Why do I need to keep certain business records for tax purposes?

Most business owners understand that they need to keep certain records. However, not all business owners understand the true importance of good recordkeeping. If the IRS comes calling, good recordkeeping practices may work heavily in your favor.

7 Reasons to Keep Good Records for Your Business

Why is it so important to keep good records for your business? The following are seven reasons:

  1. To monitor the progress of your business. While this may not be tax related, good recordkeeping can help you see whether your business is improving or whether certain changes need to be made.
  2. To be able to prepare your financial statements. Accurate financial statements pertaining to your losses and profits are crucial for dealing with creditors, managing your business, and completing tax returns.
  3. To help you identify the sources of your income. While this is important from a business management perspective, it is also important from a tax perspective. Business owners must separate business from nonbusiness receipts and taxable income from nontaxable income.
  4. To keep track of your deductible expenses. Tax deductions are crucial for any business owner. If you do not track your expenses in an efficient and reliable manner, you may forget or report them inaccurately.
  5. To keep track of the basis in your property. Basis is the amount of your investment in property for tax purposes. For example, your basis in real estate is the price you paid for the property. The basis amount is crucial for calculating the gain or loss when you sell, exchange, or otherwise dispose of the property. It is also necessary for calculating deductions for depreciation, amortization, depletion, and casualty losses.
  6. To prepare your tax return. Without records that show your income, expenses, and credits, you are unlikely to be able to prepare an accurate tax return.
  7. To support the items that you reported on your previous tax returns. If your business records are not available for inspection by the IRS, you may be in trouble if you are subject to an examination or audit because you will have difficulty substantiating your claims.

If you are facing an IRS tax problem and do not have good recordkeeping practices in place, it is important to seek help. To get started learning more, we encourage you to check out our free guide, The Ultimate Survival Guide for IRS Problems.