Whether you’ve just started your business or been going strong (one would hope) for a while, we all need to keep certain records. We need some documentation to figure out how our business is proceeding- and we need others (more?) just to satisfy the local/state/regional/national tax authorities.
For starters, we need to prove we are a business. That means we need our incorporation or charter papers (LLC, S, C, GmbH, partnership, DBA [doing business as], etc.). These should be kept in a secure file (we recommend they be scanned in and saved on your computer- in a directory marked “Tax Records”, as well the hard copies), so looking up dates of filing, jurisdictions, etc. are a breeze.
But, that’s just for starters. We recommend that our clients maintain at least 1 sub directory under that “Tax Records” file for all receipts (we’ll get to what that means). Some of our clients arrange receipts by vendors (further subdirectories), some by month and date (we do that), but the trick is to use whichever organization makes sense to you and to be consistent.
If you have a storefront, you need to save all cash register receipts (yes, all of them). You need to keep copies of all invoices you provide your customers/clients- and they should be in numeric order. (If you void an invoice, save that too, proving there was no sale associated with that invoice number.) You also need your bank deposit slips, credit card receipts (for your deposits), receipts and receipt books, as well as (in America) any 1099 forms you receive. Depending upon the accounting system you use (Quicken Home and Business and QuickBooks are the two most prominent choices), electronic copies of these can be attached to the actual entries in these programs. (We use a very specialized time and billing system that incorporates these copies.) As you can see, the more you use a computer program to run point-of-sale or to take credit card payments, the less additional record keeping you need to do yourself.
If you live in a jurisdiction for which you collect sales tax, you must denote each sales item as taxable or not. The best way to track these items is to denote the inventory item as taxable or not in your accounting program and then have the program determine the taxable and non-taxable sales in report format to match the reporting (weekly, monthly, quarterly) you must provide the locality involved.
You need to save any checks you write (which now come back in electronic form from most banks, once they clear), as well as credit card receipts and tapes you may run. These also can be attached to your accounting programs or saved in the electronic filing system described above. (We arrange for our clients to obtain their bank statements in electronic form so they can be saved in the filing system above.)
In the US, the IRS requires you to retain receipts for all expenses (credit card, invoice, etc.) that exceed $ 75. If you are self-employed or the principal of the firm (owning 25% or more), we recommend you retain all receipts that exceed $25. Only because they come in handy, should you ever be audited. In the US, the IRS feels most self-employed individuals and small business principals are among the biggest tax cheats. (And, if you are self-employed or a principal in the firm, your odds of being audited are about 10X more likely than the average taxpayer.) We recommend you scan these documents to be saved on your computer. One of the handy ways you can do so is to use Expensify, a smartphone/laptop app that employs the camera to scan the receipt for you. (Or, you can use the phone camera yourself and send it to computer.)
These records have to be retained for SEVEN (7) years AFTER you filed your tax return (in the US). That means some of the forms may be retained for eight years- or even longer if you filed an amended tax return. Which is why we suggest you save the final tax returns in these same files- with the date filed. That way you know when you can ditch the data from your computer system.
However, if you purchased a “large ticket item”, an asset such as a car, a truck, heavy equipment, a building, the receipts need to be retained until the item has been fully depreciated- plus 7 years (since the IRS could demand proof of the purchase long after its purchase, while you are just depreciating it.)
You will notice that we didn’t even begin to discuss the need to retain records for payroll purposes. These records include hourly records, if employees are paid hourly, gross wages, taxes withheld, taxes paid by the employer, as well as quarterly and annual filings.
This is the sort of advice we provide our clients every day. If you find this useful (of course, you do!), you should be contacting us to assist you in growing your firm and augmenting your net profits!
Yuck, you have just sucked all the creative juices out of me. Thankfully, I have my husband he saves every piece of paper for at least 10 years. I mean seriously, we could be considered a fire hazard in the spare bedroom closet. And don’t even get me started on shredding day…
shawn recently posted..Favorite Activities to do With Your Spouse
Oh,Shawn. This is just recordkeeping. That’s not a traumatic event. Making you add or subtract or multiply or determine what is taxable or nontaxable or profit and loss- they can trip up a few folks.
And, that’s why I recommend scanning. I am not a fan of paying for storage or dealing with fire and flood…
Roy – a question. As you know, I’m setting up a business in the UK (don’t worry – I’m not going to ask you about UK legislation), where you can set up as a sole trader without needing to register the business formally – you are of course required to keep details of all expenditure and revenues for tax purposes. I’m setting up the business as an example of a lean start-up, using the initial period to quickly check the business viability before settling on the final form of the business. My advice to people thinking of doing the same would normally be to do the same as I have: keep everything as simple as possible, and don’t register the business until you’re sure you have a future. Go for a month or two, then deal with the formalities.
If I recommended this to people in the US, would I be landing them in trouble?
Alan Miles recently posted..Fighting fire with start-ups
Alan:
If one does not incorporate (corporation, LLC formation), then one is operating a business with all liabilities centered upon the individual(s) involved. Any lawsuit, damages, errors, etc. are personal. One’s home, one’s fortune (or lack thereof), the income from other ventures are totally at risk by this practice. As you can see, I highly recommend this avenue NOT be taken.
There are also additional tax considerations in the US for such a practice.
Moreover, if one wishes to start, build, and sell an entity, having a corporate shell around the enterprise renders this a simpler proposition. A purchaser can purchase the entity- without the need to change the name or anything other than the ownership. One can purchase the assets and not the liabilities of an enterprise; this is much harder to do without a defined entity.
I hope that answers your questions.
Roy
Thanks Roy. I wasn’t proposing that the business would stay unregistered. As a sole trader in the UK as well, we’d be exposed to exactly the same risks. But in the very early stages, with exposure carefully limited, as you’re testing the viability of a product, and long before you’d even consider bringing in outside investors, it would still be the route I’d go, and nothing you’ve said shows me that it would be illegal in the US. So I’m happy with that.
The important thing of course, during the trial period, would be to make no commitment that you couldn’t fund yourself.
Thanks
Alan Miles recently posted..How to fail successfully
Alan:
Having set up proper businesses (incorporation) in various states and countries, i can assure that this small cost is well worth the insurance it provides. No, you can’t just start up a company with no expenditure of funds, but. if you have the desire to sell it or merge it in less than 22 months, it is a cost well made.
Roy
All good info. I keep EVERYTHING (overkill perhaps) AND can lay my hands on it. I have been able to warranty parts with lifetime warranties 10 or more years after installation! Yup – people are hanging on to their vehicles…. Ok, off to buy another file cabinet….
Carolina HeartStrings recently posted..LIGHT STATION OR LIGHTHOUSE?
Ah, Alessa, you are the hope and prayers for Staples! But, seriously, I keep the instruction booklets for all those devices that I have (my ovens, my range, my dishwasher, vacuum cleaners, etc) mostly for the description of the parts- so that WHEN they break, I can find a replacement part. But, then I discard the paraphernalia when I change the unit.
This is the same thing- only saving the tax records for those items that are still current. It’s one way to reduce the hoarding tendencies that we all have.
Discard the unneeeded. But, we need to keep the papers that are relevant.
Roy
My friend recently started her fashion designing business and a mishap happened when the local authorities came by to check for the invoices. Many of the invoices were missing (not in serial order) because she had forgot to store them. The reason she gives is that they were very minor sales compared to her usually extravagant bills of designer stuff. She did have to pay a price for it. And it did pinch her a little bit.
I didn’t know there are so many papers that go into a business!
Hajra recently posted..Bloggers Little Book of ABCs
Hajra, I am guessing that the authorities decided that the missing invoices were of the same average value as the others- and determined the taxes based upon this (much) elevated revenue. I have developed many clients after just such an episode…
My commiserations to your friend.
Roy
Legal Billing software is an advancement of technology that has enabled many product and services providers to maintain a better relationship with their customers and protect their system database by electronic billing generations.
Hmm.. Instead of a pronouncement like that- how about some proof?
Any billing software (or accounting system) clearly makes it easier for the practitioner to recover his/her time and bill the client appropriately. However, there is no evidence that would provide a “better relationship” with one’s client/customer base. Yes, software like PCLaw that not only lets practitioners track their time and projects, maintains a contact base (in concert with Outlook, if desired), maintains appointments (again, in concert with Outlook), can set up decision schemes and dates [called “calendaring”] for recurring types of projects- that can provide benefits to the practitioner AND have the client/customer feel some benefits. But, billing software per se… not.
Always be accurate with your time billing by using time billing softwares.
Actually, unless you are diligent in making entries- in a timely fashion- no software will make a difference.