Is This Your Situation: Choosing Which Business Records to Save
Unless you’re a bookkeeper, keeping records is not the most appealing part of running a business. But keeping good records is a necessary evil that will help you determine what money is coming in and what is going out and whether tax is deductible or adds to the basis of your property or investment. Without good records, it’s hard to prepare and defend an accurate tax return.
Although your recordkeeping system is up to you, the shoebox method is never appropriate. A business checking account will be the source of many records that should show business transactions — gross income, deductions and credits. Today, most businesses use electronic accounting software, although you’d be wise to back up all records and print out hard copies.
What Records Should You Keep?
You should keep all documents that support the numbers you include on your tax returns. Following are some of the most important records to retain.
Gross receipts: Income from your business, including cash register tapes, deposits, invoices and receipt books.
Purchases: Everything you buy to sell to customers, including raw materials or parts needed to manufacture goods. Supporting documents include canceled checks, invoices, and credit card receipts and statements.
Expenses: Costs you incur to accomplish your business; documents include canceled checks, cash register tapes, invoices, petty cash slips, cash register tapes and account statements.
Travel, transportation, entertainment and gift expenses: If you deduct these expenses, you must keep receipts to prove what you spent.
Assets: All the property you own and use to carry out your business, including furniture and machinery. Purchase records are necessary to compute annual depreciation and gain or loss when you sell these assets. Supporting documents will show when you acquired the assets and their prices, improvement costs, deductions and sales prices.
Employment taxes: Keep all records for employees, such as time cards and employment tax records, for at least four years.
How Long Should You Retain Records?
Keep business records until the period of limitation — the time when you can amend your return or the IRS can assess additional taxes — expires for that tax return. The period of limitations extends from three years to indefinitely, depending on how (or if) you file returns.
Generally, an IRS audit will include returns from the past three years, although that can extend to six years if substantial errors are found. So you’d be wise to keep records for six years. If you want additional guidance with record retention, contact us today.
Call Amy Polefrone, CEO of HR Strategy Group at 443-813-2652 to discuss how we can help you keep your workplace “house” in order!