It’s almost that dreaded time of year again – tax season. As business owners and individuals prepare their paperwork for their accountants or to file themselves, many realize that their record keeping and bookkeeping throughout the year was less than ideal. Scrambling to gather receipts and document expenses leads to headaches, stress, and often taxes owed that could have been avoided with better bookkeeping. 

In this blog post, we’ll explore what proper bookkeeping entails, how it saves you money when tax time rolls around, and tips for business owners and individuals to implement a bookkeeping system that works for them. With some time and effort devoted to record keeping throughout the year, you can rest easy knowing your books are audit-ready and accurately reflect your business’s financial situation. Read on to learn how proper bookkeeping saves you money at tax time!

What is Proper Bookkeeping?

Bookkeeping is the process of recording all financial transactions for a business or individual. This includes tracking:

– Income

– Expenses 

– Assets

– Liabilities

– Equity

Proper bookkeeping means staying on top of recording every single transaction accurately and in a timely manner. Every dollar that comes in or goes out should be documented. 

With proper bookkeeping, a clear paper trail exists for all financial activity. This creates financial transparency and makes tax time much simpler.

Why Proper Bookkeeping Saves Money at Tax Time

There are several key reasons why staying on top of your books all year long saves money when you file your taxes:

1. Accurate Documentation of All Business Expenses

One of the biggest ways proper bookkeeping saves money at tax time for business owners is through documenting all business expenses. Business expenses are tax deductible, lowering your overall tax burden. 

But in order to claim these deductions, excellent record keeping is required. The IRS requires proof of all expenses. If you’re claiming deductions for business travel, equipment, supplies, mileage, meals and more, you need proper documentation like receipts and records showing the business purpose of the expense.

Without organized books, you’re likely to miss out on plenty of deductions you’re entitled to come tax time. And that means owing more taxes.

2. Precise Tracking of Mileage and Travel Expenses

For businesses that deduct mileage and travel expenses, detailed tracking is essential. 

The IRS has strict rules in place for claiming mileage deductions. You need to record:

– Date of trip

– Destination

– Business purpose

– Miles driven

And for travel expenses like airfare, lodging, and meals, you need to demonstrate these were business-related trips, not personal. This means keeping receipts and making note of the business purpose of each trip.

Without diligent bookkeeping to back up these deductions, you won’t be able to claim them. And that can really add up at tax time.

3. Correctly Tracking Business Income 

In addition to expenses, proper bookkeeping also involves tracking all your business income sources accurately.

You need to account for all income received, whether that’s from:

– Client payments

– Sales of products/services

– Credit card payments

– Reimbursements

– Interest earned

– Any other income

If you don’t have a system for tracking income transactions as they occur, you run the risk of underreporting your total income when you file. This can lead to questions and audits from the IRS. It’s much simpler to accurately track all income in real time through proper bookkeeping.

4. Supporting Charitable Donations

Do you make charitable donations as an individual or business? These are tax deductible, but you need proper documentation to claim the deduction.

For monetary donations, you need to record:

– Name of charity

– Date and amount donated

And for non-cash donations, record:

– Charity name

– Date donated

– Description of items

– Fair market value

Maintaining these records is easy with regular bookkeeping methods. But without that, you may miss out on deductions you deserve.

5. Catching & Fixing Errors Early

Lastly, proper record keeping throughout the year helps catch small bookkeeping mistakes before they become major problems at tax time.

You might notice a duplicate payment recorded, catch an expense logged to the wrong category, or identify transactions recorded in the wrong quarter. 

With regular bookkeeping, you can catch these minor errors and correct them quickly. But if you wait until year-end, small mistakes can be much more difficult to identify and fix. Proper bookkeeping saves you major headaches by avoiding these issues.

The bottom line? Diligent bookkeeping provides the documentation and accuracy required to maximize tax deductions and avoid mistakes. Doing this all year long saves big headaches and money come tax time.

Bookkeeping Tips to Get Audit-Ready

Convinced proper bookkeeping saves money at tax time? Here are some tips to implement and stick to a bookkeeping system that will get you audit ready:

Choose Your Bookkeeping System

First, decide what tools you’ll use to track income and expenses. Here are some options:

– Accounting software: QuickBooks, Xero, FreshBooks and Wave are popular choices. They automate much of the categorization and streamline tax prep.

– Spreadsheets: Excel or Google Sheets let you log transactions manually. Best for very small businesses.

– Ledger books: Hand write entries in an actual or digital ledger if you have just a few transactions per month.

Choose the system that’s the right fit based on your transaction volume, computer savvy, and budget.

Record Transactions as They Happen

This is arguably the most important tip. Enter income and expenses into your books as soon as they occur. 

This prevents transactions from piling up, which can become an overwhelming mess. Real-time is ideal, but at least commit to weekly or monthly data entry sessions.

Digitize Documents & Receipts 

Take digital photos of any paper documents and receipts to have backup for your recorded transactions. Organize them in folders on your computer or cloud storage by month or year.

For credit card purchases, download monthly statements to have easily accessible. You’ll be glad you have these when it comes time to do your taxes or if you ever get audited.

Reconcile Accounts Monthly

Every month, reconcile your various business accounts like bank accounts and credit cards with your bookkeeping system’s records. Identifying any discrepancies right away makes discrepancies much easier to spot and fix.

Hire Help If Needed

If business growth is making bookkeeping duties too time consuming, don’t hesitate to outsource to a bookkeeping professional. Services and apps like Bench, Botkeeper, and Bookkeeper360 make it easy and affordable.

The monthly expense is well worth the tax savings you’ll see from accurate, compliant books.

Do a Year-End Review

Right before you file your taxes, do a review of your annual financial records. Double check totals, look for any gaps from missing transactions, verify deductions are documented, and confirm income matches other records like 1099 forms.

This helps catch errors and provides peace of mind that your books are comprehensive and accurate before submitting your tax return.

Key Takeaways on Proper Bookkeeping

Having complete, error-free financial records is essential for proper tax filing and avoiding IRS issues. Diligent bookkeeping throughout the year ensures you have the documentation needed to maximize deductions and accurately report income and expenses.

While no one enjoys tax season, proper record keeping can save you significant time, money, and stress when that dreaded time rolls around. Implementing consistent bookkeeping habits takes dedication, but the tax and audit protection benefits are well worth the effort.

Use this guide to start improving your own bookkeeping processes today. With some focus on organization and consistency, you can join the ranks of business owners and individuals resting easy come tax time knowing their financial records are audit-ready! Here’s to saving money and headaches through proper year-round bookkeeping.