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so i get asked all the time carlton how long should i keep my receipts do i have to keep my receipts is there a way i can just throw them away how long can the irs audit me for do you know the rule of thumb on how long i need to keep my w-2s and my books and records that is a question that comes up all the time how you doing guys my name is carlton dennis welcome back to taxes made simple and in this segment we are going to go over what is the easiest way to do your bookkeeping and accounting i want to make sure that bookkeeping and accounting is simple for you so it's simple for us accountants when we're actually filing your tax returns makes our life a lot easier and trust and believe it makes your life easier and it keeps more money in your pocket let's get started [Music] so [Music] the most important aspect to growing your business is making sure that you're utilizing the money in your business to continue to grow the business but it's pretty hard to be able to keep that money if you're not accounting for all of your expenses the reason why you can't keep a majority of this business income is if you aren't accounting for all of your expenses you could be overpaying on your tax returns the most monumental thing about tracking expenses is so that you have a recollection of what happened throughout the year but i first want to dive into some really funny cool stories to share with you guys to let you know a little bit more about why record keeping is so important story time i had a taxpayer come to me in the year of 2017 and she had just started her new business her new business was an etsy shop where she was selling different products online you guys are familiar with etsy it's pretty much an online platform that allows for you to sell a wide range of different products when she was growing this business she had a lot of products and materials that she was purchasing one of the things that i noticed was that she wasn't keeping track of any of those expenses and the reason i noticed that was because when she came in to file her tax returns the first thing that she told me was that she didn't make money in her business but she did have business expenses i said that is great you're still going to be able to take those expenses once your business is operational but i need to make sure that you've tracked your expenses so do you have copies of your receipts did you do your bookkeeping and accounting what did you do to make sure that you're accounting for those expenses well unfortunately this client that i have didn't keep receipts on any of the expenses that she purchased nor did she track any of the transactions in any type of format out of my car now she didn't have a receipt book nor did she have an online program that was tracking the expenses that were being occurred on a month-to-month basis unfortunately i had to let this client know that unless you combine those receipts and do your bookkeeping accounting when your business is operational you're not going to be able to take your startup costs guys if you're a business owner and you've been in this situation before did you know that startup costs are five thousand dollars deductible in your first year that's correct new business owners can deduct up to five thousand dollars in expenses in their first year even though their business may not be profitable this is great because if you're wanting to reduce your taxes you may be at a loss in that first year business which is fine but you need to make sure that you're tracking your expenses so you can leverage your deductions now that we've talked about a story let's go over the five reasons why good record keeping will save you money on your taxes number one good record keeping helps you identify sources of money or property received from a variety of sources when you're receiving income you need to know what income is taxable to you and what's not taxable to you so if we're not doing good record keeping we could have money that's coming in that could not be taxable let me give you an example i had a client that was a sole proprietor taxpayer he was a barber he received a lot of income coming in the form of venmo well this client that i had wasn't doing proper record keeping in the year of 2019 he ended up miscalculating part of the money he received from venmo as business income when really some of that income he was receiving were just meals and various different payments from some of his friends and family members but improper record keeping led him to recording some of those payments as income because he could not remember whether or not it was income or not when it showed up on his report so what i am stating is we never want to be in a position where we're overpaying taxes nor do i want to overpay taxes on money that shouldn't be taxed number two good record keeping can help identify expenses for which a deduction can be claimed you may forget an expense unless you record it when it occurs good record keeping can help you stay on top of your expenses this also helps taxpayers that are w2 employees because you may itemize your deductions let me give you an example if you're a w-2 taxpayer you may have medical and dental expenses that you may not have known that you can deduct on your tax returns when you go to see your tax guy he may tell you hey where are your medical and dental expenses this year you may qualify if you didn't keep track of those receipts or if you don't have statements or reports showing when you made those expenses you may not be able to take those deductions so it's important that we have good record keeping not only for itemized deductions but if we're a business owner as well number three good record keeping helps us establish the basis in real estate you need to keep records that show the basis of your property this includes the original cost or other basis of the property and any improvements you made when you are a rental real estate investor you can leverage depreciation which means that you need to keep track of any improvements that you're making on your property for the duration of you owning that property this could be years 20 30 for as long as you have that asset number four good record keeping can help you prepare tax returns accurately and timely when you're going to your tax preparers office it is so important that you have all of your paperwork in order part of the reason why it's important is you may be with a tax preparer that is impatient that may not have the time and wherewithal to coach you through your deductions so it's important that you show up with all of your books in order so that when he is filing your returns that everything gets inputted into the computer program the way it needs to get inputted and that nothing has been missed i know that's right to mention if you need to file your tax returns in a timely manner if you have to go back and look for expenses this could result in a late tax return which results in penalties and interest fees that none of us want to pay and number five if the irs should examine the return and the taxpayer can't produce correct documents he or she may have to pay additional taxes and be subject to penalties this piggy backs off of number four if we want to avoid paying penalties and interest fees then we're going to have to file a timely tax return but many business owners get into situations where they're filing their taxes late and they're going on extension because they're doing their bookkeeping too late as a business owner it is very hard to make business decisions in real time such as buying vehicles hiring employees going on vacations if you don't know what your tax liability is how much is going to uncle sam in the form of a check and how much you actually get to keep in the form of a refund or just in the form of money that doesn't have to be paid so if you know your numbers in real time you can make financial decisions in real time and this allows for you to file a timely tax return and avoid penalties and interest fees so now that we know the importance of good record keeping let's go over how long you need to keep your records for the irs has certain provisions on how far back they can assess you on certain tax returns most individuals understand this to be three years however we as taxpayers and tax preparers know that they can assess you back up to six years in certain cases section 6501 of irs tax code states that the period for assessment of taxes extended to six years when there has been an omission from gross income on a return of an amount more than 25 of the gross income stated in the return in layman's terms this means that if you've understated more than 25 of the gross amount on your return you can be assessed back up to six years so just hearing that i know as a taxpayer i should probably be saving my tax documents longer than three years i should probably be saving my tax documents at a minimum six years if the irs somehow later down the road says that 25 is not being reported on my tax returns and they choose to assess me i want to be able to go back and have those tax documents ready so i can look at and say uh i don't know i don't think you're right here's the proof that i was doing things the correct way this is how we protect ourselves let's go over a situation where you might need to hold on to your tax returns indefinitely philip the taxpayer hasn't filed tax returns since 2006. he is a part of a partnership where he's earning partnership interest income since philip's only earning partnership interest income and no other income phillip falls beneath the threshold of having a filing requirement does phillip however have to keep copies of his tax records from the partnership income he is receiving the answer is yes philip has to keep copies of the tax documents that he is receiving let's go over the reason why because the irs period for assessment does not start until a taxpayer files a return it is beneficial for philip to keep copies of his tax returns forever because if he were to eventually file a tax return down the road that is when the period of assessment can begin one eternity later so keep in mind taxpayers that is always important to keep copies of your tax documents as a business owner or as a taxpayer there are two methods of recordkeeping let's go over these two methods the first method of recordkeeping is the checkbook method the checkbook method is when taxpayers keep records of their income and expenses amounts sources of deposits and type of expenses such as receipts and sales slips on a physical checkbook this is the old school route of how you do your bookkeeping and accounting and believe it or not a lot of taxpayers are still doing this old school route of documenting their income and expenses on paper the second recordkeeping system is the electronic recordkeeping system this is the same requirements as the checkbook method except the irs requires an electronic storage system you may have heard of quickbooks intuit billpay.com and even hurdler these are all different electronic companies that can track your records online and provide you with a profit and loss statement a general ledger a balance sheet and a cash flow statement from your business the easiest method to tracking your records is online and part of the reason why tracking your records is easiest online is because of the ability to take photos of your transactions and have a computer software identify those transactions and populate it into a program and creating rules that can categorize your transactions for itself if i'm going to starbucks 40 times in a year i don't want to have to go in and move starbucks over into meal and move starbucks over into meal and move starbucks over into meal every time i'm having a meal with the business client i want the program to do it for me and that's what having an online program does it makes my life easier so i can be out with business owners doing business and creating business and making meaningful relationships while the program is doing the work for me ai is so unique and if we don't adopt ai guess what we're doing we're wasting time working too much in our business doing too much of our bookkeeping and accounting so if we want to be strategic business owners we have to adopt one of these record-keeping methods and i'm urging you to adopt the electronic record-keeping method so let's dive in more the electronic store system has five characteristics and these five characteristics must exist if you're doing your bookkeeping and accounting as a business owner and you're filing tax returns the electronic storage system must be able to index store preserve retrieve and reproduce the electronic stored books and records in legible and readable format that is so important that it's in legible and readable format if you are using accounting software that is not capable of these five characteristics i urge you to a change accounting programs because this information comes directly from irc publication all accounting systems must be able to provide a complete and accurate accessible account of your data that can be presented to an irs revenue agent now that we have gone over the methods of recordkeeping and the easiest ways to go about recordkeeping it should be pretty evident that you should be doing your recordkeeping but i want to make sure that it's easy for you guys please make sure that you're downloading an app right after this video if you haven't already most apps provide you with a free trial and i do recommend utilizing them so you can get familiar with the platform be able to sync up your bank account so everything populates in there so you can get familiar categorizing your transactions as you get comfortable categorizing your transactions you will be able to eventually create rules so every time you visit certain locations or you have certain vendors it will be able to track those expenses and categorize it for you adapting with how you run your business if you have any questions or if you need help getting your bookkeeping and accounting set up please feel free to reach out to my office or schedule a free consultation by visiting the link at the bottom of this video and if you liked this video and want to learn more about investing or more about business tax strategies feel free to like comment and subscribe so i can make more videos like this one for you i look forward to seeing on the next video take care [Music]