As a business person operating in California, you may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Generally, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is usually made in your ledgers and accounting journals. Your books must show your gross income, as well as your deductions and credits.
Supporting Business Documents
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include canceled checks, paid bills, sales slips, deposit slips, receipts and invoices. These documents contain the information you need to record in your books. It is important for you to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to Publication 583, Starting a Business and Keeping Records.
The following are some of the types of records you should keep:
There are specific employment tax records you must keep. Keep all records of employment for at least four years. For additional information, refer to yesterday’s blog concerning Recordkeeping for Employers.
Purchases are items you buy and resell to customers. If you are a producer or manufacturer, this includes parts purchased for manufacture into finished products or the cost of all raw materials. Your supporting documents should show that the amount was for purchases and the amount paid. Documents for purchases include the following:
Credit card sales slips
Invoices Cash register tape receipts
Expenses are costs you incur (other than purchases) to carry on your business. Your supporting documents should show that the amount was for a business expense and the amount paid. Documents for expenses include the following:
Account statements Petty cash slips for small cash payments Cash register tapes
Credit card sales slips
Gross receipts are the income you receive from your business. You should keep supporting documents that show the sources and amounts of your gross receipts. Documents for gross receipts include the following:
Bank deposit slips
Cash register tapes
Invoices Forms 1099-MISC Credit card charge slips
Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift or transportation expenses, in the event of a tax audit you must be able to prove (substantiate) certain elements of expenses. For additional information on how to prove business expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets.
If you have an existing business confronting a serious IRS tax audit or other examination and would like to speak with a California business attorney and former IRS lawyer, this is an important posting. Call Mitchell A. Port at (310) 559-5259.