Tax season is just around the corner, so now is a great time to make sure that you are retaining all the documentation you need to back up the income, deductions, and credits listed on your small business’s tax return. Keeping the proper records is not optional—it is required by the Internal Revenue Service (IRS).
Recordkeeping System
The IRS does not require a specific type of recordkeeping system. Rather, you must simply use one that clearly shows your income and expenses. Although the type of business you own affects the types of records you need to retain for taxes, in general, you should keep records (either hard copies or electronically) summarizing your business transactions. This summary may be included in your business books, such as accounting journals and ledgers, which show your gross income, deductions, and credits. Your business’s checking account may be the main source of the information included in your business books.
Supporting Documents
Not only should you maintain a summary of your business transactions, but it is also important to keep supporting documents that can be used to verify the accuracy of your summary. According to the IRS, small businesses should keep:
- Documents showing the amounts and sources of your gross receipts, i.e., the income you receive from your business. These documents include:
- Cash register tapes
- Deposit information
- Receipt books
- Invoices
- Forms 1099-MISC (required for each person to whom you paid rents, services performed by a non-employee, other income payments, etc.)
- Documents showing information about purchases, i.e., items you buy and resell to customers, including:
- Canceled checks or documentation identifying the payee, amount, and proof of payment
- Cash register tape receipts
- Credit card receipts and statements
- Invoices
- Expenses (costs you incur to carry on your business, not including purchases) should be documented using records showing the amount paid and a description verifying that the amount was for a business, not a personal, expense. These documents include:
- Canceled checks or documentation identifying the payee, amount, and proof of payment
- Cash register tapes
- Account statements
- Credit card receipts and statements
- Invoices
- Petty cash slips for small cash payments
Note: Travel, car, and gift expenses are subject to special rules.
- Travel expenses. Keep records showing the cost of each separate expense for travel, lodging, and meals, as well as incidental expenses in categories such as taxis, fee, tips, etc. You should also keep records of the dates of the trip and the number of days spent on business, the destination of your travel, and the business purpose or benefit from the travel.
- Gifts. Keep records showing the cost, date, and description of the gift.
- Transportation. Be able to document the cost of each separate expense: the cost of the car and improvements, the date you started using the car for business, the mileage of each business use, and the total miles for the year. In addition, keep records of the date of the use of the car, the business destination, and the business purpose for the expense.
- Keep records to verify certain information about your business assets, such as machinery and furniture, that you own and use in your business. This information is used to compute annual depreciation and the gain or loss upon the sale of the assets. The records—which could include purchase and sales invoices, real estate closing statements, or documentation identifying the payee, amount, and proof of payment—should show:
- When and how the assets were acquired
- Purchase price
- Cost of improvements
- Deductions taken under I.R.C. § 179
- Deductions for depreciation
- Deductions for casualty losses, for example, from fires or storms
- How the asset was used
- When and how the asset was disposed of
- Selling price
- Expenses of sale
- If your business has employees, employment tax records should be kept for at least four years. These records should include:
- Your employer identification number
- Amounts and dates of all wage, annuity, and pension payments
- Amounts of tips reported
- Fair market value of in-kind wages paid
- Name, addresses, social security numbers, and occupations of employees and recipients
- Any Form W-2s sent to employees but returned as undeliverable
- Dates of employment for all employees
- Periods for which employees were paid during absences for sickness or injury and the amount and weekly rate of payments made to them by you or a third-party payer
- Copies of employees’ and recipients’ income tax withholding allowance certificates
- Dates and amount of tax deposits
- Copies of tax returns filed
- Records of allocated tips
- Records of fringe benefits provided
What to Do Next
If you have questions about the IRS’s recordkeeping requirements and whether you are maintaining the correct types of records for your business, we can provide the guidance you need. Please schedule a meeting today to discuss this or any other legal concerns regarding starting or running a small business.