Taxes: The Importance of Record-Keeping
Created by FindLaw's team of legal writers and editors | Last reviewed September 26, 2022
Everyone in business must keep records, especially records that will come in handy when it's time to think about taxes on the business. Good records can help your business in a variety of ways, from monitoring your business's financial help to preparing your taxes correctly. This article discusses some of the ways that good recordkeeping can help your business.
We make business formation EASY. Click here to start your free LLC.
Monitor the Progress of Your Business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Being on top of this information by keeping good records can increase the likelihood of your business's success.
Prepare Your Financial Statements
Good records are a must in order to prepare detailed and accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business. Remember, an income statement shows the income and expenses of the business for a given period of time. A balance sheet shows the assets, liabilities, and your equity in the business on a given date.
Identify the Source of Receipts
In the course of business, you will receive money and/or property from many sources and your records can identify the source of these receipts. This information is valuable for a couple of reasons. First, it will separate your business receipts from your non-business receipts. Secondly, it will separate your taxable income from your non-taxable income. This information can also be helpful in the event that your business is audited by the Internal Revenue Service (IRS).
Keep Track of Deductible Expenses
Deducting valid business expenses are the best way to lower the amount of taxes your business will be obligated to pay. Generally, an expense is deductible if it is "ordinary and necessary" in running your business. It's a good idea to keep track of business expenses by recording them as they occur, otherwise you may forget them when you prepare your tax return.
Prepare Your Tax Returns
You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report on your tax returns. Generally, these are the same records you use to monitor your business and prepare your financial statements, so as long as you stay on top of that, you shouldn't need to keep extra records for your tax returns.
Support Items Reported on Tax Returns
There is always a chance that your business may be audited, and you must keep business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported and a complete set of records will speed up the examination. Please note that if your business is audited, the auditor is allowed to access and review your personal financial records as well.
For more information about starting and running a small business, please visit FindLaw's section on Small Business Law.
Taxes and Record Keeping: Get Professional Help Today
Typically, keeping records for your business doesn't require the help of a tax or legal professional. However, enlisting the help of legal professionals will ensure that you're keeping the right records. Not only that, an experienced tax attorney can help you reduce your tax exposure along the way. Get in touch with an experienced tax law attorney near you.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.
Contact a qualified business attorney to help you navigate your business's taxes.