Tax preparation is essential to running a business or organizing personal finances. The process involves gathering financial information and documenting it for accurate tax filing. The Internal Revenue Service requires tax records to be kept for at least three years for auditing purposes. Accuracy in record-keeping is critical when preparing taxes, as it affects your tax liabilities and avoids trouble with the IRS. Thus, this article discusses the importance of accurate record-keeping in tax preparation.
What is Record-Keeping?
Record-keeping involves the maintenance of records, either on paper or electronically, of financial transactions. Financial transactions include sales, purchases, payroll, loan payments, receipts, and other business expenses. Accurate records help prevent accounting errors, identify tax liabilities and deductions, and enable efficient tax preparation.
Tax Obligations for Businesses
Businesses have various tax obligations, including income tax, payroll tax, and sales tax (for those in states that collect it). Accurate record-keeping is important in calculating income, deductions, and tax liabilities. If a business does not maintain accurate tax records, tax filing will not be correct, which may raise doubt about the business’s credibility. Inaccurate filings could cause a tax audit, which is costly and complicated.
Tax Obligations for Individuals
Record-keeping is equally important for individuals. Whether you are an employee or self-employed, your taxes will vary. Employees must maintain records of income received and taxes withheld by their employers. On the other hand, self-employed individuals must maintain records of all their income and expenses. Such records will reflect the tax deductions available and the amount of tax owed.
How Record-Keeping Affects Tax Preparation
The importance of accurate record-keeping in tax preparation cannot be stressed enough. The process of preparing taxes is purely based on records. The more accurate the records, the easier the tax preparation process will be. When it comes to accurate tax filing, all expenses must be documentable and traced back to the source. The documentation requirement means that receipts, invoices, bills, and other financial documents must be correctly organized and kept. Without accurate records, it is impossible to reconcile tax returns with the records upon which they are based.
Accurate record-keeping makes it easy to identify tax deductions available to taxpayers. A taxpayer must remember that the more deductions can be claimed, the less tax is owed. Standard tax deductions include charitable donations, mortgage interest, business travel expenses, etc. However, taxpayers can only claim such deductions if they are accurately documented.
Furthermore, keeping track of income and expenses is essential in computing a business’s tax liabilities. This process is similar to preparing personal income tax returns but must be done more comprehensively. Effective documentation also allows for properly tracking assets and liabilities, which are critical components in tax preparation. The proper distinction between business and personal expenses also clarifies allowable expenses for tax purposes.
Records Also Help in Forecasting Future Tax Liabilities
Accurate record-keeping helps taxpayers predict what tax liabilities they may face in the future. By looking at records, businesses and individuals can forecast and prepare for future financial needs. Accurate records help make such forecasts by analyzing historical trends and projecting them into the future. That information can be critical in budgeting and financial planning.
Speak with Us About Our Services Today
At Nine Line Accounting, we understand the importance of record-keeping in tax preparation. We keep comprehensive records of our client’s transactions to prepare accurate tax returns. With our experienced team, you can put your worries about tax liabilities behind you and focus on the growth of your business. Contact us today for proactive accounting and virtual CFO services. Let’s work together to build your business and achieve your financial goals.