Strong Recordkeeping: The Foundation of Financial Health and Tax Savings

Running a successful business takes more than offering great products or services. Behind every thriving company lies a solid system of recordkeeping. Accurate, organized records are essential for maintaining financial health, ensuring compliance, and preserving valuable tax deductions. A recent U.S. Tax Court case highlights just how critical proper documentation can be.

Why Recordkeeping Matters

The IRS requires every business regardless of size to keep complete and accurate records of income, expenses, assets, and liabilities. Without this information, it’s nearly impossible to:

• Substantiate tax deductions and credits

• Track cash flow and profitability

• Prepare reliable financial statements

• Monitor business performance

• Support financing or investment decisions

• Demonstrate compliance during an IRS audit

Simply put, good records protect your business operationally and legally.

When Poor Records Cost a Taxpayer

In one recent case, a union power-line worker with several business ventures — including a storm response partnership, a salon, and a rental property — claimed significant losses and expenses on his tax return. These included partnership losses and deductions for tools, clothing, and travel.

In Tax Court Memo 2025-12, the court disallowed many of the deductions because the taxpayer couldn’t provide sufficient documentation. Some receipts were missing, others lacked clear business purposes, and critical details such as mileage logs for vehicle use or evidence of capital contributions to the partnership — were absent.

As a result, not only were major deductions denied, but the court also imposed a 20% accuracy-related penalty for substantial errors on the return.

This outcome is far from rare. Each year, taxpayers lose deductions for the same reason: inadequate recordkeeping.

Six Best Practices for Protecting Tax Deductions

A strong recordkeeping system can help you avoid costly mistakes and IRS penalties. Consider adopting these six key practices:

1. Separate business and personal finances. Maintain a dedicated business bank account and credit card. Mixing personal and business expenses leads to confusion and invites IRS scrutiny.

2. Keep contemporaneous records. Record transactions as they happen, not months later. Maintain mileage logs for business travel and note the purpose of each trip.

3. Use reliable accounting software. Tools like QuickBooks or industry-specific programs make it easy to categorize expenses, produce reports, and sync with your bank accounts to reduce errors.

4. Retain all source documents. Keep receipts, invoices, bank statements, canceled checks, and credit card records. Scanning or photographing receipts can help preserve them. Don’t forget copies of Forms 1099-MISC, 1099-NEC, and any required employment tax records.

5. Know how long to keep records. Generally, the IRS recommends retaining tax records for at least three years — but some should be kept longer. Payroll and property records often require extended retention. The period extends to six years if income is underreported by more than 25%, and indefinitely if no return is filed or fraud is suspected.

6. Implement internal controls.For businesses with employees, internal checks ensure integrity and accuracy. Examples include dual signatures for large transactions and dividing duties among staff to separate authorization, custody, and recordkeeping.

Don’t Let Poor Records Cost You

The takeaway from this Tax Court decision is simple: even legitimate deductions can disappear without proper documentation.

Our firm can help you:

• Establish a recordkeeping system tailored to your business,

• Understand which expenses are deductible and how to document them,

• Review your books proactively to identify issues before the IRS does, and

• Handle any IRS inquiries or audits.

Contact us today to strengthen your recordkeeping practices and safeguard the tax deductions your business deserves.