What type of records should businesses maintain for tax purposes?

Some of the common questions that I get are– How do I do record keeping for my business transactions? What kind of proof is required at the time of an IRS audit? What constitutes efficient recordkeeping? And I tell my clients that there are three main types of business records: income, expenses and capital expenditures. However, if your business has employees, then you will also need payroll records. This article covers recordkeeping requirements and standards only for income, expense and asset records.

1. Income Records

Business Records should list money received and the source of each item for example, “retail sales.” Identifying money received is necessary because deposits into your business’ bank account are not always gross receipts or income that is taxed. For example, you might transfer $20,000 from your personal bank account into your business bank account to buy inventory. Or perhaps, you took out a bank loan or sold your Ford Truck or received an inheritance from Uncle Tom, and put that money into your business account. All that money that you deposited does not form part of your gross receipts.

Tip: You are advised to write down the source of the deposit on the deposit slip or in your check book or make photocopies of all bank deposit items and make notes on them, this is just in case there is an IRS audit.

Cash registers with built in memories and credit card billers are other ways to keep track of business income. Though the IRS auditors prefer deposit slips and monthly bank statements.

What about recordkeeping for income received in cash?

Some businesses like arcades, take-out restaurants, convenience stores, vending machines, roadside hamburger stands, bars and laundries receive mostly cash income. The IRS keeps a close eye on them. You are advised to keep track of all your cash income and expenses just in case an auditor comes calling. And if you take more than $10,000 in cash, traveler’s checks, money orders or bank drafts from an individual or business, you are required to file IRS Form 8300 for each transaction.

Tip: The first thing that the IRS wants to see is bank statements, deposit slips and cash records for all both business and personal accounts. If your total bank deposits are greater than your reported income, you will have some explaining to do. Otherwise, the auditor might assume the difference was unreported income and hit you with more tax, interest and penalties. You are therefore advised to write down the origin of all money deposited in both your business and personal bank accounts.

What happens if you receive a Form 1099?

If you receive Form 1099s showing payments for your services, make sure all 1099 income is on your tax return. The IRS routinely matches up Form 1099s to income reported on the tax returns. If a Form 1099 is wrong, ask the issuer to send a corrected form to you and the IRS.

2. Expense Records

Ordinary and necessary expenses are deductible against your gross receipts. But you still need to maintain records such as on your calendar, planner, log book, or use a smart phone application or a software, plus keep copies of invoices, receipts, credit card statements, canceled checks, rent receipts etc. for at least three years. Cash expenses are deductible but they may be hard to prove to an auditor without any documentation. The IRS understands that even in a credit card world, cash is still around. Microbusinesses can save receipts and invoices in binders and folders though larger businesses might have to work with a software and scanned copies of all paperwork. The IRS accepts soft copies as proof as well.

Also, that the IRS accepts bank statements and if they show fund transfers, credit card payments and cleared checks, then you do not need the actual canceled checks or charge slips.

How do you track expenses on business meals and travel?

The IRS is more stringent when it comes to recordkeeping for travel and meal expenses. You will need to document the following five elements:

• Date
• Amount
• Place
• Business purpose
• Business relationship

You can make notes of these on the back of your receipts or in a business diary or calendar or on your computer.

Tip: No receipts are necessary for most expenses less than $75. The IRS does not require any proof of single expense items of less than $75 each. There is one exception though, for lodging expenses, you must have a receipt regardless of the amount.

3. Asset Records:

A business purchase that offers benefits for more than a year like a machine, a building, a car, office furniture, scanner, printer, the IRS classifies it as a business asset or a capital item. These assets need to be tracked separately from expenses.

Tip: You are advised to keep a separate file for each kind of asset indicating the date of purchase and the type of asset and write a short explanation as to how the asset is being used in the business.

For leased assets (except for leased vehicles), you simply deduct lease payments as current expenses instead of maintaining an asset log for them.

• Keep records of invoice or receipt from the seller. The description is important because the tax code for different assets is different.
• Note the date when the asset was placed in service
• Keep track of the beginning basis which is how much you paid for an asset including sales tax, installation and delivery costs.
• The sale price and the associated costs at the time of selling the asset need to be kept as well.

What is listed property and how should recordkeeping be maintained for similar assets?

Certain assets are deemed mixed use when they are used both for personal and business purposes. The tax code term for this property is ‘listed property.’ If you use listed property only for business purposes, then there is no need to keep usage records. If, however the listed property provides a personal benefit, or if you keep it at home, you must separate and track your business and personal use. You cannot claim any tax deduction for the personal use time though.

Examples of listed property are autos, airplanes, motor transportation, entertainment type property such as cameras and camcorders.

Tip: You are advised to keep a log book, a calendar or a business diary showing dates, times and business purpose.

Section 179 deduction for listed property: You can take a Sec 179 deduction only if the property is being used more than 50% for business.

In short, it is always a good practice to keep all paper records filed and in place and/or copied and scanned into your computer. Make sure you maintain a back up of your computer either on the cloud or on an external hard drive. The IRS auditors accept both hard as well scanned computerized copies of the paperwork. Nowadays, highly efficient software such as QuickBooks and Sage do an extremely good job with record keeping as well. You will also have an easy time filing taxes with the help of your tax professional if all paperwork is organized and up-to-date.

GavTax Advisory Services accepts clients from all 50 States including the State of New York, California and Texas, Illinois, Florida, Pennsylvania, Ohio, New Jersey, Virginia, North Carolina, and all U.S territories as well.