Organize Tax Documentation

Practical Tips to Simplify and Organize Your Tax Documentation

As a business owner or entrepreneur, there are a few things that you should be doing to maximize your tax deductions. You have the benefit of writing off expenses that are related to your work. But, you need to maintain the right documentation to back up your claims.

If you aren’t familiar with the accounting industry, then it can be overwhelming to know where to start with the financial tracking. Don’t overlook the importance of keeping up with the finances! It is easy to let these details fall to the backburner. Then, you will be facing a difficult situation in the future when you need to file your taxes.

What is a Legitimate Write-Off for Your Taxes

How much can you write off? It makes sense to maximize your write-offs so that you can reduce your tax burden for the year. But, keep in mind that these expenses will cut into the profitability of your business efforts. So, you shouldn’t be spending money just to save money on your taxes.

The best way to determine the legitimacy of your tax expenses is to hire an experienced accounting team to help with your finances. You can focus on your business efforts and lean on the understanding of a skilled accountant. Since the accountant has been working in the industry for many years, they will be able to offer the insight that you need to determine the legal write-offs that are available.

These legitimate deductions can include many expenses that have been incurred:

  • Computers, cell phones, and any other electronics required for business activities.
  • Travel expenses for meetings or client reach-out, including airfare, hotels, and a portion of your food and entertainment.
  • Vehicle reimbursements based on mileage, or you might deduct the expense of purchasing a car as well as the cost of gasoline and maintenance.
  • Wages and salaries paid to all employees and managers, including employment taxes, benefits, and any other related costs.
  • Invoices that were paid to contractors or freelancers. If a contractor is paid $600 or more in a given year, then you will need to use Form 1099-MISC to document the expenses.
  • Rental payments for office space, factories, storage units, storefronts, or any other facility that was used.
  • Utility costs, including electricity, gas, cell phone bills, internet, and phone services, and more.
  • Office supplies, which might include everything from printer paper to cleaning products.
  • Insurance or business fees, such as licensing costs, city work permits, or anything else that was paid to ensure that you could work legally.
  • Marketing and advertising expenses, which could include a wide range of expenses: website design, hosting accounts, Pay per Click ads, social media management, software subscriptions, and more.
  • Client or customer outreach costs, including the expenses for mailers, holiday gifts, newsletter services, customer appreciation days, and more.
  • Home office space can be used as a deduction as long as the home is regularly used for business activities. The space needs to be dedicated exclusively for Both direct costs and indirect costs can be calculated for this write-off, usually based on a percentage of the cost of the home.

This list is a general overview of the types of expenses that can be used as tax write-offs. Your accounting team can help you analyze your transactions to find the things that can be included as legitimate deductions for your line of business.

Why You Need to Keep Documentation

The tracking system that you use will provide the back-up that is needed for these business write-offs. If you don’t keep documentation for every transaction, then you might be facing a messy situation if you are audited in the future. You can hire a bookkeeper or accounting team to help with the busy work so that you don’t have to worry about the day-in-day-out tracking.

It is essential that you save copies of receipts and invoices that are related to your business efforts. When you choose to claim something as a deduction, then you always need to have a receipt to back up the expense. So, the best thing that you can do is organize a system right now which will make it easy to add documents to your file as needed.

Even though you have digital tracking of your expenses, you also need to show the paperwork for each transaction. A credit card statement won’t be enough documentation. During an audit, the IRS wants to see details about each transaction. For example, if you bought materials at a local office supply store, then the credit card transaction won’t show details of the purchase. You will need to provide the receipt to prove that the office supplies were purchased for business activities.

Organizing Your Business Records

One of the problems with documentation is that business owners feel like they are drowning in paperwork. Do you have stacks of invoices and shoe boxes of scattered receipts? It can be a mess to sort through all of the papers that come through your office.

The starting point for organization is to make sure that you have a good bookkeeping and accounting software to keep track of the transactions. Many times, these programs will automatically pull the transactions from the bank or credit card statement. Then, a copy of the receipt or document can be attached to that file.

As the transaction comes through into the accounting software, someone needs to categorize the transaction. Why was the money spent? Where should the totals go for that cost? Other tasks need to be done on a regular basis, such as reconciliation and audits to make sure that nothing is missed in the transactions.

A filing cabinet can be used to sort through the paperwork. Files should be created based on date and category, making it easy to find paperwork if it is needed. For example, you might have a section of the filing cabinet for building costs, where you keep copies of the office rental agreement, utility bills, cleaning services, and more.

If you don’t like the idea of keeping a filing cabinet full of paperwork, then you could implement a digital tracking system. All of the paperwork can be scanned into a digital folder, making it simple to keep track of the information without managing all of the paperwork. There are many great cloud-based filing systems that can be used. For example, you can take a picture of a receipt when the purchase is made. Then, an app can automatically save that picture in the right file folder of your choice.

When you are using any type of online system, make sure that you choose a secure service. Since you will be storing sensitive financial information, you need the peace of mind to make sure that your business details won’t be stolen. Hacking and online theft is a growing problem, so you need to use an encrypted system for your company.

Employee or Outsourced Accounting Services?

Part of this organization means that you have assigned the responsibility to the right person who needs to handle the job. Some business owners have employees that can manage these tasks. But, if you hand the responsibility to an employee, then you need to make sure that you have someone who is experienced in accounting and bookkeeping. Previous experience is essential so that important details aren’t overlooked.

Sometimes, a business owner will give these responsibilities to an entry-level secretary or someone in an administrative support position. While this employee might be familiar with the office setting, they don’t likely have the training and skill set that is required to keep up with the financial tracking. As a result, mistakes might be made which could impact your tax filing and the profitability of the company.

Employees can be an expensive way to manage your business finances. If you don’t have an employee who can oversee your transactions and financial reports, then you might consider the option to hire someone. But, you need to understand the overall costs that will be required if you bring on another employee. Not only will you need to pay the salary or hourly wage, but you also have the carry the burden of employment taxes, benefits, office space, and more.

Many business owners find that it is cheaper to hire an outsourced accounting team to help instead. You can reduce the costs of keeping up with the financial system. These outsourced services are much cheaper compared to hiring an employee. At the same time, you can tap into many years of experience in the accounting industry.

Outsourcing often increases the quality of the financial services that are provided, while reducing the costs at the same time. As a business owner, it is easy to see why it is a win-win situation to avoid hiring another employee and still have the expert financial consultation that is needed.

Do you need help organizing your tax write-offs? Our team is here to offer the assistance that you need! For more information about the services that can support your business efforts, you need to call Easier Accounting at (888) 620-0770

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