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Article Series: Accounting
Home & Small Business Accounting
How
Business Owners
Keep Their Books Ready for the IRS
As
a business owner, you should deposit all business receipts
in a separate bank account. If possible,
you should also make all disbursements by check. In regard
to all business entities, with the exception of corporations,
a disbursement from the business account is not necessary to
qualify the expenditure as a business expense. A check written
on a personal account for business purposes will qualify if
that expense is otherwise allowable. It is important to document
both business income and business expenses.
Write checks payable to yourself only when making withdrawals
of income from your business for your own use. Avoid writing
business checks payable to cash as it is important to identify
which disbursements are business and which are personal. In
the event of an IRS audit, this is an area that will get close
scrutiny. The IRS auditor will not only look at each check
to see to whom it was paid, but will also look at the reverse
of the check to see by whom and how the check was endorsed.
If you must write a check for cash to pay a business expense,
include the receipt for the cash payment in your records. If
you cannot get a receipt or a cash payment, put a statement
in your records at the time of the transaction to explain the
payment.
Get
receipts for all business expenditures. For all business
trips, make sure always to get receipts from hotels and motels.
Toll receipts can also help to substantiate travel expenses.
Obtain receipts from the post office when you purchase stamps
and mail larger envelopes and packages. You should establish
a petty cash fund for small expenses. All business expenses
paid by cash should be clearly substantiated by documents showing
their business purpose.
Support
your entries with sales slips, invoices, canceled
checks, paid bills, duplicate deposit slips, and any other
documents that explain and support entries made in your books.
File these materials in a safe place. Memorandums or sketchy
records that approximate income, deductions, or other items
affecting your tax liability will not be considered adequate
by the IRS. Remember, where the IRS is concerned, the burden
of proof is on the taxpayer. You will not be given the benefit
of the doubt.
Classify your accounts by separating them into five groups:
- Income
- Expenses
- Assets
- Liabilities
- Equity
(net worth).
For your assets, record the date of acquisition, cost or other
basis, depreciation, depletion, and anything else affecting
their basis. Basis is the amount of your investment in a property
for tax purposes.
Keeping
Records: You must keep the books and records of your
business available at all times for inspection by the IRS.
Records must be kept as long as they may be needed in the administration
of any Internal Revenue law. Keep records supporting items
reported on a tax return until the period of limitations for
that tax year has expired. Usually, this is the later of:
- Three
years after the date your return is due or filed; or
- Two
years after the date the tax was paid.
However, you should keep some records indefinitely. For example,
if you adopt the last-in first-out (LIFO) method of valuing
your inventory or change your accounting method, records supporting
these decisions and approvals from the IRS may be needed for
an indefinite time.
You should also keep records that support your basis in property
for as long as they are needed to figure the correct basis
of your original or replacement property (including capital
improvements). Keep copies of your tax returns. They will help
you in preparing future tax returns and in making computations
if you later file an amended return or a claim for a refund.
Using
Microfilm For Recordkeeping: Microfilm and microfiche
reproductions of general books of accounts (such as cash books,
journals, voucher registers, and ledgers) are accepted by the
IRS for recordkeeping purposes if they comply. If your micrographic
system does not meet the requirements of Revenue Procedure
81-46, you may be subject to penalties.
Using
Computerized Recordkeeping: If you maintain your records
with an automated data processing system, you must be able
to produce legible records from the system to provide the information
needed to determine your correct tax liability. You must keep
a complete description of the computerized portion of your
accounting system. This documentation must be sufficiently
detailed to show the applications being performed; the procedures
used in each application; or the controls used to ensure accurate
and reliable processing; and controls used to prevent the unauthorized
addition, alteration, or deletion of retained records. These
records must be retained for as long as they may be material
in the administration of any Internal Revenue law. # # # # # SolveYourProblem.com : 2007
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