Tips and Reminders for Better Record Keeping

Record keeping folders

Keeping records is vital for tax purposes. One reason: If the IRS questions your returns and you can’t provide “substantiation,” your deductions may be disallowed. Another incentive: If you’re an entrepreneur, evaluating your business operations will be virtually impossible without adequate records. You’ll be unable to prepare meaningful financial statements, which are necessary for obtaining credit, loans, and business insurance.

For your business, records start with original documents such as invoices, register data, credit card charges and check register detail. You should keep all data that support tax deductions, business expenses, or big-ticket transactions. Additionally, you should retain bank and credit card statements, computer records and legal documents such as loan agreements and sale or lease contracts. You’ll also need to maintain electronic or printed journals and ledgers to categorize and summarize your transactions.

For your personal return, keep records of all significant income transactions. These include interest and dividends earned, proceeds from sales of assets such as houses, vehicles, and investments and miscellaneous receipts such as insurance settlements and loan proceeds. You’ll need to retain support for your tax deductions as well. Remember that some deductions such as auto expenses and charitable contributions require additional recordkeeping. Finally, keep records for nondeductible acquisitions in case you later sell these items at a gain or lose them to casualty or theft.

How long should you hang on to your tax records? The general rule is to keep them as long as you’ll need to substantiate the income or deductions on federal or state tax returns. Depending on the document and the applicable law, that time period could range from three years to twenty or more in the case of a long-lived asset. Some records, such as birth certificates, social security cards and corporate operating agreements should be kept permanently.

As long as your records adequately reflect your activities, no particular type of record keeping system is specified under current tax law, so you can tailor your records management to your preference. Please give us a call at 419.629.3494 if you would like advice or assistance.

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