Upon going into business for yourself, you quickly learned that you were not just a contractor. You had also become an accountant, a secretary, a salesperson, and perhaps even your own office-cleaning staff. Among all these additional responsibilities, high on the list of difficult and dreaded tasks is that of record keeping.
No matter how much you hate doing it, keeping accurate and updated records is a key component of running your own business. Keeping detailed records not only makes your life easier at tax time (which the self-employed enjoy four or five times a year instead of just once), but it also means that you’re less likely to overlook a deduction because you lost track of it. In addition, you’ll need good records if you ever apply for a business loan or other funding. If you’re audited, a detailed record-keeping system will look far more professional than a shoebox full of receipts.
Although you could hire an accountant, who knows your income and outgo better than you? Who, but you, will be vigilant about tracking every receipt and possible deduction? To make this odious task a little easier for you, this article and the accompanying download will discuss the activities and expenses you should record and the easiest way to do it.
What you need to track
Simply put, you need to track your income, your assets, and every expense related to your business, as well as personal expenses tangentially related to your business, such as health insurance. The more obvious expenses to track include:
- Office expenses. If you have a home office, you need to maintain records on your deductible housing costs (either rent or, if you own your house, your mortgage interest, real estate taxes, and insurance) and utilities. You can deduct a certain percentage of these; see my article on taking the home office deduction for more information. If you rent a separate office from your house, your office rent and associated utility costs are fully deductible.
- Training expenses. Track expenses such as books, training seminars and classes, and certification costs.
- Equipment expenses. Note all your equipment, such as a laptop, printer, and even cables and extension cords. (See the note on assets below.)
- Vehicle expenses. You can deduct either actual operating expenses, which is a fairly complex way to do it, or you can track your mileage and multiply the total by .325 to deduct 32.5 cents on the mile for 2000. If you use the mileage deduction, you can also deduct parking fees and tolls.
In addition to expenses, you should also document your income and keep every check stub from client payments.
Recording other business transactions
You should have a separate business checkbook, recording monies coming into and leaving your account. If you pay cash for a business item, you should fill out a petty cash slip and attach it to the receipt for that item. Keep a separate petty cash log or record these cash payments along with your other expenses.
You need to keep detailed records on assets placed into use for your business, such as computer equipment and office furniture. Your records should include the following:
- When you acquired it
- What you paid
- Whether you took a Section 179 deduction
- Any deduction for depreciation
- How you used the asset (business only? part business?)
- If you sell the item, when and how you sold it, any expense in selling it, and the amount you received for it
How long should you keep the records
As a general rule, you need to keep all your records and documents for at least three years after you file your tax return for that year. In certain instances, you’ll need to keep them longer, depending on what the IRS terms the period of limitations for that expense. For example, you must keep records relating to each business asset until the period of limitations expires for the year in which you dispose of the item.
How you should track it
In general, use whatever system you find to be thorough and adequate. Remember that even in the electronic age, you’ll still need to keep and file hundreds of pieces of paper. You might use a completely electronic method, or a mix of electronic systems and old-fashioned paper logs from which you later enter summaries into your PC. For example, I use my business checkbook, a paper log of my automobile expenses, and two Excel spreadsheets, which include:
- Expenses. One that tracks my cash flow and all deductible expenses.
- Income. Another that tracks every payment I receive from a client and each quarter’s estimated tax payments.
Although I record very detailed information in these spreadsheets, using only two spreadsheets keeps things simple for me.
Keep your supporting documents
Even with automated tools, it’s critical that you retain all your paper records: invoices, check stubs, credit card slips, cash receipts, and so on. For IRS purposes, a cancelled check is only a backup. Don’t rely on a cancelled check as proof of anything unless you also have a corresponding receipt or invoice.
It’s in your best interest to develop and stick with a file-keeping system as well as record keeping. It doesn’t have to be anything fancy. I get one of those inexpensive, accordion-type filing boxes for each year’s receipts and various slips of paper. Each pocket is dedicated to a type of expense, and I like to use a different color for each year. Or, you can keep your papers in easily accessible file folders through the year and place them in the accordion box after you finish your taxes and no longer need them.
Paper logs for automobile expenses
As handy as computers can be, a few expenses are still easiest to track on paper. I keep a simple spiral-bound notebook in the glove compartment of my car, in which I record business trips I take in my car, whether it’s to a meeting with a potential client or to the office supply store to buy more printer paper. For each trip, I record the following:
- Starting and ending mileage
- The total mileage for that trip
- The date
- The purpose of the trip, including the client’s name if applicable
There is software for handheld devices such as PalmPilots that can track this information, too.
For a software solution for record keeping, you can check out these editions of popular personal-finance management software aimed at the sole proprietor. Both retail in the $80-$95 range:
- Microsoft Money 2000 Business & Personal. Intended to help sole proprietors manage their business and personal finances.
- Intuit Quicken Home and Business 2000. In addition to tracking expenses, you can create invoices, set up accounts payable, and prepare reports and statements. It also allows you to track personal expenses.
Meredith Little has worn many hats as a self-employed writer, including technical writer, documentation specialist, trainer, business analyst, photographer, and travel writer.What’s your system for keeping track of expenses? Has your system saved you during an audit or a lawsuit? To share your thoughts, post a comment below or send us a note.