4 Tips to Keep Your Small Business Financially Prepared for an IRS Audit
Having your Small Photography Business Financially Prepared for an IRS audit is important!
Really important!! I promise!
Most of us photographers ended up in the business because we love to create beautiful photos. Our family and friends start begging for photos the latest buzz was about how amazing your photos are. At that point, we quickly try coming up with a price-list we feel comfortable with. The mistake is not realizing that once we start taking money, this isn’t just a fun hobby any longer. It’s real business. And business needs to be accounted for and properly recorded.
It does not need to be complicated. It’s not scary!
What is scary is getting audited without being able to back up your business income and expenses.
Simple excel spreadsheets should be more then ok if they are properly organized. Personally, I use Quickbooks. I found it to be pretty strait forward and can find any answers I need by “asking google”. You can easily create income and expense accounts. All my purchases get recorded, as does my income. I know many people will tell you to just get an accountant, but if you are just a bit savvy you can really do it all yourself and you’ll be fine.
So, how do I know?
I know because I was just audited by the IRS!!!
I got a letter in the mail about it and honestly, I was really stressed out! I had to pull all my records from 2012-2014. Thankfully all my efforts of keeping organized over the years paid off. I received a field audit, which means an IRS agent actually came down to my place of business, which in my case is my home. The lady was really sweet. I showed her all my accounts, saved a copy of neatly organized folders containing statements, receipts, etc. to a CD and she was happy with it!
So for my tips:
#1: Keep your business and personal finances separate!
Having a separate bank account and separate credit cards is a great way to back up your cash flow and acceptable proof of income and expenses.
#2: Use a business credit card.(or at least a separate one just for your business expenses)
Your credit card statement is a good record of any purchases you may have incurred. If you have all your personal expenses mixed in, it’s harder to prove what’s what and will be a real headache to sort through.
#3: Make a habit of downloading all bank, credit card, paypal, etc. statements!
If you close out an account, they may not be available in a few years and will cause you a big headache in case of an audit. (It happened to me! Thankfully I was able to find a receipt for almost every transaction listed in my quickbooks credit card register in my email inbox! But that took an insane amount of hours to go through and could have been easily avoided had I backed up a copy of my credit card statements)
#4: Make sure to have a clear list of your income, cost of goods sold, and expenses.
Everything listed there needs to be backed up by either one of the statements we mentioned above or, for cash purchases, keep your receipts. (You can simply scan them into a folder with receipts to avoid the paper hassle) These should also match what’s listed on your Schedule C in your tax return.
Once your business expands, I do recommend possibly getting an accountant.
However, for the small time, new, or side business photographer, the tips above are really doable and will save you should you ever have your business audited!