For many expats, nothing is more rewarding than being a business owner. While being an expat entrepreneur has many rewards, it doesn’t come without unique challenges. For many small business owners living abroad, their primary focus is selling their product or services and taking care of the client. Many business owners neglect the backend part, such as record-keeping, tracking revenue, and tracking expenses. However, at tax time, this is a serious headache because you must know how the business performed to prepare an annual income tax return. Without documentation to support expenses, then no tax deductions are allowed. So the big question is: what tax documents do you need for your small business?
Small Business Tax Documents 101
The IRS does not have set requirements for what tax documents you must keep for your small business. The only condition that they have is that you must keep records to verify how you calculated your revenue and documents to support deductions claimed on the return. The good news is that the IRS does have some best practices and recommendations on how you should keep tax records for your small business, and we will share those best practices below.
Record-keeping Best Practices for Small Business Owners
The first step is to separate business items from personal items. The easiest way to do this is to open a bank account for the business and only use it for business transactions. In this account, you should deposit revenues from customers and money that you invest in the company. You also will use it to pay business expenses. You could also establish a credit card for the company and use it for business-related expenses solely. The statements from the financial institution are only a tracking tool used to simplified record-keeping and can’t be relied upon exclusively to establish income and expenses.
Tax Documents Needed for Small Business Reporting
Every business must track revenues referred to as gross receipts. Supporting documentation for gross receipts are cash register receipts, bank deposits, sales receipts books, invoices, and credit card receipts. For an independent contractor that works for US-based organizations, they can use Form 1099-MISC. A 1099-MISC will only be issued for payments exceeding 600 USD and shouldn’t be relied upon solely. The important thing is that you maintain records of payments you receive from your customers.
The records that you need for business expenses depend on the type of deduction you are claiming. For items that you purchase for the business, this is rather simple. You can use canceled checks, cash register tapes, account statements, credit card slips, and invoices. For deductions in which the IRS provides special deductions such as mileage and meals, then you should maintain a logbook that shows dates, who you met, where you went, and the miles driven.
Documenting Travel Deductions
Deciding which travel deductions apply to expats can be extra tricky. To know which travel expenses are deductible, by definition, they have to occur outside of your tax home. Further, depending on the type of business you own, ordinary and necessary expenses directly related to business travel may apply. So, if you have an entertainment business, travel expenses are more likely to be deductible if traveling is directly related.
Finding the Best Filing System for Your Small Business Tax Documents
To simplify the accounting process, you could use accounting software that can link to your bank account, credit cards, and other financial accounts to help you generate reports. The reports can be used to create useful statements that can assist with preparing your income tax return.
You could also choose to hire a professional to help you manage tax documents for your small business. Regardless of what method you select, you must use still have documents to back up income and expenses.
If you do only one thing, do this: create a system that makes it simple for you to track your business activities and maintain tax documents to support these items. The more often that you review your records, the more comfortable the process, so it suggested that you look at your account once a month.