Failure to properly document your business transactions will not only take a toll on your peace of mind, but it will cost you money as well.
Many home-based small business owners struggle to maintain all the proper documentation that is needed in order to claim every tax deduction they are entitled to claim. I’ve heard every excuse imaginable and every rationale as to why not documenting will be alright, or partial documentation is good enough, or they’re going to do it as soon as they get more time, etc. But convincing me or believing that you’ll be able to convince an IRS auditor that you have a great excuse does not make your deduction allowable – only proper documentation does.
Common items that small businesses struggle to properly document include:
- Business use of car and truck
- Business use of cell phone
- Business meals and entertainment expenses
- Business travel expenses while away from home
Follow these steps to help you document these expenses:
- Purchase a recorder to keep in your car. When you get in your car for a business purpose, turn on your recorder and state the date, time, odometer reading, where you are going, who you will be meeting there and the business purposes for the meeting. Then have your secretary/receptionist/child transcribe your recordings into a written mileage log. Unlogged miles are assumed to be personal miles.
- Download your cell phone detail calling log from your cell phone companies into a spreadsheet. Create a macro that will import from your own database of business names and phone numbers the name related to each call. Add a column for notes, when necessary (if it’s a potential customer, vendor, etc. instead of a current customer, vendor, etc.).
- Write on the receipt for your meal or entertainment, who you ate the meal with or enjoyed the entertainment with, and the business purposes of the meal or entertainment. If the meal was take-out or delivery indicate where you ate the meal.
- As soon as you decide you need to travel away from home for business you need to start your documentation of your trip. You should keep a separate journal for each trip and include all expenses and receipts in this journal. The journal should include the business reason why you need to travel away from home, who you have appointments to see away from home and the business purposes of going to these appointments. Your journal should also include the results of the travel – was it a successful business trip or not? If it was successful how will it help you grow your business? If it was not successful what went wrong and how will your business learn from this mistake so you don’t make it again?
It is not uncommon for the expenses I mentioned above to be in the neighborhood of $20,000. Do you really want to risk the IRS disallowing $20,000 of business expenses due to lack of proper documentation?
