Archive for January 2017

How long do I have to keep records?

Good tax record keeping may be the most important record keeping you do for your company.

You don’t want tax time to roll around and have to panic because your company doesn’t have its tax records in order. Tax records in disarray can cost you deductions—and if you happen to be audited, could create a problem costing you money.

After all, you want to get all the deductions you can and be able to back them up.

The IRS requires you to keep the last three years that you’ve filed. In January 2017, that means you’ll need to have records from 2014, 2015 and 2016. But I’m a believer that if a pinch of salt is good, then two is better. If the IRS requires you to keep three years of records, five years would be better. And if you keep those receipts for seven years, you’re never going to have any regrets.

Why would you need to keep records for longer than the required three years? It’s possible that in the fourth or fifth year after the initial purchase, you may pay off a vehicle or make an upgrade to a copy machine. If you do, it would be helpful to be able to reference those receipts for the current year’s deductions.

Once you’ve decided how long you will keep company records for tax purposes, you’ll need to set up a safe and organized system for storing them.

I organize my receipts by month. I put all my receipts for each month in a manila envelope, then file it in a box. After we file our taxes, I stick that box up in the attic with the year clearly labeled. When seven years have gone by, I shred the oldest year of tax receipts. Don’t forget—you never want to throw those kinds of receipts in the trash. It’s important to destroy them.

If you need help navigating the complexities of document management for tax purposes, let’s talk. Give us a call so we can chat about your needs.

What you need to keep to justify your expenses

Keeping track of receipts for your small business is very important: it keeps you organized and on budget, and it can be a big money-saver when you file deductions at tax time. According to the IRS, good records will help you:

  • Monitor the progress of your business
  • Prepare your financial statements
  • Identify sources of your income
  • Keep track of your deductible expenses
  • Keep track of your basis in property
  • Prepare your tax returns
  • Support items reported on your tax returns

Keeping records isn’t just helpful for filing your taxes and monitoring your finances—it’s a legal requirement imposed by the IRS. But which records do you need to keep? And which ones should you send to the shredder?

The IRS is not a big fan of estimating your expenses. If you are going to claim a deduction, you’re going to need to keep track of:

  • When: The date of the transaction
  • Where: Where you bought the item
  • What: What the item was
  • Why: What purpose it served in your business

There are three crucial documents you must keep—I call these three documents the Golden Triangle. You have to keep the receipt from the store, the statement from the credit card company, and a bank statement showing it was accurate. When, where, and what are generally found on the store receipt, which is why the IRS loves when you keep them.

In order to claim a deduction, the purchase has to have proven economic impact. To prove economic impact, you’ll need all three proofs of purchase. Amazon and Walmart are great examples of why you’d need to document well, because you can buy everything from these companies.

If you have a bank statement from Walmart, it doesn’t automatically mean the purchase was for office supplies. You could’ve purchased that night’s dinner or a new digital camera for your family’s vacation. You have to retain the receipt that says you made a business purchase for items like pens, paper and ink cartridges.

While receipts, bank statements and credit card statements are crucial to your business record keeping, there are other documents you may also need to keep on file for the future. Not sure whether or not you’re keeping track of everything you need? Give us a call and let’s talk about your company’s needs.