Many small business owners lose to the ATO and become a casualty of tax court. Deducting thousands of dollars for travel, meals, entertainment, automobile and mobile expenses, but like many small business owners, they don’t keep the strict substantial requirements of the ATO. While they are able to produce books and records proving the expenses were incurred, they fail to show receipts, notes and documentation that the expenses were business related. In the words of the court, the only evidence they presented to support the business purposes of the expenses were their “own broad self-serving testimony and uncorroborated notes.”
The reality is that you may be entitled to these deductions, but if you don’t follow the rules, you could be left out in the cold.
Here are some basic tips:
1. Keep all receipts.
This point cannot be overstated. How many of us often ignore or quickly say “No” when asked whether they want a receipt? Not small-business owners! Is this because they spend hours upon hours organizing them during the year and look forward to turning them into their accountant? Definitely not! Savvy business owners simply know to keep receipts because if they don’t, their tax return could be in peril. The reality being – Receipts are audit protection and we have to take that seriously. Arguing with the ATO can cost you a lot more time and money than just keeping your receipts.
2. Make sure you know your receipts business purpose.
This is an especially great idea for dining and entertainment expenses. It can be easy to remember why you bought a Multifunction office machine), but it could be a lot harder to remember who you went to dinner with at Red Lobster three years ago and what the business purpose was.
3. Scan receipts and keep them at least seven years.
Yes, the ATO can come knocking for documentation and audit you up to seven years back in some cases. However, hoping that the ink on your Home Depot receipt hasn’t faded away is a whole other issue. The ATO allows taxpayers to scan receipts and store them electronically. But keep a back-up, because crying about your hard drive crashing isn’t going to help you any more than “My dog ate my receipts.”
4. Take a picture with your smartphone.
With today’s technology, it’s easy to make a note on the receipt and then take a picture of it. This is a great idea and there are a whole host of apps for the iPhone and Android that can help you better track your expenses.
5. Keep a daily business journal.
Keeping a daily journal for your business may sound ridiculous and more work than you need, as if you’re not already busy enough. However, it can be simply accomplished by keeping a good calendar in your Outlook or Google Calendar. It has been known for an auditor to actually ask for a printout of a clients Outlook calendar to substantiate various deductions being claimed. A very good reason to keep a detailed schedule.
6. Stay away from cash.
Using cash for expenses seems to be a real death trap for any small business trying to keep good bookkeeping records and documentation for an audit. Cash is hard to track, easy to spend and nearly impossible to reconcile with receipts. Stick to debit and credit cards to better track your expenses and then combine them with receipts.
It is no secret that audits will continue to increase and the rules will be only more strictly enforced. The best course of action for small-business owners is to be prepared with a better set of books and receipts for all of their expenses, staying one step ahead of the “tax man.”