It’s about that time – tax time! That means it’s time to make sure you’ve got everything you need to file a return that’s coherent and fully documented.
If you’re planning on claiming a deduction, then corresponding documentation must be attached to your return. If you can’t prove the deduction, then you open yourself up to all manner of mayhem.
So, this post is for those of you asking, “Why must I document deductions?”. If you’ve been a little cavalier in that respect, what you read here will clarify why you shouldn’t be.
The IRS will expect you to be able to prove that the disbursement took place. But you also need to be able to demonstrate that the disbursement was directly related to doing business. Let’s look at some specific areas of interest.
Purchasing for Business Needs
Purchasing for your business needs should always be done, whenever possible, using a credit card. The reason is simple. If you purchase with a cheque or cash, there’s no itemized record of what you purchased, save a receipt (which may not provide enough detail).
When you buy equipment and supplies with a credit card, you receive both a receipt (itemized) and a credit card statement. This is the kind of documentation the IRS likes because it’s detailed and demonstrative.
But the best strategy is to have a dedicated credit card for business purchasing, as opposed to your personal credit card.
Personal and Business Accounts
It’s not always a “bad” thing to use a personal account for business expenses but it is more difficult to prove that the expense was business-related.
An exception, of course, would be paying to establish your enterprise by paying for its state registration. In that case, you should be retaining the receipt for registration. That’s enough, as it’s not like registering a company could be anything other than a business expense. But with other purchases, take care to ensure that documentation is in place which is detailed and which demonstrates that you purchased whatever you did for the purpose of doing business.
Log Your Expenses
Some expenses are a little trickier than others. Mileage, for example, can be difficult to get a handle on.
A good way around this is keeping an expense log. When discussing vehicle mileage, the IRS will be satisfied with handwritten notations made at the time of purchase on the receipt itself, with the log backing up that information. They’ll want you to include the date, number of miles, where you drove and why you drove there in your notation. The more detail, the better.
For mileage, though, you can also claim the standard business mileage deduction. But to do that, you need to demonstrate that your vehicle is used for business purposes at least 50% of the time it’s in service.
Remember that if you don’t have documentation for any given expense, it’s better not to claim the deduction. If it wouldn’t pass muster in an audit, swallow it.
Contact Norton Financials to get the books off your plate.