No, this isn't a post about maximizing your income tax refund. Rather, this is a focus on an area with which many small business owners struggle during tax time: reconciling petty cash. Have you finished out a year with little or no record of what happened with the cash you withdrew from ATM's throughout the year? You're not alone. Maybe this quick tip will save you some trouble. Please keep reading.
So it's that time of the year. Well, not THAT that time; the OTHER that time... when my tax antennae go up and small business owners start with the questions. My favorite tip to share when helping entrepreneurs reconcile their petty cash at year end comes from a good friend and client. My buddy is a contractor who occasionally draws cash from the ATM for small, business-related purchases. That can get tricky to clean up at tax time. He marks cash withdrawals in his calendar/planner and records how he spends the cash from each withdrawal right in that book. When we reconcile his accounts prior to filing federal taxes, he's quickly able to fill in gaps wherever he forgot to post those entries to his accounting system.
From an audit perspective, cash is an area of high risk for a business. The tighter its reins on cash, the less likely a business is to trigger an audit. Of course, there are times when you have to pay cash and when you don't get a receipt. The calendar/planner tip can save your bacon when either occurs. The more consistent you are about the methods you use in your business, the less likely you'll be audited. If you are audited, the IRS will look more favorably upon consistent and organized records than upon a shrug of your shoulders and a puzzled look.
The IRS looks... favorably upon consistent and organized records...My contractor friend and I are old-school, though. He uses his planner, and I keep a small notebook in which I make my cash notes. To take advantage of the advances of technology, you can certainly keep notes in your smartphone. Based on what I've seen in working with clients, though, if you use your phone, I recommend keeping cash withdrawal and expenditure notes IN YOUR CALENDAR app or some third-party app that allows you to record and sort by date. When reconciling petty cash at year end, it's not only helpful to know how much cash you've floated all year long, it's more useful to know WHEN you floated it because bank statements showing your withdrawals point only to a date (and maybe also a location if an ATM was used).
Remember, as you prepare to close your tax year and start your tax return, take notes about areas that jam you up with your accountant. Those are the areas that could also be sticky with the IRS. Cash is only one high-risk function in a business. If this handy tip about "calendarizing" your cash withdrawals and expenditures is helpful, start using it today. And feel free to comment some other sticky areas you've faced at tax time. Thanks for reading.