Records are an essential element in claiming deductions on your taxes. Here's how to keep them in order to ensure you don't miss out on savings.
Record keeping is important to help you track your business activities so you know where you stand at all times. Records also enable you to prepare financial statements for your bank and creditors. But for tax purposes, records are essential -- you must have them in order to prepare your return and claim certain deductions. Whether you keep your overall records using software or a handwritten ledger, here are three key areas of special note.
Select a T&E record-keeping method you'll use. Whether you use a pocket calendar, desk top diary, Palm? or other handheld organizer, or pre-printed expense account forms, choose a record-keeping format that will allow you to record all the necessary information to back up your travel and entertainment deductions. For meals and entertainment expenses, be sure to note:
The date and place of the meeting.
The names of those you met with, including their company
The purpose of the meeting-what was discussed, what you wanted to accomplish.
The cost of the expense.
Note your car's odometer. If you use your personal car for business travel, you need to record your business mileage for each trip. This is so whether you claim deductions based on the IRS standard mileage rate or your actual expenses. Jot down your odometer's reading at the start of the year to get you going.
Adopt a storage system for receipts. In addition to noting the dollar amount of income and expenses, you also need these supporting documents:
Petty cash slips
Over the course of a year, these items can pile up and overwhelm you-unless you have a storage system in place. Decide now how you'll file away these important papers. Depending on the size of your business (and the number of receipts), find a convenient way to keep these papers. Alternatives: Store by separate accounts (e.g., receipts for supplies)?chronologically, using file folders, expandable folders, or other methods.
Learn your tax record-keeping duties. Don't know exactly what you need to keep or can toss? See IRS Publication 583, "Starting a Business and Keeping Records," at www.irs.gov.