Tips for organizing your small business’ books for tax time

It is almost that time of year again….tax season is almost upon us!    As a small business owner, there is a lot of preparation that goes into getting ready for your accountant to do your taxes.   We would like to share some tips with you about how to get yourself organized and save yourself extra fees for having someone else organize your business’ finances.

Maintaining neat, comprehensive, complete and organized files is the responsibility of every business owner.   It is also a requirement of the Canada Revenue Agency that proper business records be maintained by all business owners.   The purpose of maintaining proper records, aside from knowing and monitoring how your business is performing, is  to be able to substantiate everything that you have claimed on your income tax return with actual documentation.   Without that information, CRA could potentially disallow some deductions you have claimed and assess you a tax liability.   Yikes!   Penalties, interest and assessments can add up very quickly.   That could get expensive!   The onus is then on you as the tax payer to prove them wrong.   If you don’t have proper documentation, you have no ability to back up your claim for a deduction.   Also remember that all taxpayers are required to retain all documentation for seven years.

Some best practices for getting organized that every small business owner can implement include:

1. Keep everything together in one place, sorted neatly either by month or major revenue and expense category.
2. If your business is small enough, use a binder to store everything.   If you need something larger, consider either multiple binders, accordion files or bankers’ boxes.  Use envelopes, paper slips and dividers to organize everything.
3. Keep copies of all bank and credit card statements.
4. Have copies of all invoices issued and payments received.
5. Keep copies of receipts for all expenditures.
6. Write on the back of any meal, entertainment or promotional gift receipt who it was with or for and what the business purpose was.
7. Ensure you keep the right receipts – for example, if you go to lunch with a client at a restaurant, you need to retain both the restaurant receipt and the credit card slip.   People often only retain the credit card slip.   This is not sufficient documentation for audit purposes and your expense claim could be disallowed!
8. Be sure you are maintaining a proper mileage log for all business related travel on your personal vehicle.

When it is time to go to see your accountant, the ideal situation is that you are able to provide him or her with your completed annual financial statements.  This is the best way to keep your tax preparation fees as low as possible.  Some small business owners opt to not prepare financial statements and track their revenues and expenditures themselves by other means.   If this applies to you, ensure that all of your information is neatly detailed in a spreadsheet or some other format that is easy to follow.   Record all of your revenues in one table, preferably sorted by date and totaled at the bottom.   Record all of your expenditures in several tables, separated into major categories of expenses, sorted by date and totaled at the bottom.   Major expense categories may include meals & entertainment, promotional expense, rent expense, interest and bank charges, cost of goods sold, rent, office expenses, etc.   The categories you choose have to be relevant and appropriate for your business.    If you have made any capital purchases, account for those in a separate table and be sure to include the date of acquisition, what was purchased and for how much.  Capital purchases are assets that you have acquired that are expected to be used up over a period of time longer than one year – for example, computer equipment, furniture, machinery, etc.    Either provide the spreadsheet electronically to your accountant, or provide them with a printed copy.

Implementing these tips for being organized throughout the year will make tax time a much less stressful experience for you.   Your accountant will thank you for it, and it will also save you money!

Lime Accounting + Tax offers tax preparation services for individuals, small business owners and corporations.   All work is performed by a designated Chartered Professional Accountant.   Contact us today for information about our fees or to schedule an appointment.