Keeping Tax Records

You want to be as good as you possibly can as far as keeping records and dealing with the IRS. I highly recommend hiring a tax advisor - they can easily pay for their fee many times over with the deductions they are able to find for you. Yes, TurboTax is great and I use it. It can create a Schedule C for you, which is where you keep track of the income and expenses you make from your home business. But a tax advisor can find things even TurboTax doesn't think of. You can deduct the expenses for your internet connection, for heating your office area, and much more.

Keep receipts for EVERYTHING and label them. Don't just keep the post office receipt, make a note on it what it was for. You may think you'll remember but it is likely you will not. Keep a little file-box by your desk with folders in it for your different tasks. Stick the receipts in there when you sit down. You can always move them into your larger filing cabinet later on, but the easier you make it on yourself to file as you go, the more likely it is you will end the year with things in reasonable order.

Keep your home and business accounts completely separate. Two checking accounts, two credit cards. Don't mix the two together.

As far as keeping records, be sure to read these pages on the IRS website:
* IRS Publication 552
* IRS Publication for Small Businesses

In general though you should keep all actual tax returns and W2 or 1099s forever. They can come in handy for social security or inheritance reasons. For general related documentation (receipts, bills etc) the rule of thumb is 3 years from when you file the paperwork.

From their 2005 page, they say:

IF you...   THEN the period is...
1. Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years
2. Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years
3. File a fraudulent return   Not limited
4. Do not file a return   Not limited
5. File a claim for credit or refund after you filed your return   Later of: 3 years or
2 years after tax
was paid
6. File a claim for a loss from worthless securities or a bad debt deduction   7 years

Finally, buy a shredder! That way you can just shred anything unnecessary once a year and get rid of it. Homes get cluttered enough without saving piles of paper that are no longer necessary.

Taxes and your Home Business
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