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I’ve come to realize that the most important issue to address is the lack of documentation. Taxpayers are required to maintain a healthy record of their transactions to justify their tax deductions. But, this is easier said than done.
I’d like to point out that this is not only directed at the individual taxpayer or small businesses, even major corporations such as Pfizer (among all other Fortune 500) have a hard time keeping their records.
Two years ago, I failed to keep around half of my receipts. After a quick cocktail napkin calculation, I learned that I’ve lost around $15,000 dollars in cash over 3 years because of my forgetfulness.
I never forgot a receipt after that day.
I’ve learned that no amount of calls and reminders can save my clients from themselves because we’re all too busy with other important things (like running a business).
Instead, I’ve begun to automate my clients in order to help track their expenses without them having to remember (too often). With a power of attorney, I’m authorized to act on their behalf and I proceed to do the following:
2. In a perfect world, you would have all of your cash outflows paid through this single credit card but I’m realistic. To the best of your ability you should use this credit card for everything remotely connected or related to your business.
3. Automation is a process that you have to create. The first level of automation comes from your recurring bills. Telephone, Internet, gas, electric, water, taxes, rent and etc. should all be linked to your business credit card. These are expenses that you’re guaranteed to incur and can be easily forwarded to a specific account.
4. The next level of automation comes from payroll. Because of the developments on the web, payroll can be easily billed to a credit card so that you can easily track your payroll expense (and earn rewards).
5. Lastly, the final step in automation is yourself (sorry!). You need to get into the habit of using your business credit card for everything. I’ve stopped carrying around cash and all other credit cards, so that I have to use the business credit card for all purchases. If I need cash to buy something, I have to actively seek out an ATM. (I’m lazy so this usually makes me reconsider spending money.)
6. Expense reporting. This is the point where everyone gives up because it’s depressing to see how much money you’ve wasted and even worse going through hundreds of receipts. But, we can avoid that pain with our previous automated system above. Web applications such as Xpenser.com help you automatically create excel spreadsheets/reports and mobile apps like Fresh Xpense (on the iPhone and Blackberry) help maintain daily expenses.
Conclusion:
You need to automate, consolidate, and forget your expenses.