John Bullis: Correct business records are important
For too many folks that are operating a small business, the need for correct and accurate business records is sometimes put off until “later.”
IRS has some publications that spell out the need for correct business records. Each year there are Tax Court cases where part of the problem was poor business records.
You do not have to do the records on a computer. But you do need to reconcile your bank statement(s) with your records every month on a timely basis. Your record of expenditures will be used to prepare your tax return. But sometimes there are business expenses that are not recorded on a monthly basis.
Many small businesses have vehicle(s) driving on business activities. Maybe the records show the repairs, gas, maintenance, etc., but a larger deduction is allowable on a cents per business mile driven. It is good to keep track of all business miles so you can see if actual expenses or cents per mile deduction is best for you. The ratio of business miles over total miles is important.
Many small businesses have Office in Home expenses that will save both income and self employment taxes. The expenses of the home need to be recorded so the deduction is complete. Some small business owners try to record those home expenses in the main business records as “Drawing” for now. Then the totals are available to do the computation for Office in Home expenses.
IRS does not select returns to be audited just because Office in Home deduction is claimed. As you know, the square feet of the space that is regular and exclusively business use is divided by the total square feet to determine the business portion. That percentage is then used to claim the business portion of interest, insurance, property taxes, repairs and maintenance and depreciation expenses. In this age of cell phones, it is easy to take some pictures of the business area for your records.
Some business owners pay business expenses with a credit card, but sometimes is it not a business credit card. If a business expense is paid with a personal credit card, the business records should include those credit card statements and the individual charge receipts. The credit card receipt for business meals, travel, etc., should include notes of how it is a business expense, who was present, etc. That means keeping those business records for at least four years.
It can be helpful to have a box or file of all your business records by year. The box or file should be clearly marked what is included and of course the year involved.
Payroll records of all types and kinds should be saved for at least seven years.
Did you hear “I’m going to take the high road because the low road is so crowded.” Mia Farrow