The Week of May 5, 2019 is Small Business Week!
Here are answers to some common business-related recordkeeping questions.
What records should owners keep?
Small business owners should choose a recordkeeping system that clearly shows income and expenses. The business you are in affects the type of records you need to keep for federal tax purposes.Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. Click here to find out some of the types of records you should keep:
How long should records be kept?
The length of time you should keep a document depends on the action, expense, or event which the document records. The general rule is three years depending on the action, expense and event recorded in the document. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. For more information on period of limitations, records connected to property (real estate), and records for non-tax purposes, click here.
How should transactions be recorded?
A good recordkeeping system includes a summary of all business transactions.
Business transactions are ordinarily summarized in books called journals and ledgers. You can buy them at your local stationery or office supply store.
A journal is a book where you record each business transaction shown on your supporting documents. You may have to keep separate journals for transactions that occur frequently.
A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.
Electronic Records: All requirements that apply to hard copy books and records also apply to business records which are maintained using electronic accounting software, point of sale software, financial software or any other electronic records system. The electronic system must provide a complete and accurate record of your data that is accessible to the IRS.
Whether you keep paper or electronic journals and ledgers and how you keep them depends on the type of business you are in. For example, a recordkeeping system for a small business might include the following items:
- Business checkbook
- Daily and monthly summary of cash receipts
- Check disbursements journal
- Depreciation worksheet
- Employee compensation records
Note: The system you use to record business transactions will be more effective if you follow good recordkeeping practices. For example, record expenses when they occur, and identify the sources of income. Generally, it is best to record transactions on a daily basis. For additional information on how to record your business transactions, refer to Publication 583, Starting a Business and Keeping Records.
What is the burden of proof?
(NOTE: at the time this blog post was published, the burden of proof link was not functioning properly.)
Small business owners must be able to prove expenses to deduct them. Because the burden of proof is on you to back up every item on your tax return with documentation, the best approach to recordkeeping for small businesses is to try to keep as many records as you can.
How long should employment tax records be kept?
Business owners should keep all records of employment taxes for at least four years after filing the 4th quarter for the year. These should be available for IRS review. Records should 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.
