You may choose any record keeping system suited to your business that clearly shows your income and expenses. It can be as simple as a calendar showing business income earned each day and business expenses paid each day or they may be a detailed accounting system. The system of records should include enough information to correctly determine gross receipts, business expenses incurred and the purchase price of assets acquired for use in the business. The taxpayer’s books and records should have supporting documents. You don’t need to submit the records with your tax return, but you will need to show them to your tax preparer and be prepared to show them to the IRS in case your business tax return is audited.

Documents on your business income

Gross receipts are all the income received by the business. The taxpayer should keep supporting documents that show the amounts and sources of gross receipts. Documents that show gross receipts include the following:

• Cash register receipts
• Bank statement and deposit slips
• Receipt books
• Invoices
• Credit card charge slips
• Forms 1099 MISC
• Any format (calendar, income ledger, etc.) that the taxpayer consistently uses to record receipts of the business

you will need information on all sources of income for your business, including any 1099-MISC income from work as an independent contractor. You can deduct returns and allowances that reduce your business income. You may also be able to write off bad debts, if your business uses the accrual accounting method.

Documents on Inventory

If your business sells products and keeps inventories of those products, you need to keep your document on purchases separately. Purchases are the items bought to resell to customers. Supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

• Canceled checks
• Cash register tape receipts
• Credit card sales slips o Invoices

You will need to calculate cost of goods sold. For this calculation, you will need information on:

• Beginning inventory. This is the amount you have in inventory at the beginning of the year.
• Cost of labor, materials, and supplies
• Ending inventory. This is the amount you have in inventory at the end of the year. You may need to take a physical inventory count to get these beginning and ending inventory numbers.

Documents on your business expenses

Expenses are the costs incurred (other than purchases) to carry on the business. The supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:

• Canceled checks
• Cash register receipts
• Bank account statements
• Credit card sales slips
• Invoices
• Petty cash slips for small cash payments

When the IRS refers to business expense, it’s talking about ordinary and necessary costs of operating your business. An ordinary expense is one that is common and accepted in your industry or your trade. A necessary expense is one that’s appropriate and useful for your industry or your trade.
Asset costs are excluded from business expenses. You have to capitalize and recognize as expense over the expected useful life of the underlying asset.

Documents on your business assets

Assets are the property, such as machinery and furniture owned and used in the business. Taxpayers must keep records to verify certain information about business assets. They need records to figure the annual depreciation and the gain or loss when assets are sold. The records should show the following information:

• When and how an asset was acquired
• Purchase price including purchase invoice, real estate closing statements, cancelled checks, etc.
• Cost of any improvements including invoices and cancelled checks
• Section 179 deduction taken
• Deductions taken for depreciation
• Deductions taken for casualty losses, such as losses resulting from fires or storms
• How the asset was used
• When and how the asset was disposed of, including sales invoice or closing statement o Selling price o Expenses of sale

The following documents may show this information.

• Purchase and sales invoices
• Real estate closing statements
• Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Documents on business use of your home(if you work from home)

You will need to file Form 8829 to substantiate business use of your home, including:

• Calculation of the percentage of your home square footage that is set aside for “regular and exclusive” use by your business
• Amount for your home mortgage interest ,real estate taxes, and homeowner’s insurance.
• Home expense like utilities, rent, and repairs and maintenance
• And information about the value of your home for depreciation purposes.

Documents on car and truck business expenses

It is necessary for you to tracking your business mileage to claim your deduction for the business use of your vehicle. Without a record of your business miles, the IRS would disallow your deduction. Business mileage includes driving to a client’s office, to the office supply store, to the post office, to multiple job sites, etc from your primary office. It also includes driving for out of town business trips. Business mileage does not include traveling from your home to your office or from your home to a customer’s place of business.
The IRS tends to be strict in its documentation requirements for business mileage deductions. You need to keep a thorough, accurate mileage log each year you attempt to claim a deduction. Your mileage log must include the starting mileage on your vehicle’s odometer at the beginning of the year and its ending mileage at the end of the year. Each time you use your vehicle for business purposes, you must record the following information:

• The date of your trip
• Your starting point
• Your destination
• The purpose of your trip
• Your vehicle’s starting mileage
• Your vehicle’s ending mileage
• Tolls or other trip-related costs

You have two options for claiming your business mileage deduction: You can use the standard mileage rate as determined by the IRS, or you can deduct your actual expenses. If you use the actual expense method, you should also keep receipts to substantiate all of the car expenses. If you use the standard mileage rate, you can’t deduct any of the actual expenses you incur for operating or maintaining your car. However, parking and tolls can be deducted in addition to the standard mileage rate.

Specific record keeping rules apply to Travel, transportation, entertainment, and gift expenses. In accordance with IRC Section 274(d), no deduction is allowed for travel, entertainment or gifts unless the taxpayer substantiates by adequate records or by sufficient evidence.

Travel
You must have adequate records to substantiate all travel deductions. These records must show the amount, time and place, and the business purpose of each expense. Using an expense log is the best way to keep these records. Each day, document your business activities and note any out-of-pocket expenses for which you don’t have a receipt. Always get receipts and keep them with your travel log. The IRS requires that you keep receipts for all lodging expenses regardless of the amount and for any expense of more than $75.

Meals
Deductible business meals fall into three different categories:

• Meals While Traveling. If you’re traveling for business, you can deduct your travel expenses. While you can deduct 100 percent of your lodging and mileage expenses, you can only deduct 50 percent of the meals you purchase.
• Meals as a Form of Entertainment As long as there’s a business connection, meals can be considered a deductible form of entertainment. You need another person to make this one deductible — there’s no deduction allowed if it’s just yourself.
• 100 Percent Deductible Meals. If you have employees, some of your meal expenses are 100 percent deductible. For example, the IRS allows businesses to fully deduct occasional small snacks and meals that are purchased for the benefit of employees.

You must have documentation to substantiate your meal deductions. This documentation can be in the form of a receipt or be detailed in an expense log. In either case, you must note the business relationship of the people participating in the meal, amount, time and place, and business purpose. If the meal costs more that $75, the IRS requires that you have a receipt.

Entertainment
Entertainment expenses can include meals as discussed above. But it can also include much more. Entertainment is any activity that provides amusement or recreation. Tickets to sporting events and theaters qualify as entertainment, for example. To be deductible, entertainment expenses must be ordinary and necessary business expenses. They must be incurred while entertaining an existing customer, a potential client, a business associate or an employee. In addition, entertainment expenses must be either directly related to or associated with the active conduct of your business.

Business gift

If you give business gifts in the course of your trade or business, you can deduct all or part of the cost of the gifts. No matter how much you spend on gifts for a particular business associate over the course of a year, you may deduct only $25 per individual.
When you give a business a gift, write the following information on the receipt to ensure that you’ll get the deduction:

• Date the gift was given
• Cost of the gift
• Description of the gift
• Name and business relationship of the person to whom you gave the gift
• Business reason for the gift, or the business benefit you expect to obtain

Record Reconstruction

Where the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through circumstances beyond the taxpayer’s control, Extensive record reconstruction should be performed by the taxpayer or a paid preparer. The goal of record reconstruction is to use available documentation to develop a sound and reasonable estimate of the taxpayer’s business income and expenses to make sure:

• that the taxpayer is carrying actually conducting a business and
• that the taxpayer has included all income and allowable related expenses, and
• that the income and expenses reported on the tax return are substantially correct and complete.

When reconstructing records, you can use such tools as:

• Appointment books or calendars
• Online map tools
• IRS standard allowances
• Checkbooks
• Cancelled checks
• Bank or credit card statements
• Lists of regular clients
• Partial receipts or sales tax records
• Cell phone records, call history, or computer logs
• Prior year returns