How to make a low-tech system for my small business tax records

Keep your business papers together for easy tax filing.

Many Americans are starting home-based businesses as a way to supplement income. When tax time comes, some business owners have found themselves sorting through piles of receipts, wishing they had kept better records and even guessing at some figures (which is not condoned by the IRS). You want to have all your records in place so that filing taxes is as easy as it can be. You don't necessarily have to have an expensive computerized system or personal assistant. You only need to have a system in place and do a little maintenance along the way. Designate a file drawer--or even a plastic crate with hanging files--in your office with a few file labels, and be diligent about putting all tax-related papers in there right away.

Things You'll Need

• File folders
• Clipboard or notebook

Instructions

Staying Organized for Federal Income Taxes

1. 

   Open a bank account for business income and expense.

   Business income and expenses will be infinitely easier to track at tax time if they are all in one account, separate from your personal expenses. Open an account, preferably one with a credit card, a nearby branch for easy deposits and online access to your account activities. When you receive payments from clients, take a moment to jot down the source and amount of the income. For example, on a $92 deposit you may need to write down "$50 Jones, $12 Smith, $30 Robinson."

2. 

   Track your expenses by category.

   As you use our business account for all business-related expenses, keep in mind that you will be sorting your expenses into categories of expense on the Schedule C (profit or loss from business) form. The most likely relevant categories are advertising, commission, supplies and the cost of goods you purchase for resale. Keep a blank Schedule C on hand to refer to as you track your expenses. You may find that expenses line up with the source. For example, all purchases from a certain vendor may be cost of goods sold and all purchases at another store may be all business supplies.

3. 

   Many business owners figure their auto expenses based on mileage.

   Keep a mileage log. A clipboard or notebook that stays in your car will suffice. On the page, make five columns. Each time you drive to a meeting or event that pertains to your business, write down the date, the beginning mileage, the ending mileage, the total miles driven and the purpose of the trip (showing that it is a business expense). When you fill up a page, you can take it inside and put it into your file folder. When you file your taxes, you will take the total number of business miles driven (per car) and multiply it by the IRS's number (such as fifty cents per mile) for that year to find the total dollar amount you can write off for that category.

4. 

   When you pay cash for a business expense, keep that receipt!

   When you cannot use your bankcard and must purchase business items using cash (such as tips, tolls or parking fees), keep the receipt. It should have the date and dollar amount on it, but you may need to write a short note on it explaining how it is a business expense. File it as soon as possible in a designated folder marked "cash business receipts." These small amounts will add up by the end of the year and these receipts are likely the only proof you will have that you incurred those particular business expenses.

5. 

   Some medical expenses are tax deductible.

   Record all medical expenses. Keep a folder in which you place your premium statements, receipts from doctor visits and prescriptions filled. As a self-employed person you will be able to write much of this off, so keep it handy. You may also want to keep a record of miles driven for medical appointments -- the IRS allows for deductions for this as well (at a lower rate than business miles).

6. 

   Set aside a specific part of your home for your business.

   If you use a part of your home for business only, be prepared to figure out how much you spent on utilities and home maintenance. You can keep the bills with your files or track it online. Whatever percentage of your home is dedicated to business use, you can deduct that percentage of certain home expenses. Your tax professional or software will guide you in determining which expenses qualify.

7. 

   Save some of what you earn for tax time.

   You may want to set aside 25 to 40 percent of your income as you earn it, in case you owe taxes at the end of the year. An easy way to do this is to have a savings account associated with your business checking account and transfer money there weekly, monthly or with each deposit.

Tips & Warnings

• Always check with a professional tax preparer to make sure that you are deducting business expenses in accordance with IRS code.

References

• Save Wealth: Schedule C
• Internal Revenue Service: 2010 mileage rates
• Internal Revenue Service: Small Business Taxes