Record Keeping: Part I

Adequate and appropriate recordkeeping is essential for any business and non-profit organization. As an accountant, I am frequently asked these questions about recordkeeping:

What records do I need if I were audited by the IRS? Why do I need to keep evidence of income and expenses? How do I know if my recordkeeping is appropriate?

Like everything else in business and life, there are a number of variables to consider when creating an adequate and appropriate recordkeeping system. An adequate recordkeeping system will substantiate your income and expenses when info is requested by the IRS. An appropriate recordkeeping system satisfies your management needs as an owner or non-profit director. In this blog series I have identified what I believe to be the main considerations when building an adequate and appropriate recordkeeping system. The focus target audience is a small-business owner however information provided here is still applicable to non-profit directors. Non-profits are subject to more specific reporting and compliance requirements that are not captured in this blog.

Part I: Reporting and compliance requirements

At a minimum, an adequate recordkeeping system will provide the IRS and other taxing authorities appropriate information to substantiate your taxable claims. Generally speaking, the law does not require any specific kind of records. You as an owner can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Ascent Accounting & Consulting, LLC’s chosen recordkeeping system is QuickBooks Online which produces appropriate statements and ledgers for small business and non-profit organizations.

Note, if you are an owner in more than one business the IRS recommends you keep a complete and separate set of records for each business.

In addition to your recordkeeping system, supporting documents must be kept to substantiate the information captured in your recordkeeping system. The IRS may accept proof of payment provided on your financial institutions’ account statements. The following was copied from IRS Publication 583:

If payment is by check, then the statement must show:

  • Check number

  • Amount

  • Payee’s name

  • Date the check amount was posted to the account by the financial institution

If payment is by electronic funds transfer, then the statement must show:

  • Amount transferred

  • Payee’s name

  • Date the transfer was posted to the account by the financial institution

If payment is by credit card, then the statement must show:

  • Amount charged

  • Payee’s name

  • Transaction date

Proof of payment of an amount by itself does not establish you are entitled to a tax deduction. You should also keep other documents to show you incurred the cost. Common examples of expense supporting documents are vendor invoices, purchase receipts, billing statements, and copies of cancelled checks.

The IRS has special rules for travel, entertainment, gift, and car expenses. Essentially you need to be able to prove the expense was both appropriate and necessary for your business. You will need to prove amount, date, place, and essential character of the purchase. You can prove essential character via a diary, travel itinerary, meeting notes, or similar records.

In part two of this blog series I will describe the management tracking and reporting incentives of an appropriate recordkeeping system. We will look at two accounting methods, the fundamentals of each, and how owners and directors can use their recordkeeping system to make informed decisions.

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