When should business owners begin preparing for an income tax audit? How about from the time you open for business? You don’t need to receive a letter saying you’re being audited to begin preparing for one.
Because the Internal Revenue Service can audit your business’ income tax returns at will, you should record every item of income and expenses from the first day of business. You never know, right? Understand that the income and expenses allowed for tax purposes may differ according to the legal structure of your company.
However your business is structured, your records usually fall into one of two categories: income or expenses. Here are some of the records you should diligently keep:
Gross income, including:
- Accounts receivables from products or services sold (cash register/credit card receipts and cancelled checks)
- Sales records for assets sold
- Rent paid to the business
- Notes receivables, which are loans made by your business
- Interest from business checking and savings accounts
Net income, after deducting expenses and amortizing assets:
- Rents, leases or mortgage interest
- Inventory bought
- Wages, commissions and benefits paid to workforce
- Payroll taxes
- Sales taxes paid by the business
- Compensation paid to board members
- Amounts paid to outside contractors
- Dividends paid by the business
- Amount paid for assets, including equipment and real estate
- Buy and sell dates for assets sold
- Business travel, including transportation, lodging and meals
- Equipment leasing
- Repairs and maintenance
- Licenses, professional and association memberships
- Advertising and other marketing expenses
- Business insurance costs, including for property, liability, errors & omission, directors & officers, employment practices and other business-related coverage
- Office supplies
- Professional fees paid to accountants and attorneys
Also make sure to keep tax and purchase records for items bought and sold over the Internet. If your company offers health insurance or a tax-qualified retirement plan to employees, you’ll also need to keep comprehensive records for these benefits.
How Long to Keep Records
Depending on why you’re audited, keep your records anywhere from two years to indefinitely. The vast majority of audits may require documents from the past two years for minor discrepancies to six years out for major inquiries. Only audits alleging fraudulent returns involve documents that your business must keep indefinitely.
Maybe the IRS will never audit you, but it’s best to keep comprehensive records just in case. If you’re not audited, these records can still tell you a lot about your business.