Tag Archives: Record Retention

Why Keep Financial Records?

You are really busy! You spend so much time working on your business that you don’t really have time to keep track of your finances. Why do you even need to bother with this every month? Can’t you just wait until the end of the year and throw a shoe box full of receipts and paper at your accountant and let them just put together the tax return?

There are some advantages to keeping records and using those records to keep track of your finances. Let’s take a look at a few of them.

The first reason is to track revenue. You want to know where your money is coming from. Who are your best clients? What is your best selling product or service? By keeping track of your revenue, you can determine which clients are bringing in the most money, and what offerings are the most popular. With this information, you can determine if a client is worth keeping (by comparing what they pay you to the headaches they may cause you), or if you want to focus on a certain product or service that is bringing in more money.

Second, as you track the money coming in, you also want to be aware of the money going out. By knowing where the money is going, you can analyze your spending and see if what you are spending the money on is bringing in the business you had hoped. Is that new ad campaign bringing in the customers? Is that new transcription service really saving you that much time? Once you look at it in this light, you can determine where your spending habits need to change.

An additional benefit to tracking your expenses is that it will show you if there is someone in your organization who is spending too much, or for things they should have spent money on. Is that new sales rep spending too much money taking potential clients out to expensive dinners? Is your assistant stockpiling office supplies for the zombie revolution? Keeping an eye on what gets spent will make sure you keep more of the money you have earned.

Third, record keeping will allow you to prepare financial statements and tax returns. Preparing financial statements give you an accurate view of your business and how it is doing. Additionally, you may need to have a set of financial statements available to give to your bank, creditors, or even potential customers. Customers may want to look at your financials to make sure you will be in business to fulfill a long-term contract. In addition, by having financial statements, you can readily see if things are getting better or worse for your business, and what changes need to be made.

Keeping good records helps in preparing tax returns in that you will be able to prepare an accurate return to send to the government. In addition, you will have support for the amounts you claimed on the return in case your return is selected for an audit. It makes things much easier if you are able to provide support for an amount on your return.

If you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Circular 230 Disclosure:  To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that the tax advice contained in this blog post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.

Keeping Your Tax Records: When can you get rid of them?

Did you make a New Year’s resolution to get organized this year? Maybe it was all that paperwork sitting around, or those boxes of old files that made you (or your significant other) say “I’ve had enough! We have got to stop living like pack rats.”

You probably have a lot of old paperwork related to old tax returns and your business. Why not give all that old stuff the heave-ho and start fresh? Let’s get those garbage bags we got from the mega discount store and get to work!

That sounds like a good idea, but let’s not start pitching just yet. The IRS has certain rules for how long you have to hold on to certain types of paperwork. So before we start clearing out the old junk, let’s take a look at what the rules are.

To start off with, the IRS has certain rules related to what to do if you do not file a return, file a fraudulent return, or do not report some income. I am certain you wouldn’t do that, but if it happens that you don’t file or filed a fraudulent return, you need to keep records related to the income and expenses for that year indefinitely. This is so that if you ever get caught, you will need to produce a good tax return. So it behooves you to file a correct return every year.

So if you do file a return, and either owe taxes or get a refund, keep these record for three years from the time the return was due, or two years after the tax you owed was paid, whichever is later. So for the return due April 15, 2015, you will need to keep these records until April 15, 2018. But if you owed taxes and didn’t pay them until December 15, 2016, maybe due to having an installment plan with the IRS, keep these records until December 15, 2018.

If you had a claim on your tax return for worthless securities, or took the bad debt deduction, you will need to keep the records related to this return for seven years.

Do you have employees in your business? You will need to keep all tax records related to those employees for at least 4 years after the later of the date that the tax becomes due or is paid.

How about record related to any property you have purchased. You will need to keep these records for as long as you own the property. In addition, once you sell the property, you will keep those records until the tax return is filed, and the period you need to keep the records for that tax return. The records for the property is needed to calculate the deduction for depreciation, amortization, or depletion, as well as to calculate the gain or loss when you sell or dispose of the property.

Do you have any stories about keeping records for a long period of time? I’d love to hear about it. Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Circular 230 Disclosure:  To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that the tax advice contained in this blog post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.