Business Documents And Records: What, Why, And How Long?

For many business owners, keeping up with different business records and receipts is often a task that is far from enjoyable. With all the paperwork's that may pile up over time, it seems so that record keeping isn’t exactly a favorable part of the job.

However, mismanagement of such important files can become a serious pitfall for your business as well. When tax time is finally right around the corner, you can save yourself from the headache that comes with having these records all over the place.

“It’s better to have them and not need them than to need them and not have them.” The wise words a business owner should continue to live by. It’s always best to be prepared for anything, and you can start by checking off from this list to make sure you’re protecting yourself and your business from unwarranted consequences anytime of the year.

Now, one may question, how long should you keep receipts and how important are they really? To guide you in successfully tackling business records management essentials, here’s a list of what you should be keeping and for how long they are best kept for.

Bank Statements – keep for three years

Bank statements are among the most important files that show your business is, in fact, generating revenue. The IRS considers this a major factor when deciding whether a business is carried on for the production of income, or just simply a hobby.

A number of banks today offer special access to monthly and yearly bank statements online. It is recommended to keep these monthly statement books up-to-date and handy until you receive your year-end report. When everything is sure to be in place, you can either get rid of these files or store them in a reliable cloud back-up and proceed sign-up for digital statement plans.

Payable and Receivable invoices – keep for seven years

You can also hold on to invoices that you send and receive from your suppliers/ contractors for the goods and services they have distributed. Keeping track of these is important because they, for one, back up your profit and loss statements (P&L). The IRS may also pay attention to your invoices mostly to substantiate business income and financial deductions during possible audits.

Payable invoices serve as documentation for your expenses, and receivable invoices serve as receipts of gross income. While most invoices commonly include line items, the IRS says to make sure they include a description making clear the invoice was for a business expense. Keeping these records accurate and readable is also essential.

Some invoices business owners are advised to keep include:

• An invoice from the manufacturer you purchase your T-shirts from
• Your annual invoice for your email server
• Your monthly invoice from your packaging provider
• An invoice you sent to a client who made an order over the phone instead of through your site

Home office expenses – keep for three years

One of the best perks of running your own business is the choice to work at home whenever you desire. To make your home office a space that meets the IRS regular use test, you can always compare it side by side against their standards.

Having a home space for your work allows you to have a large range of deductions you can claim as well. You should just always make sure to keep important bills such as utility, internet, home insurance, phone lines and property tax bills as well. Sometimes, a fraction or even most of these bills, will be deducted from the taxes you owe.

The most important files and records to keep for federal tax purposes usually depend in the business you are in. It is best to choose a record keeping system that is suited to your business. It should be able to clearly show your income and expenses records and should include summary of your business transactions as well. This summary may refer to those ordinarily made in your business books (accounting journals, ledgers, etc.).  Your books must show your gross income, as well as the deductions and credits of your business.

Some companies choose to make use of electronic accounting software programs (or some other type of electronic system) to monitor and manage their business records. It is important to note, however, that it must still coincide with the same basic record keeping principles mentioned. Any and all requirements that apply to hard copy books and records is also necessary to be observed by electronic records.

Supporting business documents refer to sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks that are mostly generated by purchases, sales, payroll and other business transactions. These types of documents contain the information you need to record in your books. Keeping such documents is essential because they back up your business entries in your books and on your tax return. They should be kept clean and orderly, and can be categorized by year and type of income or expense.

Some of the types of records you should keep may include:

Gross receipts – the income you receive from your business. Monitor these documents to show the particular amounts and sources of your gross receipts.

Documents for gross receipts include the following:

• Cash register tapes
• Deposit information (cash and credit sales)
• Receipt books
• Invoices
• Forms 1099-MISC

Purchases are known to be the items that you buy and resell to your customers. If you are a manufacturer or producer, the cost of the raw materials or parts for the manufacture of finished products will be counted in. The supporting documents you are holding onto should identify the payee, the amount paid, the proof of payment, the date incurred, and include a simple description of the item to prove that the amount was used for purchases.

Documents for purchases include the following:

• Canceled checks or other documents reflecting proof of payment/electronic funds transferred
• Cash register tape receipts
• Credit card receipts and statements
• Invoices

Note: In some cases, a combination of supporting documents may be necessary to substantiate all the elements of a purchase.

Expenses refer to the costs you incur (other than purchases) to carry on running your business. The supporting documents you must be tracking should determine the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was dedicated for a business expense.

Documents for expenses include the following:

• Canceled checks or other documents reflecting proof of payment/electronic funds transferred
• Cash register tape receipts
• Account statements
• Credit card receipts and statements
• Invoices

Note: In Some cases, a combination of supporting documents may be needed to substantiate all elements of the expense.

If you deduct travel, entertainment, gift or transportation expenses, you must be able to show and prove certain elements of your expenses.

Assets include all the the property, such as equipment and furniture, that you own and utilize for the operation of your business. You must also keep records of certain information regarding your business assets. These will help you determine and compute the annual depreciation and the gain or loss during the selling of said business assets.

Documents for assets should show the following information:

• When and how you acquired the assets
• Purchase price
• Cost of any improvements
• Section 179 deduction taken
• Deductions taken for depreciation
• Deductions taken for casualty losses, such as losses resulting from fires or storms
• How you used the asset
• When and how you disposed of the asset
• Selling price
• Expenses of sale

The following documents may show this information.

• Purchase and sales invoices
• Real estate closing statements
• Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Employment taxes

A few specific types of employment tax records may include the records you must keep. Hold on to any and all records within reach for at least four years. You can proceed and refer to Recordkeeping for Employers and Publication 15, Circular E Employers Tax Guide.

Do you have any questions or need help with your business documents and records?

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