This article is one of a series, collectively titled “The Dirty Dozen: Mistakes That Could Ruin Your Business.” Making these mistakes can be very costly in both time and money, but all of these possible mistakes can be easily avoided by some advance knowledge and planning ahead. Although I think the information in this series of articles can be very valuable to home business operators, it is very important for you to know that I am writing this series of articles solely from a “lessons learned” perspective. I am not a legal, tax, or accounting professional. You should consult an appropriate professional for detailed advice that is specifically relevant for you and your business.

In this article, I am going to discuss the potential problem area of not keeping adequate records.

I cannot overstate the importance of keeping clear, accurate records. If you have never filed a tax return for a business before, you will probably be pretty surprised by how much detailed information you will need. If the IRS ever audits your business tax returns, you could be required to explain and show proof of every single one of your business expenses.

Don’t throw away anything away until you are positive it no longer matters. In general, many tax specialists suggest keeping all business financial records for at least seven years after the date of your tax return. So if you are filing a tax return that includes business income and expenses for the tax year 2007, you need to keep all of your expense receipts, income statements, etc. until at least 2014.

Don’t freak out. Although maintaining detailed business financial documentation is crucially important, it is also pretty simple. Here’s one easy and inexpensive, but perfectly effective, way of keeping track of your business records. Go to a housewares or office supply store and get one or two little plastic trays that are a good size for holding regular, white letter-size envelopes. Start labeling envelopes with categories of business expenses: office supplies, professional education, computer hardware and software, etc. Put all of your receipts in your tray of envelopes at the end of every day. Once a week, put all of your receipts in the appropriate envelopes. When you come across a receipt that doesn’t already have an envelope, make one right then. Do the same things for all business income that you receive.

If you are comfortable with scanning, you could also scan your business receipts and organize them electronically. I still have sort of a paper-and-pencil brain, so I just do the envelope thing, and it works just fine.

Remember that you may be able to claim business mileage for your car. This can really add up to a nice deduction for you – but it’s also easy to lose track of it. Here’s one easy way to stay on top if it. Get a lined index card (decide what size is best for your handwriting). Make columns labeled, “date, destination, purpose, begin mileage, end mileage, and trip miles.” Leave the index card and a pencil in your car (you could attach it to a small clipboard). Every time you go somewhere that might count as business mileage, just quickly fill in one row of your index card. When the card is full, take it inside, and file it in an envelope labeled “mileage.” Even if you don’t calculate the “trip miles” every single day, as long as you record your beginning and ending mileage for each trip, you will have the information you will need at tax preparation time to help your tax professional verify that your mileage is allowable.

Note: You can’t mix business and personal mileage. Let’s say you head off to Kinko’s to do some business copying, and then, since you’re running errands anyway, you decide to get your grocery shopping done too. If going to the grocery store adds mileage beyond what your Kinko’s trip would have taken by itself, you must subtract that “personal” mileage from your business mileage claim. Again, talking to a tax professional early in the tax year can help you a lot!

Mileage on your car is not the only type of travel expense that you might be able to claim as a business expense. Let’s say you fly somewhere to attend a professional conference or to take a class that is relevant to your business. All your travel costs (transportation, hotel room, meals, etc.) might be deductible expenses for you. You might also be able to claim the costs of conference registration or class fees, educational books, etc. as legitimate business expenses.

The key here is to keep complete and detailed records, including receipts for all expenses. You can always discard records that you don’t need. Finding supporting details for a “claimable” expense can be time-consuming, frustrating, and could eventually disqualify you from claiming legitimate expenses just because you can’t document them.

Aside from documenting your business finances if you are ever audited, this careful record-keeping also helps ensure that you get to take every business deduction to which you are entitled. Again, please consult with a tax specialist about all of this.

Be Sure Your Business Expenses Are Allowable: Consult with a professional tax advisor to confirm that all your business expense claims are within IRS guidelines. (Write down all expenses that you think might count – just verify them with a knowledgeable professional.)

Another possibility is keeping all of your business records electronically. Intuit offers the Quicken and QuickBook series of products for both PC users and Mac users. It will take some time to learn if it is all new to you, but once you are familiar with them, electronic checkbooks and business record keepers can save you a lot of time – especially when it’s time to do your taxes.

One more time, please remember that what I am giving you here is only my personal understanding of these topics. I advise you to get professional assistance.

By: Cindyann Williams

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