Maintaining accurate records helps small businesses comply with regulatory changes and decrease penalties for inaccurate filings. In addition, this makes it simpler for owners to verify information on tax returns and maximize deductions.
An effective recordkeeping system includes keeping an accurate log of all business transactions. Usually this summary is maintained using journals and ledgers that can easily be purchased at office supply stores.
1. Keep it organized.
Record-keeping can provide small business owners with crucial documentation of income, deductions and credits that will aid their taxes as well as give insight to support decision-making. A system to track receipts, invoices and financial statements regularly can make tax season less daunting.
The documents you require depend on the kind of business you run and your income/expense reports. The IRS suggests keeping an ongoing summary of transactions – typically found in books called journals and ledgers – which includes gross income as well as deductions/credits documented. Some industries also have regulations mandating specific forms of documentation. Whether keeping hard-copy or electronic record-keeping systems, ensure your records are organized and accessible for easy reference.
2. Keep it digital.
Organization of business records may seem like a daunting challenge. All the paperwork related to income and expenses may become a tangled mess of receipts and invoices, canceled checks, bank statements, cash register tapes and other documentation.
IRS recommendations suggest that business owners keep records for at least three years and many documents can be digitally stored – for instance, banks offer online access to monthly and yearly reports that can be scanned and uploaded into an electronic journal and ledger that organizes this data by account.
Digital files require less physical space, can be quickly accessed, and allow for quick backup. Some documents, however, must remain on file forever such as deeds, titles and cost basis records for property such as computers or vehicles. It is wise to consult a legal professional before disposing of any important business documentation. Invest in record keeping tools that help your business run efficiently while complying with regulations while informing informed decision-making processes.
3. Keep it safe.
Maintaining accurate records not only facilitates tax filing for business owners, but is a must in terms of complying with the Internal Revenue Service (IRS). In particular, keeping financial documents and receipts may prove indispensable during an audit or legal proceedings.
The IRS mandates that taxpayers provide proof of earnings, expenses and credits listed on their taxes. This documentation can take the form of checks canceled, receipts given out as purchases were made, mileage logs kept during a journey logbook program by employer reimbursement statements for employee reimbursement purposes or bank statements as well as photos or other forms. Digital documents are increasingly preferred due to their easy storage and accessibility but should still be stored securely so as to avoid data loss or cyber attacks.
Maintaining meticulous records is integral to complying with tax laws and filing requirements, but also for streamlining bookkeeping, avoiding mistakes, and making smart business decisions throughout the year. If you’re struggling to maintain accurate business records on your own, consulting a financial expert might help ensure your practices align with current regulations and industry best practices.
4. Keep it simple.
Although record keeping can be time consuming and cumbersome, there are ways to streamline this process and make tax season simpler. By maintaining accurate bookkeeping throughout the year, you can minimize last-minute chaos while maximising deductions.
Records related to income, expenses and employee payments should be organized systematically. The IRS requires small businesses to keep documents that document income, deductions and credits claimed on tax returns; receipts, invoices, bank statements and employment contracts should all be kept for this purpose.
Additionally, you should keep copies of any documents related to depreciation of assets. If you use credit or loans for business use, save the monthly statement in case of an IRS audit. In addition, make sure that documents supporting claims for deductions or credits (for instance proof that your business qualifies for certain research and development or manufacturing tax breaks) are kept on record and that records regarding tax payments ( dates and amounts paid in) are also kept.