by Michael Lodge
Every so often in my writings I give the lecture on documenting everything you do in a business, that also means record keeping. If you are audited for any reason the documents you provide to the auditor is your evidence to support your claim for the deduction on your tax return. When you sit down with your tax accountant and he asks you questions on your income and expenses – you had better have the documentation to back up the number you are giving him. Do not make up numbers just because you think you are going to get a bigger refund. That refund can be taken away very quickly if you are audited and you can’t support your position with documentation. Not only is the tax refund taken away your probably will be hit with interest and penalties and in some cases a criminal investigation. So documentation is the key to success in supporting your deduction on your tax return.
Everyone in business must keep records. Keeping good records is very important to your business. Be also a modern business and scan all of your records up into the cloud or onto your server (back it up). Put your expenses in categories by year. Good records will help you do the following – per the IRS:
- Monitor the progress of your business
- Prepare your financial statements
- Identify sources of your income
- Keep track of your deductible expenses
- Keep track of your basis in property
- Prepare your tax returns
- Support items reported on your tax returns
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. Good records can increase the likelihood of business success.
Prepare your financial statements
You need good records to prepare 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.
- 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 sources of your income
You will receive money or property from many sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.
Keep track of your deductible expenses
Unless you record them when they occur, you may forget expenses when you prepare your tax return.
Keep track of your basis in property
Your basis is the amount of your investment in property for tax purposes. You will use the basis to figure the gain or loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses.
Prepare your tax return
You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.
Support items reported on your tax returns
You must keep your 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. A complete set of records will speed up the examination.
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