What are the right documents to prove my business income?
To prove your business income, look at the documents that support your bookkeeping entries. Your bank account statements and credit card statements are expected to match your bookkeeping entries. Your bookkeeping entries are the basis for your financial reports, which are used to prepare your business tax returns. If you are filing business taxes for the first time, fill out a Small Business Tax Worksheet to assist you with organizing your business information.
In addition to retaining your bank account statements, credit card statements, and financial records, it is important to retain other documents that prove the business purpose of your transactions. For example, hold on to invoices and receipts for your sales and expenses. Keep any contracts, order forms, and other documents that can be used to substantiate your business income, in addition to any canceled checks.
How long must I store my business records?
Taxpayers are often confused about how long to hold on to their business and tax records. Some types of business records are recommended to be kept for longer periods of time than others. A tax professional is likely in the best position to give you advice on how long to keep each kind of record for tax purposes. The IRS generally advises taxpayers to keep their records for three years. However, in various circumstances, the IRS suggests records be retained for up to 7 years, or even indefinitely in cases involving failing to file a return and fraud. In addition to usual tax records, the following may be important to keep:
- Bank statements, canceled checks, and expired contracts and leases.
- Product, material, and supply inventories.
- Ledgers, invoices, payroll, sales, and account payable and receivable records.
- Accident reports and claims, vouchers, canceled stock and bond certificates.
If you receive an audit notice from the IRS, it becomes even more crucial that you have the right records ready. The IRS may request to inspect your records if your business tax return is audited. In general, the IRS audits a tax return within three years from the due date of the tax return or the date the tax return is filed, whichever is later. However, if the IRS discovers a substantial error, they may audit returns that were filed more than three years prior. The IRS typically does not audit returns that were filed more than six years ago.
Some business records are advised to be kept permanently. These include:
- Cash books, audit reports, charts of accounts, financial statements, minutes, bylaws, charters, and records of capital stocks and bonds.
- Canceled checks for important payments, insurance records, legal correspondence, and current contracts and leases.
- State and federal tax returns.
- Deeds, mortgages, property appraisals, trademark registrations, copyrights, and other assets.
Which business records do I want to keep for business and tax purposes?
Generally, you want to keep receipts and other documents that prove your income and business expenses. For business expenses, it is important to retain records that itemize the expenses and show that the expenses are indeed business expenses. For example, to deduct automotive expenses, maintain a mileage log that tracks all business travel, including the date, where you traveled to, how many miles you traveled, and the business purpose for the trip. Similarly, for business meals and entertainment, keep a log that lists who attended the meal or event with you and what the business purpose of the meal or event was. For travel expenses such as hotels, flights, and taxis, use a travel log to capture the travel expense and purpose of the business trip. These types of records are helpful if your business taxes are ever audited.
If your business depreciates assets, make every effort to retain records that show the purchase price of those assets and any capital improvements made to those assets. You are also going to want to retain proof of any tax payments that your business made to the IRS or state taxing authority. For any deductions or credits that your business claims on its income tax return, hold on to any records that might prove eligibility for those deductions and credits. For example, if your business claims the R&D credit, you may be tasked with presenting records that show how the business qualified for research expenses.
Employment records, such as wage rates, dates of employment, job evaluations, and employment contracts, are important for your business to keep accessible. This extends to all payroll documents as well. Payroll documents include Forms 940 and 941, along with dates and amounts of tax deposits. If you are required to pay self-employment taxes, keep records of the dates and amounts of your estimated tax payments. For assistance with preparing your self-employment taxes, reach out to a tax expert today.
How can keeping my small business tax records help?
Your small business tax records may be necessary to prove income and expenses to the IRS or state taxing authority if your business tax return is audited. Your tax records may also be required to prove that an expense is a valid business expense. Sometimes it is necessary to produce receipts or other documentation that itemizes your purchases to prove that the purchases are for your business. Your business tax records are also helpful for your accountant to prepare your tax filings. Your accountant may require access to your business financials in order to prepare an accurate business income tax return. Your accountant may also want to review receipts or other documents to advise you if certain expenses are ordinary and necessary business expenses that can be deducted on your business tax return.
Your business tax records may also prove crucial if your business gets sued or must file a lawsuit. Records can be helpful in a lawsuit against a business partner, an employee, a contractor, a vendor, or another business. In addition to income tax audits, your business may be involved in other audits, such as payroll audits and workers' compensation audits.
Amending a prior year income tax return can often lead to getting money back and likely requires you to refer to your prior year business tax records to complete the amended tax return. For assistance with filing an amended tax return, a tax professional can help.
What types of record-keeping systems are acceptable?
Both paper and electronic records are acceptable. The most important thing is to have a record-keeping system that is accurate, complete, and that allows you to find documents later. With a paper record-keeping system, it is a good idea to scan the documents and save electronic versions. Similarly, with an electronic system, it is wise to back up all electronic documents in at least two locations, with one of those locations being local (not cloud or online-based).
Business owners often rely on third parties to store certain business records, but solely relying on third parties is generally not advisable. For example, some business owners do not keep copies of their bank statements and assume that their bank is always able to provide statements. However, it is possible that you may have an audit of your business tax returns many years after you filed the tax returns, and your bank may not retain your statements for more than a couple of years. If you are audited and are unable to provide copies of your bank statements or other important financial records, it can be difficult to successfully prove your business income and expenses.
If you have more questions about your business record-keeping practices, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.