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Recordkeeping for the IRS |
Mom says: Keep some records according to one of the
accounting methods described below. It boils down to:
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Accounting Method
An accounting method is a set of rules used to determine when and how income and expenses are reported. You should be careful, switching accounting methods after you've set one up requires IRS permission. You have to keep the same accounting method to figure out your taxable income and your books.
There are 2 basic accounting methods:
Cash Method
Report income in the tax year you receive the income. Deduct or capitalize expenses in the tax year you pay them.
Accrual Method
Use this method if you are going to have an inventory.
Q. Mom, I will probably have an online inventory of ebooks. It won't take physical space except for a few megabytes the on the master. Is this also inventory?
A. TBD
Report income in the tax year you earn it even though you may receive payment in a later year. You deduct or capitalize expenses in the tax year you incur them whether or not you pay them that year.
What if I have 2 Businesses?
When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows income. You have to keep a complete and separate set of books and records for each business.
Supporting Documents
Gross receipts, purchases, expenses and assets all need to be backed up with paperwork. The IRS suggests (but doesn't insist) that you organize these documents by year and type of income or expense.
What's a Gross Receipt Document?
This is another way of saying the income you receive from your business. You should keep documents that show the amounts and sources of your gross receipts:
| Cash register tapes |
| Bank deposit slips |
| Receipt books |
| Invoices |
| Credit card charge slips |
| Forms 1099 -MISC |
What's a Purchase Document?
(I won't have to use this in my business right now)
Purchases are the items that you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:
| Canceled checks |
| Cash register tape receipts |
| Credit card sales slips |
| Invoices |
What's an Expense Document?
Other then purchases (above) expenses are all the costs to carry out your business. Make sure your supporting documents show the amount paid and that the amount was for a business expense:
| Canceled checks |
| Cash register tapes |
| Account statements |
| Credit card sales slips |
| Invoices |
| Petty cash slips for small cash payments |
How small is small?
Small is small enough so that you wouldn't normally write a check for it. Each time you make a payment from this fund, fill out a petty cash "cash slip" and attach it to your receipt as proof of payment.
There are additional forms to read if you need to know more about expenses like travel, transportation, entertainment and gifts. The IRS suggests you read Publication 463.
What's an Asset Document?
Assets are the property, such as machinery and furniture you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets. Your records should show the following information:
| When and how you acquired the asset |
| The purchase price |
| Cost of any improvements |
| Section 179 deduction taken |
| Deductions taken for depreciation |
| Deductions taken for casualty losses such as losses resulting from fires or storms |
| How you used an asset |
| When and how you disposed of the asset |
| Selling price |
| Expenses of sales |
The following documents may also show this information:
| Purchase and sales invoices |
| Real estate closing statements |
| Canceled checks |
Business Plan
You do not NEED a business plan for the IRS or to run a business. They're helpful, useful, but really most useful if the owner does it herself. You do need books (Ie., accounting books). An income journal of all income received by the business and a Disbursement (expenses) journal. They are EASY.
Artist:
Sondra P. Gaylord,
EA |
Mom says: "I want you to get Publication 583". Okay, got it Mom, thanks. In fact, most of this site is based on the stuff I learned in the 583. Thanks IRS. This publication is the record keeping you need for the IRS. It's simple, comprehensive and they must accept it because it's their way. Recordkeeping is probably the biggest single thing in proving an expense for IRS. They simply cannot argue with good record keeping. Here is a summary of what it says to do. Remember, I'm doing this for myself so believe me, I have every intension of at least trying to do it right. If it helps you in any way, please let me know and let me know how I can improve it too. -Your friend in the pursuit of freedom and art. Mimi |
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First of all, I highly recommend reading the IRS's 583 yourself. As a Technical Writer, I was truly fascinated while reading this document. After all, think about it. The IRS knows people hate and fear them. They know that is the absolute worst way to learn and never-the-less they are still charged with teaching us this stuff. As a first time reader, my hat goes off to you. If you are from the IRS and read this, please let me know. I read the version of the 583 that was produced in December of 2003 and I'd like to be kept updated. |
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