Self-Employed Pros: Organize Receipts to Save Tax Season Stress

Tax filing season has officially started. When it comes to your taxes, it’s a good idea to file sooner rather than later. Filing early will help you to avoid becoming a victim of income tax return fraud. I’ve also found that accountants’ fees tend to increase the closer it gets to the IRS filing deadline.

For many self-employed professionals, that means pulling out the shoebox or accordion file where tax-deductible receipts are tossed throughout the year, and then spending a few hours sorting, categorizing, deciphering and calculating. This describes the process that I employed for a long time. A few years ago, though, I decided that I needed to develop an efficient system for digitally storing and sorting business expenses. There were four main reasons:

  • I wanted to eliminate the need to store several years’ worth of hardcopy tax forms, invoices and receipts.
  • I wanted to reduce the time that I spent sorting and manually calculating expenses every year.
  • I’ve found that the ink on paper receipts fades quickly, making it difficult to decipher cash register receipts collected during the year.
  • After a briefcase containing paper receipts and travel expenses was stolen during a business trip, I realized that I needed an easy way to capture and store expenses in the cloud. This way, I could immediately record expenses while on the go and not worry about losing them.

For years I believed that the IRS required hardcopy receipts for all business expenses (and to be honest, that was the case when I started freelancing). But in fact, the IRS has accepted scanned receipts since 1997 (see Revenue Proclamation 97-22, if you want to learn more about the rule). In short, digital copies must be identical to the original receipts, and must contain all of the relevant information (e.g., date of transaction, vendor name and address, amount paid) as in the original receipts. They also must be able to be reproduced in a legible, readable format so that you can produce them in hardcopy, if requested.

Disclaimer: The following process is one that I use for saving and storing expense receipts for my specific business and income sources. I’m offering it here for informational purposes only. It is not meant to provide tax advice. The process that you set up will depend on your particular business, income sources and the tax laws where you reside. Always seek the advice of a qualified tax professional regarding your specific situation.

How I Categorized My Expenses

I always hire the services of a qualified accountant to file my taxes, but the responsibility for saving and storing the receipts, and tallying the expenses for various deductions falls to me.

My accountant provided me with the main categories for business expenses related to my particular type of business and circumstances. These included:

  • Insurance
  • Internet
  • Meals & entertainment
  • Medical/dental
  • Office expenses
  • Office supplies
  • Postage & shipping
  • Professional services
  • Rent
  • Telephone
  • Travel & transportation
  • Utilities

I Tested Various Apps to Find One That Fit My Needs

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There are numerous software solutions and applications to track expenses. This article on the American Express small business blog site lists seven great options.

I tried out several and settled on an iOS app called BizXpenseTracker. I felt that this particular app best suited my needs, but there are a wide variety of apps and software solutions available. It’s worth your time to download and sample different types to find the one that works best for you.

My requirements were simple. I just wanted a way to track, store and calculate my receipts and store them in the cloud. I also wanted to be able to quickly add receipts via my iPhone or iPad, and I wanted the images to be high enough quality to meet IRS standards. While BizXpenseTracker also allows you to track time, I have been using Billings Pro to track billable time and generate invoices for clients, and I wanted to keep that in place.

The app allowed me to create a “business group” to hold all business-related expenses. I then created separate “logs” for each of my expense categories, listed above. Each log acts as your folder to hold individual expense entries for the calendar year. You can set the start and end dates, as well as other details like mileage, currency, etc.

In addition to business expenses, I created a log for estimated tax payments to record the details of how, when and how much I paid during the year — details that my accountant needs when filing our taxes.

I also created a “personal group” to store receipts for personal and household purchases, such as electronics, jewelry, furniture, appliances, etc. — basically all of the items that are included on my renters’ insurance inventory. (If you ever need to file a claim, your insurance company will require proof of your belongings before reimbursing you.) It also provides me with quick access to receipts for product warranty claims.

I Scheduled a Recurring Task to Log Expenses & Backup Data

Like many apps, BizXpenseTracker allows me to back up my data to Dropbox (you can also choose to back up to iCloud, Box or to your computer).

Logging expenses is a quick and simple task. You can create a take a photo of your receipt or import it from email or Dropbox.

I like to batch my daily and weekly tasks, so I created a separate folder in Dropbox called “Receipts.” I use this to forward digital receipts from any of my devices. So during the week, I scan paper invoices and receipts and drop them into the receipts folder, and save emailed receipts there. Every Friday, I log the receipts in BizXpenseTracker.

Tip: Always be sure to double-check the images of any scanned, photographed or emailed receipts to make sure that they adhere to the IRS requirements: Identical to the original receipts, containing all of the relevant details, and able to be reproduced in a legible, readable format.

Once you’ve experienced any type of data loss (which I have), it tends to make you more rigorous about backing up data (which I am). The app automatically backs up recent files when you open it. When you’re done logging new expenses, you have the option to perform a complete backup all of your data or just the new items entered since the last backup.

I also export all of my files on a quarterly basis, which is saved in Dropbox, and I save a copy on my hard drive. (You never want to have to tell the IRS that you’ve lost your receipts!)

Enjoy a More Stress-Free Tax Season

While BizXpenseTracker has simplified the task of saving and storing receipts, I find that the real benefit for me comes at the end of the year. I can export the full year’s worth of expenses, neatly grouped into category folders that hold the receipt images (PDF and JPG) along with a spreadsheet that lists each expense with details (date, description, amount, category, how you paid, mileage, and link to the image), with each category neatly totaled at the top of the sheet. No more manual tallying!

I also like that I can simply glance at the app to see exactly what my expense totals are in each category at any time. I always know whether I’m over- or underspending in any category, and how much I can put away in a retirement fund to reduce my taxable income.

Today, filling out my tax forms literally takes minutes instead of an entire afternoon. I don’t have to worry about losing receipts or having to take up valuable living space to store several years’ worth of hardcopy receipts.

Of course, this information won’t help much if you’re staring at a box of receipts and invoices that need to be sorted. But if you adopt a more efficient process now, you’ll be thanking yourself this time next year.