This post is an excerpt from a presentation I give to entrepreneurs who are trying to get small businesses off the ground.
Surprisingly, the IRS doesn’t have specific requirements for proper documentation of most items of income and expenses. See IRS Publication 583, which gives suggestions — but not requirements — on proper documentation.
There are some exceptions, mainly for expenses relating to mileage and meals and entertainment, where the documentation requirements are stricter. But in general, there are no hard and fast requirements from the IRS on recordkeeping.
Proper documentation of income depends on the type of business you run. If you’re a service provider, you probably give invoices to your customers. Keep the invoices, along with bank records showing your deposits.
If you’re a retail operation, you’ll need a cash register tape or credit card slips or some sort of documentation to show your sales.
Like I said above, the IRS has few if any requirements on proper documentation. But the best way to prove expenses is with receipts.
A receipt, combined with a bank statement/credit card statement/canceled check, should provide all the proof you need for your business expenses.
A receipt shows the date, place of purchase, and what you bought. This, combined with a bank or credit card statement showing payment, is good documentation.
A business can quickly accumulate a mountain of receipts and other documents. A common question is, can you scan all the papers and toss or shred the hard copy?
The answer is yes, as long as the scanned copy is a complete copy of the paper document.
You’re also required to keep the electronic copy for the same length of time as you would keep a paper document (generally a minimum of 3 years). This means you would need to be able to access the files during that time — something to keep in mind if you change computers every couple of years.
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“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”