For many new small business owners the first year is generally the hardest. First you have to decide what form of business you want, then there is extensive business record keeping. Bad record keeping can be a serious pitfall for small business owners. You can avoid headaches when you are filing your tax return by keeping track of your receipts and other records throughout the year.
Everyone in business must keep records. Good business records will help you do the following:
Monitor the progress of your business
- Monitor the progress of your business
- Project your tax liability
- Prepare your financial statements
- Identify source of receipts
- Keep track of deductible expenses
- Prepare your tax returns
- Support items reported on tax returns
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.
Project your estimated tax payments
During that first year of business you will need to project your tax liability so that you can make estimated tax payments. Estimated tax is the method used to pay tax on income that is not subject to withholding. Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.
Prepare your financial statements
You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
Identify source of receipts
You may receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from your personal receipts and taxable from nontaxable income.
Keep track of deductible expenses
It is very important to have a system to keep track of your deductible expenses. If you don't keep your receipts you may forget expenses when you prepare your tax return, unless you record them when they occur.
Prepare your tax return
You need business good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.
Support items reported on tax returns
You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
This information provides a brief overview from the Internal Revenue Service of issues and decisions involved in owning a small business and avoiding common pitfalls.