MANY SMALL-BUSINESS owners prepare for tax season by bringing a haphazard jumble of receipts, invoices, bank statements and accounting data to their preparer’s office. But the lack of organization can raise filing costs and lead to missed deductions.
“Bringing in a shoe box to an accountant during tax season is almost guaranteed disaster,” says Frederick W. Daily, a tax attorney in St. Pete Beach, Fla., and author of Nolo’s “Tax Savvy for Small Businesses.” “You are not going to be popular, even if you pay accordingly.”
A sloppy accounting system also can attract the ire of the Internal Revenue Service. In his experience, Daily says, “poor record-keeping is the No. 1 reason small businesses lose IRS audits.”
Tax experts say it’s critical to ditch the shoe box and get organized. Here’s how:
Pick a Method
To keep finances straight, a number of business owners turn to bookkeeping software such as Intuit’s Quicken, QuickBooks or Microsoft’s MS Money. Web-based programs such as Quicken Online or NetBooks also are growing in popularity.
When deciding which one to choose, consider your business’s cost constraints and respective needs. For instance, says Daily, QuickBooks — priced from $199.95 to $449.95 — is ideal for inventory-based businesses, as is NetBooks, which costs $200 a month. Quicken Home & Business software and Quicken Online, which he says is better oriented for service-based businesses, is regularly priced at $99.99 and $2.99 per month per user, respectively.
Some business owners feel more comfortable keeping track of transactions the old-fashioned way on ledger paper or a business-record booklet. That’s perfectly fine, says Greg Rosica, a tax partner in Ernst & Young’s Personal Financial Services Practice in Tampa, Fla. The IRS just wants your system to accurately portray income and expenses. “Anything that is suitable for the type of business you’re in will work well,” he says.
Track Your Transactions
Since business expenses are tax-deductible, keep proper track of them throughout the year, says Bill Fleming, a managing director of private-company services at PricewaterhouseCoopers in Hartford, Conn. Good records can jog your memory at tax time — and come in handy if the IRS performs an audit. Set up a separate bank account or business credit card to better manage transactions, he recommends.
Maintaining a business diary or calendar is good back-up, too. For instance, if you take a client out to dinner, include details of the evening on the receipt and in your diary or computerized expense report. Take notes on your income as well, suggests Daily. In an audit, the more you can verify your business’s transactions the better.
Tallying expenses can be complicated if you work from home or travel frequently. Those who qualify for a home-office deduction can write off a portion of utility, rent and other payments; road warriors can deduct a portion of their food and travel costs, plus vehicle costs. Check out this story on writing off mileage. For more on business travel click here . And to read up on home-office deductions click here .