Recordkeeping is essential for a sole proprietorship. Taxpayers need to keep good records and keep business accounts separate from personal accounts. Business owners need good records to help him monitor the progress of his business, prepare his financial statements, identify sources of income, keep track of his basis in the property, prepare his tax returns, and support items reported on his return.
Business owners may choose any recordkeeping system suited to his business if it clearly shows his income and expenses. Generally, the law does not require any special kind of records. The business type determines the type of records he needs to keep for federal tax purposes.
How long should a taxpayer keep the records? It depends on the action, expense, or event documented by the records. The taxpayer must keep his records as long as needed to provide the income or deductions on a tax return.
Business owners generate supporting documents for his business, such as purchases, sales, payroll, and other transactions, etc. These documents have information he needs to record in his books.
It is the taxpayer’s responsibility to substantiate entries, deduction, and statements made on his tax return – known as the burden of proof. The taxpayer must be able to prove certain elements of expenses to be eligible to deduct the expenses.
For all employment tax records, the taxpayer must keep all records of employment taxes for at least four years.