Running a small business can involve a huge amount of work. When you’re dealing with customers and taking care of day-to-day business needs, bookkeeping may not seem like the most pressing issue. But if the IRS decides to audit you and your records are lacking, you can wind up in a bad position.
Part of the challenge is that many business owners don’t know exactly which records they need to keep. We’re here to help. In this blog article, we’ll provide six tips that will help you stay on the right side of state and federal tax laws. (Afterward, if you want more help, you can read five additional bookkeeping tips here.)
Why Do I Need to Keep Small Business Records?
Both state and federal tax law say that business owners and individuals must keep their tax records for a reasonable length of time. What’s reasonable varies depending on the type of records.
The consequences for failing to keep records are steep. If the government audits you and you don’t have the records to back up your tax returns, you could face additional taxes plus penalty and interest. And although it’s very rare, there’s even a possibility you might face criminal prosecution.
Now that you know why small business records are important, here are six tips to help you maintain them.
1. Always Keep Personal and Business Accounts Separate
Nothing good can come from mixing personal funds with business funds — and that includes credit cards. If you take money out of business profits to pay yourself, make sure you first transfer the money into your personal bank account before you spend it. The reverse is also true; if you need to infuse some of your personal funds into the business, make sure you put those funds into the business account before using them.
You should keep business bank and credit card statements for at least three to seven years. Ideally, you’d keep those records forever.
To make sure you always have these records when you need them, download and save your bank statements. Many banks only allow customers to access bank statements from the past few years. And if you close your account, the bank may deny you access to records altogether. You simply cannot risk not having access to these records.
2. Save Receipts for Business Expenses
Make sure to keep receipts for your costs of goods sold and business expenses.
- The cost of goods sold is the price of raw materials bought by a manufacturer to make finished goods, or the cost a retailer pays to buy merchandise that will get sold to customers.
- Business expenses are short-term costs that you have to pay as part of doing business. Some examples include:
- Office supplies
You’ll need to keep these receipts for at least three to seven years, but preferably longer. You can summarize your receipts in a ledger or save on space by making them digital. Today, the quickest way to accomplish this is usually with QuickBooks, Excel, or a similar software program.
However, some business expenses require extra recordkeeping. For example, if you want to claim auto expenses, you’ll need to keep mileage logs that show the date, start point, destination, and purpose of your trip. You can use a simple paper-and-pen log if you want, but there are apps available that can make the process easier.
To claim business travel, you must keep not only your receipts but also notes or other evidence that can demonstrate the business purpose of the travel. For example, if you’re traveling to another city to pitch to investors or attend a convention, you’ll want to save emails and other communications that can prove what you were doing. And if you want to claim meals as a business expense, you need to make notes about whom you met with and why (example: “Joe Smith, VP of synergy at Acme Co., to negotiate the licensing of Acme tech”). These might seem like tedious tasks in the short term, but having detailed records of your activities and expenses can prove invaluable later on.
3. For Capital Expenses, Keep Records for the Recovery Period Plus Several Years
You should keep documentation — including receipts, canceled checks, and invoices — that show your capital expenses.
- Capital expenses are expenses for items that you’ll use for many years, like trucks, computers, and heavy machinery. When you deduct capital expenses from your taxes, you won’t deduct the full cost all at once. Instead, you’ll take depreciation over a recovery period, which can last anywhere from 5 to 40 years depending on the type of asset.
For capital expenses, you need to keep records throughout the recovery period plus at least another three to seven years after that.
Land is a unique situation. The land itself isn’t depreciable, but buildings are. So, if you purchase a building, make sure your records indicate how much of the purchase price was for the land and how much was for the building.
4. Maintain a Ledger for Cash Transactions
If your business deals in cash, then you’ll need to keep a daily cash ledger that shows how much cash was in the register at open, how much cash you had at closing, and any cash that was taken out and why. If you use a petty cash box, keep records that show all your cash disbursements.
5. Get Help From Apps and Software
Thanks to new technology, keeping excellent business records is easier than ever. As we mentioned earlier, popular programs like QuickBooks and Excel can streamline your bookkeeping and cut down on manual work.
Some programs and apps even let you scan or take photos of your receipts, save the image, and enter the information into a ledger automatically. This convenient process can save you time and space, but make sure you back up your information often and keep multiple backup copies.
6. Don’t Procrastinate!
We get it — keeping detailed records can feel like a chore. Just like with most chores, the key to making recordkeeping manageable is to stay on top of it. The more you get behind, the more of a headache it will become, and the more you’ll want to put it off.
There’s another important reason to get started now, too. In an audit, the IRS will probably be able to tell if your records have been hastily thrown together, and they won’t give sloppy records as much as respect as they would give to detailed records that have been kept over time.
Contact S.H. Block for Help with All Your Company’s Financial Needs
If you’ve already tried following the tips listed above and still feel that you’re in over your head with your company’s financials, please contact S.H. Block today by completing this brief form or calling 410-793-1231. We have convenient office locations in Columbia, Annapolis, and Baltimore and we are eager to schedule an appointment with you to discuss your small business’s tax and accounting needs.
In addition to providing quality tax problem representation for individuals and small businesses, we also have a wealth of experience assisting small businesses with their bookkeeping needs. We would love the opportunity to review your current accounting processes, which will help us diagnose your primary issues, develop a plan of action that may improve on your current bookkeeping strategies, and then execute that plan to deliver transformative result.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.