Tax season is rapidly approaching. Don’t wait until the last minute to scramble through desks, file cabinets, and boxes to gather as many of the necessary documents as you can find. As a small business owner, it is crucial that you stay organized throughout the year and keep good records for both income tax purposes and to personally monitor your company’s activity and growth! Poor record keeping could lead to underreported income and unsupported deductions. In the event you are audited, these could result in higher taxes and costly penalties. Stay on top of it throughout the year, and talk to one of our in-house income tax experts about any questions or concerns you may have pertaining to your particular business.
Below is a list of common questions and answers relating to small business record-keeping for income tax purposes:
How long should you keep your records?
California’s minimum statute of limitations is four years. You should keep your records in order to prove income and deductions on your tax return for the length of the statute of limitations. However, you may want to keep certain records, including tax returns, longer, depending on your business’ activities, expenses, and events.
Which records should you keep?
· Payment Records
o Cancelled checks or credit card payments
§ To show a payment was made
o Estimates and Invoices
§ Along with proof of payment, as cross-reference for business expenses
§ To itemize purchases and methods of payment
· Mileage Log
o To categorize mileage as either personal or business-related
· Records of Donations
o Charitable cash or non-cash contributions
· Meals and Entertainment
o Record of meeting time, place, attendees, and reason for meeting
Keep in mind, expense must be allowed under state law and be an “ordinary and necessary” expense for the business.
What are the most common business expenses?
· Travel and Car
· Charitable Contributions
· Rent and Utilities
· Supplies and Materials
· Start-up Costs
· Home Office
We hope you found our Q and A’s informative! However, we understand that each business is unique. Please contact us for more information about how to make sure you are prepared when tax season arrives! For more information online, visit the California Franchise Tax Board website: ftb.ca.gov, or call or visit our office for advice from one of our expert small business tax preparers.