How to Organize Schedule C Tax Information to Keep the IRS Happy

Panic! You’ve received a letter from the IRS asking you to come in and to bring your records with you. You frantically begin to re-create that particular year’s paper trail. Don’t pull your hair out. Start now to organize those records so in the event of an audit, you can confidently walk into their office with appropriate and verifiable documentation.

Difficulty: Easy

Instructions

Things You'll Need:

• File Folders and Labels
• File Boxes
• Spreadsheet Program or Pencil and Paper
• Paper Clips and Binder Clips (or 2-Pronged Fasteners)

1. 
   To be used to store your yearly paperwork.

   PREPARE. Start at the end of the year to get together your filing system. Choose a sturdy box to file your information in and keep it accessible. Office Depot and OfficeMax sell nice white boxes that require just a little assembly. These have a pull-off top which makes it easy and time-efficient to gather your documents throughout the year. Label the box “Income Taxes – Year (tax year).”
   
   When you are done, you will gather together your file folders and place them in this box.

2. 
   Collect income records.

   ORGANIZE INCOME.
   
   Label one file folder “Schedule C – Income, Tax Year (tax year).” Place all your income information in here. This includes any 1099 forms you receive. This file may not contain much information until after the year has wrapped up. After you have completed your tax return, clip all of these documents to the inside back cover of your file so that they do not become lost.

3. 
   Make your file folders ahead of time.

   MAKE FOLDERS FOR EXPENSES.
   
   Label file folders with the exact categories that the IRS uses on its Form 1040, Schedule C. File labels should read “Schedule C – (name of expense), Tax Year (tax year).” If certain categories do not pertain to your business, do not make a folder for them. As of the date of this article, those categories were: Advertising; Car and Truck Expenses; Commissions and Fees; Contract Labor; Depletion; Depreciation; Employee Benefit Programs; Insurance (other than health); Interest; Legal and Professional Services; Office Expense; Pension and Profit-Sharing Plans; Rent or Lease; Repairs and Maintenance; Supplies; Taxes and Licenses; Travel, Meals, and Entertainment; Utilities; Wages; and Other Expenses. If you have more than one “other expense,” you should label these separately. Consult the IRS’s instructions to Part V of Schedule C for information on what other expenses you can deduct.

4. 
   Get data down for easy summation.

   SET UP A LIST TO COMPILE INFORMATION. For those who use an accounting application to do your books, go to Step 5. Otherwise, use a spreadsheet (such as MS Excel) or a piece of paper with lines on it to set up a list to save relevant data. Divide your list into columns and head as follows: Date, Brief Description, and Amount. If you are using a spreadsheet, format accordingly. Print out pages of the spreadsheet to include in your records.

5. 
   File now so you don't have too later.

   ASSEMBLE AND FILE YOUR RECEIPTS. As you record your expense information in your business books or spreadsheet/paper system, immediately file the receipt in your folders. File directly on top of the previous receipt to keep them in chronological order, most recent on top. (If you prefer, file directly behind the prior receipt. Either way, choose one system and go with that one for all your receipts).

6. 
   Triumph!

   YEAR-END WRAP-UP. At the end of the year, if you have kept your filing up to date, you will have the majority of your figures collected and will only need to add up the columns. After you have completed your tax return, clip all documents to the inside back cover of your file so that they do not become lost. Use a binder clip to clip all expense folders together. Place them, along with your other tax documents and your file copy of the return, in your file box. Put the box in a storage area free from moisture, dust, and deterioration.

Tips & Warnings

• Use this system to organize all your other tax information.
• Keep only the receipts necessary to verify your deduction and discard any extraneous paperwork. If you are ever audited, the IRS auditor will appreciate the most streamlined and efficient way to accomplish his/her job.
• It may be a little more expensive to purchase the white storage boxes; however, in the end they will save you much hassle. And they can be reused when you purge your old tax records (see link for the IRS below regarding information on how long you must keep old tax records).
• You may want to use a 2-pronged fastener to hold your documents into place within the folder. I prefer the compressor and base style to the self-adhesive base only. Just be sure to punch your holes so that they do not delete important information.

Resources

• IRS

[leduncan]

on 9/19/2009 Very well written! Great organization skills for a topic we all love so much!

[PajamaMommy]

on 11/20/2008 Good organizing tips. Thanks.