RECORD KEEPING FOR SMALL BUSINESSES
If you own a small business, there is a high tendency that you are busy all year round. Keeping track of the day-to-day business activities, monitoring business performance and growing the business can be daunting. This makes it highly probable to neglect to keep proper books of record that will enhance your business and financial decision making.
Record keeping is a mandatory requirement of the Internal Revenue Service (IRS). According to IRS Publication 583, Starting a Business and Keeping Records, everyone in business must keep records. Hence the onus of maintaining accurate records falls on the management and owners of the business. Regardless of the size of the business, the type of service or whether you are just starting, you are required to abide by the record-keeping guidelines of the IRS. It is an important part of running a business. Below are some of the benefits:
Monitor Business Performance and Growth
It’s difficult to determine business performance without accurate and reliable records. Updated and good records will provide visibility to the business’s finances with valuable information for decision making. Information such as what product is the most profitable, revenue by customer, major cost drivers are some of the useful information that provides insightful information for enhancing decision making.
Prepare the Financial Statements
Financial statements are derived from source documents and accurate record keeping. The accuracy and completeness are dependent on the records available. The financial statement includes the Profit & Loss, Balance Sheet, and the Cash Flow Statement. These statements will help to assess the profitability, liquidity, and stability of the business. They are often required by banks, lending agencies and creditors before granting a loan.
Keep Track of Income and Deductible Expenses
It is easy to omit income or deductible expenses if records are not kept. Records on gross receipts will help classify income into taxable and nontaxable income and provide more insights about the sources of income. Records on expenses such as invoices, check register will ensure that no expense is omitted from the current year and all deductible expenses are accurately reported.
Prepare Tax Returns and Support Items Reported on Tax Returns.
All numbers reported on the tax return must have a supporting document. The income and expenses, as well as credits reported on the return, must match what is in the financial statements and supported with accurate records. Ensuring that these records are available to your tax preparer will ensure your return is prepared efficiently and accurately. According to the IRS, the burden of proof is on the business owner who must be able to prove expenses to deduct them. Hence all business records must always be kept and made available for inspection by the IRS. A complete set of records will speed up the examination in the event of an audit.
TYPES OF RECORDS TO KEEP
The type of business you own will determine the type of records you need to keep for federal and state tax purposes. Generally, your record-keeping system should provide a summary of business transactions and must show the gross income as well as expenses. Some of the documents you are expected to keep are:
- Cash register tapes
- Bank deposits
- Invoices Issued
- Credit card statements
- Form 1099-Misc
- Check Stubs
- Banks and credit card statements
- Cash register
- Canceled Checks
- Invoices received.
- Employee compensation records for employee cost.
- Employment tax records.
- Purchase document
- Canceled checks
- Cost of any improvements
- Depreciation schedule
- Section 179 deduction taken
HOW LONG SHOULD YOU KEEP BUSINESS RECORDS
The IRS recommends that you retain supportive records that corroborate any business income or deductions claim until the “period of limitations” expires for that return. The period of limitations is the period in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.
Note: Always keep copies of all tax returns.
The period of limitation below was extracted from the IRS website.
Period of Limitations that apply to income tax returns
- Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Following these tips can make a significant impact on your business and finances. It will allow you to act when necessary and keep you out of trouble with the IRS. For more information on this topic, contact us at firstname.lastname@example.org.