Tax time is often the most dreaded time of year for business owners because business taxes can be complicated and require detailed record-keeping. The IRS acknowledges that the cost of doing business should not be counted as taxable income, but as a business owner you bear the burden of reporting exactly what those costs are. To keep your quarterly or annual tax returns under control, you must keep accurate records of your business activities.
Keeping track of expenses is the most obvious record-keeping chore for many business owners because most expenses are tax-deductible. Keep both a running list of your business expenses and a file of supporting documentation. For each entry, your list should include the date incurred, dollar amount and description. Forms of supporting documentation include cash register receipts, account statements, petty cash slips and invoices.
Purchases differ from other expenses because, for tax purposes, this term only refers to merchandise you will resell to your customers. If you are a manufacturer, any raw materials you acquire to create merchandise count as purchases. Record these just as you would expenses, and hold on to all of your supporting documentation.
Receipts include all of the income your business takes in. Supporting documents for receipts may include cash register tapes, 1099s, invoices and receipt books. It is vital that you record every cent your business receives, so update and balance your ledgers daily or weekly, depending on the amount of business you do.
If you have employees, keep detailed records of all pertinent information for at least four years. You will need to track your employees’ names, addresses, social security numbers and dates of employment. You must also log any and all payments made to your employees, including wages, tips and sick pay, as well as copies of their withholding forms (W-4s) and any employment taxes you paid. Consult a tax professional to help you figure out what other employee-related records you need to keep.
Your company’s assets include furniture, machinery and other equipment used in the course of business. Keep records about how, when and why you acquired each asset, including the price you paid. Also, keep service and maintenance records along with any invoices related to maintenance or improvement costs. If you claim depreciation on an item, you should keep a record of that, too. When it is time to dispose of a business asset, do not forget to chronicle how you did that. If you sell old assets, the gain or loss from the sale will figure into your business taxes. If you have to throw an asset out, record that, too.
Travel, Transportation and Entertainment
Taking allowed deductions for travel, transportation and entertainment is appropriate and necessary. However, this type of deduction is often abused, so take extra steps to prove that your expenses are ordinary and necessary. Keep detailed records about when, why and how each expense is incurred. For example, if you take a business prospect out for a meal, you must be able to demonstrate the business reason for the meal, so when recording travel, meals or entertainment, include notes about who was present and what was discussed. The same goes for recording business-related mileage. At tax time, you must be able to substantiate that any transportation costs you claim are, in fact, business-related.
Keeping relevant and accurate business records not only helps you at tax time but also allows you to maintain a clear picture of your company’s profitability. When you faithfully record all of your income and expenses, you build up an archive of data that can help you predict your future sales and the costs involved in running your business over time. This helps you with tax reporting now and with business planning in the future.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.