No matter how small your business is it is imperative that you keep all the required documentation should you ever need to produce it before the IRS.
Along with the many other hats but a small business owner has to wear recordkeeping for your business like it or not is one of the most important. A lot of times people ask how long do you need to keep the documentation in case you are audited by the IRS?
There are several different answers based on the reason you’re being audited. For instance the limitation for not paying all taxes due is three years. If you are audited for unreported taxes on your gross income that is more than 25% for that tax year the IRS has up to six years to audit for this cause.
There is no statute of limitations if you are audited for failing to file a return or if you filed a fraudulent return. So the safe answer is you should keep all your tax records indefinitely.
In truth accurate record-keeping for small-business people is far from an accurately executed endeavor. How many times have you gone into a business supply store and stuff the receipt into your pocket of course with the intention of filing it properly later, but unfortunately it winds up in the wash instead of in the file for your tax receipts?
The good news is if you do not have every record for legitimate tax deductions for a given tax year and you are audited there is a rule the IRS will go by to determine what a reasonable amount for a given deduction should be. This is known as the “Cohan Rule”.
Aptly named after George M. Cohen who found himself involved in a tax case in the 1930s. To take advantage of this rule however you must produce some type of credible evidence that there was an actual payment for the claim extent such as a canceled check even a note in your appointment book will suffice.
The telling rule however cannot be used for expenses such as travel, entertainment, meals, gifts and expenses, or for property expenses.
There are two basic accounting methods that you can choose from for your business. Most small businesses will use the “Cash Method”. This is by far the simplest accounting method to use.
This method of accounting is based on a very commonsense idea that you have not really earn any income as far as for tax purposes until you have actually received payment for your products or services rendered. Using the cash method is very similar to using a checkbook. You record income only when payment is received and you only report expenses when the expenses have actually been paid.
The other type of accounting method is known as “Accrual Method”. Under this type of accounting method you report your income or your expenses as they are either earned or incurred rather than at the time that they are actually paid or collected by you.
Most small business owners do not use this accounting method because it can become quite complicated and can also require a business owner to pay taxes on income if they haven’t actually received yet.
So when it comes to accounting and bookkeeping for your business play it safe keep all your receipts and tax documentation indefinitely. Choose the accounting method that best suits your business and remember that it is possible to change this method down the road by obtaining permission from the IRS.