Bookkeeping requirements for foreign-owned US companies.
Bookkeeping is the process of recording a company’s financial transactions. This helps companies keep track of all financial information, track their current financial position, log transactions that happen within the company, and to make important financial decisions. It also helps external users such as investors, financial institutions, or the government gain access to the necessary information to make well-informed decisions about investing or lending.
Companies should engage in proper bookkeeping as it is an indication of their performance regardless of the size or structure of the business. It is easier to make strategic decisions and set benchmarks for revenue and income goals if the financial activity of the company is detailed and organized.
It’s the best way to take control of your finances. Without proper bookkeeping, you may unintentionally risk ruin to your business. It’s critical to always know where your money is going and where it needs to go.
If all the necessary documents and financial information are organized and properly recorded, filing tax returns can be easier than expected.
Requirements for Foreign-Owned US Businesses
As part of record-keeping, a US company that is at least 25% foreign-owned needs to declare information about its foreign owners and any reportable transactions with these owners and with any other foreign-related parties on Form 5472 Information Return.
Corporations need to declare the name, location, the nature of their business, the country or countries which the related parties to the corporation reside, how the corporation is related to each official, and transactions between the corporation and each foreign official to the company in accordance with section 6038A of the US Internal Revenue Code.
LLCs must also state reportable transactions between the LLC and parties including foreign owners of the company. Also, LLCs must keep a profit and loss statement and records of transactions to support the Form 5472 and will need to make those available in case these documents are requested from the IRS.
Elements of bookkeeping:
There are various elements to bookkeeping starting with the general ledger.
This document provides a summary of the financial information of your company by recording money that is coming in and going out.
Another part of bookkeeping is tracking income and expenses. Information about income can be taken from receipts — cash, sales tax, and the product or service that was provided. Any expenses incurred by your business such as rent, insurance, or employee salaries should be recorded.
Debits and credits are usually noted in the double-entry system of bookkeeping. This method of bookkeeping notes that every transaction has two parts which would impact two ledger accounts.
The debit entry in one account should reflect the credit entry in another as the sum of the debits should equal the sum of the credits. This determines the profit or loss over a certain period of time, which can be easily noted with proper bookkeeping.
Transactions in your bank account should ideally match the transactions recorded in your financial books. However, most times this is not the case and you need reconciliation, which means comparing bank statements with bookkeeping records around the same period of time and noting and recording each discrepancy.
Accounts receivable and accounts payable are also part of bookkeeping.
Accounts receivable is tracking the money that is owed to the company by customers once the product or service has been provided and also analyzing overdue invoices to determine which ones should be noted as bad debt.
Accounts payable is, therefore, the opposite. It focuses on money that the company owes and includes money owed to suppliers, vendors, employers, and the government.
Once an invoice has been received, the correct amount should be paid and then recorded in the relevant ledger. Depreciation of assets is also noted and once a portion of the tangible asset’s cost is calculated and that asset has depreciated, it is recorded as an expense.
Financial statements are, of course, a crucial part of bookkeeping.
The important financial statements are income statements, balance sheets, cash flow statements, and statements of changes in equality. Income statements, also known as Profit and Loss statements, show the profit and losses of your company within a specific time frame and show the company’s bottom line.
Balance sheets record the company’s financial health throughout the company’s entire existence. Cash flow statements show how cash and cash-like equivalents leave and enter the company. Statement of changes in equity, also known as a statement of total recognized gains and losses, shows share capital, reserves, retained earnings that have changed within a particular point in time.
How long should you keep your records?
For foreign-owned US companies, permanent books of account and other records must be kept in accordance with code section 6038A. This ensures the company maintains sufficient records and determines the accuracy of the information reported on Form 5472 and correct tax treatment of reportable transactions.
Corporations, according to the IRS, should keep tax records of depreciating assets. Usually, the IRS recommends keeping records for 2–7 years. Even though this is the average time to keep records, it is always a good idea to keep these documents longer in case you are ever audited.
Online bookkeeping services.
Although it sounds complicated, bookkeeping may not be as difficult as it sounds. There are numerous software programs that make bookkeeping easy. QuickBooks is one of the most popular programs used by accountants and bookkeepers. If you require assistance with bookkeeping, you can use a service offered by Bench which will do all of the record-keeping for your company for fraction of the cost of hiring an accountant. Visit Firstbase.io's Startup Rewards for a full list of customer rewards offered by Firstbase.io for our customers.
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