It is critical to keep the proper types of documentation to substantiate ordinary and necessary business deductions.  If you do not have the proper books and records, the expenses may be disallowed creating additional taxes and penalties for the business.

Two examples of inadequate records are:

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Bank Records

Bank statements and related records are not generally sufficient to prove that a business’s payments were for ordinary and necessary business expenses. Debit card purchases and ACH payments generally identify to whom payments were made, but not exactly what was purchased or the business purpose of the purchases. Likewise, records of canceled checks typically will show the check number, payee and amount paid, but not the goods or services purchased or the business purpose.  It is important to maintain copies of the actual bills or receipts which will provide purchase details.  

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Profit and Loss Statements

While the information included in a Profit and Loss statement is compiled from income and expense documentation, the report is a summary of the business’s transactions.  It is necessary to maintain the source documents used to compile the reports which will provide the detail for the ordinary and necessary business expenses.  

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When a deduction is denied, the Internal Revenue Service (IRS) is presumed to be correct—it is up to the taxpayer to show evidence that proves that the IRS is incorrect. This is why maintaining copies of all source documentation is essential.

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Information provided courtesy of the American Institute of Professional Bookkeepers General Ledger Newsletter, Volume 41, No. 3.

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