One of the most dreaded parts of recordkeeping for tax time may be finding all the necessary paperwork, like receipts, purchase dates, and mileage expenses. What records do you need to keep, and how long should they be kept?
First of all, you should retain any pertinent information that is documented on your tax return. For example if you claim mileage, you should always maintain mileage records. If you depreciate items, you must retain all records during the depreciation period – which can range from 3 to 39 years. Most other documents need to be kept for 3 years from the due date of the tax return.
Let’s look at two main items that need detailed records – car expenses and depreciation.
First of all, if you are in business, you should always keep track of your mileage. Start today, if you are not already doing so, and write down your business mileage on a daily basis. You can deduct any business meetings, deliveries, or any other work-related mileage.
Standard Mileage Rate – This is the easier of the two methods to figure car expenses. Since you are allowed a standard rate (56.5 cents per mile for 2013) that includes gas, depreciation, maintenance and repairs, lease payments, oil, insurance and vehicle registration fees, you need to maintain fewer records. You will need to keep track of:
- Daily mileage for business use
- Total mileage for year
- Parking and Toll Road Expenses
- Date you put the car into service
For more on what defines business use go here.
Actual Expense Method
This method is generally more beneficial if you have high maintenance on your vehicle or have less mileage. However, there are more records to maintain. If you use your car for business and personal reasons, you must also figure out the business percentage. For example, if you traveled 15,000 total miles during the year, and 5,000 miles were for business, your business usage is 33%. You can then subtract 33% of your car insurance, lease payments, maintenance, etc. to come up with the amount you can deduct as a business expense. You should keep detailed records of:
- Daily mileage for business use
- Total mileage for year
- Gas receipts
- Maintenance and repair costs and receipts
- Lease or car payments
- Vehicle registration fee
- Vehicle insurance
- Date you put the car into service for business use
Almost all equipment used in business that is expected to last one year or more can be depreciated. To do this, you need to keep records on the depreciated items. Many things such as furniture, computers, and even landscaping can be depreciated. Remember, if you use the standard mileage deduction on a vehicle, you cannot depreciate it also, since depreciation is included in the standard mileage rate. Records you need to maintain for depreciation are:
- Model of vehicle, or description of equipment/purchase
- Date item was placed into service for business use
- Cost Basis, which is purchase price, plus shipping and installation costs
- Any improvements or additions to original cost basis
Depreciation continues for 3 to 39 years, depending on the item. Remember, if you take the equipment out of service or sell it, depreciation on that item stops, and you should keep a record of the sale date or date it was taken out of service.
For more on how depreciation works go here.
Recordkeeping for tax time methods
There are numerous ways to keep records, and you should choose one that works for you. In fact, the IRS plainly states that “…you may choose any recordkeeping system suited to your business that clearly shows your income and expenses.” All sorts of recordkeeping systems – from paper notebooks to accounting software are acceptable. Starting with the most basic, let’s look at a few types to see what would fit best for your business.
A written record can consist of an account book, log, statement of expense, trip sheet, or similar record. Many people swear by a written logbook, especially for mileage expenses. It is easy to keep in the car with you, always available, low cost, and does not depend on the availability of an Internet connection. However, you must do calculations and sorting by hand, which may be time consuming in the long run. There is no backup in case your logbook gets damaged, lost, or destroyed. Some people now take pictures of their logbook pages with their smartphones, or make copies, which ensure a backup copy is available.
Many computer programs are available to help you categorize and keep track of your records. A program, such as Excel, can perform many functions to help you maintain accurate records of expenses, and you can easily add additional data or fields, if necessary. An Excel file can hold numerous worksheets, so you can have one file for depreciation, one for car expenses, and another for income and expenses. A program such as this will save time, as it can quickly add and sort your income and expenses, and is relatively easy to use. You should always do a frequent backup of your files to ensure that important material will not get lost.
Several very good programs are available for both individual and business use. Quicken® and QuickBooks® are two well-known programs that let you integrate bank accounts into your expense category, and allow you to customize reports, and sort them according to date and category. Software such as this will say you time in the long run, and the time you invest in learning the software is minimal compared with the time savings. Once again, a daily or weekly backup is essential to ensure you do not lose critical data.
Remember, the fanciest record keeping system in the world will not work unless you enter the data. It is best to record the information about your purchases and expenditures soon after they are acquired.
In the words of the IRS “…well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination, or to prepare a response if you receive an IRS notice.” While we certainly hope that you are not “selected”, good records will help ensure that the process goes smoothly. Remember – a minute of organization now, will save you time down the road.