Papers! Piles of papers and receipts and what the heck to do with them are issues that haunt every small business owner. We’ve all misplaced that invoice, lost important information amidst the towers of seemingly useless papers and procrastinated figuring out what to file and what to keep in those ten shoeboxes of receipts in the corner of your office. Then… you're left wondering, do I need to keep my receipts? Or can I toss them out with last week's leftovers?
So, what's the answer? Can you hold a bonfire tonight? Or do you need to lose a week of precious incoming-generating time and energy just to sort through all the piles?
To start, we need to talk about the REASON every small business owner in Tennessee and around the country wonders if they will one day be required to dig them out...the IRS!
What will they ask for if you get the dreaded randomized audit, and will it cost you big if you don’t have it?
Here is the super simple answer: When any business files their taxes at the end of the year, they report two main things: income and expenses.
As a business owner, the amount you are required to pay taxes on is the difference between the two.
First off, we need to talk about your business. Let’s say you make $10, but it costs you $9.50 to run your business. Not a great plan. But for tax purposes, you are only paying taxes on that $.50.
This is why the IRS wants to know that your expenses are real, valid business expenses.
But here's the thing: the IRS doesn’t have a particular way you HAVE to keep your records, just that you have them! This means you can have your credit card and bank statements, piles of receipts, invoices, canceled checks, or some other form of written documentation. You just need something that shows you actually paid the money!
(This post covers more about updating your business financial records—don't miss it!)
The next layer to this issue is making sure to document how it was a business expense.
You can go to Costco, and it may be because you are hosting a neighborhood Super Bowl party, or it could be to stock your office cabinets with coffee supplies and printer paper. More than likely, you may go to Costco and come away with office supplies but also a deep fryer for your family Thanksgiving. If you don’t have a paper trail, these expenses become difficult to prove in the case of an audit.
So then, when your expense doesn’t match the total charge on your credit card statement without the receipt, this gets even more convoluted!
So, what's the solution?
Keep drowning in all the papers, just in case?
Definitely not! As we said, we are in the digital age! There are SO many simple solutions to your paper.
Accounting software such as Quickbooks Online allows you to snap a picture of the receipt on the spot, attach it to the expense, and toss it in the trash before you even exit the building. You can quickly designate all the different expense accounts you spent and break them out by amounts. (Learn more about what switching to QuickBooks Online can do for your business here)
Other software such as https://www.bill.com/ allows you to have all of your invoices automatically filtered through one place, providing a convenient hub for payments and invoices to be matched and filed by the vendor and stored in an organized and easy-to-find manner.
The bottom line is this: you NEED a paper trail...but it doesn’t have to be paper! Your bookkeeper should be providing you with simple digital solutions perfect for your small business niche. This gives you peace of mind and puts time back into your pocket come tax time or the dreaded audit.
(Speaking of tax time, here are some tips for helping you through it)
By choosing digital options to create your paper trail, you can redirect your time back into your business and focus on killing it in your industry.
Did you know we offer several digital bookkeeping options at Two Roads? Click here to learn more about what we do!
This post was updated in 2022 just for you.