Recordkeeping

You must keep records to correctly figure your taxes. Your records must be permanent, accurate, complete, and clearly establish your income, deductions, and credits. The law does not require you to keep records in any particular way. But if you have more than one business, you should keep a complete and separate set of books and records for each business.

Publication 583 provides information about setting up a recordkeeping system, the types of books and records included in a typical system for a small business, and sample records.

Publication 463 provides information on the records to keep if you use your car in your business.

The following are suggestions for keeping adequate business records.

• Keep a business bank account. Deposit all business receipts in a separate bank account. Make all payments by check, if possible. Then business income and business expenses will be well documented.
• Make a record. Record all your business transactions in separate account books and keep a monthly summary of your business income and expenses.
• Keep your records. You must keep your business books and records available at all times for inspection by the IRS. You must keep the records as long as they may be needed in the administration of any Internal Revenue law. You should also keep copies of your tax returns to help prepare future returns or file claims for refunds.
• Support your entries. File canceled checks, paid bills, duplicate deposit slips, and other items that support entries in your books in an orderly manner and store them in a safe place. For instance, organize them by year and type of expense.

If you cannot provide a canceled check to prove payment of an expense item, you may be able to prove it with certain financial account statements. These include account statements prepared for the financial institutions by a third party. These account statements must be highly legible. The following table lists acceptable account statements.

Proof of payment alone does not establish that you are entitled to a tax deduction. You should also keep other documents as discussed in Proving Your Deductions, next.

Proving Your Deductions

The IRS may ask you to prove your deductions for business expenses.

Travel Expenses

For travel expenses, you must be able to prove the following items.

• Each separate amount you spent for travel away from home, such as the cost of your transportation or lodging. A receipt, bill, or other documentary evidence generally is required for all lodging expenses. You can total the daily cost of your breakfast, lunch, dinner, and other incidental travel costs if they are listed in reasonable categories, such as meals, gas and oil, and taxi fares.
• The dates you left and returned home for each trip, and the number of days spent on business while traveling away from home.
• The destination or area of your travel, described by the name of the city or town.
• The business reasons for your travel or the business benefit you gained or expected to gain from it.

Entertainment Expenses

For entertainment expenses, including entertainment-related meals, you must be able to prove the following.

1. The amount of each separate entertainment expense. You can total incidental expenses, such as taxi fares and telephone calls, on a daily basis.
2. The date the entertainment took place.
3. The name and address or location of the place you went. Include the type of entertainment, such as dinner or the theater, if the information is not clear from the name or designation of the place.
4. The occupation or other information about the persons for whom you are claiming a meal or entertainment expense. Include their names, titles, or other information sufficient to establish their business relationship to you.
5. The business reason for the entertainment or the business benefit you gained or expected to gain from it and the nature of any business discussion or activity that took place.
6. The presence of you or your employee at a business meal given for a client.

Business discussion. If the entertainment took place before or after a substantial and bona fide business discussion, in addition to the information in (1), (2), (3), (4), and (6) above, you must be able to prove the following.

• The date, place, and duration of the business discussion.
• The nature of the business discussion.
• The business reason for the meal or entertainment or the business benefit you gained or expected to gain from entertaining.
• The identification of the persons who participated in both the business discussion and the entertainment activity.

Business relationship. If you entertain a readily identifiable group of people, you do not have to record the name of each person. It is enough to designate the group. For example, if you entertain all the members of a garden club, an entry such as "members of the Hillcrest Garden Club" is enough.

Gift Expenses

For gift expenses, you must be able to prove the following.

• The cost of the gift.
• The date you gave the gift.
• A description of the gift.
• Your reason for giving the gift or any business benefit you gained (or expected to gain) from giving it.
• The occupation or other information about the person receiving the gift, including name, title, or other information establishing a business relationship to you.

The name of the recipient of a business gift does not always have to be recorded. A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the deduction for gifts to any one person. For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of a number of customers, it is usually enough to record a general description of the recipients.

Records

You should keep proof of travel, meal, entertainment, and gift expenses in an account book, diary, statement of expense, or similar record. You should also keep adequate documentary evidence to support each element of an expense.

You do not have to record information shown on a receipt if your records and receipts complement each other in an orderly manner.

Keep your records up to date. Record your expenses in your account book at or near the time of the expense. Entries made later, when you may not remember them accurately, do not have as much value as entries made at or near the time of the expense.

Separating expenses. Usually, each separate payment you make must be recorded as a separate expense. For example, if you entertain someone at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are separate expenses. You must record them separately in your records.

Expenses of a similar nature occurring during the course of a single event will be considered a single expense. For example, if during entertainment at a cocktail lounge you pay separately for each serving of refreshments, treat the total expense for the refreshments as a single expense.

Some items can be totaled in categories. You can make one daily entry for such categories as taxi fares, telephone calls away from home, gas and oil, and other incidental travel costs. Meals should be a separate category. Include tips with the costs of the services you received.

Documentary evidence. A receipt or bill is often the best evidence to prove the amount of an expense. Documentary evidence is needed for all your lodging expenses unless, under an accountable plan, your employer pays you a per diem reimbursement of no more than the government rate in effect at that time and in that area. It is also generally needed for any other expense of $75 or more.

Documentary evidence will ordinarily be considered adequate if it shows the amount, date, place, and essential character of the expense. For example, a hotel receipt is enough to support expenses for business travel if it has the name and location of the hotel, the dates you stayed there, and separate amounts for charges such as lodging, meals, and telephone. A restaurant receipt is enough to prove an expense for a business meal if it has the name and location of the restaurant, the number of people served, and the date and amount of the expense. If a charge is made for items other than meals and beverages, the receipt must show that this is the case.

Canceled check. A canceled check, together with a bill from the payee, usually establishes the cost. However, a canceled check by itself does not prove a business expense without other evidence to show a business purpose.

Incomplete records. If you do not have adequate records to prove an element of an expense, you must prove the element by providing both of the following.

• Your own statement, whether written or oral, containing specific information about the element.
• Other supporting evidence sufficient to establish the element.

Additional proof. You may be required to provide additional information to the IRS to clarify or establish the accuracy or reliability of the information in your records, statements, testimony, or documentary evidence.

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