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.