Just Good Business: How to Keep Business Records for Tax Compliance Part 1

Have you ever looked at one of your business documents and thought, “How long should I keep this?” Well, you aren’t alone! This is one of the most common non-tax questions tax professionals receive.

Let’s talk about record-keeping. Good business record-keeping is good for business. There is a lot that goes into records management, and it is essential for your business that you at least know the basics. 

Keeping good books and records is ‘just good business,’ but why? As a business owner, keeping good business records allows you to obtain a snapshot of your company’s cash flow, profits, assets, and liabilities. In addition, it makes managing your tax planning and compliance obligations easier to keep track of and reduces the “sticker shock” each tax season. 

Good record-keeping for tax compliance means being proactive. There are the three C’s you should keep in mind:

1. Contemporaneous: don’t wait to collect everything at the end of the year or when there’s a problem (aka an audit letter)
2. Consistent: well-planned and implemented on a regular schedule
   
3. Comprehensive: should allow you to reconstruct income and expenses, ownership percentages, and other agreements necessary to determine pro rata shares of profit and loss or to facilitate the addition or loss of shareholders or partners
   

In part 1 of this blog post we are going to cover the first two record keeping tips.

CONTEMPORANEOUS – PAY NOW OR PAY LATER

Consequences for improper (or absent) business record-keeping are extreme. Fixing the problem is almost always more expensive than simply avoiding it in the first place. The first sign you see that your business growth is creating a record-keeping problem, your record-keeping needs to become the priority. 

If you’re struggling to keep up with your record-keeping requirements, consider automating some of your mundane tasks, hiring more help, or both! The time and money you’ll spend on getting and staying organized is much cheaper than what it will cost to try to get months (or years!) worth of documents organized for an emergency (e.g., a dreaded audit). 

Feeling overwhelmed? You can reach out to one of our Certified Tax Planners to get your business under control. 

CONSISTENCY IS KEY BUT DON’T SUCCUMB TO AN
ABUNDANCE OF CAUTION

One of the keys to good record-keeping is consistency. As a business owner, you should make it a habit to the point that it feels weird if it doesn’t get done. Here are some things you can do to get on top of your record-keeping:

• Spend some time creating a written records retention policy for your business. It should categorize the documents that need to be maintained, the retention period for each type of document, and schedules for document destruction.
   
• Assign someone specific to ensure the document retention policy is implemented. And it’s even better when a record is kept (and signed off on) of changes to the policy, document inventories, and records of document destruction. 

Records management isn’t just about retaining important documents; it’s about destroying documents that are no longer relevant or necessary. Keeping too many documents can be worse than keeping none. 

• Information is useless unless it can be retrieved. The key to any collection is proper curation. Piles, boxes, and files of unlabeled, unsorted, unindexed documents can make it nearly impossible to find the necessary information in an urgent situation. 
  
• If a document is there, it can be requested—or subpoenaed. Holding onto documents past their stated retention period “just in case” they might be needed someday might do harm rather than good. Having a written policy for document retention and destruction that follows federal and state laws and is regularly implemented will allow you to quickly, truthfully, and ethically state that you are no longer in possession of information that may be requested while still maintaining the documents that are necessary for the business to remain in tax and administrative compliance. 
  
• Consider what would happen in the event of an office break-in, fire, flood, or data breach. Keeping obsolete and unnecessary records increases both liability and exposure while not providing much (if anything) in the way of additional benefits to the business owner.

Note: Compliant record keeping is critical for small business owners—For the help and expertise you need, contact a certified tax planner today! And to receive even more information on this and get tax strategy worksheets you can take to your CPA look into our DeTax University program.  We want to help you find as many ways to save money on taxes as you legally can!