total.

2. Go Paperless

For many people, part of the frustration of organizing receipts comes from sorting, filing, and storing all those bits of paper. So, skip the bulky accordion files and boxes by organizing your receipts electronically.

Fortunately, there are plenty of options for going green. There are relatively inexpensive receipt scanners available at any office supply store, or you can simply take a picture of the receipt with your phone (and send it to your amazing virtual assistant to organize for you!). Just remember to get a clear picture of the entire receipt and ensure you can see the date, address of the business, and total purchase amount.

Storing your receipts electronically protects you from the possibility of ink fading or damage that makes the text unreadable. This also makes them more easily searchable as you can keep the files clearly labeled on your computer by year and category. Then you can find or print out only the ones you need, and you can keep them for as long as you want. But, be sure to backup all your info in case of computer meltdowns, viruses, and other cyber hazards.

3. Categorize

Now that you’ve captured all of this data, the next step is getting it organized by category. This will make tax time a breeze, and allow you to refer back to any transaction without hunting through tons of files. Here are some examples of common categories for tax deductible purchases:

  • Advertising and Promotion: includes items such as business cards, mailing lists/mailing list software, brochures, branded giveaway items, posters, website design, development, and maintenance
  • Meals and Entertainment: make sure these get listed under travel if they are from a business trip and be aware this category is highly scrutinized by the IRS
  • Travel: there are certain criteria to meet for travel expenses to be deductible, but items that may be included are airfare, baggage & shipping, automotive expenses, actual expense or standard mileage, tolls, parking, rental, taxis, lodging, meals, dry cleaning, telephone/internet, tips
  • Rent: this may include rent payments for property used in the operation of your business, lease payments for business equipment, and any amount paid to terminate a lease early
  • Utilities: this may include electricity, heat, water, trash pickup, security fees
  • Communication: this may include internet access fees, phone expenses, and cell phone expenses. The IRS closely reviews items in this category, so make sure you only deduct what is used for business
  • Supplies: may include material used in the production of services, office materials, cleaning supplies, coffee, bottled water, food for clients, off-the-shelf software
  • Postage and Mailing: may include FedEx, UPS, USPS, other delivery services, P.O. boxes, messenger or courier service
  • Legal and Professional Fees: accountant's fees, bookkeeping fees, attorney's fees, other professional consultants' fees directly related to your business
  • Insurance: may include business liability insurance premiums, property insurance premiums, disability premiums, workers' compensation premiums for employees
  • Licenses and Dues: may include business licenses, professional license fees, trade association dues, franchise fees
  • Charitable Contributions: contributions by a C corporation to a qualified charity may be deductible as business expenses, but a tax professional should be consulted to calculate the amount of the deduction and the documentation required to substantiate the deduction. Qualified charities are those organizations that have been approved by the IRS as tax exempt. To determine if a charity is qualified, you can search for the organization on the IRS website here.
  • Gifts: Gifts given to business contacts are deductible but are limited to $25 per person, per year.
  • Education: Business education deductions may be taken for seminars, professional development courses and a variety of other learning opportunities if they are required by law to keep your present job or income, or are required by your employer

4. Be Consistent

Another crucial step in organizing your receipts is to stick with the process consistently. Try to keep expenses separated by paying with a “business only” credit card or bank account when possible, and avoid paying in cash.

You may tweak your system in small ways over time (by trying a new app or management system for more convenience), but using the same overall method of keeping the receipts, capturing the info, and categorizing them each year will keep your information consistent, reliable, and easily accessible to you.

Remember, it’s been scientifically proven that it only takes 2 months to form a new habit, so start your journey toward organized peace of mind today. Your future self will thank you!

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