Your Top 4 Recordkeeping Questions Answered

1. Why Do I Need to Keep Records?

Record keeping is a must do for all businesses. Though some might find the process of recording, filing, and analyzing a bit tedious, I can assure you it is actually an imperative part of your business success. Keeping good records will allow you to do the following:

• Prepare accurate financial statements. Such as an Income Statement, and Balance Sheet. 
• Those statements allow you to analyse, and compare, how your business is doing, helping you make educated decisions. See "Financial Reports... Why You Need Them" for more information on what your financial statements can tell you.  
• Know the source(s) of your income (taxable and nontaxable), and your deductible expenses. 
• Track the basis of your assets for tax purposes. The basis is used to calculate your loss or gain, as well as calculate your deductions for depreciation, amortization, depletion, or casualty loss. 
• Prepare and file your tax return. You'll need the information contained in your records in order to accurately have your tax return prepared, and avoid fines and penalties. 
• Be prepared for an IRS inspection. At any time the IRS may ask you to explain any number of this reported on your tax return. By having the appropriate supporting records you will greatly speed up the exam process, and again avoid penalties and fines. 

    2. What Kinds of Records Do I Need to keep?

Though you may choose to keep your records the "old-fashion" way, I would advise using electronic accounting software. There are many options you can choose from, including cloud-based. Cloud-based software allows you to access your records from anywhere with an internet connection. Whichever system you use you will be required to keep records for:

• Gross receipts - or income received from your business. 
• These receipts need to show the amount and source received. 
• Purchases - items you buy for the purposes of reselling. 
• Think about what your business sells, and what you need to buy (purchase) in order to provide your customers with an item to buy. 
• Just like with your Gross receipts you are required to have records showing the amount and who you made these purchases from. 
• Expenses - Your expenses are different from purchases as they do not relate to your items. These documents are for costs associated with running your business, aside from purchases. For example: Utilities, Licensing, Legal Fees, etc.
• Travel, Meals and Entertainment, Gift Expenses - The documentation required for these expenses require you to prove why these expenses were incurred. For specific information please see IRS Publication 463.
• Assets - This includes fixtures, equipment, furniture, vehicles, computers, etc. that you own and are used within the your business. 
• The documentation for your assets must include:
• when and how you gained the asset 
• what you paid for the asset 
• any costs associated with improving the asset 
• any deductions you are taking for the asset 
• how the asset is used 
• and any information pertaining to the sale or loss of the asset 
•    Employment taxes - all employee records must be kept for a minimum of 4 years. For specific information please see IRS Publication 15, Circular E.

 3. How Long Do I Need to Keep Records For?

It is recommended that you keep copies of all tax returns you file throughout your life. They can help aid in the preparation of future returns and the information contained on them can be invaluable in certain situations. 

The IRS period of limitations that apply to income tax returns is as follows:

 4. What is the Burden of Proof?

The Burden of Proof is the responsibility you have to prove any information on your tax return. To successfully meet this burden you must keep the documents previously discussed in this post. 

Chances are you are not a bookkeeper, accountant, or tax expert, therefor if you wish to keep your records solely on your own you will need to do further reading, and keep current on your tax laws and requirements. Falling behind on your record keeping should be considered unacceptable, as good record keeping can increases the chances of business success. 

For more information see IRS Publication 583 Starting a Business and Keeping Records.

Understanding Entity Types

There are five different entity types a company can choose from. Each entity type has its own rules and regulations that must be followed. 

The information contained in this post is only an overview, to determine what type is best for your business you should consult your CPA. 

      Sole Proprietorship

The IRS defines a Sole Proprietorship as - A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

This means:

• You will report your income, and expenses on your individual tax return.
• You will be responsible for Self-employment Tax.
• I recommend making quarterly estimated tax payments. 

Partnership

The IRS defines a Partnership as - A 

partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.

This means:

• Each partner must report their share of the businesses income on his/her Income Tax Return. 
• Again making estimated tax payments is recommended. 

Corporation

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

This means:

• As said by choosing a Corporation structure you are opening yourself to a double tax. 

S Corp

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders
• including individuals, certain trusts, and estates and
• may not include partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.

Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Classifications

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

Effective Date of Election

An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances. See Form 8832 General Instructions for more information.

Tax Time Doesn't Have To Be Stressful

How did Tax Time Go For You?

Now that April 15th has come and gone, ask yourself

"Could my return have gone better?"

If you can answer that question with an honest "NO", good for you! Unfortunately most, I fear, will answer "Yes". For those who are wishing their return had a different result, or was a much easier process, I invite you to ask yourself why you feel that way?

1) Did you prepare your return yourself?

2) Did your CPA, or tax professional have a difficult time with your tax records? Did those difficulties result in you filing an extension? Or paying a higher rate for your return?

3) Did you end up owing? Unexpectedly?

The most important question, WHAT ARE YOU GOING TO DO DIFFERENTLY FOR NEXT YEARS RETURN? Whether you are a business or an individual there are things you can do to make tax time less stressful, and limit surprises. 

1) Keep accurate, GAAP compliant records.

2) Know what your tax obligations are, throughout the year.

3) Ensure your with-holdings, or estimated payments are correct. 

That's a very basic list of what you need. 

Let's be honest, chances are you don't have the time or the knowledge to keep current with all that. Don't feel bad, of course you don't! You are busy running a business, or living your life. Focusing on the things you should be focused on! However, now you must take the time to think about, complete, or even learn these tasks. Boooo! I know. 

The most effective, simple, and yes cost effective solution is to hire someone to think about these things for you. Did you know having a year round professional could save you thousands! Yikes!

Don't run away now! Hiring a professional will benefit you, or your business in ways above and beyond tax season. A professional will be looking at your financials year round:

1) Helping you stay on track of financial obligations. Have you ever had a poor credit score, or know someone who has? It's not      pretty!

2) Keeps you current with tax obligations, so there is no surprises!

3) Increases your borrowing potential, due to accurate numbers that can be trusted. 

4) Can help you implement strategies to reach your goals. 

Now ask yourself "Do I want to deal with surprises, or be stressed again next year?".