We don’t want to worry you, but how organized are your business records?
Let’s say you get notified by the IRS of a Tax Audit for your finances from three years ago.
Do you have access to records reflecting your earnings and expenses?
If you don’t or if the records aren’t adequate for the IRS you might owe money. How much? The IRS can approximate your income based on industry standards and are under no obligation to assume any expenses to offset your revenue.
Basically, all your profit can be taxed.
As Virtual Assistants who handle bookkeeping for many small businesses, we’re often asked:
- How long should business records be kept?
- What records should a business keep?
We answer the first question with a simple statement:
Keep Receipts & Records for 7 Years
If you go to the IRS site, you’ll find they recommend keeping records for three years. That’s their Period of Limitation during which the taxpayer can amend tax returns or when the IRS can perform an audit.
So, why do we recommend seven years?
For the exceptions. This is the IRS we’re talking about and exceptions to their rules exist.
If the IRS identifies substantial errors in your tax records, they may add additional years to the audit—maybe back as far as six years.
Because of the exceptions, most bookkeeping recommendations say to keep business records for seven years.
Let’s Discuss What Records to Keep
The IRS will be looking for supporting documents to support your purchases, sales, payroll and various transactions. Supporting documents can include:
- Sales slips
- Paid bills
- Invoices
- Receipts
- Deposit slips
- Canceled Checks
The IRS goes into further details for the types of records you should keep.
Gross Receipts
This documents the income your business received. Supporting documents may include:
- Cash register tapes
- Deposit information
- Receipt books
- Invoices
- Forms 1099-MISC
Purchases
This the record of what you’ve bought and resold to customers. Supporting documents may include:
- Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
- Cash register tape receipts
- Credit card receipts and statements
- Invoices
Expenses
Other than purchases, what other expenses did your business incur? These are typically purchases of items used to operate your business – office supplies, overhead, equipment, etc. Supporting documents may include:
- Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
- Cash register tapes
- Account statements
- Credit card receipts and statements
- Invoices
- Petty cash slips for small cash payments
Travel, Transportation, Entertainment and Gift Expenses
You should keep records of the mileage you put on your vehicle when conducting business. If you dine out with a client, make note and keep receipts. You’ll be amazed at what expenses in this category can be deducted. If you’re a small business or self-employed, you owe it to yourself to review the information on the IRS site regarding travel, entertainment, gift and car expenses.
Assets
The depreciating value of the equipment and furniture your business uses can be deductible if properly recorded. Supporting document may include:
- When and how you acquired the assets
- Purchase price
- Cost of any improvements
- Section 179 deduction taken
- Deductions taken for depreciation
- Deductions taken for casualty losses, such as losses resulting from fires or storms
- How you used the asset
- When and how you disposed of the asset
- Selling price
- Expenses of sale
Employment Taxes
Employment tax records need to be well documented. This can be a complicated task if you have many employees, commissioned employees or contractors. Supporting documents may include:
- Your employer identification number.
- Amounts and dates of all wage, annuity, and pension payments.
- Amounts of tips reported.
- The fair market value of in-kind wages paid.
- Names, addresses, social security numbers, and occupations of employees and recipients.
- Any employee copies of Form W-2 that were returned to you as undeliverable.
- Dates of employment.
- Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.
- Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
- Dates and amounts of tax deposits you made.
- Copies of returns filed.
- Records of allocated tips.
- Records of fringe benefits provided, including substantiation.
If Record Keeping Takes Too Much Time – Outsource the Task
When you’re running or growing your business, it’s understandable that business can take a lower priority. Many times, it’s an “I’ll get to it when I have time” task.
Given the potential penalties, record keeping should be one of the highest priorities for any business. If you don’t have the time (or the passion for record keeping) do what many other businesses do—outsource record keeping.
As virtual assistant bookkeepers, we’re available to help guide you in record keeping and take on the task if needed. Feel free to give us a call at (904) 429-4588 and let’s see how we can help your business.