Good records will help you monitor the progress of your business, prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns.

Everyone in business must keep records. Keeping good records is very important to your business. Good

records will help you do the following:

  • Monitor the progress of your business.
  • Prepare financial statements.
  • Identify source of receipts.
  • Keep track of deductible expenses.
  • Records can show whether your business is improving, which items are selling, or what changes you need to make.
  • Good records can increase the likelihood of business success.
  • You need good records to prepare accurate financial statements. These include profit and loss statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
  • The profit and loss statement shows the activity of your business for a given period of time.
  • A balance sheet shows the assets, liabilities, and equity in your business on a given date.
  • You will receive money from many different sources. Your records can identify the source of your receipts. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.
  • You may forget expenses when you prepare your tax return, unless you record them when they occur.
  • You need good records to prepare your tax return. These records must support the income, expenses you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.

You must keep your business records to support any audit by a government agency. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.

Recordkeeping cannot make you money, but it can keep money from walking out your door!

Starting a new business can seem overwhelming for new entrepreneurs or even seasoned professionals. The IRS has resources to help new business owners understand the tax responsibilities of running a business.

Here are a few things any entrepreneur needs to do when starting their business.

Choose a business structure

 

The form of business determines which income tax return a business needs to file. The most common business structures are:

  • Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
  • Partnership: An unincorporated business with ownership shared between two or more members.
  • Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
  • S Corporation: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
  • Limited Liability Company: A business structure allowed by state statute. If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return as a sole proprietorship.

Choose a tax year
A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:

  • Calendar year: 12 consecutive months beginning January 1 and ending December 31.
  • Fiscal year: 12 consecutive months ending on the last day of any month except December.

If an individual files their first tax return using the calendar tax year and later begins business as a sole proprietor, becomes a partner in a partnership, or becomes a shareholder in an S corporation, they must continue to use a calendar tax year unless they get IRS approval to change it or meet one of the except

 

ions listed in the instructions to Form 1128, Application To Adopt, Change, or Retain a Tax Year.

Apply for an Employer Identification Number
An EIN is also called a Federal Tax Identification Number. It’s used to identify a business. Most businesses need one of these numbers, but some don’t. For example, a sole proprietor without employees who doesn’t file any excise or pension plan tax returns doesn’t need an EIN. The EIN checklist on IRS.gov can help business owners know if they need an EIN.

It’s important for a business with an EIN to keep the business mailing address, location and responsible party up to date. EIN holders should report changes in the responsible party to the IRS within 60 days.

Pay business taxes
The form of business determines what taxes should be paid and how to pay them.

Issue Number: Tax Tip 2023-108

 

Have questions????  Give us a call!