Record keeping is probably the least interesting part of your business, but it is one of the most important. Sure, you need financial records to file your taxes, but there are so many other reasons! Without up-to-date and complete financial records, how can you know what’s going on in your business? How can you plan?
Believe it or not, the IRS provides a lot of help with that. Their website has explanations and examples to spell out the requirements and tips to meet them. A good place to start is their summary about financial recordkeeping at https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping. IRS Publication 583, Starting a Business and Keeping Records, gives you even more information at https://www.irs.gov/pub/irs-pdf/p583.pdf.
No time to read all the details now? Here are four recordkeeping tips to get you started:
- Business income should be recorded in a ledger as you receive it. 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.
- 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 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, computers, and cell phones, must be allocated between business and personal use in order to determine the amount that is deductible for your business. Use an automated or manual log to track the use of the asset and maintain the log as support documentation.
Recordkeeping may be boring, but good financial records help to monitor the progress of your business, prepare your financial statements, and get organized to file your income tax returns. Yes, the IRS requires financial records; make sure that those records are good enough to track the progress of your business and achieve your objectives.