The refrain from the song, Where Have All the Flowers Gone, is an apt description of too many small business owners when it comes to the documentation of their business expenses.
Week after week, I read a case or two in which a business owner is unable to deduct legitimate business expenses because there are no receipts, log books, or other required written documentation to substantiate expenses for business driving, business lunches, and other business-related costs.
Take the recent case of Cristian Burerie, a woman who ran an adult caregiver business in her home. She claimed $12,974 of "other expenses" listed on Schedule C and produced receipts, bank records, and credit card statements as proof of the $9,801; she had no written proof for the balance of these other expenses. Because the Tax Court believed that there may have been other expenses for her home-based business, they used the Cohan rule, which is an approximation weighing heavily against a taxpayer, to allow a portion of the unsubstantiated costs (50% of the balance of the expenses in this case).
Lesson: Had she kept better records, she could have deducted all of her business expenses.
Or take the case of Marc Robert Gittens Sr. who ran a self-employed business as a part-time handyman while he attended college. He, too, claimed business expenses of $19,304 for his truck, cell phone, supplies, and other costs; in this case no deduction was allowed. He had no records and, as the Tax Court pointed out, there must be a reasonable basis for applying the Cohan rule. He did not produce “any books, records, receipts, client invoices, canceled checks, or other documentation to substantiate credibly any aspect of the expenses in dispute -- their actual cost, their estimated cost, or their purpose.”
In Mark E. Stroff's case, another handyman suffered the same fate and had his expenses for telephone costs and legal fees disallowed.
Lesson: Same as above.
You get the point?
When you think of recordkeeping as a way to reduce the taxes you’ll pay on your profits and enable you to keep more of what you earn, then this task becomes as important to your business as any other business activity, including marketing, financial oversight, and strategic planning.
Recordkeeping may be tedious, time-consuming, and just no fun, but it translates into real dollars in your pocket!