Recordkeeping Best Practices Are Good for Taxes

Don Goettemoeller |

Have you ever tried to claim a new tax deduction, but in the process of compiling supporting documents, you found you were missing critical information and therefore missed out on the opportunity? Or, have you ever faced an IRS audit and struggled to come up with documentation supporting your tax return data? How about this currently familiar experience, your records are in your brick and mortar office, but your staff is working remotely. Or you need to gather documents for Paycheck Protection Program (PPP) loans. As you can see, good recordkeeping is more than a storyboard for your business; it’s a valuable tool for tax preparation and in today’s climate, loan forgiveness.

The burden of proof always lies with the taxpayer, so substantiating any claims for eligible deductible expenses lies with your ability to organize and track your records. With good recordkeeping, you can:

  • Proactively prepare for tax filings
  • Present organized proof of eligibility for credits and deductions
  • Monitor business progress and make informed decisions
  • Compile accurate financial statements for use with key stakeholders
  • Track income and expenses to understand cash flow
  • Support your basis in property
  • Recover from natural disasters or cyberattacks​

If recordkeeping has been a weak or costly pain point for your business, make it a goal this year to employ recordkeeping best practices so you don’t miss out on future tax deduction or tax credit opportunities.

Recordkeeping best practice recommendations

Type of records to keep -

While it’s not the best practice to keep absolutely every scrap of paper that comes across your desk, there are several categories of documents that are worth keeping or are required for regulatory reporting. Records include:

  • W-2s, W-9s, 1099s, I-9s
  • Payroll documentation
  • Documentation on all income and expenses
  • Financial statements
  • Insurance policies
  • Vendor and customer contracts

…to name a few.

The type of business you operate will dictate the type of records you may need to keep, but payroll, tax forms, and contracts are a good starting point for many possible tax deductions available today.

How to digitize records -

The push to go paperless is real and should be a priority for most businesses today. Getting records out of file cabinets and into the cloud is often the first step in organizing and cleaning up and recordkeeping. Digitizing frees up physical office space and room in the budget that may have been spent on paper, toner, and storage devices. When making a move to digital, businesses can start small or go big.

Document scanning apps can help you put small batches of documents in the cloud, while outsourced scanning providers can help you attack large swaths of paper in one fell swoop. The project may seem overwhelming at first. Start by prioritizing your files and securing the most important items first, then work from there. Pro tip: create a high-level document map at the outset of your project. This can take the form of an Excel document and should be used to track the architecture of your filing system and even list original copy sources for government files or licenses.

How to store records -

Digital storage is not one-size-fits-all, and several methods may need to be used, including the cloud and external hard drives. Being able to back up your records in the event of a natural disaster or a cyberattack is essential, and one storage system may not cut it if your records cannot be retrieved.

  1. Remember to store your back-ups separately from your main files.
  2. Consider what property and equipment you own and what you may need to show proof of in the event of a natural disaster. Taking photos of property and equipment is a good way to substantiate any claims of loss and is a good catalog of your business assets.

How long to keep records -

The length of time you will need to store records depends on the action, expense, and event in the record. Currently, the IRS suggests three years for most tax records and four years for employment tax records. Employment tax credits, for example, rely on records kept from hire to fire/retire as most are often timely. Depreciation deductions, however, may require a few years of substantiated proof to claim a credit. For more information about what to keep and for how long, download our record retention guide. 

The sensitive records and information you keep demands the proper precautions. After all, your security is closely bound to your business’s reputation, efficiency, and, ultimately, trust.  Getting and staying organized is the key to long-term recordkeeping success and to laying the burden of proof on the table when trying to claim a credit or in the event of an audit. The professionals in our office can help you make the best recordkeeping decisions for your business. Give us a call today to discuss your options.