Recordkeeping for U.S. Small Business
Maintaining accurate and organized records is a crucial obligation for small business proprietors, irrespective of the size of their workforce, the nature of their services, or the type of business entity. Recordkeeping involves the systematic and methodical storage of business documents. The subsequent section examines the significance of recordkeeping for small businesses and outlines the recordkeeping requirements stipulated by the IRS.
- The Importance of Recordkeeping
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Monitor business progress
Records offers crucial financial and non-financial data, such as sales patterns, cost fluctuations, and customer grievances. Entrepreneurs and executives can utilize this documentation to assess the advancement of their business and identify necessary adjustments.
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Prepare financial statements
Records enables the creation of precise financial statements, which serve as crucial tools for small business proprietors in their interactions with financial institutions and creditors.
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Identify sources of income
Business owners can use records to monitor the inflow of cash and other assets, enabling them to accurately categorize the receipts and assess the associated tax implications.
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Prepare tax returns
Records furnishes proprietors with the necessary details to effectively prepare tax returns and associated filings.
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- Consequences of Not Keeping Key Records
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Poor business performance and position
In order to obtain a precise assessment of an entity’s operational and financial status, it is essential to maintain comprehensive records. These records should encompass internal and external documentation pertaining to the forecasting, management, and oversight of activities. Inadequate recordkeeping may lead to failure to achieve sales or profitability objectives, mismanagement of funds, or depletion of budgets.
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(2)
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Business operating inefficiencies
Small entrepreneurs may be required to furnish records upon the request of stakeholders such as investors, customers, vendors, employees, and the IRS. In the absence of proper record-keeping, the process of retrieving information may be protracted, potentially impeding business expansion and advancement. Furthermore, the IRS reserves the right to impose a negligence penalty of up to 20%.
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Inability to protect the business from theft or fraud
Record is crucial for the tracking, management, and safeguarding of resources. In the absence of proper records, assets are susceptible to theft.
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- Categories of Small Business Records
The Internal Revenue Service (IRS) advises businesses to maintain records in at least six categories, which include but are not limited to:
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Gross receipts
Gross receipts denote the revenue generated by a business, such as income from sources such as cash register tapes, receipt books, and Forms 1099-MISC. Documentation must provide comprehensive information regarding the amounts, timing, and origins of gross receipts.
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Purchases
Purchases refer to goods acquired and subsequently sold to consumers. These may encompass physical records of transactions such as receipts from cash registers, cancelled checks, or other forms of documentation demonstrating payment, as well as electronic fund transfers.
The accompanying documentation should specify the recipient, the sum disbursed, evidence of payment, the date of the transaction, and a description of the item. In the context of manufacturing enterprises, purchase should encompass all raw materials or constituent parts intended for use in the manufacturing process.
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Expenses
Expenses refer to the expenditures necessary for conducting business operations, excluding purchases. These may include cancelled checks, payment receipts, electronic fund transfer records, and account statements.
The accompanying documentation should specify the recipient, payment amount, evidence of payment, date of expenditure, and provide a description of the item or service acquired, demonstrating that the expense was incurred for business purposes. It is important to highlight that for tax deduction eligibility, an expense must meet the criteria of being ordinary, necessary, and reasonably priced. The Internal Revenue Service (IRS) will not permit deductions for personal or extravagant expenses.
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Travel, transportation, and gift expenses
Business-related costs such as travel, transportation, and gifts are expenditures incurred in the course of conducting business activities, excluding purchases. These may include receipts from cash register tapes and records of mileage. It is essential for supporting documentation to validate specific aspects of these expenses, such as the amount, time, location or description, and the business purpose or relationship.
It is important to note that not all travel, transportation, or gift expenses are fully eligible for tax deductions. For instance, the IRS imposes stringent restrictions on the deductibility of business meals and business-related gifts. Therefore, business owners are advised to maintain comprehensive records to aid their tax advisors in determining the deductibility of such items. For guidance on the deductibility of business meals and entertainment, please consult our other article. https://www.kaizencpa.com/Knowledge/info/id/1590.html
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Assets
Assets refer to the tangible property, including machinery and furniture, that is possessed and utilized within a commercial enterprise. Asset records encompass procurement and sales invoices, as well as real estate closing statements. Supporting record is essential to corroborate specific details regarding business assets and to facilitate the calculation of annual depreciation, as well as the determination of gains or losses incurred upon the sale of assets.
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Employment taxes
Employment tax records must contain the employer’s identification number, as well as the amounts and dates of all wage, annuity, and pension payments, among other relevant information. It is important to emphasize that these records should be easily accessible for review by the Internal Revenue Service (IRS).
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- Record Retention Policy of Small Business
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The duration within which business tax returns must be filed.
The duration refers to the timeframe during which a small business proprietor is permitted to revise a tax return to request a credit or refund, or during which the IRS is authorized to evaluate additional tax. The duration for which a document should be retained is contingent upon the action, expenditure, or occurrence that the document documents. Generally, records substantiating an item of income, deduction, or credit on a tax return should be retained until the period of limitations for the tax return expires.
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Property record retention rules
In general, records should be preserved until the statutory period of limitations elapses for the year in which the property is disposed. In instances of a non-taxable exchange, records pertaining to both the former and the new property should be retained until the period of limitations expires for the year in which the new property is disposed. It is advisable to conduct an annual review of record retention policies and make necessary adjustments, taking into account alterations in governmental and professional mandates, as well as the expenses associated with record retention.
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Reference:
https://www.irs.gov/businesses/small-businesses-self-employed/burden-of-proof
https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-recordkeeping
https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records
https://www.irs.gov/pub/irs-pdf/p583.pdf
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