As a bookkeeper this is my number one battle when it comes to working with my business owners. I'm not being naggy when I request receipts, but it can often times come off that way when month, after month, after month, no documentation is recorded. Like everyone else, I don't do my job for the heck of it, it's my duty to keep my clients financials up to date, compliant with auditors and the IRS, and to make the tax seasons as painless as possible. That's why I bill them and don't work for free.
Ensuring my business owners success, also ensures mine. I would be out of work if my clients repeatedly failed audits and had to shut down temporarily, or even permanently. However, I can't do everything for business owners when it comes to operating their business. Keeping receipts is a business owner's responsibility. I view being The Home Bookkeeper as more than just a "means to an end" day job. Working with fellow entrepreneurs and creatives is my passion, my career, my professional baby, mine and my son's livelihood, just like my clients businesses are for them. So, here I am once again writing about the importance of receipts and documenting your business's financial transactions.
Receipts aren't only the transaction slip you get at the department store check out. It's emails of confirmations of online purchases, invoices, bills, contracts, human resource documents and more....
Definition
Receipt: any record of the action of receiving something or the fact of its being received.
According to the IRS, “Good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns.”
Receipts are a pain. Trust me I know. It’s easy to let them spin out of control, but it doesn't matter if you’re a brand new sole-proprietor or the proud proprietor of an S-Corp, good recordkeeping means hanging on to your receipts. You should keep receipts for as long as a taxing authority like the IRS or your state’s department of revenue can audit you. Most audits can only go back three years (from the date you file your tax return), but in some dire cases where fraud or severe tax underpayment is suspected, the IRS can audit you back to six years (again, from the date you file your tax return). When it comes to keeping your receipts for recordkeeping, it’s a good idea to adopt the “better safe than sorry” attitude and keep all that pertains to your business.
Benefits Of Keeping Receipts
Monitor your business’ progress: Records will help you see how your business is doing. Are you improving? Which items are selling? What changes should you make in your business? Accurate records help out any size of business. You need to know how you are doing to increase your profitability and ability to succeed.
Prepare financial statements: To properly prepare a profit and loss statement and balance sheets, you need your receipts.
Identify the source of receipts: While in business, you may work with many vendors and have many sources of income and expenditures. Proper receipts will help you separate taxable and nontaxable income and identify your actual deductions.
Keep track of deductible expenses: In business, things get busy, and that is a good thing. Keeping receipts of all your transactions will help you claim all of your possible deductions.
Prepare tax returns: Business receipts help recreate a snapshot of your tax year. To reconstruct this picture and come out with the best return legally possible, you need to keep your receipts.
Support items on your tax return: You must always have records that back up your tax return. The IRS frequently audits businesses, and you need to have documents that support your tax return and deductions.
Consequences Of NOT Keeping Receipts
Pay Extra Taxes: If you don’t keep records of estimated tax payments or don’t keep receipts for planned deductions, you won’t be able to claim these items on a business tax return and you will have to pay more tax than what is owed.
Tax Adjustments After Audit: If you get audited and don’t have paperwork to back up claims, the IRS may decide that you need to pay more taxes than you originally had to pay. There may also be costly penalties for the failure to file taxes appropriately.
Audit Failures: Failing an external or internal audit can lead to large fines or even the closure of your business. Improper financial management is the #1 reason businesses fail.
Criminal Penalties For Improper Licensure: Without copies of licenses, a business owner can face jail time for operating without the proper license.
Inability to Protect Your Business from Theft: Without the right paperwork to justify claims, you may not be able to sue someone for copyright infringement or patent infringement if this is something that applies to your business.
Employee Lawsuits: If an employee claims you acted in an illegal manner – i.e., a wrongful termination or a refusal to pay worker’s compensation – you won’t have much recourse if there is no paperwork to prove that you complied with the applicable laws. Always keep copies of any interactions your employees have with your staff that may affect you in a legal manner later on.
Deals Fall Through: Losing or misplacing an important document can cause a major deal to fall through. Something as small as an old employee contract can hold up a transaction, greatly reducing your chance for success.
Thank you for reading this article. I hope you enjoyed it. If you want to find more articles like this, make sure to follow along by subscribing. If you are looking for Business Consulting services check out the services page above.
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