What Paperwork Do I Need to Keep for Taxes?

When it comes to paperwork, most business owners fall into one of two extremes. There are those who have huge boxes full of every receipt, invoice, carbon copy, and cocktail napkin they’ve ever come across (“just in case”), and those who hold onto almost nothing. 

So, what do you REALLY need to keep for taxes, and how long do you need to keep it? 

Crucial Documents to Keep

The purpose of keeping documents for taxes is to prove your income, expenses, etc. were what you claim on your tax return. Failure to provide documentation can cost you deductions or cause you to pay penalties or additional taxes. 

According to the IRS, you’ll want to keep:

Related to sales and income – 

• Cash register tapes
• Cash and credit deposit information
• Invoices
• Form1099-MISC (if any)

Related to purchases and expenses – 

• Cash register receipts
• Invoices
• Credit card receipts/statements
• Canceled checks/documents proving payment
• Account statements

You’ll need these documents to prove your income and expenses to the IRS in the event of an audit, so be sure to keep them on file for at least 3 years from the time of filing, which is how long the IRS has to audit you. In the event of a fraudulent tax return, the IRS has no statute of limitations. They recommend keeping documents indefinitely if you file a fraudulent return (!?). but I don’t need to tell you that you should NOT file fraudulent tax returns in the first place. 

Needs for Your Industry

There are some considerations to keep in mind depending on your industry. For instance, retailers, professional service providers, and real estate investors all have different needs that may impact the documents they keep. 

Retail

If you’re in retail or eCommerce (or if you manufacture), your costs are crucial. You need documentation of the purchase price of your inventory or raw materials in order to calculate your gross profits and that’s the beginning of calculating your taxable income. It’s very important that you have solid documentation of how much you paid for these items. Prices do change and not everything can be calculated using the market rates (and if prices dip down, you wouldn’t want to use market rates anyway).

Because of the high volume of transactions in retail and eCommerce, you’ll likely be relying on a POS system or reporting from your eCom platform rather than individual invoices or receipts from each separate sale. Talk with your accountant about which reports are needed and make sure you have what you need.   

Professional Services

If you’re a high-income professional (like a physician or lawyer), you’ll want to be extra careful about keeping tax documents. High-earners are the most likely to be audited by the IRS and want to be especially prepared for this possibility. If you’re using advanced saving and tax reduction strategies, that’s all the more reason to be ready to defend your tax returns if needed. 

Real Estate

Any tax documentation related to property needs to be handled carefully. Because your basis in the property is tied to the purchase price (which impacts your capital gains) these documents need to be kept through the statute of limitations from the year you sell the property. Along with closing documents and any receipts and statements proving purchase, you’ll also need any records relating to capital improvements made on the property. Speak with your accountant about any additional details for real estate transactions. 

Travel

Regardless of your industry, if you’re deducting travel or meals expenses for your business, make sure to document them carefully. These deductions are often disallowed and you may need more than simply a receipt to prove that the expense had a qualifying business purpose.

A Word About Employment Taxes

If your documents pertain to employment and payroll tax, these receive special treatment too. The IRS recommends keeping employment and payroll records for 4 years, instead of the usual 3. As long as you’re working with a good payroll company and your files are well organized, there’s no reason you can’t keep them even longer. 

Conclusion

When it comes to tax-related documents, it’s better to be safe than sorry. Ultimately, they’re your best protection in an audit, where you may need to prove the accuracy of your tax return. Fortunately, if your bookkeeping system is well set up and your bookkeepers are on top of things, you can easily keep digitized records indefinitely. 

If you’re still looking at that shoebox full of fading tape receipts, give Pooley Accounting a call and we’ll help you get everything squared away.