Just how valuable are good business records? The answer depends on how much you like reducing taxes and headaches. Maintaining good records can save you both—dollars at tax time and headaches when the Internal Revenue Service has questions.
For instance, say you’ve worked hard to make money with your sole proprietorship, but you still fail the three-year-in-five profit test. You’re worried the IRS is going to ask whether your enterprise is a business or a hobby. Good records can help establish your profit motive and retain valuable deductions.
What are “good” records? Here are four examples:
- Bank statements that prove you have a separate account for your business and confirm your intention to avoid mingling personal and business transactions.
- A summary of income and expenses, backed up by credit card statements, bills, invoices and any other documents showing what you’ve spent—and earned— in your business.
- A mileage log, updated on a regular basis, in which you’ve jotted business travels, including the date, distance and what the trip was for.
- An appointment book detailing time you spent meeting clients, attending conferences, running errands and all your business related activities, especially ones pertaining to travel and entertainment.
If you’ve been lax about establishing good records for your business, it’s never too late to start. Setting up a simple system can keep you from reaching for the aspirin—and your wallet— at tax time.