One of the worst catastrophes that can befall a small business owner during tax filing season is receipts and records that are ... gone!
Those slips of paper might be missing, destroyed or unreadable. Without them, an owner will find it hard to complete a return and claim all the deductions he or she is entitled to. Or worse, make it through an audit without having deductions tossed out.
If it happens to you, calm down. It's possible to mitigate the damage by reconstructing your records.
If you discover the disaster now, you may have enough time to pull your paperwork together.
But if it's going to take a lot of time, or if you realize close to the April 18 filing deadline that you've got a problem, consider getting an extension of the time you have to file. Remember, when you get an extension, you still have to estimate how much tax you owe and pay it to the government. (The tax deadline was delayed this year because the District of Columbia will observe Emancipation Day on Friday, April 15.)
If your records were destroyed or lost because of a natural disaster, the IRS may waive penalties for late filing and payment of your tax bill. However, such a reprieve tends to be granted in areas where there has been a federal disaster declaration.
RESURRECTING YOUR RECORDS
Under tax laws, you cannot take a deduction for an expense if you don't have physical proof, usually a receipt, that you spent the money for your business. Even if you're never audited by the IRS, you need to have a receipt to claim a deduction. And, of course, you have to report all your income.
The easy part of reconstructing your records: It should be simple for banks and credit card companies to send you new statements. And your suppliers should be able to issue duplicate invoices. Anyone who has paid you should be able to give you copies of canceled checks and other paperwork.
It gets more complicated with records like receipts for purchases and travel and entertainment expenses. You need to do your best to document what you spent. If you used credit cards, your statements can help you figure out what you spent, and they might be acceptable to the IRS, says Sandy Botkin, a tax attorney and author of "Lower Your Taxes -- Big Time!"
Sometimes the problem isn't a lost receipt, it's a receipt printed on thermal paper that has faded. In this case, your credit card statement may be sufficient to prove you had an expense. But hold on to the receipt even if you can't read it. If you're audited, the IRS may want to see it.
Consider scanning those receipts into a computer file when you first get them. The IRS will accept a scanned receipt, Botkin says.
TRAVEL AND ENTERTAINMENT RECORDS
Even more complicated is losing travel and entertainment records. For example, if you kept a mileage log that tracked how much you used the family car for your business, you need to reconstruct that.
Botkin says you might recover some of that information by looking at your daily calendar, and seeing who you had appointments with. You can then calculate how much you drove from one point to another.
As you look over your credit card statements and find restaurant charges, you'll need to do more than pick out the ones that were business-related. Botkin noted that you'll have to remember who you were with and what business you discussed or transacted. The IRS requires you to have that information in order to take deductions for these expenses.
Some good news: The IRS actually doesn't require receipts for entertainment and travel expenses aside from lodging in the U.S. if the amount spent was under $75. But Botkin's advice -- which you'll hear from most tax professionals -- is to have the receipts or try to reconstruct those records anyhow. If you're audited, it'll make the process a lot easier.