Accurate record-keeping plays a critical role in small business tax planning and preparation. Inaccurate records can lead to missed deductions, inaccurate tax return filings, missed deadlines, IRS penalties, and unnecessary stress during tax time. Additionally, the results of poor record-keeping could even trigger a potential audit, leading to more regulatory exceptions and penalties. For small businesses and independent contractors who are often operating on tight budgets, these types of oversights and unnecessary expenses can result in a significant financial strain.

Strengthen your business by learning more about accurate record-keeping for tax preparation, why it matters, and how to improve your small business’s financial records with bookkeeping for taxes.

Why Accurate Record-Keeping Matters for Tax Preparation

Accurate record-keeping is essential to tax preparation. Having thorough, accurate, and well-organized financial records provides better financial visibility in addition to simplifying tax filing, making it easier to identify deductions, and keeping your business audit-ready.

Maintain Regulatory Compliance and Avoid Tax Penalties

Businesses not only need to file tax returns with accurate numbers, but they must also maintain proof of the figures included in the returns. Accurate records translate to accurate, well-documented numbers on your tax returns.

Having good financial records helps you avoid tax penalties that could arise as a result of inaccurate claims on your tax returns or late tax filings as a result of disorganized or incomplete records slowing you down.

Maximize Tax Deductions

Tax deductions help to reduce the amount of income on which your business will be taxed. So, maximizing deductions should be an essential step in every small business’s tax strategy.

Accurate records make it easier to identify, categorize, and document all eligible tax deductions such as business operating expenses, home office deductions, mileage, travel, meals, charitable donations, in-kind donations, and equipment depreciation. Receipts should be kept for all of these expenses with documentation of the business-related reason for the expense.

Always Be Audit-Ready

Businesses that maintain accurate records benefit from this practice during tax time and in the event of an audit. Audits can occur with little notice and little time to prepare. The primary reason why audits are so frustrating for business owners is that business owners often do not maintain accurate, organized financial records. With accurate records, small businesses can get through audits with minimal stress and minimal issues discovered.

The Types of Records Small Businesses Should Keep

Small businesses must maintain comprehensive records of all financial activities. The IRS requires businesses to maintain a record of:

• Gross Receipts (records of income received) – Deposit information, cash sales, credit sales, cash register tapes, receipt books, invoices, and forms 1099-MISC 
• Purchases and Expenses (records of direct and indirect costs) – Cash register tape receipts, credit card receipts and statements, invoices, canceled checks, ACH receipts, and other documents reflecting proof of payment or purchase. 
• Travel, Transportation, Entertain, and Gifts – Receipts, mileage logs, and substantive proof of business-related use. 
• Assets (business-owned property, capitalized expenses) – Date of acquisition, purchase price, cost of improvements, Section 179 deduction taken, depreciation deductions taken, loss-related deductions, how the asset is used, when/how the asset is disposed of, selling price, sale-related expenses, purchase and sales invoices, real estate closing documents, and canceled checks. 
• Employment Taxes – EIN, amounts and dates of all types of payments, reported tip amounts, allocated tips, fair market value of in-kind wages, employee personal information, W-2 and tax withholding forms, employment dates, absence payments, dates and amounts of tax deposits, copies of returns filed, fringe benefits records, documentation of sick or other leave, and social security tax deferment records from 2020. 

IRS Requirements and Tax Compliance for Businesses

To be considered accurate, a small business’s records must be thorough, complete, and maintained for the proper amount of time. The IRS outlines all of the record-keeping requirements it compels small businesses to satisfy.

Businesses should maintain the above-listed records (in addition to any records specifically required by their home state, operating locations, and industry) for the length of time required by the IRS. The IRS period limitations vary between three and seven years, depending on the type of document or record and the type of related tax return document.

Failing to maintain proper financial records and regulatory compliance in your business can result in substantive penalties that can include large fines, business closure, or even criminal penalties depending on the severity.

5 Best Practices for Effective Record-Keeping

Effective record-keeping requires clear, documented bookkeeping policies and a sound accounting system.

1. Use accounting software to digitize records and create a separately stored backup of your records.
2. Use accounting software to improve accuracy by automating as many processes as possible with integrated record-keeping applications.
3. Perform a monthly accounting close to ensure the previous month’s records are thorough, accurate, and complete.
4. Separate duties and powers between at least three people to ensure proper checks and balances in your bookkeeping and accounting department.
5. Seek professional record-keeping guidance and advice from a professional accountant to stay current and compliant with ever-changing rules and regulations. 

The Benefits of Partnering With a Professional Accounting Service

Partnering with a professional accounting service shifts the burden of compliance from the business owner to the accounting professional, saving you time and stress while ensuring you have complete, accurate, well-organized records for proper tax filing, audit readiness, and compliance.

Simplify Tax Preparation With Accurate Records

Accurate and thorough record-keeping is essential for tax preparation. Good record-keeping helps businesses ensure compliance with IRS regulations to avoid costly penalties while maximizing deductions. Maintaining organized records throughout the year makes the tax filing process more efficient and stress-free.

Contact Accounting Freedom today to learn how our bookkeeping and tax preparation services can ensure your records are in perfect order for tax season.