Recordkeeping for Small Businesses
Well-organized business records will make it easier to prepare your tax return and will help you answer questions if your return is selected for examination, or if you are billed for additional tax.
If you are in business, there is no particular method of recordkeeping you must use, but your records must substantiate both your income and expenses. You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year.
You must keep your records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, income tax returns should be kept at least 3 years from the date the return was filed. If you have employees, you should retain your records for at least 4 years. If you omitted income or need to establish basis for property, you will need to keep records even longer.
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Why should I keep records?
Good records will help you:
- Monitor the progress of your business ? You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make and can increase the likelihood of business success.
- Prepare your financial statements ? You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business. An income statement shows the income and expenses of the business for a given period. A balance sheet shows the assets, liabilities, and your equity in the business on a given date.
- Identify your source of receipts ? You will receive money or property from many sources. Your records identify the source of your receipts. You need this information to separate business from nonbusiness receipts and taxable income from nontaxable income. It is a good business practice to establish separate bank accounts for business and nonbusiness purposes.
- Keep track of deductible expenses ? You may forget expenses when you prepare your tax return unless you have recorded the expenses as they happened.
- Prepare your tax returns - You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.
- Support items reported on tax returns ? You must keep your business records available at all times for inspection by the Internal Revenue Service. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.
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Where do I find additional information or get help?
- Publication 1066C, a Virtual Small Business Tax Workshop DVD, is an educational product that helps small business owners and the self-employed understand and meet their Federal tax obligations. The workshop is subtitled in English, Spanish and Mandarin Chinese.
- Publication 3207, 2007 Small Business Resource Guide CD-ROM, is an interactive CD designed to help small business owners comply with the tax laws and includes business tax forms, instructions and publications. In addition to providing a wealth of tax-related information, the CD contains Web links to various government agencies, business associations and IRS organizations.
If you have questions, concerns, or need information about recordkeeping, please contact the IRS at 1-800-829-7650.
ADDITIONAL RESOURCES
You can select and download multiple IRS forms and publications at www.irs.gov or you can call 1-800-829-3676 to order forms and publications through the mail at no cost.
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