Spring Cleaning Never Throw These Important Papers Away

Spring is a great time to clean out that growing mountain of financial papers and tax documents that clutters your home and office. Here's what you need to keep and what you can throw out without fearing the wrath of the IRS.

Let's start with your "safety zone," the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.

The concept behind it is that after a period of years, records are lost or misplaced and memory isn't as accurate as we would hope. There's a need for finality. Once the statute of limitations has expired, the IRS can't go after you for additional taxes, but you can't go after the IRS for additional refunds, either.
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The Three-Year Rule

For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you're looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:

• If you don't report all your income and the unreported amount is more than 25% of the gross income actually shown on your return, the limitation period is six years.
  
  
• If you've claimed a loss from a worthless security, the limitation period is extended to seven years.
  
  
• If you file a "fraudulent" return, or don't file at all, the limitations period doesn't apply. In fact, the IRS can get you at any time.
  
  
• If you're deciding what records you need or want to keep, you have to ask what your chances are of an audit. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.
•  

Assuming that you've filed on time and paid what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.
Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.

Here's a checklist of the documents you should hold on to:

1. Capital gains and losses. Your gain is reduced by your basis - your cost (including all commissions) plus, with mutual funds, any reinvested dividends and capital gains. But you may have bought that stock five years ago and you've been reinvesting those dividends and capital gains over the last decade. And don't forget those stock splits.
   
   You don't ever want to throw these records away until after you sell the securities. And then if you're audited, you'll have to prove those numbers. Therefore, you'll need to keep those records for at least three years after you file the return reporting their sales.
   
   
2. Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It's just good practice, even though most homeowners won't face any tax problems. That's because profit of less than $250,000 on your home ($500,000 on a joint return) isn't subject to taxes under tax legislation enacted in 1997.
   
   If the profit is more than $250,000/$500,000, or if you don't qualify for the full gain exclusion, then you're going to need those records for another three years after that return is filed. Most homeowners probably won't face that issue thanks to the 1997 tax law, but of course, it's better to be safe than sorry.
   
   
3. Business records. Business records can become a nightmare. Non-residential real estate is now depreciated over 39 years. You could be audited on the depreciation up to three years after you file the return for the 39th year. That's a long time to hold on to receipts, but you may need to validate those numbers.
   
   
4. Employment, bank, and brokerage statements. Keep all your W-2s, 1099s, brokerage, and bank statements to prove income until three years after you file. And don't even think about dumping checks, receipts, mileage logs, tax diaries, and other documentation that substantiate your expenses.
   
   
5. Tax returns. Keep copies of your tax returns as well. You can't rely on the IRS to actually have a copy of your old returns. As a general rule, you should keep tax records for 6 years. The bottom line is that you've got to keep those records until they can no longer affect your tax return, plus the three-year statute of limitations.
   
   
6. Social Security records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they're wrong, you'll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don't dispose of those records until after you've validated those contributions.
   
   Contact us by phone or email if you have any questions about what records you need to keep this spring.
   

QuickBooks 2012: New Paths to Better

As it usually does this time of year, Intuit has introduced new versions of its Pro and Premier products. QuickBooks 2012 promises to help you get better organized, save steps, and acquire more in-depth financial insights.

The new Express Start is designed for businesses that want to blast through setup and start entering customers and invoices. You have two other options, though: Advanced Setup is the old EasyStep interview that solicits more details. You can also open an existing file or convert data from Quicken or other accounting software.

Express Start requires minimal input: company name, industry, company type, tax ID, and contact information. After you save your company file, it lets you start adding or importing customers/vendors/employees, products/services, and bank accounts.

Figure 1: Express Start simplifies company setup.

An Activity-Driven Calendar
QuickBooks' Reminders keep you apprised of each day's tasks, but they don't provide any information about the past or future. QuickBooks 2012 solves this problem with its new Calendar. When you enter an appointment, to-do, or key business task (invoices, bills, purchase orders, etc.), it appears in the calendar. You can display a graphical view of the month that tallies activities for each day and lists them below. Daily and weekly views are in list form. And links open the original documents.

Figure 2: The new Calendar displays daily, weekly, and monthly views of your financial transactions.

Save Excel Formatting
Once you've formatted a QuickBooks report in Excel, it's frustrating to have to reformat it each time you run it for different time periods and/or with your ever-changing content. Excel Integration Refresh simplifies this process. You can now export a report to Excel, make formatting changes and save them, and then reapply them later to the same type of report using different date ranges and your updated QuickBooks data. Acceptable alterations include:

• Row and column header font formatting
• New formulas
• Renamed column and row headers, and report titles
• Resized columns
• Inserted columns and rows
• Inserted formula text

You can do this by opening your report in QuickBooks and clicking Update an existing worksheet, or by launching your report in Excel and clicking the QuickBooks tab on the toolbar, then the Update Report button.


Figure 3: This window opens when you click Update Report in Excel.

A New Report Community
There's always room for more report formats. QuickBooks 2012 offers a library of Contributed Reports, variations created either by Intuit or your fellow users. You can select one of these, like Customer Sales By Quantity By Item Detail and instantly populate it with your own data.

You can sort these templates by industry and rating, and view them as a list, in a grid, or in the Report Center's Carousel view.

Centralized Operations
QuickBooks 2012 also saves you time with its new Centers. The Inventory Center works similarly to those available for customers, vendors, and employees. It's a clearinghouse of item records and transactions that can be viewed and sorted. You can also do inventory housekeeping tasks here, like adding items and launching transactions.

The Lead Center helps you carefully track new leads that you either paste in from Excel or enter manually. You can add to-dos and notes to contact records, and convert them into customers.

Upgrading Can Be Tricky
Intuit has included other, smaller time-saving organizational and reporting tools in QuickBooks 2012, like One-Click Transactions, which lets you create related transactions from existing ones (i.e., invoice to credit memo) with one click.

There's nothing especially difficult about using most of QuickBooks 2012's new features. But upgrading and setup are sometimes quirky, and the Excel Integration Refresh tool has a learning curve. We're happy to help you start your company file on the right foot or get acclimated to this latest version.

Small Business Guide

Keep Your Small Business Advantage
While your know-how is certain to make an important difference in your business' success, you're no doubt well aware that producing a winning combination for a smooth-running operation depends on many other factors as well.

High on the list of considerations for your business should be creating the ability to meet criteria imposed by Uncle Sam and the Internal Revenue Service. To help you avoid headaches that can go with trying to meet tax law requirements, this brochure highlights pitfalls to be aware of and provides some tips on how to overcome them.

"Material Participation" in Your Business:

"Material participation" has become a major issue for business people since Congress passed rules regarding "passive activities" in the late '80s. To show material participation, you as the owner must demonstrate that your activity in your business is continuous and substantial. The IRS has established several "tests" for measuring material participation. An owner who can't pass any one of the tests will most likely be considered just a passive investor in a company. Since deductible losses from passive activities can be limited to the amount of income from such activities, showing material participation in your business becomes doubly important.

If you work full-time in your business, you will have no trouble showing you materially participate. However, if you're an employee at another job and operate your business on a part-time basis, you need to make sure you pass one of the material participation tests. One way you can do this is to show that you spend 500 or more hours during the year running your business.

You can establish material participation in other ways too-e.g., based on your past years' involvement or how your work time compares with others working in the business (including employees).

Your Profit Motive:

The IRS sometimes questions profit motive of a business owner if an activity consistently shows tax losses. This is common with activities that lend themselves to personal enjoyment or hobby such as horse/dog breeding, arts and crafts, etc. You should be prepared to show that you entered your business with the intent to make a profit and that you are taking measures to realize that intent. How do you show profit motive? At least in part by establishing that you have experties in your field and you are using businesslike practices in carrying on operations.

Your Recordkeeping Routine

The Recordkeeping System:Give priority to establishing good recordkeeping practices for your business. Recordkeeping goes much farther than actual check writing, depositing income, keeping receipts, etc. Also involved are the choices you must make about accounting methods, dealing with inventory (if any) and other assets, complying with regulatory and tax requirements, and computerization. You will probably find taking care of all these details time-consuming and frustrating to say the least; many of the choices you have to make may require help from a financial or accounting professional.

When keeping your business records, though, try to follow a few basic "rules":

Don't Co-Mingle Business and Personal Bank Transactions.

From the very outset have a separate bank account for your business in which you deposit only business gross receipts and from which you write checks for business expenses.

Keep Backup For Your Bank Deposits And Expenses.

Keep bank statements and supporting documents so you can trace your bank deposits, including those that aren't income (e.g., loan documents for loan proceeds deposited, insurance reimbursement, etc.)

If possible, pay all expenses by check. They should be supported with sales slips, invoices and any other available documents of explanation. The income and expenses should be recorded in an orderly manner (either by hand or on computer) so that the backup can be readily available if and when needed.

Sometimes you can log your expenses in a timely manner so you don't have to keep receipts. Before you adopt a logging system though, it's best to check with your tax advisor because the rules for logs are quite strict.

Be Sure To Keep All Reports Filed With Government Agencies.

This includes personal income tax returns, sales tax returns, payroll returns, W-2s and 1099s filed for employees and other hired labor, etc.

Length of Time to Keep Records:

From a federal tax standpoint (some states may be different), you should retain books and records of your business for three years after the due date of your income tax return. There are some sections of the tax law where the statute of limitations is longer than three years, however. Because of these, it's wise to keep records at least six years. When it comes to the records that support cost basis of property, equipment or any item that you are depreciating, keep records for at least three years beyond the life shown on the depreciation schedule in your tax return.

Capital Expenses vs. Other Costs:

Costs of assets that will be used in your business for more than a year and the costs of improvements that add to the value of assets are "capital" expenditures. For tax purposes, these expenses are usually deducted over a number of years. Operating expenses, i.e., advertising, office supplies, etc., are currently deductible, as are the costs of getting started in your business (within limits). Try to keep records for capital expenses separate from those for the general operating expenses.

Expensing Normally Depreciable Costs:

Under some circumstances, the costs of depreciable business assets can be deducted all in one year on your tax return (up to a yearly maximum). While this can be a real advantage, taxwise, it also has a negative side - if you dispose of the assets before the end of their normal depreciable life, you may have to "recapture" (i.e., report additional income for) some of the costs you expensed. Be sure to check with your tax advisor before you dispose of assets you previously expensed.

Automobile Expenses:

Many business people are uncertain about what car expenses they can deduct. Those expenses you have for traveling between business locations are deductible. However, COMMUTING expenses, i.e., the car costs of going between your home and your office each day, aren't deductible. But when you travel to TEMPORARY locations away from your regular business location, you can deduct the costs of those trips regardless of the distance. Be sure to keep good records of your business driving by logging for each trip: where you went, your business purpose for going there, who you met with, and the number of business miles you traveled.

You will only be able to deduct expenses for the business portion of your car expense. However, you can choose one of two ways to do this: (1) You can deduct your expenses using actual cost of gas, oil, insurance, repairs, depreciation, etc., or (2) You can multiply your business miles by a standard mileage rate to figure your expense (this rate varies from year-to-year).

"Ordinary and Necessary Expenses":

The tax law only allows you to deduct expenses that are "ordinary" and "necessary" for your business. Taxpayers and IRS auditors often dispute over the meaning of these two terms. The IRS' definitions are somewhat general:

An "ordinary" expense is one which is common and accepted in your type of business. On the other hand, a "necessary" expense is one that is helpful and appropriate in your business; it does not have to be indispensable.

A Pension Plan:

Maintaining a pension plan offers you an excellent way to defer income from your business and plan for your retirement. One good option is a Keogh plan. Different plans have different rules about contributions, reporting, coverage, etc. Be sure to consult with your plan administrator so that you meet the specific requirements and limitations.

Estimated Tax Payments:

If your business is unincorporated, the income you earn from it is reported on your individual tax return and is subject to income and self-employment tax. Since no withholding is usually taken from self-employed income, you may need to pay estimated taxes to avoid getting hit with a penalty. Your tax advisor should be able to help you compute the amount you need to pay to ensure that no penalty is assessed. The usual due dates for estimates are April 15, June 15, September 15, and January 15.  However, if a due date falls on a Saturday, Sunday or holiday, the due date will be the next business day.

QuickBooks and Double-Entry Accounting: Where’s the Other Side?

Bookkeeping is a little like physics – there are unbreakable rules. So to paraphrase one of them, “For every debit, there is an equal and opposite credit.” But in QuickBooks, that is not always obvious. The “implied side” of a transaction is not staring you in the face most of the time.

The balancing side of every transaction is there nonetheless, so that your general ledger zeroes out and your financial statements work as they are supposed to.

Where do you find the implied side of the transactions? Sometimes you want to know (or confirm) what the offsetting entry is behind the scenes. That’s where the Transaction Journal comes into play.

You can simply run the Reports / Accountant and Taxes / Journal report. It will show every transaction within the reporting date range (which you can change) and it will break out the debits and credits of every transaction into columns for the accounts that are affected.

In this example (which I split into different lines for viewability), Mr. Teschner made a payment against his customer account. You see the split in the Journal report: Checking account 10100 was debited (increased) by $5,000 and Accounts Receivable account 11000 was credited (decreased) by $5,000.

You can change the dates on this report to focus on a particular date or date range, or you can click Customize Report / Filters to limit the Journal report’s output to particular accounts you wish to see.

A faster way to pinpoint one particular transaction is to pull up the customer, vendor, employee, etc. in its respective Center.

Let’s say you want to see the implied side of an invoice that posted to a particular customer.

Go the Customer Center and click on the customer you want. You’ll see the customer’s transaction in the right-hand pane.

In this example, let’s say you want to see all the debits and credits associated with invoice 1024, the last transaction in the listing.

You just right-click on that transaction, and select “View Transaction Journal”, like this:

A new window will pop up with the debits and credits for that specific transaction. Here’s the rightmost columns of information in the window:

Nice! This is faster and easier than running the big Journal report and filtering down to this level. You see that the implied side of the transaction is listed first: accounts receivable. That’s the implied side of the invoice transaction.

This is a pretty obvious example. But in cases where you’re not sure what the offsetting debit or credit was, you have ways to find out.

Sourced from 

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Selecting Mrs Bookkeeper

Let’s assume that you decided to hire an independent bookkeeper. How should you interview and select such a bookkeeper?

Recruiting in general, whether it is for a bookkeeper or any position, is more of an art than a science, so there is no simple recipe that will ensure that you get the best bookkeeper in the door, but there are criteria that will enable you to mitigate risks. Here’s a short checklist and I’ll cover each item in more details below:

• Professionalism
• QuickBooks knowledge
• Accounting knowledge
• Price
• Availability
• Referencechecks

Professionalism
Why do I start with this criteria? Because it is the single most efficient factor to trim your list of candidates down. If you are reviewing a long list candidates and you test them first on their QuickBooks knowledge, you’ll shrink your list by 50% pretty quickly. If you test them on professionalism first, you’ll shrink the list by 80% right from the get go and you’ll save yourself a lot of time. What do I mean by “professionalism”? That’s the whole package of people skills that the bookkeepers expose to you. How crisp and well written are their emails? How friendly are they on the phone and in-person? How punctual are they to the interview? How well dressed are they? How well do they listen? Did they prepare for the interview by researching your company? A bookkeeper who doesn’t score high on this dimension will cause you problems down the road, because good bookkeeping is not only about the accuracy of the data that you get into QuickBooks. A bookkeeper is a consultant and as such, the bookkeeper needs to know how to adapt to your industry and company, understanding your needs and adapt his/her work to your needs.

QuickBooks knowledge
There is an enormous difference between being knowledgeable in QuickBooks and knowledgeable in accounting. QuickBooks appears simple to use if all you need to do is reconcile bank accounts, but as soon as you start pushing the envelope (job costing, sales tax, inventory management, integration with 3rd party apps, etc…), it’s a whole new ball game. Even if you majored in accounting in college, it won’t help at all. Case in point: most CPAs cannot be called QuickBooks experts. They know how to pull reports out of QuickBooks to prepare your taxes, but the number of CPAs out there who would be able to fix a “broken” QuickBooks file is very small. That’s not their area of expertise.

Accounting knowledge
This one is a no-brainer and you have to test for it. However, you’ll be surprised how few candidates will fail in this dimension, because the accounting knowledge required to keep clean books is actually easy to acquire. This being said, let me stress that this holds true only if all you are looking for is a bookkeeper. If you are expecting your candidate to play a controller or CFO role, it’s a very different story, but then, the job description should not be “bookkeeper”.

Price
Like in any market, you get what you pay for. The lower the cost, the lower the expertise. If you plan on giving your bookkeeper primarily data entry tasks and you will be verifying every detail of his/her work on an on-going basis, you can afford to go lower on the price scale. However, if you expect your bookkeeper to be self-sufficient and you won’t have time to quality control the work, you will be forced to pay more. Keep in mind that the hourly rate is not necessarily a good representation of cost. Jane might charge twice the hourly rate as Joe, but if Jane works twice as fast as Joe and she provides higher quality work, you will end paying Jane less than Joe at the end of the month.

Availability
Supply and demand doesn’t only affect price. It affects availability as well. The better bookkeepers are busier. Make sure that the bookkeeper you hire still has available bandwidth for you and will be able to turn your work around quickly and be responsive to your questions during the week. That’s one of the key differences between independent bookkeepers and firms. When an independent bookkeeper is maxed out, there is no safety valve. You can’t move work around or assign different resources. You just have to wait for your turn.

Check references
Last but not the least, don’t skip on the reference checks. You’re about to give this bookkeeper a lot of sensitive financial information. Better be safe than sorry!

Internal Controls Accounting Principles

The two most common causes of fraud in small businesses are when rogue employees or contractors write checks to themselves or deposit checks to their account instead of the company’s account. Those are very unsophisticated schemes and can easily be detected after the fact, but by the time you detect the fraud, the damage is already done. Very often these individuals go from paycheck to paycheck and spent your money in a hurry. You can’t get the money back. They are broke and you can only “punish” them through termination and prosecution. You get a sense of vindication, but the money is gone.

It is much better to prevent fraud in the first place and for such basic fraud, there are easy tricks. It all starts with what larger companies call “Internal Controls”. Essentially, any financial process that moves money around needs to involve at least 2 individuals checking on each other. When you apply this to a small business, it can be very basic, but still effective.

Guarding your stock of blank checks

Many small business owners feel that as long as they are the ones signing checks, all is safe. Not really. Banks do a very bad job at checking signatures. They can be easily forged. The signature is an effective tool to trace back the source of the fraud once the fraud has been detected, but by then, it’s already too late. The better approach is to control who has access to stocks of blank checks and how these blank checks are handed out.

The safest process is to have your bookkeeper prepare the checks in QuickBooks and mark them as “To be printed”. You, the owner, would then do the actual printing. In this scenario, you’re the only one with access to the stock of blank checks.

If you don’t have time to do the printing, you can delegate the printing to the bookkeeper as well, but you would hand-out only the exact number of blank checks needed and you would keep a log of the check numbers that you handed out. Essentially, avoid at all cost to have the blank check in a self-service mode. Checks need to be in a locked drawer with as few people having access to them as possible.

The panacea is to not have blank checks at all and to use online bill payment with rigorous approval workflows, but these techniques are a little bit more involved in term of setup.

Controlling the deposits

Let your bookkeeper or the individual acting as bookkeeper record the deposits in QuickBooks and prepare the deposit slips, but make sure that it is a different person who goes to the bank to make the deposits. Ideally it should be you, but if you don’t have time, separate the roles of preparing the deposits and making the deposits. Whomever makes the physical deposit needs to bring the deposit slip back and immediately hand it off to the person in charge of QuickBooks. This is of course not bullet proof, because the person making the actual deposit could still swap the accounts, but by enforcing the requirement of handing off the deposit slip on the way back to the office, you send a clear signal that this type of fraud will be caught almost in real time.

There are of course much more sophisticated ways of committing fraud, but by implementing the processes above, you will be preventing the two most basic and common fraud schemes. 

Accountants Versus CPAs

CPA or Certified Public Accountant and Accountant perform almost the same duties. But the fact is that all accountants cannot be Certified Public Accounts whereas all CPA’s are accountants.

An accountant is a person who looks after financial records. An accountant would have good knowledge about owner’s equity, cash flow, chart of accounts and balance sheet and how these are going to affect the business.

An accountant is responsible for the accounting works of an individual or a business firm. It is the accountant’s responsibility to issue financial reports. Accountants need not be certified professionals.

On the other hand, CPA is a professional who is regulated by the state. An accountant can become a CPA only if he passes certain tests conducted by the respective Institutes of a country. Though the requirements to become a certified Public Accountant varies from one state to another, the basic thing is that one has top undergo rigorous tests to qualify to become a certified profession.

When comparing the works of both the professions, an accountant cannot do the work that a Certified Public Accountant can do.

An accountant cannot do the same work as a Certified Public Accountant whereas a CPA can do all work of the accountant. Unlike the Accountant, the Certified Public Accountant has a higher position in the financial and business circles. It is the Certified Public Accounts who are capable of advising on the financial aspects of a company. The CPA are trusted more than an accountant in financial matters. Even if an accountant’s views are valued, the last word is always from a Certified Public Accountant.

More than passing the test, the CPAs have to flow a strict code of ethics. Every two-year, the CPAs should have to complete 80 hours of professional education to keep up the new trends in accounting.

Summary

1. All accountants cannot be Certified Public Accounts whereas all CPA’s are accountants.

2. An accountant cannot do the work that a Certified Public Accountant can do.

3. It is the Certified Public Accounts who are capable of advising on the financial aspects of a company.

4. The CPA are trusted more than an accountant in financial matters.

5. Even if an accountant’s views are valued, the last word is always from a Certified Public Accountant.

6. CPA is a professional who is regulated by the state.

7. It is the Certified Public Accounts who are capable of advising on the financial aspects of a company more than an accountant.

Organizing Financial Records

Keeping good financial records is a common nightmare for most small business. What should you keep? How long? Is electronic OK? How to organize all these documents? Here are some high level guidelines, but bear in mind that the law around bookkeeping records is loaded with exceptions and corner cases. In case of doubt, always check with your CPA or attorney. Another disclaimer: this blog is about financial records as they are relevant to the IRS. Records that are HR related or that involve legal contracts follow very different rules.

1. The IRS is OK with electronic records.

The days when the IRS wanted every bookkeeping record to be on paper are long gone. As long as you can retrieve documents easily and as long as they are very clearly readable, IRS inspectors are fine with electronic records.

2. Electronic records are safer than paper.

The beauty of electronic records, besides their obvious advantage in term of space savings is that you can keep backups in multiple locations. With paper, you are at the mercy of a flood, fire or theft. With electronic bookkeeping records, make sure to have backups offsite. Options include online backup services such as Mozy, online document management solutions such as SmartVault or simply DVD copies kept in a safe deposit box at your bank.

3. Don’t rely on 3rd parties to keep records for you.

Many of your financial records are peppered around with 3rd parties such as your bank, your payroll provider, your CPA, your bookkeeper, your insurance company, etc… By the time you get audited, you may no longer be using these providers and you may not have access to this bookkeeping data anymore. Always store copies on your side. For instance, save a PDF of all your bank statements.

4. Keep everything!

The IRS says that you don’t need to keep receipts under $75. However, it also says that you need to be able to substantiate ANY expense that you incur, implying that, if you don’t keep the receipts, you need to keep a log that includes the date, time, place, amount, who was involved, and the business purpose of the expense. Why sweat it then? Just keep all your receipts and handwrite on them the business purpose. You can then file them or scan and shred.

5. Keep the organization simple.

For small businesses, there is no need to create complex indexing systems. For instance, keeping bookkeeping records in separate folders for each vendor might be overkill. A folder per month for all your receipts and statements is often sufficient. You can then rely on QuickBooks to tell you when a given transaction took place, to help you find the correct folder. This is a case of quantity over quality. Focus on keeping everything rather than on the way it is organized. The more complex your organization system is, the less likely you are to stick with it.

6. Keep records for at least 7 years.

The regulations on how long to keep financial records varies wildly depending on the type of record. If you are current with your taxes and filing, 7 years is a safe rule of thumb. Some people might say that it’s too long, but it is simpler to follow this rule than to have to keep different types of records in different folders and once a year go through the excruciating process of having to decide what to get rid of and what to keep. The main exception is for tax returns. Try to keep those for the life of the company. Digitize them if necessary to save space.

7. QuickBooks is your ultimate database.

Where does the IRS inspector go first when they audit you? The general ledger. The inspector will start asking for supporting documentation based on what he/she sees in QuickBooks. The cleaner QuickBooks is and the more details you have about each transaction in QuickBooks, the less documentation you will have to retrieve.

8. Beware of Meals and Entertainment.

It’s the small stuff that gets you in trouble. Write down who you met with and why on each receipt.

9. Archive your calendar.

The IRS will compare the entries in your calendar to the transactions you made. Each year, archive a paper or electronic copy of last year’s calendar in your files.

10. Keep a mileage log in all your car.

The IRS wants you to track the mileage of your odometre at the beginning of your trip and at the end of your trip. An entry like “2/25/11 – 32 miles to go meet with Bob” is not sufficient. It should look more like this: “2/25/11. 45,000 miles through 45,032 miles. Met with Bob Smith from Acme Ventures at 205 1st Street, Austin. Sales call.” Once a month, rip the pages of your log, enter the mileage into QuickBooks and archive the log.