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Tax Corner: A follow-up to “Keeping track of income and expenses for a business”

By Neil Seidler, CPA, CMA
Dear Neil,
I scan all of my invoices and receipts and keep them on my computer. I destroy all of the paper copies in order to save space and not have a box of papers in my RV. As well, I only use one bank account for all of my personal and business income and expenses. I think that the saving in bank fees makes this worthwhile. Your comments?

Neil’s reply:
You want to keep your records easily available and verifiable for the IRS should they decide to review (audit) you or your business income and expenses. Either scan your sales invoices and expense receipts and store them electronically, or store them in a file or file box.

You should have a separate bank account where you deposit all of your business income and from which you pay all of your business expenses. That will make their job much easier and faster. During an audit the IRS will likely want to take a look through your other personal accounts. If they see that all of your business transactions are handled in a separate bank account, that process will also be easier.

There’s another downside to running everything through one combined bank account. That is, the last thing you want or need is for an auditor to decide that it looks like you’re trying to deduct personal expenses as business expenses.

Easier to make mistakes with one bank account

If you’re doing your accounting and/or taxes yourself using one of the accounting and tax preparation software packages, it is also much easier to make mistakes if you’re using only one bank account. If you keep a separate account for your business income and expenses, then everything running through that account is related to your business. That way you don’t run the risk of entering something into your business expenses that is actually a personal item. You also won’t miss something that is a business expense and not deduct it. Also, your bank’s service fees for your business account are deductible as an expense.

If you’re taking your records to an accountant to prepare your business income and expense statement and your tax return, then you are making their job much easier if there is a separate bank account. Again, they will know that everything going through that account is related to your business. They won’t have to go through your personal account and try to figure out which items are business related and which are strictly personal. You’ll save them time, which in turn will save you money on their accounting fees.

Monitor the financial health of your business

I’ve used this system for clients over the years and it seems to work very well. You’ll also have a better understanding of how your business in doing financially as you can monitor your business bank account balance. Is it going up or down? Are you taking money from that account and putting it into your personal account, or are you having to deposit personal money into that account to cover the business expenses? If there is just one account, that simple test is not available.

The size of most small businesses run from an RV makes this a great system that doesn’t take up a lot of storage space for your business income and expense information. As your business grows, or if you’re running a major business enterprise, obviously you may need to do things a little differently. But for the most part, for most small businesses, you can’t beat a simple system like this.

*****

We welcome your questions and inquiries. If you have tax-related questions, or any other questions that we may be able to address, please email us or comment below and we’ll try to answer them in a future article.

If you need assistance with your tax filings or other accounting matters please feel free to contact me. I’m happy to help. You can email me at Neil@profitprocpa.com. My business website is ProfitPro Accounting and Tax, or call my office at (702) 754-1338.

We present this material for informational purposes only. It is not intended to provide, and should not be relied on, for tax, accounting or legal advice. Therefore, readers should consult their own tax, accounting and legal advisors to discuss their own personal matters.

Read Neil’s most recent post: Keeping track of income and expenses for a business

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Bob
6 months ago

What happens if your computer crashes and you lose all of this information?
I know you could have a fire and lose it also, but the odds are in favor of a computer problem.
Probably the best way is to archive all this information onto a removable drive and keep it in a safe place, or the cloud.
We use a separate program for all of our expenses and financial information, but also save it outside of the computer in a fire proof safe.

Impavid
6 months ago

Wow, there are so many things I’m doing wrong but I’m not changing. First, why have a separate business account that you can deduct, which in the first place creates an expense for you? As a small self-proprietorship business I do everything in my personal account so there is no real “business” money, it’s all mine. A lot of my incoming $ is cash. Yes, I do claim it all. My meticulous spreadsheets tell me how much I make and how much I spend. I also scan all receipts. So many of the receipts you get today fade to blank paper in less than a year. If you keep proper records and aren’t cheating, you’ll have no issue with an audit. My tax preparer only wants numbers. She never sees a receipt.

Dan
6 months ago

Maybe the times have changed, but my accountant told me to keep all of my original receipts for at least seven years, including after I closed or sold the business. Yup. I had a ton of boxes stacked in a closet with all of the paper from my business. I finally got brave enough to have it all shredded about ten years after I sold the business. He also stressed to keep separate bank accounts for business and personal, and to always write myself a paycheck. A good accountant pays for himself. I still use the same firm since I retired.

Tim
6 months ago
Reply to  Dan

The times have changed. The IRS accepts photocopies and photographs of receipts and electronic invoices.

It is also far more efficient. If you file your e-copies in an app you can find a receipt from 5 or 6 years ago or just last week in seconds (from anywhere in the world, not just boxes in one location).

I use Expensify for every receipt and invoice. Not perfect because I still need to do my book keeping but it takes the photograph and records all the searchable stuff automatically. I add the account and business purpose and it is done.

QB Online & 2021 Desktop version (for extra $$) do this AND automatically book keep at the same time. Don’t know how good that is as I think the extra money is way too much and I suspect it is not perfect🙂. Expensify is only $60 per year.

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