Nothing makes a difference when tax time rolls around like having all of your documentation ducks in a row. The importance of record keeping cannot be overstated. By closely monitoring and thoroughly tracking all of your expenses, revenue, and deductions throughout the fiscal or calendar year, you can ensure that your accountant will be able to fill out your tax return accurately and completely. Without good record keeping skills, however, tax time may prove to be a challenge. Here are some principles and guidelines to stick to that highlight how essential documentation is for all businesses, large and small.
Gathering and Maintaining Your Businesses Records
Use record keeping to motivate your employees and keep track of the progress of your business. Thoroughly documented figures of spending and revenue can help the appropriate people within your organization determine which products and services are successful and which aren’t.
A well-run and booming business is one that has healthy relationships with banks, creditors, and other financial partners. These entities will often want to see important financial documents, such as income statements, which portray both profit and spending for a certain amount of time, and balance sheets, which show the amount of assets, liabilities, and equity in your business. Keep your financial figures on these documents updated and current to best reflect where your business stands at any point in time.
Receipts are an important part of your business records. Always be sure to make the origin and dates on any receipts clear. When it comes time to file your business taxes, this information will help you distinguish personal expenses from business expenses and taxable versus nontaxable income.
One key responsibility throughout the calendar or fiscal year is to keep track of all tax-deductible expenses, such as business travel, client meals or entertainment, and business-related communication. Document these when they occur so that you can include them on your next tax return.
Documentation and Your Tax Return
Those same records mentioned above that help to monitor your business’s progress, keep track of its successes and failures, establish and maintain vital relationships with your business’s financial partners, organize receipts, and track potential deductibles are the records that you will use when filling out your tax return. All of your documentation throughout the year must match and reflect the information that goes into your return. Without these records, it will be a challenge to assemble the exact figures for your business’s income, profits, losses, expenses, and deductions, which are essential to accurately complete your tax return.
With diligent documentation, however, you can either successfully avoid the instance of auditing or be well prepared for it if it does occur. When dealing with an auditor from the Internal Revenue Service, it is necessary to produce the appropriate records that back up any information that you have claimed on your tax return. Otherwise, your business runs the risk of facing consistent investigation and monitoring, until you are able to set up a thorough system of record keeping.
The more transparent, comprehensive, and clearly available your business’s balance sheets, income statements, receipts, and deductible records are, the easier it will be for you to face the Internal Revenue Service in the case that they pose an inquiry. If the Internal Revenue Service does decide to closely examine any aspect of your tax return, they may require that you produce the necessary backing documentation, which is just one more reason to have it readily available.
The benefits of acquiring, ordering, and maintaining the organization of your business documents throughout the year are numerous. Record keeping is the ultimate act of responsibility in any kind of business and will be advantageous to you when it comes to the rigors of tax time, as well as in the context of other situations throughout the year.
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