Feb 16, 2024

Recordkeeping for Tax Purposes

Good records do good businesses make. Records help you monitor the progress of your firm, prepare financial statements, identify sources of income, keep track of deductible expenses and prepare tax returns. Read through for some advice on recordkeeping.

Any recordkeeping system that suits you and your company and clearly shows your income and expenses is OK with the IRS. It's the business you're in that affects the type of records you need to keep for federal tax purposes.

And for how long should you keep records? For as long as needed to prove income or deductions on a tax return, according to the IRS. How should you record business transactions? All supporting documents from purchases, sales and payroll contain information you need to record in your books. Keep all records of employment taxes for at least four years after the tax was due or you paid it, whichever date is later. IRS Publication 15 addresses the types of employment tax records to retain.

The U.S. Chamber of Commerce reasons that if the IRS audits your business or you need to adjust a return, it will be vital to have complete, accurate documents. Failure to keep records could increase your taxes owed substantially and, in some cases, result in penalties.

• Retain records for three years after filing your return.
• If you file for a bad debt deduction or loss from worthless securities, keep documents for seven years.
• If you underreport income, and it's more than 25% of your gross income, retain records for six years.
• If you filed a fraudulent return or no return at all, keep tax and supporting documents indefinitely.

Add a year to the statute of limitations period. At a minimum, this means keeping tax returns for four years. But it may be more prudent to retain them for seven years. Most tax advisers tell business owners to keep most tax records for seven to 10 years, if not permanently. Why? The responsibility to substantiate entries, deductions and statements made on your tax returns, known as the burden of proof, is on you, especially for certain elements of expenses you deduct.

Advice from the government

The IRS lists several documents that small businesses and self-employed individuals should keep:

• 1099s.
• Cash register tapes.
• Audit reports.
• Charts of accounts.
• Depreciation schedules.
• Annual financial statements.
• Fixed asset purchases.
• A general ledger.
• Inventory records when using the last in, first out method.
• Tax records.
• Canceled or substitute checks for real estate purchases.
• Information about leases or mortgages.
• Patent and trademark details.
• Corporate shareholder reports.
• Employee pension and profit-sharing plans.
• Construction records.
• Leasehold improvements.

Always keep business records available for inspection by the IRS, according to IRS Publication 583. An electronic storage system "must provide a complete and accurate record of your data" and be accessible by the IRS.

Your system "must index, store, preserve, retrieve and reproduce the stored documents and books in a legible format." The IRS can penalize your firm if your electronic records don't meet its requirements and you have already disposed of the paper documents.

What else you should save

Supporting documents to back up your tax returns and bookkeeping records:

• Gross receipts — Documents showing the sources and amounts of your gross receipts, including bank deposit slips.
• Inventory — Keep canceled checks, credit card sales slips and invoices to show what you paid for stock and proof of payment.
• Expenses — Save receipts, proofs of purchase, canceled checks or account statements for each business expense.
• Travel, transportation and gift expenses — Follow IRS guidelines in IRS Publication 463 to meet additional recordkeeping rules for these expenses.
• Assets — Save supporting documents like canceled checks, purchase and sales invoices, and real estate closing statements.

Talk to your creditors or insurance company before discarding tax records, as they may require you to keep them longer than the IRS does. Keeping records for your business can seem overwhelming — everything from paying your taxes to planning for the future rides on your having accurate numbers. Make sure your storage system is secure and safe from the elements.

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