Staying on top of taxes is crucial when you’re a business owner. Proper recordkeeping plays a huge role in making that manageable. Check out this list of recordkeeping best practices for businesses to find out which financial records you should maintain – and why.
Why recordkeeping matters?
Accurate reporting & compliance. Accurate record keeping for taxes is essential to maintain compliance. It can minimize the risk of mistakes and errors that could lead to costly penalties or trigger an audit. This is especially important for businesses that must track payroll, sales, and other tax-related items.
Claiming deductions and credits. Business owners can potentially save on taxes through a variety of credits and deductions. Comprehensive recordkeeping means you aren’t missing out on opportunities to reduce what you owe during tax filing season.
Efficient tax filing. You’re busy running a business. Record keeping as a best practice year-round simplifies small business and startup tax preparation. This can save you time and stress when tax season arrives.
Which records should businesses keep?
You want to keep records that clearly show your business income and expenses. Your records should also include a summary of your business transactions. For federal tax purposes, the IRS recommends businesses retain the following records.
Gross receipts
Include supporting documentation that shows amounts and sources.
- Cash register tapes
- Deposit information (cash and credit sales)
- Receipt books
- Invoices
- Forms 1099-MISC
Purchases
Include supporting documentation that identifies the payee, amount paid, proof of payment, date incurred, and item description.
- Canceled checks or documents reflecting proof of payment/electronic funds transferred
- Cash register tape receipts
- Credit card receipts and statements
- Invoices
Expenses
Include supporting documentation that identifies the payee, amount paid, proof of payment, date incurred, and item or service description.
- Canceled checks or documents reflecting proof of payment/electronic funds transferred
- Cash register tape receipts
- Account statements
- Credit card receipts and statements
- Invoices
Travel, transportation, entertainment, and gift expenses
Your business is likely to incur expenses related to travel, transportation, entertainment, and gifts. To claim tax deductions for expenses in this category, you must provide the proper documentation to substantiate them. This can include receipts, vouchers, and invoices.
Assets
Include supporting documentation that determines annual depreciation and gain or loss for assets sold.
- When and how you acquired the assets
- Purchase price
- Cost of improvements
- Section 179 deduction taken
- Deductions taken for depreciation
- Deductions taken for casualty losses, such as losses resulting from fires or storms
- How you used the asset
- When and how you disposed of the asset
- Selling price
- Expenses of sale
- Purchase and sales invoices
- Real estate closing statements
- Canceled checks or documents that identify payee, amount, and proof of payment/electronic funds transferred
Employment taxes
The IRS requires businesses to keep certain employment tax records, and requires that your documentation show the following information:
- Employer identification number
- Amounts and dates of all wage, annuity, and pension payments
- Amounts of tips reported by employees
- Record of all allocated tips
- Fair market value of in-kind wages paid
- Names, addresses, social security numbers, and occupations of employees and recipients
- Employee copies of Form W-2 and W-2c returned/not delivered
- Dates of employment for each employee
- Periods where employees or recipients received pay while absent due to sickness or injury as well as the amount and weekly rate of payments by your business or third-party payers
- Copies of Forms W-4, W-4P, W-4S, and W-4V
- Dates and amounts of tax deposits made and acknowledgment numbers for deposits made by EFTPS
- Copies of returns filed and confirmation numbers
- Records of fringe benefits and expense reimbursements provided to employees, including substantiation
- Substantiation of credits claimed
- Documents to substantiate the amount of employer or employee share of Social Security tax that your business deferred and paid for 2020
Recordkeeping best practices for businesses
How long you keep a record depends on what kind of documentation it is. Here are some general guidelines.
- Business tax returns: 7 years
- Employment tax records: at least 4 years
- Property: until the limitation period expires for the year you dispose of the property
- Records for qualified sick leave wages for leave after March 31, 2021: at least 6 years Documentation of qualified family leave wages for leave after March 31, 2021: at least 6 years
- Records of qualified wages for the Employee Retention Credit paid after June 30, 2021: at least 6 years
You should also keep business records for non-tax purposes – for example, documentation related to insurance policies. Check with each entity to determine how long you should keep certain records.
How should businesses keep track of records?
The method you use to retain the documentation outlined in this article is totally up to you. Many businesses use accounting software or some type of electronic program for bookkeeping for startups and small businesses. Just make sure your system captures a summary of your business transactions, gross income, deductions, and credits.
Need expert tax help?
Keep in mind, this list of recordkeeping best practices for businesses is not exhaustive. Questions about recordkeeping for your startup or small business? Reach out to your Escalon tax professional for help.
If you’re ready to spend more time growing your business, outsource your tax needs to Escalon. We offer tailored tax solutions to businesses of all sizes. Our team can work with you year-round to optimize your tax strategy so you can focus on what matters most. Contact us today.
