Federal Income Taxes & Your Business.

Welcome to Metro Accounting and Tax Services information series, What You Need to Know about Federal Taxes and Your New Business. Today we’ll be examining the Employer Identification Number or EIN, Record Keeping Requirements and Bookkeeping System for the small business owner.

As a small business owner you might be experiencing a little difficulty keeping up with all of your business recordkeeping.

You might be asking yourself what is an EIN? And what does EIN stand for, anyway?

You know it’s an Entrepreneur Something Number?

That doesn’t sound right.

You have receipts, receipts, receipts! You don’t know what to keep and what you can get rid of. You might have a restaurant receipt, and you’re of the opinion that you might not need it so you’re contemplating whether or not to keep it. You’re not even sure if you have all the information needed.

You’re a sole proprietor, but you’re thinking that maybe you should be a Limited Liability Company or maybe you should just incorporate.

You have lots and lots of questions. But presently your first bone of contention is that maybe you should just get through this mess first and deal with the rest later.

And you’re thinking that you still need to make sure you’re using the right accounting method.

The cash method, you guess… or maybe accrual is better. You don’t know.

How long should you keep records for? Maybe you should just pay someone to do it for you. But who?

Let’s see if we can help bring some order to the chaos that most small business owners are experiencing.



Employer Identification Number, or EIN

The federal Employer Identification Number, or EIN identifies tax returns filed with the IRS, and, as a business owner, you may be required to get an EIN.

As a small business owner will need an EIN if you pay wages, have a self-employed retirement plan, operate your business as a partnership or corporation, or if you are required to file any of these tax returns: employment; excise; fiduciary; or alcohol, tobacco, and firearms.

It is important to note that even if you are a sole proprietor with no employees and don’t meet any of these requirements, you may still need an EIN for dealing with other businesses, including banks, they require an EIN to set up a business bank account.



It is imperative that small business owners keep receipts, sales slips, invoices, bank deposit slips, canceled checks, and other documents to substantiate items of income, deductions, and credits. Although it may sound like a lot of work, unless you have records showing the sources of your receipts and payments you may not be able to prove that some are non-business related or non-taxable. Remember, recording these items will help you pay only the tax you owe.

Please remember that records must support the claimed amount, the time and the place, the business purpose, and your business relationship to any other person involved.

As a small business owner if your records are incomplete, they may not support your deductions. To support items of income or deduction on your tax return, you must keep records until the statute of limitations for that tax return expires. Usually, the statute of limitations for an income tax return expires three years after the return is due or filed or two years from the date the tax is paid, whichever is later.

So the moral of the story is, as a business owner you must keep your records as long as their contents may be material in the administration of any Internal Revenue Service law.

You’ll be required to keep employment tax records too if you have employees. All employment tax records must be kept for at least four years after the date on which the tax return becomes due or the tax is paid, whichever is later.

However, if you change your method of accounting, records supporting the necessary adjustments may be material for an indefinite amount of time. In addition, records relating to the basis of property must be kept for as long as they are material in determining the basis of the original or replacement property. They might be important to figuring out depreciation, amortization or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.

In the unfortunate even that you’ve lost your records due to circumstances beyond your control, such as a flood or an earthquake, you may substantiate a deduction by a reasonable reconstruction of your accounting records.


Bookkeeping Systems

Surprisingly, many persons who operate their own one-person business never bother to set up a business bookkeeping system. Their personal checking account serves as both a personal and a business account. The IRS, however, recommends that you open a separate business bank account for your business.

It is also recommended that business adopt the double entry bookkeeping system for maintaining their accounting records. Although more complex: it has built-in checks and balances, it’s self-balancing, and is more accurate than the single entry system. Because all businesses consist of an exchange of one thing for another, double entry bookkeeping is used to show this two-fold effect.

Along with the selected a bookkeeping system, the small business owner will also need to select an accounting method. This basically is a set of rules that you use to decide when and how you report your income and expenses.

The two most commonly used accounting methods are the cash method and the accrual method. On your tax return, you must use the same accounting method you used to keep your accounting records.

Under the cash method, the business owner reports all income in the year received and expenses are deducted only in the tax year in which they are paid.

With the accrual method of accounting, income is reported in the year it is earned, regardless of when it’s received. Expenses are deducted in the tax year they are incurred, whether or not they are paid that year.

Generally businesses that have inventory for sale to customers must use an accrual method for sales and purchases. However, many small businesses with gross receipts averaging less than 10 million dollars a year may use a cash method for sales and purchases.

User | 26/08/2020