California Tax Service Center

Staying on Track, Keeping Good Business Records


Keeping your business records in a filing system may be last on your list of priorities, but it's just as important as any other aspect of your business, especially if you're on a tight budget. Every receipt saved could translate into a deduction on your tax return.

So, what's the best way to keep good records? It doesn't have to be complicated. Use any system you like to keep books and inventory records, as long as you clearly and accurately show your gross income and expenses. Your tax records must back up all the tax deductions and credits you claim on your tax return. Keep careful track of all your income and where it comes from. It's important to separate your business and personal receipts and your taxable and nontaxable income.

Be careful if you transfer some of your personal funds into your business account, essentially making a "loan" to the business. Keep complete records of that transaction so that you don't include the money in your taxable business income by mistake.

Expenses

Record your expenses when you actually incur and pay them. It's easy to forget about some of last year's expenses when you're filling out your tax return. Overlooking deductible expenses can cost you money.

Assets

Your business assets are the property and equipment you use for your business. Keep a complete and detailed record of your assets, showing when you acquired them, how much they cost, and how much you use them in your business. This detailed record will allow you to depreciate your assets properly and report the correct gain or loss if you ever dispose of them.

Self-Employment Earnings

If you are self-employed, you must pay self-employment tax instead of the social security tax that employees pay. This tax establishes your eligibility for social security and medicare benefits when you retire or are disabled. The amount of benefits you receive is related to how much you earned.

Car Expenses

It's important to get into the habit of recording your business mileage each time you use your car for business-related travel. Try keeping a logbook in the glove compartment and jotting down the mileage of each business-related trip. Record parking fees and tolls, and save your gas and oil, insurance, and repair receipts.

Payroll Expenses/Taxes

If you have employees, you must keep all records dealing with federal and state payroll taxes for at least four years. Make sure your records include your federal employer identification number and state employer account number, the confirmation numbers on tax records from any electronic payments or tax returns you filed, and the dates and amounts of all the payroll tax deposits you have made.

Keep track of the amounts you withhold from your employees' wages for social security and medicare (FICA) taxes, federal personal income taxes, California personal income taxes (PIT), and State Disability Insurance (SDI) in the same way. Record the date and amount of each paycheck, and the date and amount of the taxes you withheld. You must also provide your employees with a receipt showing the withheld taxes. Keep a record of the federal unemployment tax (FUTA), State Unemployment Insurance (UI) tax, and State Employment Training Tax (ETT) you paid.

Travel and Entertainment

Keep all business-related travel and entertainment receipts. Indicate the exact business reason for these expenses.

Sales and Use Taxes

Because you are required to pay the correct amount of tax and account for your business purchases and sales, it is essential you keep adequate records. For more information on keeping records, you may download Regulation 1698, Records and Publication 116, Sales and Use Tax Records. In addition, tax tip publications prepared for specific types of businesses include information on record keeping. You may obtain copies of these publications from the Forms and Publications area of BOE’s Internet site or call BOE’s Information Center at (800) 400-7115.

Note: The following information applies to the Board of Equalization. Other government agencies may have other record keeping requirements.

Business record requirements
You are required to keep business records so representatives from the Board of Equalization may:

  • Verify the accuracy of sales and use tax returns
  • Determine if tax is due if a return has not been filed

Failure to maintain accurate records may be considered evidence of negligence or intent to evade the tax and could result in penalties.

Types of records to keep
You must keep records that are necessary to determine the correct tax liability under the Sales and Use Tax Law, such as:

  • The normal books of account (books of account can include information stored on computers)
  • Documents of original entry (for example, bills, receipts, invoices, job orders, contracts, or other documents) supporting the entries in the books of account
  • All schedules or working papers used to prepare your tax returns

What should your records show
Your records must show:

  • Gross receipts from all sales or leases of tangible personal property-even sales or leases you may consider to be exempt from tax
  • All deductions claimed in filing returns
  • The total purchase price of all tangible personal property purchased for sale, consumption, or lease

Retain your business records
You must keep sales and use tax records for four years unless the BOE gives written authorization for their earlier destruction. This applies to all records that pertain to transactions involving sales or use tax liability.

In addition, if the BOE is auditing your records, you should retain all records for the period being audited until the audit is completed (or - if you appeal the findings or file a claim for refund - until your case is resolved).

Retain resale or exemption certificates
You need to keep the certificates to document claimed nontaxable sales. If you do not keep these records, you are subject to tax, interest, and penalty charges if you cannot otherwise prove a sale was not subject to tax.