Records that document income:
The following records must be kept for 3 years after filing the return and serve as evidence of items that are considered taxable and those that are not (and why):
- Bank and broker forms
- Invoices and sales receipts
- Loan paperwork, any signed receipts or check copies and any other documentation for items that may appear to be income on the bank statement but are not
Records that document deductions:
Simply showing up on your business credit card or business checking account statement does not make it a deductible expense. In case of your records being examined, the following would have to be shown: amount of deduction, date of deduction, business purpose of the deduction. It helps to remember that certain expenses such as travel, meals/entertainment and mileage may face heightened scrutiny.
The following documents should be kept for 3 years after filing the return:
- Lender Forms 1098 to substantiate interest paid on mortgaged property
- Credit card statements showing year-end interest paid
- Loan or other statements showing business interest paid or lines of credit from vendors
- Receipts showing the payment amount, date and business purpose for all expenses
- Mileage logs showing date, mileage and purpose of a trip-there are great apps available nowadays like MIleIQ to make the process easy and paperless
- Mileage logs can include personal and business miles to determine business use percentage for any vehicles
Records for assets and liabilities
A rookie mistake would be to categorize loan proceeds as income. Make sure to keep records that support deposits that are related to loan proceeds. When disposing of assets, make sure to keep track of the asset basis, as overstating asset basis is just as bad as understating gross income. Keep any related records for three years. Substantial understatement of income may extend examination period from 3 to 6 years.
Records for ownership interests
Keep any records related to partnership interest for at least three years after disposition of partnership interest. These may include but are not limited to any agreement noting the disposition of interest, as well as Partnership and Service agreements that detail ownership interest as well as distributive percentage as it’s not always the same.
Keeping track of partner asset basis versus business asset basis is important as those are often times different.
Lastly, recordkeeping shouldn’t be done on as-needed basis or in case of emergency (audit). Recordkeeping should become a part of your daily business practice. Fortunately for all of us, there are plenty of ways to do this seamlessly and without mounds of paper.
As always, we are here to help -if you have any questions on this or any other topics, please contact us!
*Source: Think Outside The Tax Box (subscription required)