Uggh! I get it. Who likes to keep receipts and do data entry? Can I be real with you?
I don't know how many times I shove a receipt in my purse knowing I'll need it later, only to go back and it's disappeared!
I've also seen it so many times with my past bookkeeping clients. They would come to me not knowing what receipts to keep and leaving me with not much. Every single one of those clients were losing thousands of dollars a year!
My new mantra is "Track What You Want to Attract". If you want more money flowing in your business, you gotta show it respect, give it attention, and care. Below, I'm going to talk about what you need to track and for how long.
Why You Need to Keep Records
Keeping records of all your business transactions (even your cash ones!!) can bring in and save you money in a lot of ways:
cleaner financial statements to help make bad boss financial decisions
streamlined processes and record keeping can add beneficial tax deductions and credits
Catch banking mistakes that would otherwise lose you money
Get clients to pay you faster
See what products/services are actually selling well
your trusted tax pro will LOVE YOU. You made their job easier and quicker.
What Kind of Records Should You Keep?
I break down a summary of what is on the IRS website. These are the things that they look for.
Gross receipts are your sales reports. Be sure to either have digital, printed, or both copies filed. Also, anything that shows how you made money. Some examples are invoices you sent to customers, deposit slips to the bank, or if you keep a receipt book. SAVE THEM ALL.
These are items you bought to resell, create, or distribute product
wood, string, varnish for a guitar maker
clothing, shipping, merchant fees for a retailer
These are things that you would have purchased regardless if you made a sale. The cost of doing business . Such things like payroll, utilities, rent, and office supplies are few items. Make sure to keep any invoices, receipts, or statements for these items.
Travel, Transportation, Gift and Entertainment
The IRS are strict about these categories. These categories often prompt tax audits if they send red flags. So they want proof of these expenses. Be sure to get with your trusted tax adviser to find out what is allowable as a deduction and how much.
Things like computers, equipment, and office furniture are assets, according the IRS. These are items that can have many uses and last longer than a couple of years.
Employment Tax Records
This has to do with any and all payroll taxes that you have incurred. According to the IRS website, you should keep at least four years’ worth of records on hand. Copies of paycheck stubs, employer copy of W-2's, payroll reports are a few thing you should have on hand.
How Long Should I Keep Records?
According to the IRS website, these are how long you should keep records on file.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and if you file an amended return.
Period of Limitations that apply to income tax returns
Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
If you plan to ask for a credit or refund on a previous return:
You have to keep files for at least three years after you filed your return or two years after you paid the taxes
Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
Keep records for 6 years if you do not report income that you should report. Also if it is more than 25% of the gross income shown on your return.
Keep records indefinitely if you do not file a return.
Keep records indefinitely if you file a fraudulent return.
Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Now, some of the above items make me nervous. Do me a favor, keep records for at least 5-7 years, and ALWAYS file your taxes on time. It makes things simple, easy and less stressful for you and your tax adviser. You can always apply for an extension if you aren't ready.
*this post was originally posted in January 2016 but since been updated.