Small Business Recordkeeping
Well-organized business records will make it easier to prepare your tax return and help you answer questions if your return is audited or selected for examination, or if you are billed for additional tax.
- Is there a recordkeeping system I am required to use?
- How long should I keep business records?
- Why should my small business keep records?
- Where do I find additional information or get help?
What can I do to prepare?
There is no particular method of recordkeeping businesses 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 each 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 three years from the date the return was filed. If you have employees, you should retain your records for at least four years. If you omitted income or need to establish basis for property, you will need to keep records even longer.
Good records will help you and your business:
- Monitor the progress of your business – Well kept records can show whether your business is improving, which items are selling, or changes you need to make.
- Prepare your financial statements – You need good records to prepare accurate financial statements, such as income statements (both profit and loss) and balance sheets. An income statement shows the income and expenses of a business for a given period. A balance sheet shows the assets, liabilities and the equity in a business on a given date. These statements can help you in dealing with your bank or creditors and help you manage your business.
- Identify your source of receipts – You will likely receive money or property from multiple sources. Your records identify the sources of your receipts. You need this information to separate business from non-business receipts and taxable income from nontaxable income. It is a good business practice to establish separate bank accounts for business and non-business 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 – Your records must support the income, expenses and credits you report on your tax returns. Generally, these are the same records you use to monitor your business and prepare your financial statements.
- Support items reported on tax returns – You must keep your business records available at all times for inspection by the IRS. If the IRS audits any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the audit, or examination.
Your Guide to a Small Business Audit, a new video series, presented by the IRS, shows small business owners the steps of an audit, start to finish, and answers questions about the process in ten lessons. The videos can be watched in any order, at any time.
- The IRS has a virtual workshop titled Small Business Taxes: The Virtual Workshop. This workshop is composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities.
If you have questions, concerns, or need information about recordkeeping, please contact the IRS at 1-800-829-7650.
As you prepare for the end of the tax year reporting, the following new employment forms are available:
- 2012 Inst. 940, Instructions for Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return (Rev. Aug. 2012)
- 2012 Form 940 (Schedule R), Allocation Schedule for Aggregate Form 940 Filers (Rev. Aug. 2012)
- 2012 Form 940 (PR), Planilla Para La Declaracion Federal Anual Del Patrono de la Contribcion Federal Para El Desempleo (FUTA) (Rev. Aug. 2012)
- 2012 Inst. 944, Instructions for Form 944, Employer's Annual Federal Tax Return (Rev. Aug. 2012)
- 2012 Form 944, Employer's Annual Federal Tax Return (Rev. Aug. 2012)