The Internal Revenue Service (IRS) recommends that business owners keep good records for a variety of reasons. Maintaining timely and accurate records allows the business to monitor its progress and success, identify where income comes from, track expenses the company can deduct on its tax return, and prepare financial statements. Of course, good records are also essential for filing an accurate tax return and minimizing your company’s obligation to the IRS.
Types of Business Records to Keep
You will want to keep financial documentation that proves how your company earned its income. This will typically be receipts or invoices from customers. Bank deposit slips, cash register tapes, and credit card slips also help to document the methods by which your company earned money and how much it earned. Be sure to keep these receipts for at least three years.
Keeping employment tax records is also important as a business owner. We recommend compiling this information on each employee to provide to the IRS:
- Full name
- Social security number
- Dates of employment and any gaps in employment
- Fringe benefits and/or tips
The IRS requires businesses to keep employment tax records for four years.
Receipts for Expenses and Purchases
You must prove any expense that you plan to claim as a deduction for your business. This includes fixed costs such as rent and variable costs, such as the cost of materials to create products for sale. The IRS requires businesses to keep files and petty cash vouchers to account for the more nominal expenses. It’s also important to save receipts for travel, entertainment, and gifts that you purchased on behalf of your company.
You will need to hold onto these records for at least three years per IRS regulations. However, that increases to seven years if you intend to claim a bad debt loss on your next business tax return.
Track the Purchase, Depreciation, and Sale of Major Assets
When you purchase major equipment for your business such as a delivery vehicle, the IRS allows you to claim depreciation for each year you have it in service. However, you will need to keep excellent records if you plan to take a credit for the original purchase and annual depreciation. That means you will need to keep real estate deeds, sale and purchase invoices, canceled checks, receipts, and bills of sale for all major assets. When it comes time to sell the asset, you will need to report the gain or loss on your business tax return.
Remember the Burden of Proof is on You as the Business Taxpayer
The IRS states that the responsibility to substantiate deductions, entries, and statements on a business tax return lies entirely with the preparer of the business tax return. At Nolan Accounting, we have years of experience offering tax planning and preparation services. Please don’t hesitate to contact us if you would like more advice on what to save or would like to schedule a tax planning session.