5 Benefits of Proper Recordkeeping
Last year, Mr. Albert, owner of a construction material distribution company, arrived at my office. When I entered his information into the system, it showed that he owed $8,600 in taxes. I started off by asking him what he did, what was his company’s line of business and whether he had any work-related expenses with their relevant supporting documentation and receipts. We made the calculation right there and then, including an estimate of any expenses he could recall. His taxes changed completely so, instead of paying, he would be receiving $1,100.
Albert went back home and did his homework—as we say at the office. He looked for all the supporting documentation for his expenses, and when he couldn’t find it, he retrieved the invoice online or went directly to the store to request it. He came back three weeks later with all of the supporting documentation for his deductible expenses.
IRS Publication 583 includes guidelines on how a company should keep its records.
For instance, one of the first things you need to do when you open a business is open a business bank account. This account should remain separate from your personal bank account. The bank account for your business is your main source for keeping a record of your business expenses. You need to enter all of your daily receipts in your account and check it to see if there are any mistakes when it is reconciled.
Write checks payable to you only when you withdraw money for your business for your own personal use. Avoid writing checks that would be payable in cash. If you have to write checks to pay for business expenses in cash, include the voucher of that payment in cash in your records. If you can’t get your hands on a voucher for a payment in cash, enter an appropriate explanation in your records when you make that payment.
Company owners have to create and keep the records of every transaction, whether they have one employee or dozens. Whether you install flooring, do haircuts or weed gardens, keeping good records is an important part of getting your business on the path to success.
What’s at stake
The right records will help you:
- Monitor how your business is progressing: Records tell you whether your business is improving, what products or services are selling best and what changes you need to make to improve profits. .
- Prepare your financial statements: You need to have useful records to prepare financial statements that are accurate. These include Profit and Loss Statements and Balance Sheets. These statements can help you earn credit with your banks and commercial creditors. A Profit and Loss Statement shows your company’s income and expenses during a given period of time. A Balance Sheet shows the assets, liabilities and equity of a business at a particular date.
- Identify your sources of income: The money you receive comes from a myriad of sources. Your records may help you identify the sources of those receipts, some of which may be tax-free.
- Keep a record of your deductible expenses: Record expenses on a job as you incur them so that you can track whether a job is on budget and match expenses and income come tax time..
- Prepare your tax statements and supporting documentation for your deductions: Remember, that should the IRS audit your tax return, they can demand proof that any and all expenses you claim as deductions are legitimate..
Suggestions for organizing your records
Here are some common questions I get from my clients.
Owners of small companies may choose any record-keeping system that works for their business and clearly shows their income and expenditures.
The IRS usually recommends taxpayers keep their records from tax returns for at least three years. If you have employees, you must save all your payroll tax records for at least four years.
A good record-keeping system includes a summary of your business’ transactions. The business transactions are usually summarized in a daily ledger Books or general ledger. All the requirements applicable to printed books and records are also applicable to electronic records of businesses.
A daily ledger is a book where all business transactions are shown along with their supporting documentation. The system you use to record your business transactions will be more effective if you follow good record-keeping practices.
In general, the best way is to record your transactions on a daily basis, to make every transaction via the company’s bank account, and ensure that each transaction has its own hard-copy support ordered by month and by year.
The Importance of Original Receipts
Many of my clients start off with their businesses and don’t know that they need to create these records to claim deductions on their tax return, so they rarely save any type of records. During an audit, the IRS can insist on seeing original receipts for every expense claimed as a deduction. They will not accept checking or credit card account statements as proof of purchase.
This is why I recommend the use of receipt scanning apps to my clients to stay up-to-date with their expenses.
With all the challenges of owning and running a business, bookkeeping often falls down the priority list below things like sales and operations. The truth is good record-keeping is essential to running and growing a healthy business. It improves decision-making and makes filing state and federal income taxes returns much less stressful and time consuming.
Based on my experience, hiring a professional bookkeeper is your best option because you will be compliant with the law, be on top of how well your business is performing and be able to deduct their fees as an expense on your tax return.
That was also Mr. Albert’s experience. The year after I helped him earn his tax refund, he showed up with all the supporting documentation for his expenses. He’d learned his lesson and realized the benefits of proper record-keeping.
Sherly Ramirez is the owner of SR Accountant Services, a tax and accounting consultancy firm specializing in the construction industry. You can connect with her on her social media channels. You can find her as SR Accountant Services on Instagram, Facebook, Twitter or LinkedIn, or visit www.sraspro.com. You can also send her an email at firstname.lastname@example.org