Every taxpayer is required to keep adequate and complete records to substantiate the entries on their business or personal returns.
Except in a few cases, the law does not require any special kind of records. You may choose any record keeping system suited to your business. The only requirement is that the record keeping system you choose must clearly show your income. Your record keeping system should include a summary of your business transactions. This is generally in the form of journals and ledgers. When properly maintained they will summarize your gross income, deductions, and credits.
A revenue and expense journal is used by many small businesses and is single-entry accounting to only record receipts and expenditures.
A ledger is double-entry accounting. It works on the principle that each transaction has two sides. For example, you make a sale, so your books would show an increase to income (a debit) and a decrease in inventory (a credit). This system is more cumbersome and you may want to use a computer program or a bookkeeper to keep your ledger. If you choose to have someone else maintain your books be sure to review them regularly. You are responsible for the completeness and accuracy of the business books and timely-filed tax returns.
In addition, you must keep the source documents which support your entries in your ledgers or journals. Suggested retention periods for your documentation is discussed in the Records Retention Schedules section of this workshop.
Your day-to-day business transactions such as purchases, sales, travel, payroll and other transactions will generate supporting documentation that will substantiate the entries in your books. Each form of documentation needs to clearly identify the nature and purpose of the transaction. A quality record will contain information that answers the five W's, which are:
In an audit situation all entries on your return will be reviewed along with any supporting documentation. Deductions you have claimed could be disallowed if supporting records are not available or do not answer the five W's. You need to substantiate that the expense was really for the business, and the amount must be what is usual and customary for the type of business you own.
Remember that a cancelled check by itself is not adequate to support your transactions. You need to also keep receipts, memos, and other documentation.
It is important to organize your supporting documentation in an orderly manner by year and type of income or expense. You need to keep the documentation in a safe place. Some ideas on organizing your records will be presented in another section later in the presentation.
These receipts identify the sources of income your business receives. The following documents show your income:
Expenses are the costs that your business incurs such as utilities, insurance, legal fees, rent, maintenance, office supplies and etc. They do not include purchases of items for resale to your customers. Properly maintained supporting documents will substantiate that the amount paid was a business expense. Documents for expenses are:
Purchases are items you buy for resell to your customers. This includes the cost of raw materials or parts purchased by a manufacturer or producer to manufacture finished products. Your supporting documents will substantiate the amount of the expenditure and that it was for purchases. These documents are for purchases:
The use of cash in your business needs to be accounted for otherwise all of your business expenses will not be recorded for the year. There are two ways to account for cash expenditures: you can keep a petty cash record or write reimbursable checks.
If you use the reimbursable check method, you need to keep track of all cash receipts and total them weekly, biweekly, or monthly, depending on the volume of cash expenses. A cash expenditure log needs to be kept listing each category of expense, which is necessary for tax purposes.
With a petty cash record you write a check to petty cash and keep a log of each expense paid out of petty cash.
Keeping on top of your inventory is important. If not managed effectively, inventory can hurt your cash flow and your ability to meet your financial obligations. Your inventory needs to be managed so there is enough available to meet immediate sales needs. However, if you have too much inventory or the wrong items in inventory you will not be able to take advantage of changing market opportunities.
The information you need to capture for inventory items are:
Keeping accurate inventory records also has a direct impact on your sales and use tax liabilities. Items purchased for resale and placed in inventory should be purchased as tax exempt for resale. When the item is sold, or you take it out of inventory for use by your business, a sales or use tax liability is incurred.
If your customers pay for your products or services upon delivery, you will not need an accounts receivable tracking system. However, if you provide services or products and allow customers to pay at a later date, your accounts receivable system will keep you informed concerning who and what is owed to you. To track accounts receivables, you must capturing the following information:
Your accounts receivable impact your sales and use tax liability. When you invoice a customer sales and use tax is reported and paid in the period the item is invoiced, regardless of whether you are paid at a later date.
Accounts payable are debts owed by your company for goods and services you have received from other businesses. Keeping track of who you owe and when your debts are due will enable you to establish good credit. It will also help you maintain a viable cash flow allowing you to have your money working for you as long as possible.
Your paper records should be organized and filed by creditor, and contain the following information:
Your accounts payable may impact your sales and use tax liability. If you order goods from a company and they do not collect and remit sales tax you will be liable to pay use tax on the items purchased (unless purchased for resale or the item becomes part of a product that will be sold). Any use tax owed is reported and paid in the liability period of the date on the creditor's invoice. For example: if you file a quarterly sales and use tax return and your creditor's invoice is dated June 15, the tax will be reported on your second quarter return.
You must have each employee you hire complete and sign the following forms which are then filed in the employee's individual file:
All employees must have a valid social security number. Penalties for not having the I-9 are steep.
When you hire your first employee, you become responsible for filing forms and paying the following payroll taxes:
If you hire workers as independent contractors, the IRS has established strict rules designed to keep employers from using the classification as a way to avoid paying employee taxes. The courts and the IRS have identified four categories of activity that determine whether a worker is an independent contractor or actually your employee. The categories are:
You can request a determination whether a worker is your employee or an independent contractor by completing IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. When the IRS makes a decision, the determination also applies to Utah employment and withholding reporting.
If you hire an independent contractor to provide services and pay the contractor $600 or more during the year, you must issue the contractor IRS Form 1099MISC. A copy of the form is sent to the IRS. The form provides the name, address, social security number or EIN (employer identification number) and amount paid to the recipient for the calendar year. However, you do not send a 1099 if the recipient is a corporation, unless the corporation is a law firm/individual. You must issue a 1099 to all lawyers or law firms regardless of the amount paid or type of business entity they are.
If you hire independent contractors you need to prepare a separate independent contractor file for each contractor. The following items need to be completed and/or provided by the independent contractor and filed in their file:
A seller is charged with collecting sales tax from the purchaser and remitting the tax to the state. If the seller does not collect sales tax on a taxable transaction, the tax becomes use tax and the purchaser is responsible to report and remit the use tax.
Sales and use taxes are transaction taxes. The tax is not on the item, but on the transaction and the purchaser (final consumer) is the actual taxpayer.
Sales and use taxes are trust fund taxes. This means the funds collected by the seller may not be used for any other purpose. The seller holds the collected tax in trust for the state until remitted to the Tax Commission.
The same exemptions and tax rates apply to both sales and use tax. The two taxes complement each other and both taxes cannot be applied to the same transaction.
For additional information see Pub 25, Sales and Use Tax General Information and the online Sales and Use Tax Workshop.
Sales and use tax requires the accrual method of accounting. You must report and pay the tax to the state in the period in which the sale or initial delivery is made, regardless of when you actually receive payment. Every seller doing business in Utah must maintain complete records to determine the amount of sales and use tax for which each seller is liable. The records must contain documentation to substantiate the following information:
Business records must be retained for not less than three years from the date the return was filed. The records must be available for examination upon request.
Records may be microfilmed or microfiche. However, microfilm reproductions of general books of account such as cash books, journals, voucher registers, ledgers, and like documents are not acceptable as original records. The conditions set forth in Tax Commission Rule R865-19S-22 must be met if you maintain microfilm or microfiche reproductions of your supporting records such as sales invoices, purchase invoices, credit memoranda and like documents.
Automated data processing (ADP) tax accounting systems must be capable of producing visible and legible records for verification of any tax liability. The ADP system must be able to:
