Keeping thorough and accurate financial records is one of the less exciting tasks that business owners face, but it is a necessary one. In addition to enabling you to monitor the progress of your business and make informed decisions on a daily basis, keeping good accounting records is essential when it comes time to prepare your tax returns. While the smallest businesses may be able to get by with the “shoebox method,” having in place a reliable and comprehensive financial recordkeeping system is crucial if you want your business to grow.
The types of accounting records you must keep are not mandated by law, but the Internal Revenue Service (IRS) demands that your recordkeeping system clearly shows your business’ income and expenses. A failure to keep good financial records could result in underpayment or overpayment of taxes, penalties for filing late or for underpayment, and additional fees for tax preparation. Incomplete records can also present problems if your return is audited by the IRS.
Rather than relying on handwritten journals or ledgers, many businesses now use small business accounting software to keep track of their revenues and expenses. Relatively easy to use and generally affordable, a basic accounting software application will help you generate balance sheets, categorize transactions, track sales, record cash disbursements, manage payroll, create invoices, set up budgets, conduct your banking, and monitor tax liabilities. Your tax professional may be able to recommend an accounting software program that provides the level of functionality appropriate for your business.
But even the best electronic bookkeeping system does not eliminate the need for filing and storing paper receipts that may be necessary to substantiate deductions. In addition to recording transactions electronically, keep any printed documents that show the amounts and sources of gross income, such as invoices, cash register tapes, and credit card charge slips. The IRS may also want to see documents that show the amounts paid for purchases, such as canceled checks, credit card sales slips, and invoices.
It is especially important to have a paper trail when claiming deductions for certain types of expenses, such as business-related gifts, entertainment, travel, and meal expenses. In addition to keeping paper receipts, maintain a diary or calendar to record details of business meetings, including who was in attendance and what was discussed. While you are not required to keep receipts for entertainment and meal expenses of less than $75, you should still maintain written records of any meetings for which expenses are deducted. If you use your personal car for business part of the time, keep a log in the car that records mileage, tolls, and parking fees incurred in the course of business usage.
Documents relating to the purchase price of any assets owned by the business should be securely stored, as these will be needed to determine gain or loss when the assets are sold or to compute annual depreciation. Businesses with employees have additional obligations to keep track of all employment taxes, employee Social Security numbers, and W-4 certificates, as well as a history of wages and benefits paid.
When a business-related transaction is conducted online, you may want to print out a record of the transaction and keep it on file. If you choose to store this data electronically, make sure backup copies of all important information are made and stored in a secure location.
Setting up a financial recordkeeping system for tax purposes may, at least initially, demand some extra effort on your part. But, in addition to maximizing your opportunities for deducting business expenses, getting into the habit of maintaining thorough and accurate accounting records can help you run your business more efficiently and make it easier to obtain additional financing when needed.
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*Associated persons of Lincoln Financial Advisors Corp. who hold a JD and/or CPA license do not offer tax or legal advice on behalf of the firm.