By Mark E. Battersby / Published December 2021
Records are important, not only for backing up tax deductions but also to qualify for traditional loans or many of the government’s recent funding programs. Records are, of course, invaluable when preparing the financial statements so necessary if the pressure cleaning operation is ever sued or audited.
The IRS requires a business’s financial records be retained, but for how long? What records should be held? The answer can be as simple as keeping tax returns forever and backup documentation for three years. Quite a few other items, however, have extremely different requirements.
The IRS can audit tax returns three years from the date it was filed or when the return was due, whichever is later. However, if a substantial under-statement of income of more than 25 percent is discovered, the period is extended to six years. With fraud or failure to file a return, there is no limit.
Naturally, there is more to recordkeeping than the basics. Consider the special recordkeeping necessary for write-offs, tax credits, and transactions such as the following:
Receipts, especially those for small amounts, often get lost. That’s why the IRS has special rules that generally make receipts for expenditures under $75 unnecessary. Of course, all business deductions are fair game and can be questioned by auditors.
In the event of an IRS audit, for the IRS to uphold a deduction under $75 without a receipt, a record of the amount, where and when it was made, and the purpose of the expense are required. With meal and entertainment expenses, a list of those present and a record of what was discussed must be included.
It can’t be mentioned enough: when it comes to income tax returns, copies of those filed returns should be kept indefinitely. Past returns can help in preparing future tax returns.
Supporting documents means different things to different people. Supporting documents generally include any records related to business expenses, asset purchases, sales, payroll, investments, and more—all subject to a number of basic rules, including the following:
In addition to keeping records, there is the problem of keeping them safe and accessible. Failure to take steps to prevent a breach could prove costly. It could be lost customers, suppliers, or employees and, in many cases, substantial fines. At least one state has passed legislation imposing fines for a breach of a customer’s information.
This brings up another tried-and-true strategy: if a business record is truly not needed any longer, shred it. This is essential to protect the pressure cleaning business, its employees, and customers from identity theft. After all, failure to take steps to prevent a breach can prove costly for every size of business.
Ensuring the pressure cleaning operation has antivirus and anti-malware in place, using strong pass-words and changing them frequently (substantial changes, not merely changing a letter or two), and making sure there is a firewall are obvious protections. Above all, don’t forget non-computer information thefts.
Many pressure washing business owners routinely make PDFs of important papers and records or store backups in a safe place. But what happens if the original papers are exposed, scattered, or lost in a hurricane, tornado, or similar catastrophe? If records are stored someplace that is vulnerable, at least put some roadblocks, such as a safe, in place to deter crooks or combat natural disasters.
As mentioned, records such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit appearing on the return must be kept as long as they may become material to the administration of our voluminous tax laws.
Manually-kept records satisfy the tax law as long as they are accurate and can be understood or explained if questioned. However, most businesses will go paperless and store everything electronically.
According to the IRS, electronic records are just as official as the paper originals. By utilizing a software program, math errors are eliminated, and profit and loss statements, along with the operation’s other financial statements, can be produced with the click of a button.
Well-organized records make it easier to prepare the annual tax returns and help provide answers should the return be selected for scrutiny by the IRS. Without records, how can any owner or manager monitor the progress of his or her pressure cleaning business and guide it to increased profits and success?
The SBA and several other watchdog agencies are auditing beneficiaries. Every pressure cleaning contractor, business owner, or manager should consult a professional about today’s increasingly more complex recordkeeping requirements.