It’s important to keep documents that support the income, deductions, and credits you claim on your tax return. This includes items like W-2s, 1099s, receipts for expenses, bank statements, and any other paperwork related to your income or deductions. Examples of these documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These records help validate the information you report in your books and on your tax return.
If you don’t file a return or file a fraudulent one, you should keep your records indefinitely. For most people, it’s a good idea to hold onto your tax records for at least seven years. Before discarding them, check if other entities, like your insurance company or creditors, require you to keep them for longer.
Here are the types of records to keep:
- Gross Receipts: These represent the income you earn from your business. Keep documents that show how much you received and from whom. Examples include:
- Cash register tapes
- Deposit records (for both cash and credit sales)
- Receipt books
- Invoices
- Forms 1099-MISC
- Purchases: These are the items you buy to resell to customers. If you’re a manufacturer, this also includes raw materials. Your records should show the payee, the amount paid, proof of payment, date, and a description of what was purchased. Examples include:
- Canceled checks or proof of payment
- Cash register receipts
- Credit card receipts and statements
- Invoices
- Expenses: These are the costs associated with running your business, excluding purchases. The supporting documents should show the payee, the amount paid, proof of payment, the date, and a description of the expense. Examples include:
- Canceled checks or proof of payment
- Receipts
- Account statements
- Credit card receipts and statements
- Invoices
- Travel, Transportation, Entertainment, and Gift Expenses: If you deduct any of these, you must keep detailed records to back up the claim, which will come in handy if your tax return is ever audited.
- Assets: These are items like equipment or furniture used in your business. You’ll need records to track things like depreciation, as well as any gain or loss when you sell the asset. Your records should include:
- How and when you acquired the asset
- Purchase price
- Cost of any improvements
- Section 179 deductions
- Depreciation deductions
- Casualty loss deductions (e.g., damage from fire or storms)
- When and how you sold or disposed of the asset
- Selling price and any costs related to the sale
Documents such as purchase/sales invoices, real estate closing statements, and canceled checks are key to supporting this information.
Keeping detailed and organized records ensures you’re ready for tax season and any potential audits.