Keeping books and records may not be the most exciting part of running a business, but it's certainly a very important part. According to the IRS: "Good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns." The start of the year is a great time to review your recordkeeping practices so that you can maintain the information you need for your business and tax purposes.
Businesses are required under the tax law to keep books and records, and to make them available to the IRS in certain situations. Whether you use a desktop or cloud accounting solution, be sure to have business practices in place to maintain these records. This includes:
- Determining how frequently to input information and which employee(s) have access to this sensitive business information.
- Working with your CPA or other financial advisor to review your books so you can take actions throughout the year to help you improve profitability and optimize tax-saving opportunities.
Tracking income and expenses in your accounting system is not the only part of recordkeeping. You also need to retain receipts, invoices, and other proof of income and expenses. At the start of the year, consider:
- Setting up a filing system for storing your paperwork. This will facilitate tax preparation and be available as proof if the IRS questions your return.
- Scanning paperwork. Instead of keeping receipts and other papers, it may be preferable for storage purposes to scan and retain them. Make sure you have a retrieval system to find what you've scanned.
- Using a recordkeeping provider. You can choose to use a third party to organize and store your paperwork offsite.
Getting employees to keep records
Take the time at the start of the year to educate employees about company policy on recordkeeping. For example, if you maintain an accountable plan to reimburse employees for the company-related business travel and entertainment expenses, they must provide you certain substantiation for these costs. This means:
- Maintaining an expense account or other log noting required information (see Table 5-1 in IRS Publication 463). There are apps that you can request employees to use for this purpose in place of self-created expense account statements.
- Keeping receipts or other evidence of expenses. Having employees use business credit cards is useful for this purpose.
- Providing you with the account and receipts in a timely manner. You can set any reasonable deadline for this. The IRS considers 60 days to be a reasonable period, but you may want to have a shorter deadline.
Special rules for vehicles
If you want to deduct the cost of using your car, pickup, or van for business, you must track your mileage and record other aspects of each trip (the date, destination, business purpose of the trip). Here are some tips to ease your recordkeeping burden for a vehicle:
- Take note of the odometer of the vehicle at the start (and end) of the year. This information is required for tax reporting.
- Use an app for vehicle recordkeeping. There are numerous apps for this purpose. They use GPS to record mileage, date, and destination of each trip, but you still need to record other elements (e.g., the business purpose).
- Consider sampling. This is a recordkeeping method in which you make adequate records for part of the year and then extrapolate the amount for the entire year, being able to demonstrate with adequate records that the part of the year is representative of driving for the entire year. The IRS gives this example: You drive your vehicle to see customers daily and keep adequate records for the first week of each month that shows 65 percent of car use is for business. Invoices and bills show that this driving is at the same rate for the rest of the month. Here, extrapolation is permissible.
When it comes to recordkeeping, it's hard to play catchup. Memory can be unreliable, and you may lose track of important paperwork. The start of the year is a great time to get back on track with recordkeeping, educate or remind your staff about what they need to do, and follow through! Find more information about recordkeeping in IRS Publication 583.