Two Big Issues with Recordkeeping for Tax Purposes
The records you keep provide the documentation to support the deductions and expenses claimed on your tax return. There are two big issues.
Big Issue One. The first issue is that you need to prove that the expense is deductible. To do this, you must always keep documentation of the “reason” for the payment. This is especially true if you are paying things that could be construed as a personal benefit to the owner. These are things like truck payments, repairs, meals, mobile telephones, etc.
Big Issue Two. The 2nd big issue is proving that the expense actually occurred. Third party documents, such as statements, receipts, and cancelled checks help establish the existence of the expense. Although, you are allowed to pay expenses with cash, it is hard to document the occurrence of the payment. The documentation must show the amount, payee’s name, and transaction date. A couple of years ago, I helped a drywall contractor with an IRS audit. He paid everything in cash and had no receipts. You can imagine how the audit went! We took his case to Appeals and were able to get him some tax reduction based on reasonableness. If he had kept his records, he would not have had the train wreck!
