A. There’s no one way to keep records. In fact, the IRS states on its website that “you may choose any recordkeeping system suited to your business that clearly shows your income and expenses.”
However, it’s important to keep thorough and accurate records. If you have incomplete or no records and get audited by the IRS, it can cost you valuable deductions.
According to the IRS, here are some of the types of records you should keep:
|Gross receipts||The income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts.||Cash register tapes; deposit information (cash and credit sales); receipt books; invoices; and Forms 1099-MISC.|
|Purchases||Items you buy and resell to customers. For manufacturers or producers, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Supporting documents should show the amount paid and that the amount was for purchases.||Canceled checks or other documents that identify payee, amount, and proof of payment/ electronic funds transferred; cash register tape receipts; credit card receipts/ statements; and invoices.|
|Expenses||The costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense.||Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred; cash register tapes; account statements; credit card receipts and statements; invoices; and petty cash slips for small cash payments.|
|Travel, transportation, entertainment, and gift expenses||If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.||Same as above|
|Assets||The property, such as machinery and furniture, that you own and use in your business.
You must keep records to verify certain information about your business assets.
You need records to compute the annual depreciation and the gain or loss when you sell the assets.
|Purchase and sales invoices; real estate closing statements; and canceled checks or other documents that identify payee, amount, and proof of payment/ electronic funds transferred.
Documents should show: When/ how you acquired the assets; purchase price; cost of any improvements; deductions taken for Section 179 and depreciation; deductions taken for casualty losses; how you used the asset; when/ how you disposed of it; selling price; and sale expenses.
There are also specific employment tax records you must keep. Keep all records of employment for at least four years.
Don’t leave the important matter of documentation to chance. You can prepare and maintain tax return records that will stand up to close scrutiny from the IRS. For more information about tax recordkeeping, consult with your tax advisor.