Many small business owners wonder if keeping that shoe box or accordion file is really necessary. If you’re wondering too, you’re not alone.
The purpose of keeping receipts is to have defensible records. Defensible records are those documents you can use to prove what was reported on your tax return, in the event of an audit. Defensible records can include receipts, check stubs and images, bank statements and credit card statements or any combination of these.
Some of these documents will have more info than others. For example, if your construction business purchases an order of lumber from Home Depot for a job and pays with a debit card, the only thing that is likely to show on your bank statement is the date of purchase, vendor and final cost. The bank statement would probably suffice in the event of an income tax audit.
However, what if you got a sales tax audit? The bank statement doesn’t show the sales tax paid, therefore, without a receipt how can you prove the sales tax was paid? The answer is that you cannot.
On the other hand, what if you paid for that lumber order with your corporate Home Depot
card? Unlike your bank statement, Home Depot provides online access to Home Depot purchase invoices. Problem solved, right? Well… Home Depot provides access to invoices for a limited number of days. Maybe you can call them and get older invoices emailed over in case of an audit, but for how long? Is that a chance you want to take.
The very best course of action is to retain all info relating to any business transaction. You’ll never be penalized for having too much documentation. And these days, this doesn’t even necessarily mean keeping paper around your home or office.
You could always use the old shoebox approach if that easiest, or you could get an inexpensive scanner and keep them that way. The level of organization is up to you, but take it from me, you don’t want to be caught without your ducks in a row in the event of an audit.
I’ve had audits that dragged out for months with lots of back and forth before we finally saw a costly resolution and I’ve had audits that were virtually painless and wrapped up very quickly with little or no penalty. The manner in which we kept our records made all the difference in the world. Take it from me, it’s far better to have what you need and know where it is than to find yourself digging and hoping to find what you need.
I hope this article has been helpful to you in making the right decisions for your business.
If you have any questions about bookkeeping or are considering hiring a bookkeeper for your business, please feel free to contact us at info@peggysbookkeeping.com.
About the Author I have been doing bookkeeping for about 20 years and concurrently held a position as the head of HR for a small management firm for 14 of those years.
Currently, I am an owner of Peggy’s Bookkeeping Service with my partner and mother, Peggy. Peggy’s Bookkeeping is a small, family-owned bookkeeping service based in Clearwater, FL. You can visit our website at www.peggysbookkeeping.com.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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