A Beginner's Guide to Record-Keeping for Small Businesses

Tax Tips
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Fincent Team

Any business owner knows that keeping financial records and receipts is one of the most important and cumbersome tasks of running a company.

Efficient record-keeping doesn't just make tax filing easy - it also helps you keep track of your expenses and produce proof during audits or lawsuits if required. Moreover, the Internal Revenue Service (IRS) mandates that businesses keep financial records and produce them if necessary.

If you are unsure of which records to keep and for how long, this guide will help you navigate the tedious task of record-keeping. Here, you can learn about managing small business financial records and the different ways to file them.

How Long Should You Keep Tax Records and Receipts?

Ideally, you should keep business tax records and receipts for a period of 3 years. However, some specific paperwork requires to be preserved for longer.

Check out this list for details.

You can take a call to keep these records for longer, depending on the volume of other paperwork. However, these are the minimum time periods that you should maintain.

Small Business Record-Keeping Rules

After you have determined how long to keep your financial records, you must pay heed to these 4 small business record-keeping rules to manage your finances:

  1. Whatever financial transactions you declare on your tax returns, from expenses to deductions, must be accompanied by receipts, bank statements, invoices, and other legit documents. So, make sure you preserve this documentation.
  2. To reduce paperwork, keep electronic records. Always make sure to backup your digital records in different locations.
  3. It's recommended to have a separate business bank account and credit cards to distinguish them from personal expenses and ensure a smoother and error-free record-keeping process.
  4. Even if you do not need certain documents to file taxes, it is a good idea to keep them for a period of time.

Which Receipts Should You Keep for Taxes?

Any income, deductions, and credits that you want to report on your tax returns require relevant documentation. If you want to avoid any trouble with the IRS, you should keep certain invoices and receipts that can prove your claims while filing taxes.

Some of these include:

  • Cash register tapes
  • Deposit information, like cash and credit sales
  • Receipts and invoices
  • Canceled checks for other proofs of payment
  • Documents or proof of transferring funds electronically
  • Bank statements and credit card receipts
  • Petty cash slips for small payments
  • Accounts payable and receivable
  • Tax filing records
  • Previous tax returns
  • Payroll records
  • W2 and 1099 forms
  • Any other documents that support expenses or deductions

Other optional paperwork that you can maintain includes client contracts, documents detailing contractor or employee associations, business permits, articles of incorporation, annual reports, regulation documents, and so on.

Can I Choose to Not Keep Any Documents?

Although the IRS requires you to keep all documents related to tax records and expenses, you can choose not to keep receipts if:

  • The expense amount is less than $75 in transportation or meals related to business functions.
  • The expense is related solely to transportation, and you are unable to get receipts.
  • You report lodging or meal expenses under an accountable plan with a per diem allowance.

However, if you are still troubled about how long to keep these receipts, you should know that even expenses under $75 can be questioned during an audit or lawsuit. Hence, it is a good idea to save all receipts nonetheless.

In case you do not have a valid receipt for this amount, you can provide:

  • The expense amount
  • Details about when and where it was incurred
  • The purpose or context of the expense

For expenses involving more than one person, the IRS may ask for details regarding the number of people that were present, the topic of the meeting, and the expense.

If you have multiple deductions of this kind, you can make a list and keep track of all small expenses. Professional bookkeeping services like Fincent can manage these costs for you and lower the stress associated with maintaining records.

Record-keeping for small business expenses is a tough task, so be sure to check out the IRS guidelines as well.

How Long to Keep Tax Records

As said earlier, the IRS advises you to keep tax records for 3 years - or until the income or tax breaks on your returns are verified. This indicates 3 years from the date you filed your return or the due date of the tax return, whichever is later.

For example, any records for 2018 must be kept till 2021. If you filed your tax returns on March 12, 2018, you must keep the documentation till April 15, 2021, as it was the 2018 due date.

The suggested time is 3 years because of the Period of Limitations. During this time period, you can amend your tax returns and are eligible for an audit by the IRS.

Once this time period expires, the IRS can no longer audit you. Hence, you do not need to keep the returns or their documentation further.

Exceptions to the 3-Year Rule

In addition, you must keep track of what receipts to keep beyond 3 years for your taxes:

  • Employee Tax Records: These should be kept for at least 4 years after the due date of payroll taxes or the date you paid them.
  • Omitted Income: If your omitted income is more than 25% of the gross income stated on your return, you must keep proof for up to 6 years.
  • Bad Debt or Worthless Securities Cost: These records must be kept for 7 years.
  • Fraudulent or No Return: If you have not filed tax returns or committed fraud, the IRS can audit you at any time, without any statute of limitations.
  • Property Records: Sometimes, property deductions like depreciation, loss from sales, financial gain, etc., need to be proved beyond 3 years.

Do I Need to Keep Paper Bank Statements?

Paper bank statements are becoming a thing of the past. If you have online banking, the digital copy suffices as proof. You can also keep digital records of all bank transactions in case you want to avoid being loaded with a ton of paperwork.

The Easiest Way to Keep Records

Currently, the easiest way to keep financial records is to digitize them.

The IRS accepts digital proof as long as it clearly shows your finances. You can submit documents digitally if they are a copy of the original and can be printed to produce a legit document.

You should also consider digitizing your documents by scanning all important receipts to prevent them from being misplaced, damaged, or stolen. Several online tools can help you log all your documents and archive them for the future securely.

In Closing

Before deciding to throw away any document, ensure its purpose is over, not only with the IRS but also with other stakeholders like creditors, lawyers, insurance companies, etc.

The mantra to follow is that when you are in doubt, keep it. It might feel like you are hoarding stuff, but you will surely be protected tax-wise.

You could also consider handing over your record management worries to Fincent, a professional bookkeeping service designed for creative small businesses.

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