Keeping good business records can help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, prepare your tax returns and support items reported on your tax returns. According to irs.gov, “the responsibility to substantiate entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove certain elements of expenses to deduct them.”
You are not required to keep any special kinds of records by law, and different types of businesses will need to keep different records. Purchases, sales, payroll and other transactions you have in your business will be the source of most of these documents. The IRS suggests that you keep records as long as is needed to prove income or deductions on your tax return.
Here are 5 things to consider when it comes to record keeping:
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• Purpose of keeping records
In addition to tax purposes, records can show whether your business is improving, which items are selling or what changes you need to make. You can’t prepare accurate financial statements without good records.
• What to keep
Be sure to keep documents that show income and expenses. For most small businesses, the main source of this might be a business checking account. Keeping receipts, proof of purchases, business expenses, records of assets and employment tax records is also advised.
• How long to keep them
This varies from business to business. The IRS suggests keeping records for three years after the date you filed your original return. If you file a claim for a loss from worthless securities or bad debt deduction, the suggested length of time is seven years, and employment tax records should be kept for four years. In cases where you did not file a return, the length of time is indefinite.
• Best ways to record
A summary of your business transactions can be kept in a journal, ledger, accounting software program or business checkbook. It’s best to record transactions on a daily basis to maintain accuracy and transparency.
• Burden of proof
It is your responsibility to prove entries, deductions and statements made on your tax return. Having information and receipts for expenses is usually enough, but canceled checks or bills and additional documentation for travel, entertainment, gifts and auto expenses may be needed to help support your statement.
MidSouth Bank offers a full line of banking services that include checking and savings accounts, ebanking, and more. Visit MidSouthBank.com for more information.
*Sharing information from an outside source does not constitute an endorsement of the source. Some linked sites are not controlled by MidSouth Bank. Consult a tax advisor regarding the specific record keeping requirements for you and/or your business.