It's important for a business of any size to keep well-organized and up-to-date financial records. For the purposes of a small business, this can be through either hard copy or electronic filing. Not only will this organizational practice help prepare financial statements and tax returns, but it's also a good way to track your company's personal growth while maximizing your return.
This is of particular importance to small business owners. As various documents start pouring in for your company, you may find yourself unsure of what documents to include in your financial record keeping. Here's a rundown on what to hold on to — and for how long.
Documenting Your Income
Income that flows into your business will generate a receipt or invoice. Once that information has been entered into your accounting system, keep a copy as confirmation. Small business owners should keep gross receipts for three years from the date of filing taxes. Besides receipts and invoices, income documentation that needs to be filed includes bank deposit and credit card slips, as well as cash register tapes.
Filing Your Purchases and Expenses
All costs, whether they are purchases (materials) or expenses (rent and utilities), need to be filed for tax purposes. Financial record keeping for purchases includes saving cash register slips, invoices, canceled checks, credit card slips, and other documentation of items and supplies purchased. Like purchases, expenses require you to keep the same files plus petty cash vouchers for the more nominal expenses. Businesses that claim travel, gift, and entertainment tax deductions should also keep original expense documentation.
Retain purchase and expense documents for at least three years from the date you file your tax return. If, however, the business claims a bad debt loss, keep the records for seven years.
Keeping Tabs on Your Assets
Keeping track of the purchase, sale, and depreciation of business assets is an important part of financial record keeping. A portion of the value of your assets may be deducted against taxable income through depreciation. If your business sells an asset, there may be a financial gain or loss, which will either increase or reduce your taxes.
Make sure to keep all real estate documents, canceled checks, purchase and sale invoices, bills of sale, and receipts for the period of limitation for the particular asset. An asset's period of limitation is determined by the time of its "taxable disposition." This refers to the transfer of ownership from one party to another in a transaction that is taxable. In other words, hold on to this documentation until your business gets rid of the asset through direct sale or another method.
Organizing Employment Tax Records
If you're a small business owner, your employment records should include details on all employees and payments (including pensions) made to them. Additionally, make sure to document their names, addresses, social security numbers, dates of employment plus absences, and all income tax withholding allowance certificates. If applicable, record any tips or fringe benefits received, as well.
Employment tax records must be kept for at least four years, according to the IRS.
Choosing Between Hard and Electronic Copies
The IRS auditing process has become far more efficient for businesses that use an online accounting system. Electronic filing allows the IRS to examine all proper documentation without printouts, and far fewer follow-up documentation requests are necessary if your business has filed everything electronically. All that is required is either a backup file or your login information, which the IRS can request during an audit.
For more information on financial record keeping for small businesses, visit the What kind of records should I keep? page on the IRS website.