What is Recordkeeping?
Recordkeeping is the practice of keeping and organizing your business records. However, it’s not quite as simple as it sounds. There are laws and regulations surrounding the documents you need to keep and the length of time you need to keep them. Therefore, you’ll want to ensure that your business is being accurate and orderly in its recordkeeping practices.
Why is Recordkeeping Important?
Keeping business records isn’t only helpful but required by the IRS. These records are extremely important to your business because you’ll need them when filing your taxes, in case of any audits, and for your own knowledge and insights. Here are ways that recordkeeping can help your business:
Understand the financial position of your business
Prepare P&L Statements and Balance Sheets
Quickly and easily identify suspicious activity
Keep track of deductible expenses
Fulfill legal requirements
Identify source of receipts
Prepare your tax returns
In the event of an audit
In an audit, if you can’t substantiate expenses with receipts, the IRS may disallow the expenses resulting in additional taxes and possible penalties.
Where Should I Keep My Records?
The IRS does not require you to keep your records in any certain format. You can choose to keep them in physical journals and ledgers or opt for a computer software program such as QuickBooks. The same requirements apply to both physical and digital books.
However, in an age where everything is becoming digital, in the bookkeeping world, it’s easy to see why. Paper receipts can be easily misplaced, damaged, or destroyed. Keeping electronic copies of all your documents can be helpful in the case of an unfortunate event. Also, think about the amount of paper and space that you can save!
What Records Should I Keep?
Depending on your business, the types of records you need to keep will vary. However, all businesses need to keep copies of their previous tax returns. The main components you want to keep track of are gross income, deductions and credits. These items can be supported by a wide range of documents including:
Bank and Credit Card Statements
Bills
Invoices
Receipts
Deposit slips
Canceled checks
If you have employees, there are many important documents you should keep such as employment tax records and payroll. The Fair Labor Standards Act (FSLA) also requires employers to keep basic records that include the employee's full name, SSN, address, and documentation regarding hours and wage.
If you’re not sure whether you’ll need a document, the general rule of thumb is to keep it. It's much easier to throw away a receipt once you realize you don’t need it versus dumpster diving for it later.
How Long Should I Keep Records?
The length of time you need to keep a record will vary depending on the action, expense, or event. Generally, the record needs to be kept until the period of limitation for the return runs out. The IRS defines period of limitation as “the period of time in which you can amend your return to claim or refund.”
For regular tax returns, the period of limitation is 3 years. However, there are special cases that may require you to keep them for longer. If you have employees, employment tax records must be kept for at least 4 years. Records for assets need to be kept until the period of limitation expires for the year that you dispose of them.
The IRS is not the only entity that requires you to keep records. Check with your insurance company and creditors to see what records they require and how long you need to keep them.
We hope we've answered some of your questions! If you have other recordkeeping questions, leave a comment down below!