Gather Your Paperwork & Organize Your Business Receipts
Hopefully you’ve been keeping records for tax purposes throughout the year, but if not, now’s the time to get all your paperwork organized. Disorganized receipts can put your small business at risk for sloppy and inaccurate books. Not to mention, messy records can increase your chances of making errors on your small business tax return and cause more issues in the future.
To keep your business receipts organized, you can:
Sort receipts by type of expense
Use folders and labels
Organize receipts chronologically
Store receipts digitally on your computer or device
Review Your Bookkeeping
Far too often, small business owners miss out on tax deduction opportunities, meaning they also miss out on the opportunity to put more money into their pockets. The best way to avoid this is by ensuring all transactions have been recorded.
Update Your Expense Records
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business operates to make a profit.
If you do not carry on the activity to make a profit, you must report all of the gross income (without deductions) from the activity as 'Other Income' on Form 1040, line 21.
To be deductible, a business expense must be both ordinary and necessary.
An ordinary expense is one that is common and accepted in your trade or business
A necessary expense is one that is helpful and appropriate for your trade or business
An expense does not have to be indispensable to be considered necessary
Expenses are incurred and should be recorded when:
the liability amount is set and recorded, and
the property or services are provided or the property is used
Be sure to make note of any expenses that you’ve used, but haven’t been charged for yet, like phone, gas and electricity bills, and also any expenses you’ve prepaid but haven’t yet used, like insurance, rent, and some kinds of equipment.
Review Your Payroll
Remind your employees to submit any outstanding expense reimbursements, and complete your payroll.
Determine If You Will Disburse a Bonus or Other End-of-Year Incentive
It makes a difference whether you disburse bonuses or other rewards before the end of the year or in January, especially for your taxes, as it directly impacts the profits you report.
Separate Your Personal & Business Expenses
Ideally, small businesses should have a separate bank account for business expenses, however, we know this isn’t the reality for many smaller businesses and freelancers. That means you must separate your personal and business expenses.
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense that is used partly for business and partly for personal purposes, divide the total cost between business and personal and deduct the business portion.
If you or your employees travel to visit clients or attend trade shows, you may be able to deduct these expenses. Many types of business travel expenses are deductible can include transportation and accommodation costs, and the IRS allows a 50% deduction for business meal expenses.
Commuting expenses continue to be nondeductible.
IMPORTANT: you shouldn’t attempt to write off any expenses associated with sightseeing and leisure travel, which can trigger an audit.
Additionally, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.
For additional information about travel expenses, see:
Travel & Hotel
Business Use of Your Car
If you use your car in your business, you can deduct your auto expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Be sure to update your motor vehicle expense information including business use of auto, operating expenses, vehicle driving (mileage) log with business miles driven, etc.
For additional information about auto expenses, see:
For a list of current and prior year mileage rates see:
If your home is your principal place of business, or you use the work space in your home to earn your business income and use it regularly to meet with clients, customers, or patients, you may be able to deduct expenses for the business use of your home if you refrain from using it for other purposes.
Deductible expenses may include both direct costs (e.g., painting a home office) and indirect costs (e.g., rent or mortgage interest, insurance, utilities, repairs, and depreciation).
The deductible portion is usually calculated based on the work square footage vs total square footage of your home and can be calculated using either the regular or simplified home office deduction option.
Update your income records.
Check for billable sales or services that you haven’t invoiced for yet and send those invoices out. Be sure to include payment terms.
Make note of any customer deposits you’ve received for work you haven’t done yet, as well as work that you’ve started but can’t invoice for just yet.
Collect past due invoices
Send out invoice reminders.
Try to collect all of the money that customers owe to your business. Follow up on any outstanding invoices and send final payment reminders to late customers—start calling if you need to.
If collecting payments from customers is difficult, consider offering them a payment plan instead. The customer might not be able to pay their invoice off all at once. Negotiating an installment plan can help you get paid faster. Plus, it shows customers that you care about their business and understand their situation.
If you really can’t collect the money yourself, consider hiring outside help. Collection agencies will do the dirty work for you. However, the collection agency will keep a portion of the total amount due.
If you’ve followed up with a client but it looks like you’re never going to get that payment, you can write off those invoices and move the receivable to bad debt expense.
Reconcile Bank and Credit Card Accounts
After you’ve properly categorized and verified all your income and expenses, and that taxes are accounted for within each transaction, reconcile your bank and credit cards to make sure all of the transactions in your monthly statements appear in your accounting records, and that there aren’t any duplicates.
~ To reconcile your accounts, compare your bank statements to your accounting records ~
Your bank statements should match the balance listed in your books. If they don’t match, find the discrepancy.
Be sure to look for, and review, all uncleared transactions.
Why are accurate reconciliations important?
Know how your business is doing. You can't really know unless all accounts are reconciled and properly accounted for on your financial statement.
Manage your cash more effectively. Proper management of funds not only saves money, it makes money for you.
Avoid overlooking any tax deductions when aiming to reduce tax liability.
Protect yourself. By timely reconciling and promptly objecting to your bank about any unauthorized, fraudulent or forged checks presented to your bank and paid by that bank, you can relieve your agency of responsibility for the shortfall and transfer the risk to the bank. This reason to reconcile alone should be enough. Crime exists.
Detect and prevent embezzlement of funds from within your company.
Detect and prevent excess/unjustified bank charges and ensures transactions are posted correctly by your bank.
Identify lost checks, lost deposits and unauthorized wire transactions.
Sleep Better. You will sleep more peacefully at night knowing your bank accounts are reconciled, in balance and that all escrow funds, accounts, checks and disbursed funds are properly accounted for.
Review outstanding accounts receivable and verify for accuracy
You should have a running list of what invoices are still unpaid or which clients still owe you money for work already completed.
Confirm that the amount owed in total matches the amount owed as a sum of the individual billing records.
Conduct an inventory count
If you keep product or materials in a warehouse or on-site, conduct an inventory count before the year’s end, and make any corrections to your current records. If you notice significant discrepancies, it might be a good idea to investigate. You want to be sure that not only are you keeping accurate records, but that you’re not experiencing any internal loss.
Review unpaid bills from vendors
Every business should have an “unpaid vendors” folder. Keep a record of each of your vendors that includes billing dates, amounts due, and payment due dates. If vendors offer discounts for early payment, you may want to take advantage.
Update and review fixed assets
Review your asset accounts to ensure additions or disposals during the year such as land, buildings, vehicles, machinery, etc. have been properly recorded and nothing is booked to an asset account incorrectly.
A fixed asset is a long-term asset with a life that lasts longer than a fiscal year.
Double-check your payroll as well as tax deposits and benefits and make necessary corrections
Ensure that taxable fringe benefits, such as third-party sick pay or a company car are accounted for. Other benefits that are easy to forget include educational reimbursement, health and life insurance, and transportation subsidies.
Now is also a good time to:
Review your current benefits and ensure you’ve communicated any changes to those plans or retirement options.
Determine the correct payroll deposit frequency for 2020
Review quarterly payroll reports, and make payments, if necessary
Review filing requirements and ensure that you are in compliance with employees and subcontractors.
If you paid an independent contractor or vendor $600 or more this year, you need to give them IRS Form 1099-MISC in January so make sure you have their forms on file for January.
Before the end of the year, be sure you have a W-9 form on file for all contractors and vendors you paid $600 or more to throughout the year. If you’re missing a form, ask your vendor or contractor to complete one before year-end.
This is a good time to review all of your vendors in your system, and verify that the contact information, including phone number, email address and contact name are still correct. Also, purge the system of any inactive vendors or inaccurate information. Or if time permits, evaluate whether or not they’re worth reconnecting with, and act accordingly.
If you have employees, you also need to make sure you have IRS Form W-4 on file for each of them. At year-end, check your records to verify you have Form W-4 for each employee you hired during the year (including terminated employees). Ask employees to update their addresses in your payroll system so that W-2s will reflect the correct addresses.
Collect sales tax exemption certificates from any vendor who has not paid sales tax.
Proof of Insurance:
Collect workers compensation proof of insurance certificates from contractors so you won’t have to pay workers comp on payments you have made to them.
Common Mistakes to Avoid
Don’t record your assets as expenses
Your capital assets and equipment purchases are adding value to your business, so they’re not considered expenses
Make sure you’re consistent with how you record your inventory purchases
Goods and materials for resale are considered inventory
Don’t record an owner’s withdrawal as an expense
This is a reduction of owner’s equity, not a business expense
Don’t record loan payments as an expense
Payments should be split between principal payment on the loan and interest expense
You may only deduct $25 in non-cash gifts to each employee
The maximum deduction amount for non-cash achievement or service awards given to any one employee is $1,600