I’ll teach you how to organize your business receipts so that you can meet the IRS requirement to keep business records for at least three years.
There are many great methods for receipt organization available, but before we dive into the details; you need to ask yourself some key questions.
Am I more comfortable working with paper or digital receipts?
This comes down to personal preference. Some of my clients prefer 100% digital solutions, and others work best with paper. Either way can work, but you need to be honest with yourself about which type of system you’re likely to maintain over the long run.
How many receipts do I usually have to keep track of each month?
If you have a lot of receipts each month, trying to keep up with organizing them each month is probably not going to work out. On the other hand, if you only have a few receipts from the same stores each month, investing in a fancy system might not make sense. You should review at least three months of bank and credit card activity to get an idea of your volume now and think about where you want your business to be in the next year.
How much time and effort am I willing to commit to organizing my receipts?
It’s crucial to be totally honest with yourself here. It doesn’t matter what you want to do or what you think you should be doing – you can create the best system in the world, but if you’re not willing to commit the time to use it, it’s not going to work.
While there are many great reasons to keep your receipts, the most important reason is that the IRS requires it. If you want to learn more about the types of records you should be saving, the IRS has some surprisingly straightforward guidance.
If you choose not to keep your receipts, you risk having an unnecessarily complicated IRS audit. While the chances of being audited are very low, if you get unlucky and the IRS finds problems in one year, they can look back further. The folks over at Keeper tax did a great job of outlining what can happen if you get audited and don’t have your receipts, but the result is likely to be a higher tax bill and lots of stress.
As long as you save your receipts, does it matter if you keep them organized? Technically, it doesn’t matter if they are organized as long as you can produce them during an audit. However, there are some great reasons why you should commit to keeping your receipts organized.
You’ll save money at tax time
I know plenty of business owners who show up at their CPA’s office in March with a box of unorganized receipts and expect the CPA to turn them into a tax return. While some CPAs will do it, you’re going to pay more for the service. But, on the other hand, if you have all of your records organized and ready for tax preparation, your fees will be lower, and you’re less likely to need an extension.
You’re less likely to lose receipts
If your system involves dropping all your receipts into a shoebox, how do you know if you’ve lost one? If you’re like me, you probably have old receipts at the bottom of your purse, in your vehicle, in coat pockets, in your email, and in plenty of other places. Accidentally throwing one away is incredibly easy, and if you don’t have them organized, you won’t realize one is missing.
You’ll be able to find them when you need them
Audits aren’t the only reason you might need a receipt. For example, let’s say you have someone doing your bookkeeping, and they want to know if your purchase from Home Depot is related to job materials or light bulbs for your office. If you can’t remember, you’ll need to check the receipt, and doing so will be much easier if they are organized. Perhaps, you have an employee who uses the company credit card. If you need to review what they’ve purchased, you spend hours digging through receipts to find the right one.
Keeping physical records is a tried-and-true method. In fact, until recently, the paper method was the only way to keep track of your business records, and it is relatively straightforward
If you’re committed to a paper-based system, you need to have a system in place for saving everything.
In-Person Purchases: If your business requires you to make frequent purchases in person, you need to have a sound system for saving all of your receipts. I suggest keeping a separate container with you or in your work vehicle where you store all of your receipts as soon as you get them. Then, get in the habit of moving those receipts into your central organization system at least weekly.
Online Purchases: When you make purchases online, print out the receipt immediately. Then, you can either organize it into your system directly or put it into your inbox to handle in batch at the end of the week.
If you’re going to use this system, you must take the time to organize your receipts. For most people, organizing them in chronological order will make the most sense. In fact, most receipt organizers on the market today are set up to organize based on date. If you have a mix of in-person and printed receipts, you may wish to attach the in-person receipts to a full-sized sheet of paper to make them easier to manage.
A paper-based system’s key to success is reconciling your receipts to your bank and credit card statements every month. If your receipts are well organized, matching each line to a receipt shouldn’t take long. It’s important to do it monthly because it will be a lot easier to locate it now than in six months if you miss one.
I’ll never forget when I audited a company that used this system to organize their business records. They had all their receipts saved with each bank statement; everything was well organized and easy to locate. When I arrived to do the audit, I let the owner know which receipts I wanted to see. She looked at the list and immediately said, “This is the one receipt I don’t have from last year. “We talked about what happened, and I requested to see some additional receipts and found that there really was only one missing receipt. I documented my work and was able to wrap up the audit quickly. The audit went well for her because she had done an excellent job organizing and reconciling her receipts. She could be confident that there was only one missing receipt because she reconciled them with her bank statements. I could see that was the only missing receipt because I could easily verify her records. Had she been less organized, the audit would not have gone as smoothly.
Pros
Cons
If you’re ready to go paperless, you can choose to store and organize everything digitally. There are tons of options, so we’ll start with a digital method that mirrors the paper method.
In-person purchases: You’ve got two options, keep your receipts and scan them when you get back to the office, or take a picture with your phone right away. I’m personally inclined to take a picture with my phone as soon as I get the receipt because that’s the time I’m most likely to remember to do it. However, you’ll still have to develop a system to get it off your phone and into your document storage system, so saving them up to scan once a week is still a good option. Tools like google drive can make this process easy, but consistency is key. If you’re shopping at stores that have an e-receipt option, opt for that instead so you can save the receipts right from your email.
Online purchases: This method shines when it comes to online spending. Every time you make an online purchase or get a digital receipt, you save that receipt to your digital receipt organizer. If you come up with a good naming convention (I suggest YYYY-MM-DD vendor name $x.xx), you can even organize your receipts while you save them.
Each week, you’ll need to make sure all the receipts in your digital organizer are appropriately named. This is especially important if you regularly make in-person purchases and have a number of pictures from your phone. Using a good standard naming convention is critical to making this system work, so you don’t have to open each file to see if it’s what you’re looking for. For example, I like YYYY-MM-DD vendor name $x.xx because the date format will keep everything in chronological order. In addition, including the vendor name and dollar amount helps you track it to your bank statement without opening the file.
You’ll still need to make sure you reconcile your receipts each month with this method to ensure that nothing is missing. However, if you’ve consistently used a strong naming convention, it shouldn’t take long to go through everything.
Pros
Cons
Requires comfort working with technology
Recent advances in technology have taken a lot of the pain out of organizing your business receipts. Several software solutions are available that can take a lot of pain and frustration out of the process.
In-person purchases: Pick a system with an app that allows you to take pictures of receipts on the spot. The system should have optical character recognition (OCR) capabilities to read the vendor name, receipt date, and amount from the picture. Make sure you take a picture of the receipt with the app as soon as you get it, then you can simply throw the receipt away. If you’re shopping at a store that has e-receipt options, you can still select this method and send the receipt into your software via email.
Online purchases: Your software should have the ability to forward online receipts right from your email. I’ve experienced the occasional receipt that needs to be downloaded and then uploaded into the software, but on the whole, this solution works beautifully for online receipts. I make it my habit to forward the email into my receipt software as soon as I get it, so it doesn’t take up space in my inbox.
Every Friday, I open my receipt software and review all of my receipts for the week. I can then select the expense category and vendor information and sync the receipt to QBO. Then I check my bank feed in QBO and match each expense to a receipt. If I have an expense without a matching receipt, I know I’ve missed something, and I go back through my records and find it. The process is quick and painless and can easily be delegated to a bookkeeper or virtual assistant.
If you’re syncing receipts to your accounting software and matching them to your bank feed, the work of reconciling should be done for you. The only thing left to do is complete the bank reconciliation in your accounting software to ensure there were no errors in the bank feed and complete the reconciliation.
Pros
Cons
I am personally partial to automated receipt management software. Organizing business receipts is necessary but not the most valuable use of your time. Choosing the right software for you depends on how many features you need, how many people need access to the app, your budget, and which accounting system you use. Some of the solutions on the market also integrate with banks or large vendors to fetch statements and organize receipts, while others can be used for employee expense report processing and other needs. If you need help finding the right solution, contact me, and we can work together to find the right solution for you.
Learning how to organize your business receipts is necessary for every business owner. But, no matter what method you choose, you need to commit the time to make it work. If you’re not ready to commit to organizing your receipts yourself, let’s chat about how CenterFocus can help.
