TAX

Record Keeping

Keeping records is a fundamental part of accounting. Having good records can help you support your revenues and expenses during a tax or financial statement audit, verify the accuracy of your financial statements for managerial purposes and even help you get more money for your business should you choose to sell it down the road. The recordkeeping requirements outlined by the IRS will help you prepare and substantiate your Schedule C but they should also be viewed as a best practice guide to financial recordkeeping for almost every business.

ENTREPRENEUR

Ramsey is a merchant who sells handcrafted shoes on Etsy. In addition to using an accounting software to summarize all of her transactions in real time, she also retains a copy of the sales receipt for each of her orders, vendor bills for the raw materials she purchases, FedEx invoices for all of her shipping costs, paper copies of receipts from her miscellaneous purchases and all of her credit card and bank statements. Retaining these records will help ensure Ramsey can substantiate her business activity during IRS examination and also help her understand how well her business is doing.

REAL ESTATE AGENT

Chris is an independent real estate agent who regularly incurs expenses for staging, brochures, ad placements and open houses for his listings. Chris puts all of these transactions on to his business credit card and then using hurdlr classifies his expenses and captures a photo of each receipt. Not only will this practice help him meet IRS record keeping requirements, but it will also save him loads of time when he prepares his Schedule C at the end of the year.

CLEANER

Fig is a sole proprietor who makes a living providing cleaning services through Homejoy. Fig typically incurs costs on a daily basis for cleaning supplies. After Fig enters his expenses into hurdlr, his summary level record, he should retain hard copy and / or digital copy of all of his cleaning supply receipts for at least three years.

AUTHOR / SPEAKER

Deandra, a self employed oil and gas industry expert frequently travels the United States giving presentations on new exploration technologies. In addition to keeping sufficient records for all of her business transactions, when she travels she always makes sure to request itemized receipts from the hotels she stays at and she keeps a detailed mileage log that includes the date, beginning and ending odometer readings and the business purpose of each trip. Deandra knows keeping these records is well worth the extra effort since travel costs make up a significant portion of her Schedule C deductions.

TASKER

Danny is a part-time tasker from Palm Springs, California who helps members of his community maintain their Pools. Danny always makes sure to hold onto the Form 1099-MISC he receives from Taskrabbit detailing his revenue, since he knows the burden of proof to substantiate his revenues (and expenses) is on him should the IRS conduct an examination.

WHAT YOU NEED TO KNOW ABOUT THE IRS'S REQUIREMENTS

Keeping good records will help you understand how well your business is doing, prepare your tax return and financial statements, support tax your deductions and credits and quantify how much you have invested in your business and assets, not to mention save you hours when you need to pull together your financial information.
There are numerous guidelines on how far back your records should go, but generally the rule of thumb is three years. You should refer to the IRS for additional information to see if you need to keep records for more than three years (i.e. you own property, you fail to file a return, you do not report all of your revenue, etc.).
Your records should include a summary your of revenues and expenses (general ledger, accounting journal, accounting software, etc.) and underlying support. Underlying support can include but is not limited to invoices, Form 1099-MISC's, credit card and bank statements, petty cash slips,deposit slips, receipts, cancelled checks and real estate closing statements. You can keep your records hard copy or electronically (keep in mind that sometimes paper receipts can fade in a matter of months), what is most important is that you have them.
Keep in mind that if you travel for business you may need to adhere to some additional record keeping requirements. For example, a hotel receipt from a business trip would need to be itemized (room, meals and incidental expenses stated separately), include the name and location of the hotel and the dates you stayed there; A meal receipt would need to include the name and location of the restaurant, the number of people served, the date and the amount you spent; A trip log to substantiate your mileage deduction would need to include including the date, destination and miles driven; Further, for all travel, meal and entertainment expenses you must also provide a brief written summary of the business purpose of an expense. Refer to Publication 463 for specific travel recordkeeping requirements.
Remember, it is your responsibility to be able to support the revenues and expenses you report on your tax return. The IRS refers to this as the "burden of proof".

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