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January 16, 2006—Now that the holidays are over and a new year has begun, it’s time to review your business’ recordkeeping system. From an IRS perspective, there are certain key documents that are needed and required to support your business’ income and expense items. Without these documents and a proper paper trail, you could be missing out on significant deductions and paying more in tax than is legally required.

Except in a few cases, the IRS allows you to choose any recordkeeping system suited to your business that clearly shows your income and expenses for your tax year. Your system, commonly referred to as “your books,” should include a summary of your business transactions and show your gross income, your deductions and your credits. For most small businesses, the business checkbook is the main source for income and expense information. But supporting documents, such as sales slips, invoices, receipts, credit card payments, cancelled checks or other proofs of payment, should also be organized and kept in a safe place.

There are a few areas where the IRS is more specific about what actual documents should be kept and in what way:

1) Employment Records – Most employers are aware of the basics, such as the names, addresses and occupations of employees, their dates of employment, copies of employees’ withholding allowance certificates (W-4s) and any W-2s issued. But there are other retention rules that make this area more complex. For example, employers are required to keep any employee copies of Forms W-2 that were returned to them as undeliverable, and they must also keep records of payments made to employees by third parties because of sickness or injury.

2) Travel Expenses and Logs – Employers that wish to reimburse employees without requiring the employee to include the reimbursement in income should require their employees who are claiming travel expenses to maintain an account book, diary, statement of expense, or log which lists each element of the expenditure at or near the time it was made. Under an accountable plan, where you reimburse your employees for expenses and do not include these in their taxable pay, employees will also need to provide documentary evidence to support their expenses for away-from-home lodging and other expenditures of $75 or more. These can be hard copies of receipts, paid bills, and cancelled checks.

3) Assets – Business owners must record when and how an asset, such as a computer or piece of equipment, was acquired; the purchase price and any subsequent improvements; how the asset was used, when it was first used in the business and the subsequent sales price or date it was disposed. If the asset is used for both personal and business purposes, detailed records for each type of use must be kept. An auto used for both purposes, for example, may be substantiated by recording mileage driven for business purposes, showing the date and reason for the business purpose.

Generally, records need to be kept for as long as they are needed to support the item of income or expense on your tax return for the “statute of limitations,” or IRS-designated time-frame where you can amend your return or the IRS can assess additional tax. That’s three years for most tax returns but if income is underreported by 25% or more, this normal three-year period extends to six years. The time frame becomes indefinite if fraud is committed. The statute of limitations begins with the filing date of the return, so seven years is the suggested minimum retention period for most records. Because, however, the IRS is not the only governing body that requires records be kept, the best recommendation is to securely maintain records for as long as the business is in operation. When in doubt, document it and file it for safekeeping—and speak with your tax and business advisor for more guidelines.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: stephen.parezo@fiducial.com.

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