Recordkeeping for Small Businesses

Good tax recordkeeping may be the most important recordkeeping you do for your company. The Internal Revenue Service (IRS) requires that you keep certain tax records for certain periods. You don't need to panic when tax time comes because your company does not have its tax records in order. Tax records in disarray can cost you deductions, and if you're audited, it may cost money and causes bigger problems. After all, you want to get all the deductions you can and be able to substantiate them. 

Here are eight tips on what tax records to keep, how to keep them, and how long to keep them:

01
Set up a Good Accounting Software System

man sitting at desk with book
Klaus Vedfelt/ GettyImages

If you want good tax records, it is important to have good accounting software.  You may want to outsource the preparation of your final tax return to a tax professional, such as an accountant.  Your final tax return is a product of your recordkeeping; so, choose software that can deliver the best results.

02
Burden of Proof For Business Taxes

When you make an entry (e.g., income, expenses, and deductions) on your tax return, you have what is known as the burden of proof. You must be able to prove that you are entitled to certain deductions and expenses to be eligible to claim them.

How do you establish proof? Through good record keeping. If you have records substantiating those deductions and expenses, you have satisfied the burden of proof for the IRS. Do not take deductions or claim income without having documentation to supply as proof.

03
Source Documents for Accounting Journals

The source documents for purchases (e.g., canceled checks and receipts) are what you use to create accounting ledgers and journal entries. They also serve as your documentation for claimed tax deductions. 

The original paper documents should be kept with the ledgers where you recorded the transactions. In case of a fire or other disaster, each source document should be scanned into a computer file and stored on a flash drive.

04
EFT and Your Business Payments

Technology is changing the way we operate our businesses. Instead of writing paper checks for transactions, we often use credit or debit cards or electronic funds transfer (EFT) to pay bills. How do we make sure that we have the proper source documents for the IRS under these circumstances?

If you use either EFT or credit/debit cards, use the financial statements issued by your bank as source documents. For EFT, the statement must show the amount transferred, payees' name, and the date the transfer was posted to the account by the financial institution. For credit/debit cards, the statement must show the amount charged, payees name, and transaction date.

Proof of payment on its own does not necessarily mean you are entitled to a tax deduction. Keep credit card slips and invoices to substantiate your claim of a deduction.

05
Daily and Monthly Summary of Cash Receipts and Disbursements

Your daily and monthly cash receipts and cash disbursements worksheets are worth their weight in gold. Anything you missed in your accounting ledgers and journals, you can likely find here. Again, you will need source documentation. Disbursements, such as expenses for telephone and internet service and for truck/auto expenses, can be picked up here as possible tax deductions.

06
Pay Attention to Your Petty Cash Fund

Any transactions made out of the petty cash fund must be treated as cash disbursements with a source document. Some may be tax-deductible.

07
Employee Payroll Tax Deductions

Employee payroll tax deductions are complex. The tax guide usually focuses on personal tax, but this article summarizes the tax implications of employee business tax. Keep unusually good records for your employees.

08
How Long Should you Keep Your Tax Records?

According to the Internal Revenue Tax Code, you must keep your records as long as they may be needed for the administration of any part of the tax code.

If you have employees, you must keep their records for no less than 4 years. To be safe, keep employee records for at least 7 years. If you owe taxes, keep your records for at least 3 years. If you own property, keep associated records until the period of limitations expires for the year in which you dispose of the property. If you have reportable income but do not report it, and it is more than 25% of the gross income on the tax return, keep your records for at least 6 years.