Receipts and Records

Keeping good records is a very important part of the growth and maintenance of your business. Good records will help you do the following:

• Monitor the progress of your business
• Prepare your financial statements
• Identify source of receipts
• Keep track of deductible expenses
• Prepare your tax returns
• Support items reported on tax returns

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. Good records 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 of time.
• A balance sheet shows the assets, liabilities, and your equity in the business on a given date. 

Identify source of receipts

You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from non-business receipts and taxable from nontaxable income. 

Keep track of deductible expenses

You may forget expenses when you prepare your tax return unless you record them when they occur.

Prepare your tax return

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 IRS. 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.

So what’s the best way to keep records?

Simple: Use any recordkeeping system that clearly and accurately reflects your income and expenses. Keep in mind your tax records must support all the income, tax deductions and credits listed on your tax return. Be sure to separate your business and personal receipts and your taxable and nontaxable income.

Recording Expenses: Record your expenses when you pay or incur them, depending on your method of accounting. It’s easy to forget last year’s expenses when you’re filling out this year’s return. Don’t overlook deductions for which you qualify.

Keeping a Record of your Business Assets: Your business assets are the property and equipment you own and use for your business . Keep a complete and detailed record of such assets showing when you acquired them, how much you paid for them and how the assets are used in your business. This record will allow you to depreciate your assets properly and report the correct gain or loss when you dispose of them.

How long should I keep records?

The length of time you should keep a document depends on the action, expense, or event the document verifies. You must keep your records as long as they may be needed to prove the income or deductions on a tax return.

How long should I keep employment tax records?

You must keep all of your records as long as they may be needed; however, keep all records of employment taxes for at least four years.

Are the records connected to assets?

Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

What should I do with my records for non-tax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

See Publication 583, Starting a Business and Keeping Records.