How to Deal with Tax-Deductible Receipts Quickly and Easily

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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How do you deal with tax-deductible receipts that you collect on the fly? Are they stuffed into your wallet until it becomes so distended that you are forced to do something about them? Are they crumpled in pockets or left in a pile or folder dedicated to “I’ll deal with this later”? Worse yet, do you lose your receipts before you have a chance to deduct them from your income when you file your taxes?

If you don’t have a quick and easy way, then read on. Dealing with tax-deductible receipts doesn’t have to be a chore; it takes me no more than five minutes per week to manage three businesses’ worth of receipts.

Step One: On purchase, stuff the receipt into your wallet.

Yes, you read it right; stuff that tax-deductible receipt into your wallet whenever you buy something that is business-related. The idea is to keep the receipt somewhere safe, as well as regularly accessible so you don’t forget about it.

Depending on how many business-related purchases you make, your wallet may feel the pinch at the end of a day, few days, or possibly a week. When you have collected a few receipts and are eager to empty your wallet of them, proceed to Step Two.

Step Two: Enter the purchase information into a spreadsheet.

Although designing a spreadsheet to suit your needs might take a small amount of time, don’t worry about making your accounting spreadsheet too fancy. You simply want to record all the pertinent details of your purchase for easy reference and organizing data later as well as eventual ease of filing your taxes (we’ll get to that soon).

Here are some sample columns you may want to use:

• Date of Purchase
• Store/Vendor
• Category of Expense
• Cost
• Comments
• Additional Comments

Some notes on the above columns:

Category of Expense: You can either develop categories that make sense to you for later re-organization, or you can choose categories that directly relate to filing your taxes for ease of tax return preparation (I recommend the latter for ultimate time-saving purposes, but you must have a general familiarity with what the various tax categories are, and how your expenses fit into each).

Cost: Always list your total expenses including tax.

Comments: If your category is too broad or involves a variety of expenses, then use a comments column to further define your purchase or add miscellaneous notes.

Additional Comments: I don’t often use this column, but it is good to have just in case I need to make extra notes. I tend to use the Comments column to further break down categories of purchases, and I use the Additional Comments column for my more miscellaneous or explanative notes. For example, when I fill up the car with gas, my Category is “auto” and under Comments I list the expense as “gas.” If I take a client or prospect to lunch, then I’ll enter my Category as “marketing” or similar, my Comment is “client/prospect lunch” and the Additional Comments will name the particular client.

Step Three: File the recorded receipts.

This entire process is designed to make your life easier when it comes time to file your taxes (or — gasp — in the event of an audit). It will save you money spent on a bookkeeper to sort through a messy shoebox full of receipts, and/or will save you the grief of trying to do it yourself when you probably don’t have a chunk of time available to do so. It will also save you the expense of sorting through all this with your accountant, as a large chunk of the tax-preparation work will be done already.

So although this next step may seem primitive if you are not the sort of person who is inclined to keep tidy filing systems, believe me — it helps, and will save you time if you stay on top of it.

As quickly as you pulled out your small handful of receipts from your wallet and entered the information into a spreadsheet, you can have the receipts filed away and all but forgotten. You’re almost there!

The idea is to file the receipts in a manner that you can cross-reference them easily if you need to. More than once I’ve had to reproduce a receipt for auto service, or consult the specifics of a shipment I had sent to me many months ago. My receipt filing system is my savior for this.

The trick is to file the receipts according to the same master categories you have set up in your spreadsheet. This allows you to cross-reference them through your spreadsheet first, and then to find the originals in your filing system.

For example, within one filing folder, I will store the current year’s receipts. I clip them together in separate bunches organized by category, and each time I add new receipts, I simply clip the latest “auto” receipt to the “auto” category pile, on top. This way I even have my receipts organized by date within each category; something that is optimal for relocating the receipts again if necessary.

As for the routine maintenance of dealing with tax-deductible receipts, you are done! After the end of the tax year, when it comes time to file your taxes, you can do the following:

Preparing your spreadsheet for the tax man

Because you have logged the details of your tax-deductible receipts in a spreadsheet, all you have to do now is organize the spreadsheet a little more, and you are ready to file your taxes!

You have already divided and further subdivided your expenses into categories, so now is the time to itemize your overall expenses for ease of plugging numbers into your tax return. Using data searches and sorts, create (and print, if you wish) a page for each type of expense. For example, I have a page with all my “category=auto” expenses. They are further broken down by their comments sections into “gas,” “maintenance,” “insurance,” etc. I have subtotals for each sub-category, so that these subtotals can simply be plugged into a tax return with my accountant.

In the first few years, you may find this particular step of the process to be tedious, as you learn to develop categorical systems that work for you. After a few years of sitting with my accountant, I learned to develop a system of recording expenses that mutually works well; now I am so confident in my accountant’s knowledge of my situation (and he with what I require from him), that I just email him my spreadsheet and earnings and he files my taxes based on that alone.

Filing tax-deductible receipts, year over year

Once you have completed a given year’s taxes, file away the corresponding receipts with that year’s tax documents and returns. At the start of a new tax year, start with a new spreadsheet, an empty folder, and new categories and clips waiting for the next year’s worth of tax-deductible receipts.