• Open a separate bank account for your business. Tell your banker that you are in business and need a corporate or a “DBA” (Doing Business As) account. Even if you are a sole proprietor who files a Schedule C, make it a priority to open up a separate bank account for your business.
• Write only business checks from your business account. If you need money, write a check to yourself or transfer funds to your personal account, and then pay your personal expenses from your personal account. When you write business checks, always fill in the “For” line, so you never again have to wonder why you wrote that check.
• Keep a record of all bank deposits. Use a duplicate deposit book, or better yet, make a photocopy of your deposit ticket and the checks that went into that deposit. If there is ever a question about a transaction, you will have a clear record of which checks were deposited, and even who signed those checks.
• Identify all bank deposits by source. For example: income, loan from Mom, refund from Office Depot, etc. You don’t want to pay income tax on money that is not income, such as gifts and loans.
• Keep ALL cash receipts in one envelope for each month. To save yourself time and money, you should itemize your cash receipts by category on the OUTSIDE of a #10 business-size envelope or in a petty cash journal.
• Keep ALL debit card receipts in one envelope for each month. As with your cash receipts, itemize all debit card receipts by category on the outside of a #10 envelope.
• Use separate credit cards for your business. The interest on these credit cards will be deductible, but ONLY if they are used 100% for business expenses. Keep your original charge receipts in a #10 business envelope. When you get your credit card bill, use your receipts to verify the charges. Note: The date you charge something is the date that the IRS considers it paid.
• Track reimbursable expenses. We all pay for things with cash out of our own pockets and by our personal credit cards or checks. Keep track of these expenses to substantiate your reimbursement. This means not only write it down somewhere, but also keep the original sales receipts for these items.
• Write down your vehicle’s odometer reading at year end, and keep a mileage log. For 2010, the mileage rate is 50 cents per mile. For many small businesses, mileage will be your largest deductible expense, so it is important to keep a written record. Find a system that works for you, and use it consistently.
• Inventory on December 31st. If you sell products, you will have to take an inventory of the products you have on hand and the amount you paid for them. This amount is subtracted from your purchases for the year, and is treated as an asset. In addition, you need to keep track of the products you use personally, because those items are not deductible.
• Store your day-timer or appointment book with your yearly records. It could be used to verify your intent to conduct a profitable business activity. For example: your attendance at meetings; seminars or classes you have attended; meals and entertainment expenses; and mileage. If you keep an electronic calendar, set it up so that all past events are not deleted.
• Documentation wins the audit. Don’t fall into the trap of not keeping receipts just because you’ve heard that the IRS doesn’t require them for Meals and Entertainment costs of less than $75. KEEP ALL RECEIPTS, and you will be safe.
What if I have 2 different home-based businesses? Should I open two different accounts?
Grateful Child, that’s an excellent question. Yes, you will want to open a separate bank account for each business. When you file your Form 1040 at the end of the year, you will have a separate Schedule C for each home-based business, so you will want to keep those funds separate, as well. You will also want to separate out your expense receipts for each business.
Valerie