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Are Your Tax Records “Company Clean”?
By Stacie Clifford Kitts
My mom had a philosophy about housekeeping. I think this stemmed from her preference to spend her free time on other activities like mastering a still life in watercolor, or watching a classic old movie. In any case, her philosophy usually resulted in our house being in one of two stages. She lightheartedly referred to these as “lived-in clean”, or “company clean”. I can still recall the first time I noticed mom running around the house painting over dirty little finger prints, or using Old English scratch remover (love that stuff by the way) on the furniture. This was when she explained that “company clean” meant paying attention to the details while “lived-in clean”, maybe not so much.
We sometimes see Taxpayers that have this same philosophy. They never quite seem to pay attention to the detail, that is, until they have company knocking at the door. Sometimes that company is a taxing agency. But, more often than not, everyday life events have resulted in the need for “company clean” records. Those include:
1) Accurate tax planning
2) Retirement planning
3) Applying for a home or business loan
4) Divorce or marriage considerations
5) Estate and succession planning
Taxpayers are often shocked at how costly it is to have someone “clean-up” after the fact. But consider the cost of hiring someone to clean or repair your house after a long period of neglect. Imagine the damage that can occur to your property when not taken care of properly. If you cannot, might I suggest an episode of Horders as an arguably extreme example of the damage caused by a lack of proper housekeeping.
“Company clean” records do not need to steal from your free time thought. Here are a few tips.
1) Do not wait until the end of the year to accumulate your records or do your accounting. You should be accumulating this information and doing an accounting (if necessary) at lease monthly.
2) Know what records you should be keeping. Ask your accountant or check out the IRS Website
3) Hire a qualified bookkeeper. This is someone who has a basic knowledge of accounting rules, not just someone who knows how to use Quickbooks.
4) Have your CPA look at your accounting records before the end of the year to make accounting suggestions and to help with tax forecasting.
5) Budget for the costs of hiring qualified tax and accounting professionals. Usually, the quality of your tax and accounting information is a reflection of what you pay for them.
Keeping The Correct Records To Support Your Deductions
[Stacie says: keeping the right records to support your business income and deductions can save you some sleepless nights if you are selected for audit. The IRS offers some helpful tips in their Small Business News.]
You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.
Supporting Business Documents
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to Publication 583, Starting a Business and Keeping Records.
The following are some of the types of records you should keep:
Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
Cash register tapes
Bank deposit slips
Receipt books
Invoices
Credit card charge slips
Forms 1099-MISC
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases.
Documents for purchases include the following:
Canceled checks
Cash register tape receipts
Credit card sales slips
Invoices
Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:
Canceled checks
Cash register tapes
Account statements
Credit card sales slips
Invoices
Petty cash slips for small cash payments
Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.
For additional information on how to prove certain business expenses, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets include the following:
When and how you acquired the assets.
Purchase price
Cost of any improvements.
Section 179 deduction taken.
Deductions taken for depreciation.
Deductions taken for casualty losses, such as losses resulting from fires or storms.
How you used the asset.When and how you disposed of the asset.
Selling price.
Expenses of sale.
The following documents may show this information.
Purchase and sales invoices.
Real estate closing statements.
Canceled checks.
Employment taxesThere are specific employment tax records you must keep. Keep all records of employment for at least four years. For additional information, refer to Recordkeeping for Employers and Publication 15, Circular E Employers Tax Guide.
How to Keep Good Records
More IRS Summer Tax Tips
Although most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized. Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.
Here are a few things the IRS wants you to know about recordkeeping.
Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.
Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
Bills
Credit card and other receipts
Invoices
Mileage logs
Canceled, imaged or substitute checks or any other proof of payment
Any other records to support deductions or credits you claim on your return
You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
A home purchase or improvement
Stocks and other investments
Individual Retirement Arrangement transactions
Rental property records
If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:
Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks
For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
IRS Publication 552, Recordkeeping for Individuals (PDF)
IRS Publication 583, Starting a Business and Keeping Records (PDF)
IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)
What Tax Records to Keep
You probably already keep records in your daily routine. This includes keeping receipts for purchases and recording information in your checkbook. Keeping these and other records will help you avoid headaches at tax time. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:
Credit card and other receipts
Invoices
Mileage logs
Canceled, imaged or substitute checks or any other proof of payment
Any other records to support deductions or credits you claim on your return
For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Stacie's Tax Tips and Other Stuff 