Part 16: Recordkeeping & Accounting — The IRS-Proof System for Home-Business Owners

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Recordkeeping & Accounting — The IRS-Proof System for Home-Business Owners (2025)

Strong recordkeeping is not only required by the IRS — it is the foundation of every tax deduction you take.
Poor documentation is one of the most common reasons home-business owners lose deductions during an audit.
This 2025 guide explains what records to keep, how long to keep them, and which digital tools make compliance easy.



1️⃣ Why Recordkeeping Matters

According to Chapter 16, deductions are only valid if you have records that prove:

  • ✔️ Amount
  • ✔️ Date
  • ✔️ Business purpose
  • ✔️ Proof of payment

Important: If you cannot prove a deduction, the IRS can deny it — even if the expense was legitimate.

2️⃣ Receipts & Documentation Rules

You must keep receipts or records for any business expense you deduct.
Acceptable records include:

  • ✔️ Paper receipts
  • ✔️ Digital receipts or PDFs
  • ✔️ Bank or credit card statements
  • ✔️ Invoices, bills, or contracts
  • ✔️ Mileage logs

2025 Update: The IRS accepts digital copies as long as they are clear, accurate, and legible.

3️⃣ Digital Records — Are They Accepted?

Yes. The IRS fully accepts digital records, including:

  • ✔️ Scanned receipts
  • ✔️ Cloud-stored documentation
  • ✔️ App-generated mileage logs
  • ✔️ Digital invoices & payment confirmations

Digital records must be stored securely and must be retrievable upon request.

4️⃣ Categories of Records to Keep

Home-business owners should keep records for:

  • ✔️ Income & deposits
  • ✔️ Expenses & receipts
  • ✔️ Inventory purchases & COGS
  • ✔️ Mileage & travel
  • ✔️ Home office measurements & calculations
  • ✔️ Assets & depreciation schedules
  • ✔️ Payroll (if spouse or employees)
  • ✔️ Retirement plan contributions

💡 Example — Home Office Records
✔️ Square footage calculation
✔️ Utility bills
✔️ Rent or mortgage proofs
✔️ Photos of office space

5️⃣ Separate Business Banking

A dedicated business bank account:

  • ✔️ Keeps personal and business expenses separate
  • ✔️ Makes bookkeeping easier
  • ✔️ Reduces audit risk
  • ✔️ Helps support your profit motive

Tip: Even sole proprietors should maintain separate banking.

6️⃣ Best Accounting & Tracking Tools

Digital tools simplify compliance and automate recordkeeping.

  • ✔️ QuickBooks Self-Employed
  • ✔️ Wave Accounting
  • ✔️ Xero
  • ✔️ MileIQ & Everlance (mileage)
  • ✔️ Expensify (receipts)
  • ✔️ Gusto (payroll)

7️⃣ Real Examples

💡 Example 1 — Digital Records
You buy software for $120.
You store the receipt in Google Drive.
✔️ Acceptable for IRS purposes.

💡 Example 2 — Mileage Log
You record:
• Date
• Start/stop locations
• Business purpose
• Miles
✔️ Fully acceptable during audit.

💡 Example 3 — Mixed Bank Account
You mix personal and business transactions.
✔️ IRS can disallow deductions due to lack of clarity.

8️⃣ IRS Retention Requirements

How long to keep records:
• 3 years — general rule
• 7 years — if claiming a loss
• Permanently — asset & depreciation records

Digital backups (Drive, Dropbox, iCloud) help ensure you never lose documentation.

IRS Reference Links

📦 Small Business Essentials — Recommended Tools

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📚 Home Business Tax Deductions Series (2025)

  1. ① Is Your Home Business Really a Business?
  2. ② Do You Have a Profit Motive?
  3. ③ Can You Deduct Your Startup Costs?
  4. ④ Operating Expenses You Can Deduct
  5. ⑤ Section 179 & Bonus Depreciation
  6. ⑥ Home Office Deduction
  7. ⑦ The QBI 20% Deduction
  8. ⑧ Car & Local Travel Expenses
  9. ⑨ Out-of-Town Travel Rules
  10. ⑩ Inventory Rules
  11. ⑪ Employees vs. Contractors
  12. ⑫ Health Insurance & Medical Deductions
  13. ⑬ Retirement Plan Deductions
  14. ⑭ Additional Business Deductions
  15. ⑮ Crypto in Your Business
  16. ⑯ Recordkeeping & Accounting
  17. ⑰ Spouses in Business Together
  18. ⑱ How to Avoid an IRS Audit

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