Keeping good financial accounts is essential for small business owners. Since every dollar counts, you want to ensure that you get back all of the money that you are legally entitled to during tax season. Conversely, you also want to avoid paying any penalties when tax time rolls around. In order to achieve this, you need to keep accurate financial records. Here are some suggestions to help keep your records in order:
1. Separate Records – To begin, you will need to be sure to keep your company records entirely separate from your personal records since this is a requirement of the Internal Revenue Service.
2. Source Documents – You should always keep all original paper documents relating to your business in a safe place that is easily accessible such as a fireproof filing cabinet or fireproof safe. These include items such as: Receipts, bank deposit slips, canceled checks, credit card statements, invoices, etc. For a complete list of the source documents you will need, please view the Internal Revenue Service website.1
3. Organizational Methods – Your work will be much easier to find if it is properly categorized. The following are three ways to help you easily organize your documents:
A. Traditional Filing System – Setting up files that are classified by type makes them much easier to find and can save you a lot of money and time in the event that you are ever audited by the IRS. In fact, some sources indicate that small businesses are three times more likely to be audited than individuals.
Some titles that you might want to use for your filing system include: Automobile costs, Rent/Mortgage, utility bills, advertising expenses, travel costs, professional fees, entertainment expense, etc. (Note: Sources indicate that the IRS tends to focus most of their time on expenses related to entertainment, car, and travel).2
B. Automated Software – For most small organizations, the commercial checkbook is the main source of financial entries. However, in addition to this, you can save yourself a lot of time, money, and aggravation by investing in a quality financial software program that is relatively inexpensive when you consider the value that it will provide you.
Your automated system of choice should include a summary of transactions that clearly reflect your gross income, deductions, and credits. Also, be sure that you have a reliable back up for whatever automated system you choose in case of an emergency such as a computer crash, fire, etc.
If you tend to lose receipts or should we say “misplace” them, you might even want to choose a system that has an automatic data backup to various servers at multiple data centers.
Some options such as the Evernote database or Expensify will allow you to archive your receipts and automatically create expense reports.3 In addition, there are many programs that can also take care of your invoicing and payroll needs such as Xero, Simple Invoices, etc.4
C. Mobile Apps – There are various mobile apps that can also simplify your life. TaxMate is a free app that you might want to consider using on your Smartphone. It is easy to use, requires no sign-up or download, and works by providing quarterly tax estimates for small business owners and those who are self-employed. You will be guided with a questionnaire of routine tax questions and the app will then automatically calculate the amount you owe in federal and state taxes. This is a great way to avoid facing any unwanted surprises on your annual taxes.4
The right automated system or mobile app can definitely take away a lot of the grunt work by producing accurate records as well as financial statements at the touch of a button. (Note:
It is always best to keep original documentation as a back-up just in case the IRS comes knocking at your door).
4. Type of company – The type of establishment that you have will dictate the records that you will need to keep for federal tax purposes. In addition, the way that your organization is structured from a legal standpoint can have a major impact on the amount of taxes that you pay at the end of the year depending on whether you are a Sole proprietorship, Partnership, Corporation, etc. In fact, it is a good idea to consult a Certified Public Accountant and/or a lawyer to be sure that your company is in the best possible tax situation.5
So, remember that you do not have to face tax season all alone. There are some great tools available to make your life much easier. So why not consider using some of these tips to keep good financial accounts for your business? You will be glad that you did!
1 IRS.gov, “What Kind Of Records Should I Keep?”, updated January 27, 2015, accessed February 13, 2015, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What-kind-of-records-should-I-keep
2 Findlaw.com, “Small Business Tax Information FAQ”, accessed February 13, 2015,
3 Bradley Gauthier, “Traveling For Business? How To Never Carry A Receipt Again”, accessed February 13, 2015, http://blog.bradleygauthier.com/travel-without-receipts
4 Sara Angeles, BusinessNewsDaily.com, “12 Accounting Solutions For Small Businesses”, updated March 20, 2014, accessed February 13, 2015, http://www.businessnewsdaily.com/5737-accounting-solutions.html
5 David Waring, FitSmallBusiness.com, “Business Structure: How To Choose The Right One For You”, updated July 31, 2013, accessed February 13, 2015, http://fitsmallbusiness.com/business-structure