You may choose any recordkeeping system suited to your business that clearly shows your income. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to IRS Publication 583, Starting a Business and Keeping Records.
The following are some of the types of records you should keep:
- Gross receipts
- The income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts.
- Cash register tapes
- Bank deposit slips
- Receipt books
- Invoices
- Credit card charge slips
- Forms 1099-MISC
- Purchases
- The items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your 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
- Invoices
- Expenses
- The costs you incur (other than purchases) to carry on your business. Your 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 tapes
- Account statements
- Credit card sales slips
- Invoices
- Petty cash slips for small cash payments
- Travel, Transportation, Entertainment, and Gift Expenses
- Taxpayers must show that the gift was ordinary and necessary to their profession. Taxpayers must further show the following elements:
- Cost of the gift
- Date of the gift
- Description of the gift
- Business purpose or reason for the gift, or nature of business benefit expected to be derived as a result of the gift
Occupation or other information relating to the recipient of the gift, including name, title, or other description sufficient to establish a business relationship to the taxpayer. In addition to the elements to be proved, the law limits the deduction to $25 per person per year. This limit does not apply to any item for general distribution which costs less than $4 and has the giver's name imprinted on it.
Special recordkeeping rules apply to these expenses. For more information, refer to IRS Publication: Travel, Entertainment, Gift, and Car Expenses.
