Don't lose your tax deductions because of poor recordkeeping

Good record keeping is essential for both individuals and business owners when it comes to income taxes. Beyond helping you prepare accurate tax returns, proper documentation ensures you can substantiate deductions, handle IRS inquiries, and avoid costly mistakes. Here’s what you need to know about maintaining organized records.

Why Record Keeping Matters

The IRS requires taxpayers to keep records that support the income, deductions, credits, and other items reported on their tax returns. Without these records, you could lose deductions or face penalties in an audit. Organized record keeping also makes tax time less stressful and allows you to monitor your financial progress throughout the year.

Good record keeping and organization will also save you money on tax preparation fees. The less time your tax preparer has to spend digging through documents, the less they have to charge you.

1099's: this post isn't about 1099's, but in many cases, you are required to file a 1099 for many expenses. Failure to do so can result in penalties and in some cases, loss of deduction.

Key Records to Keep

The type of records you need depends on your tax situation, but here are some common categories:

• Income Documentation: Keep W-2s, 1099s, K-1s, and other forms that report income. For businesses, retain invoices, receipts, and bank statements showing deposits. In some cases, the IRS may ask you to substantiate every deposit or incoming transfer in your bank account.

• Expense Records: Save receipts, canceled checks, and credit card statements for deductible expenses such as office supplies, travel, meals, and professional fees. Again, in some cases, the IRS may ask you to prove every single expense you claim.

• Asset Documentation: Retain records for real estate, vehicles, and other assets. This includes purchase agreements, sales receipts, and improvement costs, which are necessary for calculating depreciation and basis.

• Tax Forms and Returns: Keep copies of past tax returns and any forms submitted to the IRS, such as extensions or amended returns.

• Business Records: If you’re a business owner, keep payroll records, loan documents, and contracts. For real estate investors, maintain detailed records of rental income, property expenses, and improvements.

• Mileage Record: keep a log of both business and personal miles. for business miles, document the purpose of the trip.

  
  

How Long to Keep Records

The general rule is to keep records for at least three years from the date you filed your return or two years from the date you paid the tax, whichever is later. However, longer retention periods apply in specific situations:

• Six Years: If you underreported income by more than 25%.

• Indefinitely: If you didn’t file a return or filed a fraudulent one.

• Property Records: Keep records related to property until the period of limitations expires for the year in which you dispose of the property.

Typically, we just say 7 years to remove any doubt, except for asset records, which you need to keep indefinitely (up to 6 years after you sell).

Tips for Effective Record Keeping

1. Go Digital: Scan receipts and documents to avoid losing paper records. Check out mobile app options below.

2. Organize by Category: Create folders for income, expenses, assets, and tax forms. For businesses, consider using bookkeeping software to track categories in real time.

3. Label Everything: Add notes to receipts or digital files explaining the purpose of the expense or transaction. This is especially important for items like meals and travel.

4. Keep a Log: For expenses like mileage or business use of your home, maintain contemporaneous records. A logbook or app can help you track these deductions accurately.

   
   

Useful Apps for Tracking Expenses and Mileage

• Expensify: Ideal for tracking business expenses and scanning receipts.

• QuickBooks: A comprehensive solution for managing business finances and tracking expenses.

• MileIQ: Automatically tracks and logs your mileage for business trips.

• Shoeboxed: Simplifies receipt scanning and expense tracking.

• Everlance: Combines mileage tracking and expense management, perfect for freelancers and small business owners.