Audit Proof of Your Small Business | Kiplinger

When you run a business, you have a lot to manage. If you don’t have someone in your face pushing you to stay on top of a task, it can be easy to keep putting it off until tomorrow, Friday, or next week…and soon you’ll have a big pile of work to do.

Although this strategy works for many projects, it can lead to problems in the financial sphere. If you get audited, you’ll need a history of every transaction or face the consequences. Your business expenses aren’t something you can make up or take your best guess at. They must be accurate and you must have evidence to support them.

The best and least stressful way to keep your business expenses accurate is to maintain what the IRS calls a concurrent approach. It’s basically an organized approach to tracking your expenses as they occur. Here are eight tips to help you manage your business expenses and finances and make sure you’re prepared in the event of an audit.

1. Choose a strategy that works for you

You can outsource your finances by hiring an accountant or “QuickBooks expert.” The more cost-effective but time-consuming route is to track your expenses yourself, either by hand or electronically.

2. Know what to track

You’ll want to track the following items. Make sure you have a strategy for each.

  • Cash flow
  • Expenses
  • Donations/charitable donations

3. Keep your business expense information in one place

The law requires you to keep all tax records for at least three years. This can be a digital copy in the cloud or a physical copy. You can also store your expenses in the subscription service app.

4. Keep your business and personal accounts separate

Having a separate bank account for your small business will help keep your personal expenses from mixing with business expenses. Having a credit card linked to the business account will also allow you to easily send business expenses through that account.

5. Use technology and applications to streamline the process

Traditionally, professionals keep all business receipts in an envelope. Nowadays, there are many electronic, paperless options that sync with your accounts or allow you to upload photos of receipts. Choose a platform that you feel comfortable with and that is not excessively high.

  • Microsoft Excel has many templates available for tracking cash flow, revenue, etc. This is a great option for small businesses without too many transactions.
  • QuickBooks is a widely used platform that functions as a subscription service that larger organizations and companies use to track business expenses.
  • Other subscriptions to consider include Expensify, Certify, and Zoho Expense (a lower-cost option).

Additionally, you can use apps to help track a specific category of expenses. Google Maps can help recreate and calculate your business mileage. MileIQ is a great app to accurately track your mileage by tracking your movement for business trips and can generate a report at the end of the year.

6. Find out what qualifies as a deduction

This is one of the key areas of contention, so it is extremely important to understand what does and does not qualify. According to the IRS, business deductions must be “ordinary and necessary.” In other words, it’s an expense that’s common to businesses in your industry and necessary to run the business. This largely includes office expenses such as printer paper, monitors, computers, pens, etc.

If you’re not sure whether an expense qualifies as a deduction, track it down. Your tax advisor can later guide you in determining whether to include this expense.

7. Remember: Only your business can take business deductions

If employees incur expenses on behalf of your business, their option is to discuss reimbursement with you. Employees cannot take business deductions on their personal taxes. This rule has changed over the past few years, so some people may find the consequences confusing.

For example, people can write off that they have a home office only if they are self-employed. Otherwise, employees should discuss reimbursement with their employers.

8. Find out how to track donations

Your charitable donations are not a deductible business expense if you’re a sole trader reporting your business income on Schedule C, but they could potentially be an itemized deduction on your personal return. If a donation is made in exchange for sponsorship, it may be categorized as advertising or marketing rather than charity.

Principal Tax Advisor, Berger Financial Group

Andy Gylund, CPA, MBT, is a Principal Tax Consultant and CPA for Berger Financial Group. He has more than a decade of accounting experience helping clients reduce their tax burden. Andy holds a bachelor’s degree in accounting and received a master’s degree in business taxation from the Carlson School of Management at the University of Minnesota. He is active in the Minnesota Society of CPAs and the Volunteer Income Tax Assistance (VITA) program.

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