Taking Care of Business! Record Keeping for Small Businesses
Businesses of all sizes have one thing in common... PAPERWORK! From orders and invoices to receipts and bills, knowing what to save for tax purposes can be a real challenge. In fact, one of the most common questions we get throughout the year is, “What kind of business records should I keep?”
The type of business you have can determine what records you need to keep for tax purposes. A good record keeping system should include a summary of your business transactions and show your gross income, deductions and credits. For most small businesses, a business checking account is the main source for entries in the business books. However, most businesses choose to use electronic accounting software programs like QuickBooks or some other type of electronic system to capture and organize their records.
Why should business owners keep records?
Purchases, sales, payroll, bills and other transactions you conduct in your business will generate a large number of supporting documents. These documents contain the information you need to record in your books. It’s important to keep these documents because they support the entries in your books and on your tax return – and you are required by the IRS to carry the “burden of proof”, should they ever have questions. You should keep them in an orderly fashion and in a safe place. For instance, many clients choose to organize records in a locked file cabinet by year and type of income or expense. Digital scanners can also help make saving documents electronically easier. Just make sure you take appropriate steps to store them securely as cyber attacks are becoming more common each year.
What kinds of records should business owners keep?
Gross Receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
Cash register tapes
Deposit information (cash and credit sales)
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:
Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
Credit card receipts and statements
Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:
Credit card receipts and statements
Petty cash slips for small cash payments
Travel, Transportation and Gift Expenses
If you deduct travel, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses
For additional information, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses
Assets are the property, such as office equipment and furniture, that you own and use in your business and which will last for more than a year. You must keep records to verify certain information about your business assets. You'll need these records to compute the annual depreciation and gain/loss when you sell the assets. Documents for assets should show the following information:
When and how you acquired the assets
Cost of any improvements
Deductions taken for depreciation
Deductions taken for casualty losses, such as losses resulting from fires or storms
How you used the asset
When and how you disposed of the asset
Expenses of sale
Purchase and sales invoices
Real estate closing statements
In addition to the items above, we recommend you also keep copies of all tax records for your business, including employment tax returns, for a period of at least 5 years. It’s a good idea to keep copies of all tax returns themselves indefinitely.
If you have questions about which records you should hang on to for tax purposes, please CONTACT US for assistance. There’s a lot to keep track of and we’re here to help!