IRS Copy and Recordkeeping for Small Business

Hip No. 2353 Consigned by Penn Sales, Agent Rose B 1/4, ch.createdAt RedDogStream.fun

Good record keeping is one of the easiest and most effective ways to protect your small business, make smart decisions and stay prepared for tax time or an audit. Knowing how you should maintain records can help you decide what records to keep, for how long and in what format to store the information so you can locate it easily at a later time.

Defining a business record

Business records comprise anything that reflects on income, outgo, property or custodianship. They include such records as sales invoices, receipts, bank and credit card statements, payroll records, employment tax filings, contracts, lease agreement forms,purchase orders,cancelled checks,and tax returns with schedules. Both hard and electronic copies are acceptable, but they must be accurate, complete and retrievable.

Basic retention timelines

Most taxmen require you to hold on to records for a certain period of time after filing the return. A practical rule of thumb is:

• Retain records supporting most items for at least three years after the date you filed your tax return.
• Keep information for six years if you failed to report income equal to more than 25 percent of your gross income on a return.
• Retain records for seven years if you make a claim for credit or refund after filing your return and also file a claim for a loss from worthless securities or bad debt deduction.
• Keep employment tax returns for at least four years after the deadline for filing or after the date it’s refunded, whichever comes later.
• Keep documents connected with property (such as purchase, improvements, and depreciation records) for as long as you own the property plus the statutory period following a sale.

These times are general guidelines; your business might have to keep some documents longer, based on contracts, warranties or state requirements.

Preparing for day to day operations and taxes

establish a filing system and stick with the one you use to run your business. The typical categories would be: Revenues, Expenses (broken out by type), Payroll, Assets, Liabilities, Tax Returns, Legal/Contracts. Under each section, arrange papers by date and vendor or client where applicable. In electronic files, use logical filenames and a filing system for dated physical mail.

Electronic records are accepted more and more, but they have to be readable, must safeguard the integrity of their content. Scan paper receipts straight away and ensure files are consistently name. Have a backup plan — local and cloud-based backups, with good index or metadata that makes getting files back relatively straightforward.

Receipts and small purchases

Little purchases add up to big sums. Retain receipts of those purchases made in the course of your business for which you can receive tax deductions and Reimbursement. For very small amounts, try keeping date, amount, business purpose and vendor (no receipt) even if it is under a threshold. When the I.R.S. seeks documentation, a contemporaneous log with bank or card statements can justify it.

Payroll and contractor documentation

Payroll records general Payroll reports should have employee name, address, social security number or taxpayer identification number, employment dates and payment details (wages & time cards and tax deposits). For independent contractors, retain copies of Form W-9s and any 1099’s that you have issued. Precise payroll records safeguard your business should disputes arise, and also help you meet tax obligations.

Recordkeeping for assets and depreciation

Keep track of purchase dates, price, improvement expenses and depreciation schedules on any business asset. An asset’s history determines its basis, affects depreciation deductions and comes into play when you sell the property. Retain receipts, invoices and work orders for improvements.

Preparing for audits and inquiries

Good records ease the stress of audits and streamline resolution. Have the corresponding tax returns and records organized and accessible. If you receive a question, provide the requested records in a timely manner and retain copies of what you send. A one-page summary showing where crucial records are kept and for how long they’re retained can be helpful to whomever is responsible for tax matters at the business.

Practical tips to simplify compliance

Create a schedule: Schedule a regular time, either weekly or monthly, to file receipts, reconcile bank statements and categorize income and expenses. When maintained regularly, it can help prevent backlog and errors.

• Segregated accounts: Have your own bank account and credit card for business so it’s simpler to reconcile your income and expenses. When you mix personal and business transactions, it makes record-keeping difficult and can potentially lead to legal problems.
• Adopt regular documentation: If the business purpose is not clear, date and document why it's a business expense. For travel or meals, specify who attended and the business purpose.
• Keep an audit trail: Hold onto source records and any communication that explains unusual transactions or adjustments.
• Train employees: Ensure everyone who accepts receipts or does the accounting knows how to file them and when they can be purged.

Electronic records and security

In an electronic record system, store records in a format that enables easy reading and verification of the records, and protects them from changes or loss. Keep widely-supported file formats with metadata like date and source. Put some focus on security: unique and strong passwords, access based on roles and frequent backups. Encrypt data that you do not want to expose, such as customer or payroll information.

When to hire a tax adviser

For companies with complex transaction, multiple locations or large asset purchases, a tax professional can design a recordankeeping process to suit your needs and ensure you are in compliance with any retention rules. Professionals can also provide guidance on the type of documentation required for specific deductions and how long you should keep records like yours.

Final checklist for immediate implementation

• Establish a file hierarchy for both paper and electronic records.
• Make it a routine to scan and store copies of paper receipts.
• Retain tax returns and all supporting schedules for the longest recommended time period.
• Record payrolls and keep a record of contractors.
• Record asset purchases and depreciation for any number of years.
• Create an internal retention schedule and train employees on it.

Keeping records consistently and deliberately will minimize your risk, provide you with better support for your decisions, and make when it’s time to pay taxes easier. Through awareness of the IRS record keeping standards for small businesses and a little structure, you shield your business and have a better idea about its financial status.