Even after a short amount of time, business documents may begin to build up. Find out which records you should sort and save here.
What you’ll discover:
What papers should I use to establish my company income?
How long do I have to keep my company records?
Which business documents do I wish to maintain for tax and accounting purposes?
How can preserving tax records for my small company help?
What kinds of record-keeping systems are permitted?
Most business owners understand the need of keeping certain documents linked to their company and its taxes. Yet, determining which documents to maintain and for how long may be perplexing. It is critical to understand which documents may be needed in the event that a tax return is audited, yearly reports are required, or just to assist your firm in tracking its financial health.
Table of Contents
What papers should I use to establish my company income?
Examine the paperwork that support your accounting entries to demonstrate your firm revenue. Your bank account and credit card statements should match your accounting records. Bookkeeping records serve as the foundation for financial reports, which are needed to produce company tax filings. Fill out a Small Company Tax Worksheet to help you organize your business information if you are paying business taxes for the first time.
Such papers that verify the business purpose of your activities should be kept in addition to your bank account statements, credit card statements, and financial records. Keep invoices and receipts for your sales and costs, for example. Maintain any contracts, order forms, and other papers that may be used to prove your company revenue, as well as any canceled checks.
How long do I have to keep my company records?
Taxpayers are often perplexed about how long they should keep their company and tax documents. Several sorts of company documents should be retained for longer periods of time than others. A tax specialist will most likely be able to advise you on how long to maintain each kind of record for tax reasons. The IRS recommends that taxpayers preserve their records for three years. But, in some instances, the IRS recommends keeping information for up to 7 years, or even permanently in cases of failure to submit a return and fraud.
If you get an audit notification from the IRS, it is even more critical that you have the necessary data on hand. If your company tax return is audited, the IRS may seek to view your documents. In general, the IRS audits tax returns within three years of the due date or the day the tax return is submitted, whichever comes first. Yet, if the IRS detects a significant mistake, it may audit returns submitted more than three years ago. The IRS does not normally audit returns filed more than six years ago.
Which business documents do I wish to maintain for tax and accounting purposes?
In general, you should save receipts and other documentation that proves your revenue and company costs. It is critical to keep records that itemize company costs and demonstrate that the expenses are actually business expenses. Maintain a mileage record that details all business travel, including the date, where you went to, how many miles you drove, and the business objective for the trip, for example, to deduct vehicle expenditures. Similarly, maintain a journal of who attended business dinners and entertainment with you and what the business objective of the meal or event was. For business travel costs such as hotels, airlines, and taxis, keep a travel log to record the expense and the purpose of the trip. These documents will be useful if your company’s taxes are ever audited.
If your company depreciates assets, make every effort to keep documents that demonstrate the item’s purchase price as well as any capital upgrades made to the asset. You should also save documentation of any tax payments made by your company to the IRS or a state taxation body. Save any documents that establish eligibility for any deductions or credits that your firm claims on its income tax return. For example, if your company claims the R&D credit, you may be required to submit paperwork demonstrating how the company qualified for research costs.
Wage rates, dates of employment, job evaluations, and employment contracts are all critical data for your company to retain. This also applies to all payroll paperwork. Payroll papers contain Forms 940 and 941, as well as tax deposit dates and amounts. Keep track of the dates and amounts of your projected tax payments if you are obligated to pay self-employment taxes. Contact a tax professional immediately for help with your self-employment taxes.
How can preserving tax records for my small company help?
If your company tax return is audited, your small business tax documents may be required to show revenue and spending to the IRS or state taxation authorities. Your tax documents may also be requested to demonstrate that a company spending is legitimate. To establish that your purchases are for your company, you may need to present receipts or other paperwork that itemizes your transactions. Your company tax records will also assist your accountant draft your tax returns. In order to complete an appropriate business income tax return, your accountant may need access to your company’s financials. Your accountant may also want to go through receipts or other papers with you to determine if certain costs are common and necessary business expenses that may be deducted on your company tax return.
Your company tax records may also be important if you are engaged in a business-related lawsuit. A lawsuit might be filed against a business partner, an employee, a contractor, or another company. In addition to income tax audits, your company may be subject to payroll audits and workers’ compensation audits.
Amending a previous year income tax return will almost certainly include consulting your prior year company tax data to complete the revised tax form. A tax expert can assist you in filing an amended tax return.
What kinds of record-keeping systems are permitted?
Paper and electronic records are both allowed. The most essential thing is to create an accurate, full record-keeping system that helps you to discover papers afterwards. It is a good idea to scan papers and preserve electronic copies while using a paper record-keeping system. Similarly, when using an electronic system, it is advisable to back up all electronic documents in at least two places, one of which should be local (not cloud or online-based).
Company owners sometimes depend on other parties to maintain certain business documents, however this is typically not recommended. For example, some company owners do not save copies of their bank statements because they believe their bank will always be able to supply them. Yet, it is likely that your company tax returns may be audited several years after you submitted them, and your bank may not keep your statements for more than a few of years. If you are audited and are unable to give copies of your bank statements or other critical financial documents, proving your company revenue and spending might be tough.