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Small business owners should keep good records. This applies to all businesses, whether they have a couple dozen employees or just a few. Whether they install software or make soft-serve. Whether they cut hair or cut lawns. Keeping good records is an important part of running a successful business.
Here are some questions and answers to help business owners understand the ins and outs of good recordkeeping.
Why should business owners keep records?
Good records will help them:
•Monitor the progress of their business
•Prepare financial statements
•Identify income sources
•Keep track of expenses
•Prepare tax returns and support items reported on tax returns
What kinds of records should owners keep?
Small business owners may choose any recordkeeping system that fits their business. They should choose one that clearly shows income and expenses. Except in a few cases, the law does not require special kinds of records.
How long should businesses keep records?
How long a document should be kept depends on several factors. These factors include the action, expense and event recorded in the document. The IRS generally suggests taxpayers keep records for three years.
How should businesses record transactions?
A good recordkeeping system includes a summary of all business transactions. These are usually kept in books called journals and ledgers, which business owners can buy at an office supply store. All requirements that apply to hard copy books and records also apply to electronic business records.
What is the burden of proof?
The responsibility to validate information on tax returns is known as the burden of proof. Small business owners must be able to prove expenses to deduct them.
How long should businesses keep employment tax records?
Business owners should keep all records of employment taxes for at least four years.
Businesses that use a car or other vehicle may be able to deduct the expense of operating that vehicle on their taxes. Businesses generally can use one of the two methods to figure their deductible vehicle expenses:
Standard mileage rate
Actual car expenses
For 2019, here are the standard mileage rates for calculating the deductible costs of operating an automobile for business, charitable, medical or moving purposes:
58 cents per mile driven for business use
20 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
Of course, business taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Here are some facts to help business owners understand the differences between the two methods of figuring their deductible vehicle expenses:
Businesses that want to use the standard mileage rate for a car they own must choose to use the standard mileage rate in the first year they use the vehicle. Then, in later years, they can choose to use either the standard mileage rate or actual expenses.
If a business wants to use the standard mileage rate for a car they lease, they must use this rate for the entire lease period.
The business must make the choice to use the standard mileage rate by the due date of their return, including extensions. They can’t revoke the choice.
A business that qualifies to use both methods may want to figure their deduction both ways to see which gives them a larger deduction.
Here are some examples of actual car expenses that a business can deduct:
o Licenses
o Gas
o Oil
o Tolls
o Insurance
o Repairs
o Depreciation – limitations and adjustments may apply
