Record keeping is probably the least interesting part of your business, but it is one of the most important. During this time of year – tax season – I meet business owners who are scurrying to scrape together their financial records to file their income taxes. They don’t realize that they need up-to-date and complete financial records all year long.
Many businesses fail because they don’t have the necessary financial information to make decisions that are right for them and identify financial warning signs before they become real problems. Recordkeeping may be boring, but good financial records are key to monitoring progress, in addition to getting organized to file all required income tax returns.
Here are four recordkeeping tips to get you started:
- Maintain separate records and bank account for each business and for personal transactions to identify income that derives from your business vs. personal (e.g., investments and wages). A separate business account also makes it easier to reconcile business financial activity between the bank and your financial records.
- Business income should be recorded as it is received. Income should be supported by invoices, bank deposit slips, online receipt records, cash register tapes or other documents that show the source of the income, the amounts and the dates received. Generally, income is taxable when received, not when the invoice is sent, or funds are deposited.
- Business expenses must be documented to prove the amount, date, business purpose, and expense type in order to deduct them. That proof, or documentary evidence, should consist of a disbursements register, canceled checks, and/or invoices. Additional evidence is required for travel, entertainment, gifts, and auto expenses.
- “Mixed use” assets, such as vehicles and computers, must be allocated between business and personal use to determine the amount that is deductible for your business. For vehicles, use an app or other method to track the mileage and keep a report. For other assets, like a cell phone, use reasonable judgement to determine the business portion.
You didn’t start your business to do financial recordkeeping, but it’s one of the most important part of monitoring the progress of your business and getting organized to file your income tax returns. Up-to-date and complete business financial records are key to knowing what’s going on in your business. And yes, the IRS requires business financial records.
Believe it or not, the IRS provides a lot of tips for keeping business financial records. A good place to start is their website https://www.irs.gov/businesses/small-businesses-self-employed/how-should-i-record-my-business-transactions. IRS Publication 583, Starting a Business and Keeping Records, has even more information at https://www.irs.gov/pub/irs-pdf/p583.pdf.