Running a small business can be a challenge, but for many business owners, the most difficult aspect is recording taxes. When your tax records are in disarray can not only cost you deductions but if you are audited, it may cause even bigger problems, costing you money. Fortunately, we have some tips to help make the process of recording taxes easier.
Set Up A Good Software System
If you want to keep good tax records, it is crucial to have a good software system. Whether you will be outsourcing your final tax return preparation to a tax professional or you’ll be doing your own books, you need to choose software that can deliver the best possible results.
Understand Your Business Tax Burden of Proof
When you make any entry on your tax return, you will have a burden of proof. Whether it is expenses, income or deductions, you need to be able to prove you are entitled to claim them. Good record keeping is crucial to establish this proof, so you can satisfy the burden of proof with documentation for the IRS. Remember to keep all your original paper documents such as receipts and canceled checks with your ledgers, and err on the side of caution with a scanned copy into a dedicated computer file.
Keep Daily and Monthly Summaries
Daily and monthly summaries of your cash disbursements and receipts can be worth their weight in gold. This will allow you to double check that you’ve not missed anything in your accounting ledgers, so you can pick up any possible tax deductions.
Pay Attention to Petty Cash
In a small business, petty cash can become a fund for a variety of services. However, it is crucial to treat any transactions from petty cash as cash disbursements. So, you’ll need to keep a source document with your records. Remember that some of these may be tax deductible.
Carefully Document Employee Payroll
The tax deductions for employee payroll can be complex, so you need to take care to understand the tax implications of employee business taxes. This means that you should keep unusually good records for any employees, to allow your tax advisor to ensure that you comply with all regulations and rules.
Keep Your Tax Records
With so much paperwork involved in running a small business, it is very easy to think that once you’ve filed your return, you can forget about the records. However, according to IRS tax codes, you are required to keep tax records for as long as they may be required for the administration of the tax code.
While you must retain your employment tax records for at least four years, err on the side of caution and keep them for seven years. If you owe any taxes, you should retain your records for a minimum of three years. Also if you won property, the associated records should be kept until the period of limitations has expired for the year you dispose of the property. Finally, if you have reportable income, but it is not reported, and it is more than 25% of the tax return gross income, you’ll need to keep your records for six years or more.