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What Records Do Small Businesses Need to Keep for Taxes?



Tax season is just around the corner, so now is a great time to make sure that you are retaining all the documentation you need to back up the income, deductions, and credits listed on your small business’s tax return. Keeping the proper records is not optional—it is required by the Internal Revenue Service (IRS).


Recordkeeping System


The IRS does not require a specific type of recordkeeping system. Rather, you must simply use one that clearly shows your income and expenses. Although the type of business you own affects the types of records you need to retain for taxes, in general, you should keep records (either hard copies or electronically) summarizing your business transactions. This summary may be included in your business books, such as accounting journals and ledgers, which show your gross income, deductions, and credits. Your business’s checking account may be the main source of the information included in your business books.


Supporting Documents


Not only should you maintain a summary of your business transactions, but it is also important to keep supporting documents that can be used to verify the accuracy of your summary. According to the IRS, small businesses should keep:


(1) Documents showing the amounts and sources of your gross receipts, i.e., the income you receive from your business. These documents include:

Cash register tapes

Deposit information

Receipt books

Invoices

Forms 1099-MISC (required for each person to whom you paid rents, services performed by a non-employee, other income payments, etc.)

(2) Documents showing information about purchases, i.e., items you buy and resell to customers, including:

Canceled checks or documentation identifying the payee, amount, and proof of payment

Cash register tape receipts

Credit card receipts and statements

Invoices

(3) Expenses (costs you incur to carry on your business, not including purchases) should be documented using records showing the amount paid and a description verifying that the amount was for a business, not a personal, expense. These documents include:

Canceled checks or documentation identifying the payee, amount, and proof of payment

Cash register tapes

Account statements

Credit card receipts and statements

Invoices

Petty cash slips for small cash payments

Note: Travel, car, and gift expenses are subject to special rules.

Travel expenses. Keep records showing the cost of each separate expense for travel, lodging, and meals, as well as incidental expenses in categories such as taxis, fee, tips, etc. You should also keep records of the dates of the trip and the number of days spent on business, the destination of your travel, and the business purpose or benefit from the travel.

Gifts. Keep records showing the cost, date, and description of the gift.

Transportation. Be able to document the cost of each separate expense: the cost of the car and improvements, the date you started using the car for business, the mileage of each business use, and the total miles for the year. In addition, keep records of the date of the use of the car, the business destination, and the business purpose for the expense.

(4) Keep records to verify certain information about your business assets, such as machinery and furniture, that you own and use in your business. This information is used to compute annual depreciation and the gain or loss upon the sale of the assets. The records—which could include purchase and sales invoices, real estate closing statements, or documentation identifying the payee, amount, and proof of payment—should show:

When and how the assets were acquired

Purchase price

Cost of improvements

Deductions taken under I.R.C. § 179

Deductions for depreciation

Deductions for casualty losses, for example, from fires or storms

How the asset was used

When and how the asset was disposed of

Selling price

Expenses of sale

(5) If your business has employees, employment tax records should be kept for at least four years. These records should include:

Your employer identification number

Amounts and dates of all wage, annuity, and pension payments

Amounts of tips reported

Fair market value of in-kind wages paid

Name, addresses, social security numbers, and occupations of employees and recipients

Any Form W-2s sent to employees but returned as undeliverable

Dates of employment for all employees

Periods for which employees were paid during absences for sickness or injury and the amount and weekly rate of payments made to them by you or a third-party payer

Copies of employees’ and recipients’ income tax withholding allowance certificates

Dates and amount of tax deposits

Copies of tax returns filed

Records of allocated tips

Records of fringe benefits provided


What to Do Next


If you have questions about the IRS’s recordkeeping requirements and whether you are maintaining the correct types of records for your business, we can provide the guidance you need. Please schedule a meeting today to discuss this or any other legal concerns regarding starting or running a small business.

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CONTACT COLLINS LAW FIRM, LLC

Milwaukee Address

11616 W. North Ave., Suite A

Wauwatosa, WI 53226

(414) 207-6292

La Crosse Address

319 Main St. S., Suite 312

La Crosse, WI 54601​

(608) 886-9529

giff@giffcollinslaw.com

 

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 ©2019 by Collins Law Firm, LLC. All rights reserved. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation.  We invite you to contact us and welcome your calls, letters and electronic mail.  Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

 

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