You’ve probably heard a lot of advice on how to run your business successfully. Do this. Don’t do that. Do more of this.
While all insight is given in good nature, it’s important to understand what exactly applies to your specific circumstances and business structure. According to the IRS, keeping good records is important for any small business, no matter your employee count.
Here, we’ll go over some answers to frequently asked questions as it relates to (good) recordkeeping.
1. Why should I keep records?
Good records will help your business with the following:
- Monitoring the progress of your business – Records can show if your business is improving, which items are selling the most, and provide insight into any changes you need to make.
- Preparing your financial statements – These would include income (profit and loss) statements and balance sheets. All valuable information when it comes to dealing with your bank or creditors.
- Identifying sources of income – You likely receive money from many sources. These records can help you separate business from nonbusiness and taxable vs. nontaxable income.
- Keeping track of deductible expenses – It can be easy to forget expenses come tax time, so keeping track of them as you go will help.
- Preparing and supporting tax returns – Records to help prepare tax returns must support income, expenses, and credits. If the IRS examines any of your tax returns, you could be asked to explain items reported. Keeping good records will help with this process.
For more information on these items listed above, visit this page on IRS.gov.
2. What kinds of records should I keep?
Great news. We recently wrote a full blog post on federal employee recordkeeping and retention requirements. In general, the IRS explains that you may choose a recordkeeping system that fits your business and clearly shows income and expenses.
3. How long should I keep business records?
The IRS explains that the length of time you’re required to keep a document depends on the action, expense, or event which the document records. In general, you should keep records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.
To clarify, the period of limitations is the amount of time that you can amend your tax return to claim a credit, refund, or the IRS can assess additional tax.
As for employment taxes, the IRS says business owners should keep these records for at least four years.
4. How should I record transactions?
Any good recordkeeping system includes a summary of your business transactions. Usually these can be kept in books called journals and ledgers. A journal is a book where you record business transactions shown on supporting documents. A ledger is the book that contains totals from all of your journals.
Of course, many of you likely keep electronic versions of these transactions. Whether you use accounting software, point of sale software, financial software, or any other electronic records system, it must be able to provide a complete and accurate record of data to the IRS.
For more on business transactions, click here.
5. What is the burden of proof?
The burden of proof is the responsibility to prove entries, deductions, and statements made on your tax returns. The IRS explains further that you must be able to substantiate certain elements of expenses to deduct them. More on this here.
With these 5 tips only scratching the surface of what it takes to stay compliant, you may be feeling a little overwhelmed. Luckily, we have a solution for that.
How can PrimePay help.
PrimePay’s small business HR solution, HR Advisory, can help you with your recordkeeping compliance. Click here to learn more.
Disclaimer: Please note that this Q&A is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.