Running a successful business take more than delivering great products or services – it requires disciplined financial management. Meticulous recordkeeping plays a critical role in not only financial health but compliance and tax savings. Good recordkeeping can mean the difference between success with defending a deduction or losing valuable tax breaks. Good recordkeeping is not just about staying organized – it is about protecting your bottom line. Having a reliable system in place can mean the difference between a smooth audit and a costly setback. There was a recent U.S. Tax Court decision that emphasizes just how important this is.

Why Does it Matter?

The IRS requires that all businesses, no matter the size, maintain records that accurately reflect the income, expenses, assets, and liabilities. Without these records, it can be impossible to:

• Support tax deductions and credits,
• Track cash flow and profitability,
• Prepare accurate financial statements,
• Monitor the progress of your business,
• Support decisions for financing, and
• Demonstrate compliance during an IRS audit.

In short, strong recordkeeping not only protects your business for operational purposes but also for tax law purposes.

Taxpayers Lose Deductions Due to Insufficient Records

In one case, a union power-line worker also had business interests in a storm response partnership, a salon, and a rental property. For the tax year in question, he claimed significant losses and business expenses on his return. Among the claimed deductions were partnership losses and expenses for tools, clothing, and travel for his other businesses.

In Tax Court Memo 2025-12, the court disallowed significant deductions because the taxpayer could not properly support them. There were invoices or receipts that were missing or that did not tie clearly to the business purpose.

For example, with vehicle or travel expenses, the court noted the lack of accurate logs and details that separated business vs personal use for the tax year. For the partnership losses, the taxpayer needed to show his basis in the partnership, but he could not provide distinct documentation of all his capital contributions.

In addition to denying multiple of the taxpayer’s deductions, the court upheld an accuracy‐related penalty. This is an extra charge (typically 20% of the underpayment) that can be imposed when a taxpayer makes substantial mistakes on a tax return.

This case is not unique. Year after year, businesses lose costly deductions for the same reason: poor recordkeeping.

Six Key Practices to Protect Tax Breaks

To avoid costly mistakes, businesses should implement a recordkeeping system that is both practical and compliant. Here are six best practices to consider:

1. Separate business and personal finances.

Open a dedicated business checking account and credit card. This keeps the chance of mixing personal and business expenses low and creating confusing – which attracts IRS scrutiny.

2. Maintain accurate and timely records.

Document expenses when they occur, not weeks or months later. Timely recordkeeping ensures transactions are captured while details are fresh and easier to verify. For example, keep mileage logs for business driving and note the purpose of each trip at the time it happens. In addition to capturing expenses promptly, businesses should regularly reconcile their accounts. Matching bank statements with accounting records to easily catch discrepancies early. This can help prevent errors and ensure that financial data remain reliable.

3. Use accounting software.

Modern accounting platforms (like QuickBooks® or industry-specific tools) do more than just track expenses. They help businesses stay audit-ready by categorizing transactions, generating real-time reports, and integrating daily with bank accounts to reduce manual errors.

4. Keep your source documents.

For example, retain purchase and sale invoices, receipts, bank statements, canceled checks, and credit card bills. Scanning or photographing receipts ensure they will not fade or get lost. Also, keep copies of Forms 1099-MISC and 1099-NEC. There are also specific employment tax records you must keep. You can set a monthly reminder to scan and upload receipts to help maintain accurate records like point two above.

5. Retain records for the correct amount of time.

Generally, the IRS recommends keeping records for at least three years. That is the amount of time that the tax agency can audit a tax return. However, some records (such as payroll tax or property records) should be kept longer. The length of time can be extended to six years if the income is underreported by more than 25%. And if no return is filed or fraud is involved, the IRS can conduct an audit for an indefinite amount of time.

6. Establish internal controls.

For businesses with employees, internal checks help ensure the accuracy and integrity of your records. Examples of these controls include requiring dual signatures for large expenses and segregating duties so that different employees manage authorization, custody of assets and recordkeeping.

Reliable records are essential

The lesson from the Tax Court case described above is clear: Without reliable records, even legitimate deductions can vanish. Having poor documentation can cost your business money. Start by looking at some basic items in your business to assure you are managing your financials the best you can. Check if you separate your personal and business expenses? Are you documenting the expenses promptly as they occur? If you are using accounting software, are your digital records backed up and stored securely? Are you reconciling your bank and credit card statements regularly? These are just a couple questions to ask if you are on the right track to stronger compliance. We are also here to help your business with:

• Setting up a recordkeeping system tailored to your business,
• Learning which expenses are deductible (and how to document them),
• Reviewing its books to catch issues before the IRS does, and
• Managing any IRS challenges to tax deductions.

Contact us to discuss how we can help you establish sound recordkeeping practices and safeguard valuable tax breaks.