How to keep business records for tax purposes

How to keep business records for tax purposes

How to keep business records for your eBay business for tax purposes

So you’ve finally gone into business for yourself. You’ve found a product, sold and shipped it, and pocketed a tidy profit. The taxman won’t be far behind, which is why it’s essential that you keep good records for your business. Good records can mean the difference between paying too much in taxes and getting a hefty fine for paying too little.

So how do you keep good records? It’s easy, and not only is it good for the taxman, but it’s good for the long-term health of your business.

Rule #1: Keep business money separate from personal money.

Whether your business is sole proprietorship, a partnership, or a corporation, it’s important that you keep all the financial aspects of your business separate from your personal ones.

Keep a separate checking account in your businesses name and keep receipts for everything you buy for your business in a separate place from your personal expenses. Set up a separate online banking account and get a separate credit or debit card in your company’s name, so when you buy or sell items online you can keep the expenses off your personal balance sheet.

One of the advantages businesses have over individuals when it comes to taxes is that they get to deduct legitimate expenses before they calculate their taxes. So when it comes to finding all those deductible expenses, they can be organized much more easily if you don’t have checks to the babysitter and cash withdrawals for personal purchases mixed in with your inventory costs.

Rule #2: Keep receipts, bank statements, and a log of activity.

Keeping paper records, including returned checks and bank statements, can go a long way toward ensuring that your records are both complete and accurate. Even if you use financial and tax software (discussed below), paper records, kept in a safe place, provide an essential backup and will go a long way toward satisfying the tax man’s curiosity about your business.

If you have to travel as part of your business, you may be able to deduct those costs as a price of the business, but it’s important that you keep track of those expenses to be able to justify them. If you take a trip on the company credit card, make a note in your financial records of where you went, who you met with, and what you purchased or sold. Even food or entertainment may be deductible if they are legitimate business expenses, but you’ll need to ensure that you have a record of what you were doing for the company in order to be able to deduct them.

If you mail items to your customers, keep a log of your postage and insurance expenses, as they are legitimate costs of doing business. Those costs cut into your profits, and they should cut into your taxes as well.

Because you may be able to reimburse yourself for certain personal expenses (like driving your own car to a trade show), it’s also essential that you keep track of the dates of your trips, your mileage, and what you were doing for the company. Keeping thorough notes can mean the difference between a legitimate reimbursement and a taxable disbursement.

Rule #3: Keep track of your inventory.

Your inventory is a legitimate cost of doing business, but it’s also an asset, and the increase or decrease in your inventory changes the value of your business and your taxable profit. As your business grows, your inventory will also grow, so it’s important to keep a record of the items you have for sale at the end of every tax year. Uncle Sam will ask you not only how much inventory you have, but how you figure its value, so having accurate records of purchases, sales, and what you have on hand is essential.

Rule #4: Use professional accounting software or an accountant.

Keeping good records means keeping organized ones. A pile of receipts and check stubs is going to be a nightmare to organize when you’re under the gun at tax time, so it’s important to keep track of your sales, your purchases, and your inventory using professional software or a professional accountant.

Good accounting software can also provide reports, allow you to balance your accounts, even tell you which items are money-makers or money-losers for you. It’s fairly easy to use and will go a long way toward helping you justify those expenses you’ll be claiming at the end of the year. Be sure to balance your accounts at least monthly, because you may need to file a quarterly tax form. Having up-to-date records will ensure that you can file easily and on time. Remember, it’s best to save everything in paper form as well. Computer crashes are all too common, so having paper backups (bank statements, printed reports) is essential to ensuring that your records are accurate and complete. Keeping a separate digital copy of your records off-site is also important. If your home or business has a fire, you’ll need to have copies of your records stored somewhere out of danger.

A professional accountant knows the tax laws, what forms need to be filed when, and can give you professional advice that can save tons of trouble down the road.

An investment in quality software and professional advice is money well-spent.

Rule #5: Keep track of what you pay yourself and others.

If your business is a sole proprietorship, your business profits will be taxed as part of your personal income, including a self-employment tax paid for Social Security and Medicare. If you elect to do business as a corporation, your taxes may be lower, but that doesn’t mean that you can take the money and go on vacation.

All money from the business that you use for personal items is income that must be declared by you on your personal tax forms. That’s another reason to keep business records separate: you don’t want the tax man to count legitimate business expenses as your personal income.

Rule #6: Don’t forget about the state.

If your business is a corporation, don’t forget that you may have to file a separate tax return and an annual report with them. Your state’s Secretary of State’s office usually has the forms you need online, along with instructions, and many will allow you to file those forms online as well. If you fail to file those forms properly, you could lose your charter, so it’s important to be aware of the necessary forms and filing deadlines.

Rule #7: Be professional.

The secret to keeping good records is to keep them separate from your personal finances and as accurate as possible. It’s to treat your business as a business, managed professionally and efficiently. Keeping records of all company costs and up-to-date accounts will help you avoid the headaches of tax time and let you enjoy the profits of successful business instead.

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