Keeping track of all your business expenses such as AliExpress invoice and documents is not just a way to make your tax filing process easier, it is absolutely required by the government for you to keep a record of these. But, it can be pretty hard and confusing as a dropshippers to know which documents to keep, and which you can get rid of.
Every small business owner or self-employed person is required by the IRS to keep documentation that supports items of income, deductions, or credits appearing on their tax return. This documentation is how you prove that you earned what you said you earned and purchased what you said you purchased.
As for documents, not only do you need to license your business to keep your personal and professional liabilities separate, you need to pay attention to a lot of other stuff to make sure your business is legal in every way possible. You have to make sure you pay all types of taxes you owe to the state, as well as make sure there is no way your business is illegal, thus giving the feds a chance to get its claws on you.
Guide for Dropshippers
But being a dropshippers, your business may be a bit different than most other small businesses. So this will mean you will need to keep a record of a whole set of slightly different and some same documents and tools to help you with it.
The tax records and supporting documentation you need to hold on to include:
- Bank and credit card statements
- Canceled checks
- Proof of payments, like transaction records from PayPal
- Financial statements from your bookkeeper
- Previous tax returns
- W2 and 1099 forms
- Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return
Running a business is no small feat. If you were a person who was doing a job, then it would have been much easier, but being a business owner, the burden of proof to prove your business transactions is on you, the taxpayer. Since you need documents to back you up, the “go to advice” is simple, keep hold of everything.
During a tax audit, your first line of defense is your tax records. Your best bet is to store everything digitally, so it’s easily on-hand in case of scrutiny from the IRS. This will also help you avoid losing receipts so you can support every possible tax deduction that applies to your business.
If you are drop shippers who have been conducting your business with suppliers from China, i.e AliExpress, one thing that must bug you is that you do not get any AliExpress Invoice for the purchases that you made. So using different tools like AliBilling to generate your order details will help a lot.
The thing is, the IRS will accept digital copies of documents so long as they’re identical to and contain the same accurate information as the original copies. You need to be able to produce a legible printed copy of the document upon request.
It is important to note that generally, you need to keep tax records for the three years following the date the expense was filed, or from the due date of your tax return, whichever comes later. Even if you file your tax return early, it’s treated as though it was filed on the due date.
But there are exceptions to this 3-year rule as well. For eg, if you deduct the value of the bad debt or worthless securities on your tax return, you have to keep records of these debts and securities for seven years.
Another such exception is the omitted income, which is when you failed to report income that you should have reported, and it was more than 25% of the gross income listed on your return. In such cases, keep records for six years after the date you filed your taxes.
Most often, people make the mistake of thinking that keeping records is only for filing your taxes, but it’s not. Your creditors, business lawyer, or insurance company may also want to see copies of your tax records, and they may need you to hold on to them longer than the IRS does. Once you’re past the period of limitations on your records, double-check that you won’t need them for another purpose before you shred them.
God forbid you to lose the physical copies in some hazard, it is always safe to keep a soft copy on the cloud. If you’re using digital storage, you can simply archive records you no longer need — rather than permanently deleting them.
It can be tough to keep up with all the rules businesses are expected to follow. Although it’s important to make sure which records you need to keep and the period of limitations for each, remember: The best approach to small business recordkeeping is to hold onto everything. Life is easier when you’re not running amok searching for the missing receipts and records during tax season. And, so long as you keep everything, you’ll know you always have what you need in case of an IRS audit.