How Do I Keep the Best Financial Records for My Small Business?
Keeping good records for your business is a requirement on many levels, from inventory to expenses. Preparing your income taxes effectively also requires that you keep certain records as well. This information will be vital to prepare your return, and it will be required if the IRS or another taxing authority wants to take a more in-depth look at your finances through an audit. Not having the right records can be a nightmare of paperwork, fines, and penalties.
Many business owners struggle to find the right balance between keeping every scrap of paper for their company and keeping nothing at all. Having the right combination of documents and keeping them in an organized way will save you time when you sit down to do your taxes, and it can save you money through deductions and credits as well.
What Records Should My Business Keep?
Keep in mind that you may need other records for your company that do not necessarily affect your taxes, such as credit card information for automatic payments or refund processing information, but this article does not address those issues. Speak with your attorney or do some additional research for those specific items.
For tax purposes, you need to have records that reflect every:
- Business expense you have incurred
- Items of income
- Costs that you plan to deduct
- Documents that show amounts of credits you can take
Some businesses choose to only keep summaries of this information on a regular basis. However, if you are audited, the IRS may expect that you have original records to review. While you may not have every slip of paper, you should at least be able to access bank statements, credit card slips, or sales information upon request.
Some specific examples of documents or electronic records that you should have at all times include:
- Bank statements
- Payroll records
- Invoices (both for expenses and for income)
- Employment tax records
- Materials that reflect bad debt or items that were written off your books
- Income tax returns
You can certainly keep these documents in electronic format to cut down on the amount of paper and clutter in your office. However, you should be sure that your information is backed up in some format in case something happens to your computer or database.
What Is the Best Way to Store Financial Records?
There is really no “best” way to keep records. Every business is different, and every business owner will have different preferences when it comes to how they want to keep and access information. For some, paper documents just seem to work better compared to having electronic copies.
Regardless of the method you use to store information, it may be a good idea to organize it by year. Arranging the data by year will allow you to simply pull out the years that you need at any given time.
You may also want to summarize the “high points” of the year so you can track and analyze that data. Some of the most useful information includes things like income based on certain sectors of your business, overall expenses, or costs for specific items or departments.
In general, keep like items together—all expenses can go in one folder, for example, so you can review them quickly and find things easier if necessary.
No matter how you store information, be sure that you have a backup. That backup can be stored in another location or electronically, for example.
How Long Should I Keep Records?
Some businesses choose to keep records in some format forever—but for tax purposes, you really do not have to go that far. Instead, you can start to discard records after a few years, depending on the type of information involved.
Keep in mind that the information provided here only relates to taxes—other laws or requirements for your specific business (such as from your insurance company) may require that you keep records longer than indicated below.
If you choose not to file a tax return for your business in any year, the IRS recommends that you keep records indefinitely for those years. In general, if you keep up with your regular tax obligations, you should not need to worry about that qualification.
Staying organized and ensuring that you have the right records when you need them can prevent a lot of wasted time, effort, and cost in the future.