Good Business Record Management Means Less Tax Time Stress
If you took the time to make a list of all the tasks you need to do to manage your business and then ordered them in terms of how much you liked doing them, where would record management come in? Two hundred and seventy? Or even lower?
But while most of us definitely consider business record management to be an unimportant work and tend to give it a low priority, good record management not only makes our working lives easier, but can give us real stress relief at tax time.
Here’s what you can do to make record management easy:
- Keep your business and personal expenses separate.
Sounds easy, doesn’t it? But this is the part of record management that trips up most people. If you take a potential client out for a round of golf, for instance, is that a personal expense or a business expense? (The answer is personal, because green fees are not a deductible business expense.) Vehicles that you use for both personal and business reasons are another perennial problem. You need to know what qualifies as legitimate business expenses and what doesn’t, and be sure that your business records reflect this accurately
- Get sufficient documentation for all business expenses.
Many business people make the mistake of thinking that “lists” are good enough for record management purposes. For instance, they have a list of purchases on their credit card statements and think that that’s good enough in terms of claiming those purchases as business expenses.
Unfortunately, the tax authorities are more demanding. They do not accept credit card statements or cancelled cheques as sufficient documentation for expenses when an invoice or receipt would normally be issued..
In terms of keeping records, there are two points to bear in mind:
- a) Always get a receipt. Get in the habit of asking for a receipt whenever you make a purchase – no matter how small. Little expenses add up, too, and you need the documentation for your business records.
- b) Label your receipts, if necessary. There are still businesses around that hand out receipts that don’t have anything on them except the date the item was purchased and how much it cost – which isn’t very helpful when you’re staring at a receipt trying to figure out what the item in question was and which business expense category it fits into.
When you get a receipt, look at it and write the missing/relevant information on it, such as what the receipt is for and the expense category.
- Get a separate bank account for your business – and use it.
While the fees for business bank accounts are notoriously high compared to personal accounts, a business bank account is absolutely necessary for good business record management.
A business bank account helps you keep your business and personal expenses separate. You will deposit all your business revenues into the business account, and withdraw any business related expenses or payments from the business account only.
What kind of business bank account should you get? A current account – preferably one that delivers monthly statements and returns your unpaid cheques to you.
Business cheques help make your record management easy because you can use the memo line on the front of each cheque to document the business purpose of the expense.
- Have and use a separate credit/debit card for business expenses.
Using your personal credit cards for business purposes will swiftly drop you into a record management quagmire. A business credit/debit card greatly simplifies your business record management by helping keep your personal and business expenses separate. (It also helps make your business look more professional.)
- Keep a mileage log of your business travel.
If you use any of your vehicles for business purposes, a mileage log will be a big help in record management. Note the mileage (or kilometer) reading on the odometer at the beginning of the year and then enter the mileage by date each time you use the vehicle for a business purpose. Keeping your mileage log in the glove box of your vehicle will make this easy. If you have more than one vehicle that you use for business purposes, keep a mileage log in each.
- Keep all your business records for a particular tax year together and in one place.
Having your business records scattered all over the place is a real time-waster when it comes to accounting or preparing your taxes, and organizing your business record management system by fiscal year will make it much easier to find the business records you need when you need them.
- Keep your business records for the correct length of time.
For some reason, there seems to be a lot of confusion about how long you have to keep your business records. For tax purposes, “if you file your return on time, keep your records for a minimum of six years after the end of the taxation year to which they relate” This six-year period of time starts from the last time you used the business records, not from the time the transaction occurred.
These seven things you can do to make your record management easy aren’t difficult. Like a lot of the administrative business related to running a business, they just require establishing good habits and persistence. But if you apply these rules now and follow through, you’ll see a huge difference next tax time and your accounting will be easier all year long.