Record Keeping for Small Businesses

Practice Good Tax Record Keeping to Avoid Problems at Tax Time

Good tax record keeping may be the most important record keeping you do for your company. The Internal Revenue Service (IRS) requires that you keep certain tax records for certain time periods and other records for different time periods. You don't want tax time to roll around and have to panic because your company does not have its tax records in order. Tax records in disarray can cost you deductions and if you would be audited, may cause a problem and cost money. After all, you want to get all the deductions you can and be able to back them up.

Here are eight tips on what tax records to keep, how to keep them, and how long to keep them:

Set up a Good Accounting Software System

Credit: Klaus Vedfelt
Klaus Vedfelt/ GettyImages

If you want to keep good tax records, the first thing to do is have a good accounting software system in place. You have to keep good accounting records in order to keep good tax records. Here are several good accounting software packages that will serve you well as a small business owner. You may still want to outsource your final tax return to a tax accountant. However, your final tax return is a product of your good record keeping through your accounting software system in-house. More

Remember That you Have the Burden of Proof When it Comes to Your Business Taxes

When you make an entry, such as income, expenses, and deductions, on your tax return, you have what is known as the burden of proof for them. You have to be able to prove that you are entitled to certain deductions and expenses in order to be eligible to take them as deductions.

How do you establish proof? Through good record keeping, of course. If you have records substantiating those deductions and expenses, you have met your responsibilities to have the burden of proof for the IRS. Do not take deductions or claim income without having documentation substantiating that you have the burden of proof.

Good Record Keeping Starts with the Source Documents for Accounting Journals

The source documents for purchases for your businesses, such as canceled checks, receipts, cash register tapes, and others, are what you make your accounting ledger and journal entries from. They are also your documentation for tax deductions for your business that you take at the end of the tax year. Source documents, kept properly, can take you a long way with good record keeping.

The original paper documents should be kept with the ledgers where you record the transaction. As a backup, in case of fire or other disaster, each source document should be scanned into the correct computer file and be stored on a flash drive. More

What If You Don't Use Checks Exclusively in Your Business for Payments?

Technology is changing the way we operate our businesses. Instead of writing paper checks for transactions, often we use credit or debt cards or electronic funds transfer (EFT) to pay the bills. How do we make sure that we have the proper source documents for the IRS under these circumstances?

If you use either EFT or credit/debt cards, use the financial statements issued by your bank as source documents. For EFT, the statement must show the following: amount transferred, payees' name, and date the transfer was posted to the account by the financial institution. For credit/debt cards, the statement must show the following: amount charged, payees name, transaction date.

Proof of payment on its own does not necessarily mean you are entitled to a tax deduction. Keep credit card slips and invoices to substantiate your claim to a deduction.

Daily and Monthly Summary of Cash Receipts and Disbursements

Your daily and monthly cash receipts and cash disbursements worksheet is worth its weight in gold. Anything you missed in your accounting ledgers and journals, likely you can find it here. Again, you will need source documentation. Disbursements like expenses for telephone and internet service and for truck/auto expenses can be picked up here as possible tax deductions. More

Pay Attention to Your Petty Cash Fund

Any transactions made out of the petty cash fund must be treated as cash disbursements with a source document. Some may be tax-deductible. More

Employee Payroll Tax Deductions

Employee payroll tax deductions are complex and I have referred you to our tax guide who summarizes it nicely for you. The tax guide usually focuses on personal tax, but this article summarizes the tax implications of employee business tax. Keep unusually good records for your employees. More

How Long Should you Keep Your Tax Records?

According to the Internal Revenue Tax Code, you must keep your records as long as they may be needed for administration of any part of the tax code.

If you have employees, you must keep their records a period no less than 4 years. To be safe, I would keep employee records a period of no less than 7 years. If you owe tax, keep your records for no less than 3 years. If you own property, keep your records on it until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. If you do not report income you should report and it is more than 25% of the gross income on the tax return, keep your records for 6 years.

This list has gone through the basic record keeping system you should use as a small business in order to maintain a good record keeping system for tax returns and the IRS. For more information on record keeping for your tax returns, consult IRS Publication 583.

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