Resolve to get organized
BY JOHN ALLEN
The beginning of a new year signifies the start of our resolutions to better ourselves. It also begins the three-and-a-half-month scramble to dig up all of our receipts, crunch the numbers and file our income tax returns on time. As we work to dig up proof for every expense, we realize we are not as organized as we thought. In order to make the year-end tax process painless, one needs to be organized year-round.
Recordkeeping
The first step to good recordkeeping is to open up checking and credit card accounts that are separate from your personal accounts. This will make it much easier to reconcile your expenses each month or at year-end. Plus, it is also a good business practice to keep things separate. One of the biggest things that the IRS will target during an audit is business versus personal expenses. If you are co-mingling accounts, it makes it that much harder to distinguish between business and personal.
The next step is to create a monthly financial log. You can do this by either creating a spreadsheet (if you are computer savvy enough to do so), creating a monthly journal or by using an accounting software to track your progress. I don’t recommend using accounting software, such as Quickbooks, Quicken or Peachtree, unless you find yourself incurring business expenses several times a week year round. Using these types of software is best done by someone with an accounting background. Otherwise, you could find yourself doing more harm than good.
You can either create your own monthly journal using a notebook, or you can buy tax-return-specific journals at most office supply stores. You’ll track your income, expenses and any other relevant information on a monthly basis in your journal. Then you can reconcile the amounts to your checking and credit card accounts. I would only recommend this way if you find computers to be inconvenient.
In creating a spreadsheet, you can tailor how you track your expenses to what works best for you. Start by downloading a copy of the IRS form 1040 schedule C from the IRS website. The form hardly, if ever, changes, so the year that you download is not critical. The form lists out all of the expenses that you are required to individually break out. You are also required to include a schedule of other expenses that do not fit into these categories. As an outdoor communicator, conference dues and membership dues usually fall into this “other” category. You should also create a line for “large purchases,” which can be depreciated over several years. These are generally defined as anything that has a useful life that is greater than one year such as camera equipment, computers and photo editing software.
In addition to financial information, I will also track my business-related mileage on the spreadsheet. I keep a reporter’s notebook in my vehicle and whenever I am making a business-related trip, I write down the date, where I started my trip and my destination. At the end of the month l look up the distance via Google Maps and then log the mileage into my spreadsheet. This will take the guesswork out of trying to remember where you went throughout the year.
I reconcile my bank and credit card statements to my spreadsheet on a monthly basis to ensure that I have marked down everything work-related I did or purchased for that particular month. By using a spreadsheet instead of a handwritten monthly journal, you eliminate the chances for human error, but whichever way you decide to track your finances, make sure that you stick with it for the whole year.
Supporting Documentation
Just as important as good recordkeeping, having strong supporting documentation to back up your expenses is extremely crucial in case you are ever audited. You should keep documentation (generally in the form of a receipt) for every expense that you deduct for at least three years. At the end of three years, you can shred your receipts, but make sure that you hang on to any large purchase receipts that you are still depreciating as it is seen as a current expense if you are still receiving a tax benefit from it. Most equipment is depreciated for five or seven years depending on its use, so those receipts will need to be maintained for eight to 10 years.
I use an accordion folder sorted by month to track my receipts. As part of my monthly reconciliation process, I total up my receipts by expense category, then paper clip a note with the amount and category from my spreadsheet written on it and then place it into the corresponding month’s folder.
It sounds like a lot of work, and by April it’s easy to fall back into bad habits. But if you can tough it out, tax season next year will be much easier. So this year make your resolution to get, and stay, organized. ♦
— John Allen is a CPA and outdoor writer. He lives in Carlisle, Pennsylvania, with his wife, Maribeth, and daughter Claire