Tis the season when the thought of the taxing task of tax reporting begins to faintly chime in our minds, and just like Christmas, that time of year is going to be here before you know it!
Being prepared for that time, having all documentation to support your claims, and ultimately being ready for any consequential audit that might occur (heaven forbid!) is essential for a successfully operating business…especially in this electronic age of “doing business.”
With this in mind I’d like to share some great tips with you from Grant Neilley, CPA. Grant is President of Neilley & Company, CPAs in Columbus, Ohio and is one of the outstanding CPAs who provide volunteer guidance and counsel to many of our OSBDC business clients.
Take note of the excellent recommendations he shares in the following excerpt from his “Neilley & Co. Newsletter” regarding “Record Keeping in the Electronic Age.”
Record Keeping in the Electronic Age
In the “good old days” when everything was done on paper, most people had a sense they should hang on to the copies for tax purposes. But today, a lot of things are going electronic: sometimes with an email, sometimes directly on a website. As a result, you might not have a record of a transaction, bank reconciliation, etc. unless you take the extra step of downloading or printing out a copy. Recent audits we’ve helped with have brought to light a growing problem of having the necessary documentation, so here are some reminders.
Electronic copies of documents are fine if you’re audited, in fact the IRS encourages that. So even if you do have paper copies, consider scanning them.
If you order or pay bills directly on line, be sure to download and save a copy of every transaction, both invoice and payment confirmation. The same goes if you receive invoices or pay by email, don’t just keep it in your email software; actually save it to your hard drive so all your records are in the same place. Ditto for your own billings and invoices to customers.
You still need to do monthly bank reconciliation, even if you pay everything through a bank’s online bill pay service or don’t even keep a traditional check register. Save an electronic copy of your bank statement and reconciliation every month, and especially at year end. The same goes for monthly credit card statements.
Although fear of electronic record loss keeps some folks from relying on it, the reality is that if done properly (and that’s an important if, see next paragraph), it’s actually safer. Your paper copies will be gone forever in the event of a flood, fire, building collapse, theft, etc. The possibility of an electronic loss of records (e.g. computer crash) is greater than with paper (in fact, it’s almost assured), but it’s so easy to have multiple copies in multiple places, allowing for greater assurance you’ll have them when needed. This leads to the next point…
BACK IT UP! No matter how you store your electronic records, that system will fail at some point. It is absolutely essential that you do regular back ups of your records, and keep the back up at another location to safeguard against fire, flood, theft, etc. Options include a commercial online service, CD, DVD, flash drive, tape backup system, etc. Don’t rely on fireproof file cabinets to store electronic media, because even if they don’t burn, they will melt. And if you use a subscription service, you still need your own periodic copies in case that company goes out of business or you decide to switch vendors.
This is so critical; we have to say it again. You must have a backup system…one which is easy enough that you will actually do it on a regular basis without fail (we strongly recommend daily for active businesses). And you must test that system periodically by trying to retrieve a document to make sure you can. If you don’t have regular and reliable back ups, at best you will at some point have a permanent loss of records; at worst, it can quite literally put you out of business. Back ups are not optional!
You need to have some organization scheme for all those electronic documents, so you can retrieve them easily when needed. That might be for an IRS audit, but it also could be to return items for credit or warranty service, prove payment was made, research how much you spent with a particular vendor over time, etc. Many options are available for how to organize these, all with their advantages and disadvantages.
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