Many small business owners fear the thought of an audit. However, you don’t have to quake in your boots as much if you keep thorough and organized bookkeeping records. The number one rule for bookkeeping and how to avoid an audit: Have a record of everything that flows in and out of your business. You’ll be prepared to answer any auditing questions and provide the required paperwork when billed for additional tax.
Although U.S. law doesn’t require any kind of recordkeeping system, good recordkeeping ensures your company has accurate financial statements, acts as a report card on your business progress, tracks deductible expenses and helps with tax return preparation.
What you need to prepare for tax time
You just need something that shows your income and expenses. Such supporting documents include printed and digitized sales slips, paid bills, invoices, receipts, deposit slips and canceled checks. These have the details you need for managing your books.
Consider saving printed receipts as digital files. It’ll be easier to search for it and you won’t have to worry about the print fading away. Make it a habit to scan these receipts as they come in or on a weekly basis to avoid falling behind.
It’s easier to digitize receipts because some smartphones have an app that can scan your receipts. For example, Scan Pages is a free iPhone app that creates a PDF file of scanned pages that you can email or save in Google Docs, Dropbox or Evernote.
Documents you need to save
Income documents, also known as gross receipts, show the amount and source of income your business receives:
- Bank deposit slips.
- Cash register tapes.
- Credit card charge receipts.
- Receipt books.
Purchase documents show the amount paid for purchases that you use to resell to your customers:
- Canceled checks.
- Cash register slips.
- Credit card sales slips.
Expense documents show the cost your business incurred to conduct business:
- Account statements.
- Canceled checks.
- Cash register slips.
- Credit card sales receipts.
- Form 1099 for miscellaneous income.
Financial institution-prepared financial account statements also work as proof of payment, especially if you don’t get canceled checks. The statement needs to display the check number, amount, payee’s name and date check posted to the account.
The same information is needed — except for the check number — for electronic transferred funds and credit cards. Even though you have the financial account statement, you still need to have the receipts and other documents to support the incurred costs.
How long should you keep records?
Some situations require keeping records longer than the standard such as filing a claim for a loss from worthless securities or a bad debt reduction.
Here’s how long you want to retain these records:
- Records of supporting items: Three years.
- Employment tax records: Four years after the tax is due or paid, whichever is later.
- Records of business assets: Three years after selling or disposing.
The IRS provides a recordkeeping system example on how to use a single-entry system to keep records. This example includes:
- Daily summary of cash receipts.
- Monthly summary of cash receipts.
- Check disbursement journal.
- Employee compensation record.
- Annual summary.
- Depreciation worksheet.
- Bank reconciliation.
Where to get tax help
It’s wise to hire an accountant or a bookkeeper to ensure your records stay organized and accurate. You can visit IRS.gov for answers to your tax law questions.
Here are some useful tools you’ll find on the IRS website:
- Enter “ITA” into the search box to use the Interactive Tax Assistant. It’s a tool that asks you questions about tax laws and provide answers.
- Enter “Tax Map” or “Tax Trails” into the search box for detailed information by tax topic.
- Enter “Pub 17” into the search box for the “Your Federal Income Tax for Individuals” publication, which covers the general rules for filing a federal income tax return.
- Call 1-800-829-4477 for recorded information on tax topics.
- Review tax law information in your electronic filing software.
For anything not covered here, check Help & Resources.
More tax resources
- Alternative Minimum Tax (AMT) Assistant: Find out if you’re subject to AMT.
- Earned Income Tax Credit Assistant: Determines if you’re eligible for EITC.
- Electronic Filing PIN Request: Verify your identity when you do not have your prior year Adjusted Gross Income (AGI) or prior year self-selected PIN available.
- Get transcript: Get transcript or copy of a return or call 1-800-908-9946.
- IRS forms and publications.
- IRS Videos: Tax questions answered in videos and audio clips.
- IRS Withholding Calculator: Find out the amount you should have withheld from your paycheck for federal income tax purposes.
- Online EIN Application: Get an Employer Identification Number.
- If you can’t pay taxes on time, refer to the Online Payment Agreement Application or the Offer In Compromise Pre-Qualifier.
- Refund status: Check on the status of a refund.
- Taxpayer Advocate Service: Independent organization within IRS that helps taxpayers and protect their rights.
What are your tax questions? Let us know in the comments.
Image credit djshaw