By: Pamela Martinez, JBS Corp.
The golden rule of owning a business; owners are tired of hearing it, and accountants love repeating it: Good recordkeeping is essential to success. According to the IRS, good recordkeeping helps small business owners track, prepare and monitor all of the following: their progress, prepare financial statements, identify income sources, keep track of (deductible and nondeductible) expenses, prepare tax returns, support items on those returns, and maintain business asset list. The IRS recently released a set of “Tax Tips,” highlighting the importance of good recordkeeping and a few suggestions on doing so. We want to elaborate further on those suggestions.
What kind of records should you keep?
All records that demonstrate your business earnings and expenses should be filed and kept. According to the IRS, business owners should keep supporting business documents such as gross receipts, purchases, expense reports, assets, employment taxes, and entertainment/gift expenses. Items on these records include, but are not limited to:
- Cash register tapes
- Cash register tapes receipts
- Deposit information (cash and credit sales)
- Receipt books
- Invoices
- Forms 1099-MISC
- Canceled checks
- Credit card receipts and statements
- Purchase and sales invoices
Recordkeeping System
It’s a good idea for business owners to establish a sophisticated recordkeeping system during the beginning stages of operations. A good recordkeeping system will outline business revenue and expenses, is customizable to fit every business owners’ needs, and can be achieved through one of two ways; manually and automatic (electronic).
Most small business owners start off using a manual recordkeeping system and even continue to do as their business grows. A manual system can be achieved by organizing labeled folders to store documents or pre-formatted record books/account ledgers.
An automatic recordkeeping system utilizes the same methods as a manual system. However, because it minimizes human error risk, it can be done in half the time and is more accurate. Automatic systems can either be free software you use to create your electronic-filing system and excel spreadsheet—or purchased software programs like Microsoft Money.
Recordkeeping Duration
Generally, the IRS recommends that you keep records for at least three years; however, business owners who have employees should keep all employment tax records for at least four years. The duration of time you should keep records on file is dependent on the type of document itself and you as the business owner. Keep in mind that these records are the ones you will utilize to track your business’s growth and record potential tax deductions.
Start strong, treat your business as if it’s already successful, and keep your records in orders. Doing so will provide you with a clear picture of where your business is heading and serves as a security blanket in the unfortunate case that the IRS audits you. Having impeccable records can save you from an IRS related nightmare.
