There are few instances that provoke the kind of anxiety that surfaces during tax season. That’s especially the case for businesses that have no effective processes for maintaining their books or organizing their expenses. Despite a world increasingly defined by digital innovation, an alarming number of businesses still keep their receipts in a shoebox—a practice that becomes less endearing and more risky every year.
The issue isn’t simply that “shoebox accounting” makes tax filing more time-consuming, although that’s certainly true. After all, any loose receipts you’ve stored are likely disorganized and lack description. Paper records are also prone to fade over time, ultimately rendering them useless. The real concern, however, is that this disorganization puts businesses at greater risk of having their tax claims denied.
If you can’t properly demonstrate the expenses you’ve incurred, or manual bookkeeping processes are resulting in errors, you could end up with a heftier tax bill and a costly CRA review. In fact, the cost of preparing and submitting a response to the CRA can easily exceed the cost of preparing your tax return in the first place—not to mention resulting in a potential reassessment that could see you paying additional taxes, interest and even penalties.
Tax authority scrutiny is on the rise
Far from sliding down the regulatory agenda, the Canada Revenue Agency (CRA) is actually paying even closer attention to your receipts as a result of the rise in home office expense claims spurred by the pandemic’s work-from-home rules. Whereas, in the past, the CRA somewhat accommodated business owners by allowing them to submit credit card statements to back up their expense claims, those days are done. In fact, the CRA has become more stringent about the details they require to support expense claims.
One business found this out the hard way when they submitted credit card statements as evidence of their vehicles’ fuel expenses. On denying the expense claim, the CRA stated that credit card statements were insufficient as they list the total amount of a purchase only, making it impossible to verify if the amounts paid are actually for fuel or for ineligible expenses, like food, tobacco or lottery tickets.
The lesson is clear. To be valid, expense claims must include details, such as an itemized list of purchases, the number of guests on a restaurant receipt and HST paid. Not surprisingly, tracking these details can be fairly difficult if your bookkeeping practices are sub-par.
The solution is simple
If you’ve been managing your books manually for as long as you can remember, changing your approach can seem daunting. In truth, however, it’s simpler now than it’s ever been. Today’s cloud accounting solutions are so easy to use you can track all your expenses by simply taking a picture of your receipts with your phone. The application even lets you allocate each receipt to the expense category of your choice—making recordkeeping a breeze, while giving you insight into your cashflow and balance sheets in real time.
If the CRA does decide to audit your return, you can access copies of your receipts electronically at the click of a button, rather than digging through the faded manual receipts currently stored in your drawers and file folders.
Plus, thanks to stringent security protocols, you can rest assured that your information is safe. Leading cloud accounting systems use unique user names and passwords to identify users, as well as two-factor authentication (e.g., a password plus a text message code) to enhance security. Data encryption and backups across multiple servers also protect your information and enable data recovery in the event of a blackout or natural disaster.
The time has come
While manual accounting systems worked in the past, times have changed. Tax authorities increasingly expect a higher level of expense reporting from businesses and are quicker to deny unsupported claims. This stance isn’t surprising given how easy it now is to transition to cloud accounting.
By making it easier to track and categorize your expenses, cloud accounting lets you save time, stay organized throughout the year, meet the CRA’s requirements and maximize your tax savings. The best part? You get to face tax season without anxiety.
To find out how the transition from shoebox accounting to cloud accounting can be beneficial for your business, contact your Grant Thornton advisor.