A business must keep good records for practical reasons like tracking inventory and revenues, and simply to know whether its operations are “in the black.” However, the advice of an IRS publication is equally wise: Good business records may even stave off a tax audit.
As background, the choice of business entity determines the tax obligations of the owner(s) in four general types of tax: income, self-employment, employment and excise. In a sole proprietorship, for example, the owner reports all profits and expenses of the business on his or her own personal tax return.
In a general partnership, taxes also pass through to the partners, who report those profits and/or losses on their own returns. However, a partnership must also file an annual information return. There are also exceptions, such as partners who elect for treatment as a qualified joint venture or own partnership property under their state’s community property laws.
At the opposite end of the tax spectrum are corporations and limited liability companies. Those business forms are treated as separate tax entities that file their own tax returns. Neither the shareholders of a corporation nor the members of an LLC are personally liable for payment of the entity’s tax obligations. Filing and reporting obligations, however, are a different matter. In fact, Section 6672 of the Tax Code imposes a trust fund recovery penalty upon an individual who was required to collect and account for a business entity’s taxes, but failed to do so.
Consider all of the business tax functions that a business performs. From employee payroll withholdings to deductions of start-up costs and asset depreciations, a business owner needs to understand the applicable tax laws and his or her responsibilities under them. Decisions must also be made about the accounting method and whether to adopt a calendar or fiscal tax year. When disputes over these obligations arise, an experienced tax attorney can help protect your rights.
Source: Internal Revenue Service, “Starting a Business and Keeping Records,” copyright 2016, U.S. Department of the Treasury