Why You Need Accurate Record Keeping
Every business needs accurate and complete record keeping. Why? To:
- Track business progress
- Prepare financial statements
- Identify sources of income
- Track deductible expenses
- Prepare tax returns
- Provide supporting evidence for tax returns
Records are invaluable for internal purposes, as well as in complying with governmental requirements. But what records should you keep, and for how long?
According to the IRS, you must maintain “adequate” records. When you are claiming income and expenses, keep records that support each item. Receipts, cancelled checks, invoices, bank records, and sales slips should be properly recorded and stored.
Have a system in place to record nonroutine transactions (e.g. purchasing depreciable assets, such as a vehicle, computer, office equipment, etc.). File purchase documents, give the items an inventory number, and create a depreciation schedule.
Sales and Use Tax
Because the IRS pays particularly close attention to small business sales and use tax, it is important to keep invoices and reports reflecting your sales tax amounts. Connect these to your sales and use tax filings. You also need to keep records that show all of your purchases and sales and use tax reporting.
If you are incorporated, keep records relating to the formation of the company, business licenses, board meeting minutes, and bylaws. In terms of shareholders, keep records of stock registers share issuances, and redemptions. All contracts, leases, current and terminated employee files, employee pension, and employee profit sharing plans should also be retained. Corporate records should be kept indefinitely.
Travel and Entertainment
This is an area that can attract audit attention. You must keep accurate and complete records for any and every expense related to travel and entertainment. Record who, when, where, how much, and the business purpose for each purchase or expense. Employees who travel for business-related reasons should also keep a dated mileage log.
The IRS has three years from the date that a tax return was due or tax was paid (whichever is later) to initiate an audit. If, however, they suspect a significant understatement of income, they have six years after the due date or seven years after the tax year.
- Keep most income tax records for seven years.
- Keep employment tax records for at least four years (though seven is safer).
If you keep records electronically, make sure you follow the IRS’s rules and recommendations.
Record keeping requirements for business can be complex; Faw & Associates has the experience necessary to ensure you comply with all laws and regulations — and that you have the documents and information you need to keep operations running smoothly.