As we meet with clients just starting a business or existing business clients, a common question they have is: What kind of records should I keep?
The answer it that you have the ability to choose any record keeping system that suits you and your business as long as it clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your records need to show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business record keeping system. We advise that you keep a SEPARATE checking account from your personal account for business purposes.
What are supporting business documents?
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to the IRS publications, specifically, Publication 583, Starting a Business and Keeping Records.
The following are some of the types of records you should keep:
Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
Cash register tapes
Bank deposit slips
Receipt books
Invoices
Credit card charge slips
Forms 1099-MISC
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:
Canceled checks
Cash register tape receipts
Credit card sales slips
Invoices
Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:
Canceled checks
Cash register tapes
Account statements
Credit card sales slips
Invoices
Petty cash slips for small cash payments
Travel, Transportation, Entertainment, and Gift Expenses. If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses. For additional information on how to prove certain business expenses, refer to IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets include the following:
When and how you acquired the assets.
Purchase price
Cost of any improvements.
Section 179 deduction taken.
Deductions taken for depreciation.
Deductions taken for casualty losses, such as losses resulting from fires or storms.
How you used the asset. When and how you disposed of the asset.
Selling price.
Expenses of sale.
The following documents may show this information.
Purchase and sales invoices.
Real estate closing statements.
Canceled checks.
Employment taxes. There are specific employment tax records you must keep. Keep all records of employment for at least four years. For additional information, refer to Record keeping for Employers and Publication 15, Circular E Employers Tax Guide.
