Why Keeping Accurate Tax Records Is Vital for Business Owners & Professionals
Spending a little time creating tax records and holding onto documentation could save you a lot of hassle in the future.
Business owners and individuals must, of course, retain relevant tax information to file accurately. But you’ll also want to hold onto all of your documentation in case the IRS wants to see it later.
Saving your receipts, bank statements, invoices, and payroll records proves your income, expenses, and deductions, ensuring you have the right answers when the taxman comes calling. Other documentation you’ll require includes employment tax records and any supporting documentation that proves your financial picture to the IRS.
Keeping this tax information on-hand also makes it possible to deduct more business expenses and, potentially, save you significant money.
Here’s some information on why thoroughly organizing and holding onto tax records is essential to your bottom line:
Which documents you need
Many different recordkeeping systems exist, and the goal of each of them is the same: to show your income and expenses clearly.
As a result, whichever system you employ should include a summary of all of your business transactions and have information on your gross income, credits, and deductions. If you’re running a small doctor’s office, for example, having a business checking account makes it simpler to monitor your income and expenses. If your organization is a little more complicated, you might use a different system.
In addition to the numbers, you’ll need your gross receipts, which can include documentation like deposit information, receipt books, register tapes, your 1099-MISC form, and invoices.
If you buy items and resell them to customers, including manufacturers that purchase raw material and sell the finished product, records of your purchases are required. Supporting documentation here includes canceled checks, invoices, credit card statements, and cash register tapes.
Similar documentation can prove your business expense claims, which are any costs you incur, not including purchases, that you require to carry on the business. You’ll also need to substantiate travel, entertainment, transportation, and gift expenses on your return.
Assets are a vital part of your tax records, including your office furniture and any equipment you purchase. In this case, you’ll need documentation showing when you bought these assets, the cost, how you used it, and how and when you disposed of any old assets. If you’ve sold off some business assets, you must also include information on the selling price.
Finally, if you have employees, you’ll have to hang onto your employment tax records for the IRS to review. These records include all wages and benefit payments you make, employee information, and copies of your employees’ income tax withholding certificates.
Organizing all of this documentation in case the IRS wants more information from you can make your life much easier down the line.
How long you need the records
The amount of time to hold onto tax information depends on your situation.
If you end up owing on your taxes, you’ll want to keep your records on-hand for at least three years from their due date. After three years, the period of limitations for assessing tax ends, and the IRS can no longer amend a return and demand additional payments.
However, there are always exceptions, as the period of limitations never expires for a fraudulent claim or if you fail to submit your return. The IRS also has six years to audit if they believe you’ve underreported income by 25% or more. As a result, many businesses hold onto their detailed annual financial statements for as long as seven years, just to be safe.
There’s a slightly different employment tax process, and you’ll want to keep these records for at least four years from the date the tax is due or paid, whichever is later.
The gist is that as long as you keep diligent records, file your taxes on time, and make accurate claims, you’ll only need to hold onto your business tax records for at least three years and employment tax records for four years from their due date.
Avoiding fines and saving money
Of course, the main reason you’re keeping all of these records is that you don’t want to get on the wrong side of the IRS.
If the IRS goes back and looks over your tax returns, it’s up to you to prove expenses and deductions. If you don’t have the documentation to verify the return information, the IRS can demand back taxes and issue a penalty for tax underpayment.
The penalty depends on a business’s structure and the reason the IRS audits you. Your business could also end up paying interest on late tax installments. In short, you don’t want to end up in this situation because it will lead to significant financial losses.
The other benefits of keeping tax records
Beyond using tax records to satisfy the IRS, you can use this information to monitor the business’s progress and provide an accountant with more items to deduct.
In the retail environment, you’ll see which items are selling as you go through these documents, providing insight into any changes that may affect projections. The same can be said for any business type because financial records show managers what’s working and what needs improvement.
These records also make life easier for your tax professional. The more documentation provided, the easier it is to deduct expenses from a tax bill. For example, executives and investors can use certain travel and transportation expenses to bring about considerable tax savings.
You can even go after tax refunds from past reporting periods if you feel like you’ve overpaid. Taxpayers have three years from the date they filed a return or two years from the date they paid the tax, whichever is later, to revisit a claim. You also have seven years to recover a tax overpayment resulting from a bad debt deduction or worthless securities.
Get the help you need
Taxes can be confusing, but receiving professional advice and assistance delivers a clearer picture of the documentation needed to avoid tax problems. This help can also significantly lower your annual tax bill.
Provident CPA & Business Advisors helps our clients pay the least amount of tax as legally possible. We work with professionals, entrepreneurs, executives, and investors to provide maximum tax savings ethically. Contact us for more information about what we can do for you.