Failure to follow appropriate record keeping guidelines can expose your home business to many risks. Whether it's an audit from the Internal Revenue Service (IRS), loss of revenue or the inability to file insurance claims, you will do yourself more harm than good if you don't become organized in this critical area. Even if you delegate the task of record keeping, you need to understand these guidelines:
Organize by Year
When it's time to prepare your tax returns or if you need to examine records to generate a financial report, the easiest way to look something up is to file records by each year. For example, all of your 2010 receipts should be in your 2010 folder, envelope, plastic tub or whatever container you use to keep records in. It's the most efficient way to sort it, and in most instances, you'll need to refer to your records based on the year of your earnings or expenses.
Backup Electronic Records
Regular backup of your electronic records is essential to best record keeping practices. Set up auto reminders each time you use a business, customer relationship or financial software, which will ask you whether you want to back up your data before exiting the program. You should also backup PDF files, such as copies of your tax returns or any other data that you're required to keep according to federal and state tax laws.
Keep Basic Records
According to the IRS Publication 552, you must keep records in the following categories as proof of your business income and expenses:
- Income: Forms 1099, K-1, bank statements and brokerage statements
- Expenses: Invoices, sales slips, receipts and canceled checks
- Home: Insurance records, improvement expenses, closing statements and purchase and sale invoices
- Investments: Form 2439, mutual funds statements and Forms 1099
When it comes to record keeping guidelines for tax purposes, you can never be too picky about what you keep. Hold on to everything, even if you don't think you need it.
Shred Unwanted Documents
You need to protect your personal and business identity, and your customers' or clients' identities as well. Investing in a shredder is often a necessary business expense and an important aspect of record keeping. When you're done with contracts and letters containing sensitive information, or if you scan documents in order to go paperless, shred the documents. You risk leaving data on paper that you try to rip up yourself.
How Long to Keep Records
It's not necessary to hold on to your forever. Follow these time guidelines for basic expenses associated with most home businesses:
- Medical bills - five years from service date
- Real estate taxes, mortgages and other real estate documents - as long as you own the property plus seven years
- Bank statements - one year
- Brokerage statements - one year
Don't throw away records until you've filed the necessary tax forms that are based on those records, even if it's time to get rid of them.
Following record keeping guidelines will save you a lot of hassle. It's worth hiring someone to help you if you're struggling with record keeping. A virtual or local bookkeeper can be helpful.
Daphne Mallory, Esq. is the co-owner of Mallory Writing Services and has written more than 100 articles helping home based business owners and entrepreneurs start and market their business. You can learn more about her here.