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Protect Yourself with Records...no, not the vinyl ones.
By Mark E. Battersby
Remember, when a taxpayer has kept either inadequate or no books or records, the IRS has authority to compute income in order to clearly reflect the taxpayer’s income. The methods used by the IRS for reconstructing income vary depending on the facts and circumstances, but are rarely favorable to the errant taxpayer.
Why keep records?
Properly prepared financial statements based on good records, also allow the owner or manager to monitor the progress of the sign business. Records can show whether the business is improving, when items or services are selling, and whether changes are necessary.
Since most sign businesses receive money from a variety of sources, the operation’s records can identify the source of the receipts. This information is essential to separate the business from non-business receipts and taxable from nontaxable income as will be seen later.
Those records can serve as a reminder of expenses forgotten when it comes time to prepare the sign operation’s income tax returns. In addition to being necessary when preparing tax returns, good records support the expenses and credits reported on those returns. Generally, these are the same records used to monitor the state of the business and prepare the financial statements.
No sign business owner or manager keeps records merely because they like to count. Records are kept because the owner or manager has a need to know. Without proper business records it is impossible to accurately understand what is going on.
The area of sales tax recordkeeping provides an excellent illustration of just why records are so important. Frequently overlooked by many sign professionals is the amount of sales tax included in the reported total receipts. A sign business can wind up paying sales tax on the sales tax and income tax on the sales tax -- if adequate records are not maintained.
This can happen because "gross receipts" means the total of all monies coming into the business, including sales tax collections. Obviously, careful recordkeeping is needed in order to "blackout" the sales tax from the sign operation's gross sales.
Recording business transactions
The totals from all of the business’s journals are usually summarized in a ledger. That ledger is usually organized into different accounts.
Basic recordkeeping systems
One notable exception to that general rule was provided when the IRS issued guidelines for so-called “electronic records.” With more and more businesses turning to their computers to keep track of their financial matters, including tax records, the IRS expanded its electronic record retention rules.
Although the electronic recordkeeping requirements apply only to those sign businesses with assets of $10 million or more, those sign operations with assets of less than $10 million must also comply with the record retention rules if any of the following conditions exist:
With certain limited exceptions, no sign business is required to create any machine-sensible record other than those created in the ordinary course of its business or to establish return entries. For example, if a sign professional that, in the ordinary course of business, does not create the electronic equivalent of a traditional paper document (such as an invoice) generally does not have to construct such a record.
The IRS guidelines go further by mandating that machine-sensible records must provide sufficient information to support and verify entries made on the sign operation’s tax return and to determine the correct tax liability. To meet this requirement, machine-sensible records must reconcile with the taxpayer’s books and tax return. Machine-sensible records must contain sufficient transaction-level detail so that the information and the source documents underlying them can be identified.
As for retaining machine-sensible records, they must be retained so long as their contents may be material, i.e., at least until the statute of limitations expires for the tax year. Some records should be kept for a longer period of time, e.g., records that relate to fixed assets and LIFO inventories.
Finally, keeping electronic records does not relieve a sign professional of his or her responsibility to retain hardcopy records that are created or received in the ordinary course of business. Hardcopy records may be retained in microfiche or microfilm format.
How long should records be kept?
Generally, this means that a sign business must keep records that support an item of income or deduction on a return until the period of limitations runs out. The period of limitations is the period of time in which a business can amend a return, claim a credit or refund or the IRS can assess additional tax.
The period of time in which a return can be amended to claim a credit or a refund is generally the later of:
1) Three years after the date the return is due or filed; or
Returns that are filed before their due date are treated as having been filed on the due date.
The IRS has three years from the date a return is filed to assess any additional tax. However, if a fraudulent return is filed -- or no return at all -- the IRS has a longer period of time to assess additional tax.
Employment tax. If the sign operation has employees, all employment tax records must be retained for at least four years after the date the tax becomes due or is paid, whichever is later.
Assets: Records should be kept for property until the period of limitations expires for the year in which the property is disposed of or abandoned. These records must be maintained to determine depreciation, amortization or depletion deductions as well as for computing gain or loss when the property is sold or otherwise disposed of.
Tax returns: Should be kept indefinitely.
Non-tax records: No record should be disposed of simply because it is no longer needed for tax purposes. Those records should be retained until the sign professional checks to see if they must be kept longer for other purposes. Insurance companies and creditors for example, may require some records to be kept longer than the IRS does.
Records and recordkeeping can take a variety of forms and shapes. However, those records are not only about making the IRS happy. They also play an important role in managing every sign business to profitability and success.
Good recordkeeping does require time and effort but remember it is necessary. How much time and effort it requires depends on your approach. Generally, however, the fundamental axiom of “Quality” applies as much to recordkeeping as to every facet of a sign business: It is always easier to do things right the first time.
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