Equine Accounting: Tax Records - What, what, where, when and how (long to keep it)...

The IRS requires that you keep permanent records that are "sufficient to establish the amount of gross income and deductions, credits and other matters shown on your tax return." To accomplish that goal, tax law requires that your business maintain an accurate and complete set of books. J.K. Lasser Publications estimates that the average small business owner spends ten hours each week working on their company's financial records.
Examples of deductible expenses for a horse business could include costs for wages, training, supplies, feed, breeding fees, veterinary visits, donations, trailering, interest, taxes, repairs, auto, travel, advertising and insurance.
Documentation for most types of expenses require that you maintain basic information for each expense - date of purchase, amount, description and business purpose. But some categories of expenses have specific requirements for documentation:
Auto - Keep a log of all business-related travel including destination, purpose of trip, name of party visited and start and end odometer readings.
Charitable Contributions - For cash contributions, you need either the bank record or written communication from the donee with the date, amount and donee name. For cash contributions of $250 or more, a contemporaneous, written acknowledgement from the donee indicating the amount of donation is required.
Gift - The amount, date given, description of the gift, business reason for giving the gift, name and occupation of person receiving the gift and their business relationship to you must be documented.
Travel & Entertainment - Records must show the amount, time, place and business purpose of the expense. The written proof must be recorded "contemporaneously" with the expense. In other words, you can't spend the money one day and document the expense in writing six months later.

How long do you need to keep this documentation?
The IRS has three years from the date the return is due or filed OR two years from the date the tax was paid (whichever is later) to assess the tax. There are also longer statutes of limitation for unreported income, filing a credit or claim for refund and losses from worthless securities. However, if the taxpayer files a fraudulent return or doesn't file a return, there is NO statute of limitations for the IRS to assess tax. Also, for any property, supporting documentation for the cost and any improvements should be kept until the property is sold. Since each situation is different, business owners should consult with their financial advisor before deciding to throw away any documentation that support their tax return.
For more information, visit the IRS website.