Part of the series: 10 Small Business Tax Mistakes (Based on IRS Guidance)
Small business owners are required to maintain records that clearly show business income and expenses.
IRS Publication 583 explains that businesses must keep records that support the amounts reported on tax returns. These records must show income, expenses, and other financial activity related to the business.
When personal and business transactions are combined, records become difficult to support.
Why This Happens
Many small business owners begin using one bank account or credit card for both personal and business spending.
When personal and business purchases are made in the same account, it becomes harder to identify which transactions belong to the business.
Over time, this can lead to incomplete records and inaccurate reporting.
IRS Recordkeeping Requirements
IRS Publication 583 explains that taxpayers must keep records that support the income and expenses reported on a tax return.
Business records should clearly show:
- Income received
- Expenses paid
- Other financial activity related to the business
Records must allow these amounts to be identified and verified.
Why This Creates Problems
When personal and business finances are combined, documentation becomes more difficult to verify.
- Unclear business expenses
If a transaction cannot be clearly identified as a business expense, it may not qualify as a deduction.
- Incomplete records
Mixing transactions can make it harder to determine which expenses belong to the business.
- Verification issues
If records are requested to support items reported on a tax return, mixed transactions can make it harder to confirm the documentation.
Best Practices
Maintaining separate accounts for business activity helps keep records clear and organized.
Using a dedicated business bank account or credit card makes it easier to identify income and expenses and document them accurately.
IRS Publication 583 emphasizes that records should clearly identify and support the amounts reported on a tax return.
Steps to Take
- Use a dedicated business bank account for business income and expenses.
- Avoid paying personal expenses from business accounts.
- Maintain organized records that clearly identify business transactions.
- Review transactions regularly to ensure they are categorized correctly.
Continue the Series
Next → Small Business Tax Mistakes #2: Not Tracking All Business Expenses
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