Here’s what HIVE AI had to say about “What records must I keep for business deductions?”:
Records Required for Business Deductions
When claiming business deductions on your tax return, proper record-keeping is essential to substantiate your expenses and withstand potential IRS scrutiny. The tax code requires taxpayers to maintain adequate records that can establish the elements of each business expense.
General Record-Keeping Requirements
A taxpayer ordinarily must maintain adequate records to substantiate the amounts of income and entitlement to any deductions claimed. This requirement is established in section 6001 of the Internal Revenue Code and section 1.6001-1(a) of the Income Tax Regulations. Dawson U.S. Tax Court Opinions: Emad Alabsi & Yana I. Daevidoff Dawson U.S. Tax Court Opinions: Emad Alabsi & Yana I. Daevidoff
Section 162(a) generally allows deductions for ordinary and necessary trade or business expenses. However, taxpayers have a responsibility to maintain adequate records to substantiate the amounts and purpose of claimed deductions. Dawson U.S. Tax Court Opinions: James Michael Burke & Elizabeth Ann Burke a.k.a. Elizabeth Ann Jacobson
Taxpayers are required to maintain records sufficient to substantiate their claimed deductions. These records must be retained “so long as the contents thereof may become material in the administration of any internal revenue law.” Dawson U.S. Tax Court Opinions: Frederick Dabankah
What Constitutes “Adequate Records”
Adequate records for substantiating business expenses include “account books, diaries, logs, statements of expense, trip sheets, or similar records and documentary evidence made at or near the time of the expenditure.” Dawson U.S. Tax Court Opinions: Sheri Flying Hawk
To meet the “adequate records” test, a taxpayer must maintain an account book, a diary, a log, a statement of expense, trip sheets, or similar records prepared contemporaneously with the expenditure, and documentary evidence of certain expenditures, such as receipts or bills. In combination, these records must be sufficient to establish each element of the expenditure for which a deduction is sought, including amount, time and place, business purpose, and business relationship. Dawson U.S. Tax Court Opinions: Adedayo Alubunkudi & O. Adedotun Alubunkudi
To meet the adequate records requirement, you must maintain “an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use.” IRS – Publication 534: Depreciating Property Placed In Service Before 1987
Elements That Must Be Substantiated
For most business expenses, you need to document:
- Amount – The exact amount of each expense
- Time and place – When and where the expense occurred
- Business purpose – Why the expense was business-related
- Business relationship – For entertainment or gifts, the relationship to the people involved
Taxpayers are to maintain records and documentation which are sufficient to establish each element of a claimed business expense—amount, time, place, and business purpose. Dawson U.S. Tax Court Opinions: James Michael Burke & Elizabeth Ann Burke a.k.a. Elizabeth Ann Jacobson
Special Substantiation Requirements for Certain Expenses
Some business expenses are subject to stricter substantiation requirements under section 274(d) of the Internal Revenue Code:
Certain expenses are subject to especially strict substantiation rules under section 274(d). These include expenses associated with the use of certain “listed property”, which is defined in section 280F(d)(4) to include passenger automobiles. When section 274(d) applies, a taxpayer must substantiate—using adequate records or sufficient evidence corroborating the taxpayer’s own statement—(1) the amount of the expense; (2) the time and place the expense was incurred; (3) the business purpose of the expense or business use of the asset; and (4) the business relationship of the taxpayer to other persons benefited by the expense or use, if any. Dawson U.S. Tax Court Opinions: Frederick Dabankah
Certain business expenses, including lodging or other traveling expenses and entertainment expenses, are subject to stricter substantiation requirements pursuant to section 274(d). That section and the regulations thereunder require a taxpayer to substantiate, by adequate records or by sufficient evidence corroborating the taxpayer’s own statement, the amount, time and place, and business purpose of each expenditure. Dawson U.S. Tax Court Opinions: Emad Alabsi & Yana I. Daevidoff
Under section 274(d) and the regulations thereunder, heightened taxpayer substantiation and documentation requirements apply to expenses for business travel away from home, including meal and vehicle mileage expenses. Dawson U.S. Tax Court Opinions: James Michael Burke & Elizabeth Ann Burke a.k.a. Elizabeth Ann Jacobson
Vehicle Expenses
For vehicle expenses, you must keep detailed records of:
For listed property other than a vehicle (for example, a yacht, airplane, or certain computers), taxpayers must provide: (i) The date that the property was placed in service, (ii) The percentage of business use, (iii) Whether evidence is available to support the percentage of business use claimed on the return, and (iv) Whether the evidence is written. Tresuary Reg. 1.274-5T
Cell phones are considered listed property under Sections 274 and 280F of the Code. Strict substantiation requirements must be in place, otherwise the use of cell phones is taxable to the employee. IRS Determination-0435021
Home Office Deductions
If you claim a home office deduction, you need specific records:
You should keep canceled checks, receipts, and other evidence of expenses you paid. Your records must show: • The part of your home you use for business • That you use part of your home exclusively and regularly for business as either your principal place of business or as the place where you meet or deal with clients or customers in the normal course of your business • The depreciation and expenses for the business part IRS – Publication 587: Business Use of Your Home (Including Use by Daycare Providers)
How Long to Keep Records
You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. A period of limitations is the period of time after which no legal action can be brought. IRS – Publication 225: Farmer’s Tax Guide
You must keep your records for as long as they are important for any tax law. This is usually the later of the following dates: • 3 years from the return due date or the date filed • 2 years after the tax was paid Keep records to prove your home’s depreciable basis. This includes records of when and how you acquired your home, your original purchase price, any improvements to your home, and any depreciation you are allowed because you maintained an office in your home. IRS – Publication 587: Business Use of Your Home (Including Use by Daycare Providers)
You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. IRS – Publication 583: Starting a Business and Keeping Records
What If You Don’t Have Adequate Records?
If a taxpayer is unable to satisfy the “adequate records” standard, they must establish each element of the expenditure by: (1) their own statement, including specific and detailed information and (2) by other corroborative evidence sufficient to establish each element. When the element to be established is the amount of business use, this corroborative evidence must be direct evidence—such as a statement in writing or oral testimony of witnesses setting forth detailed information about the use—or documentary evidence. Such documents “must contain sufficient information as to each element of every business/investment use.” Dawson U.S. Tax Court Opinions: Sheri Flying Hawk
Electronic Records
Records can be kept in either paper or electronic format:
Records “may be retained on paper or electronically in the manner prescribed in applicable regulations, revenue rulings, revenue procedures, or other appropriate guidance.” T.D. 9570
Practical Record-Keeping Tips
- Keep all receipts and invoices for business purchases
- Use a separate business bank account and credit card to simplify tracking business expenses
- Maintain a mileage log if you use your vehicle for business
- Document business purpose for each expense at the time it occurs
- Take photos of receipts as backup in case paper receipts fade
- Use accounting software to organize and categorize expenses
- Regularly back up electronic records
- Keep a calendar of business appointments and meetings
Keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. IRS – Publication 225: Farmer’s Tax Guide IRS – Publication 225: Farmer’s Tax Guide
Consequences of Inadequate Records
Without adequate records, the IRS may:
- Disallow your claimed deductions
- Impose penalties for negligence or substantial understatement of tax
- Shift the burden of proof entirely to you in case of an audit
Conclusion
Maintaining thorough and organized records is essential for supporting your business deduction claims. The specific records you need depend on the type of expense, but generally include documentation of the amount, date, business purpose, and business relationship for each expense. These records should be kept for at least three years from the date you file your return, though in some cases you may need to keep them longer.
By establishing good record-keeping habits, you not only protect yourself in case of an IRS audit but also gain better insight into your business finances, which can help with future business planning and tax strategies.
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