Why this matters

Accurate, organized records turn a potential audit into a routine review. In my 15+ years advising business owners, audits most often result from poor documentation — not the expense amount. The IRS expects records that substantiate your deductions and will disallow items that lack supporting evidence (IRS — Documenting Business Expenses).

What the IRS expects (quick checklist)

  • Amount of the expense
  • Date and place of the transaction
  • Business purpose or business relationship of the person(s) involved
  • Proof of payment (receipt, invoice, cancelled check, or bank/credit card statement)

These are consistent with IRS guidance on business recordkeeping (see IRS Documenting Business Expenses and Publication 535).

Practical steps to document business expenses

  1. Capture the proof at the time of purchase
  • Keep original receipts when possible. Photograph or scan them immediately and upload to your accounting system.
  • Save invoices, bills, and receipts that show the vendor, date, amount and description of the goods or services.
  1. Record the business purpose
  • For each entry, record why the expense was necessary for the business (e.g., client lunch to discuss contract details, software subscription for bookkeeping).
  • For meals, note the business relationship or meeting topic and attendees. For vehicle use, keep contemporaneous mileage logs with dates, purpose and odometer readings.
  1. Choose and apply a consistent method for vehicle and travel expenses
  • Use either the standard mileage rate or actual expenses for vehicle deductions; keep the supporting log and receipts for whichever method you use.
  • For travel, retain itineraries, hotel folios, receipts and proof of the business purpose (meeting agendas or conference schedules). See IRS Publication 463 for details.
  1. Keep business and personal funds clearly separated
  • Use dedicated business bank and credit card accounts. Mixing personal and business transactions is a leading cause of disallowed deductions.
  1. Reconcile regularly and categorize correctly
  • Reconcile expense reports and bank accounts monthly. Categorize expenses to match tax schedules and your chart of accounts.
  • Use consistent expense categories so auditors can follow amounts year to year.
  1. Maintain backup and a searchable system
  • Keep digital backups (cloud storage, encrypted drives) and retain originals for items that may be hard to reproduce.
  • Ensure scanned images are legible and indexed by date, vendor and category.

Tools and templates that work

  • Accounting software (QuickBooks, Xero) and receipt apps (Expensify, Receipt Bank) reduce manual steps and create an audit trail.
  • A standard audit binder (organized by tax year) with a cover sheet, summary, and tabbed sections for receipts, bank statements and contracts speeds review. For guidance on assembling an audit binder, see Preparing an Audit Binder: Documents to Organize Before an IRS Audit.

Common documentation mistakes to avoid

  • Relying only on bank or credit card statements without receipts or notes of business purpose.
  • Vague descriptions on receipts; the IRS wants specific business purpose details.
  • Failing to log mileage contemporaneously — reconstructed logs are harder to accept.
  • Treating digital receipts casually; scanned copies must be legible and complete.

Retention timelines (general guidance)

  • Keep records at least 3 years from the date you filed the tax return or the due date of the return, whichever is later. Some situations require longer retention — for example, a claim for a loss from worthless securities or bad debt may require keeping records for 7 years. See official IRS guidance for specifics (IRS Publication 535).

Real-world example

A small-service business I worked with switched to a policy requiring staff to photograph receipts and enter the business purpose into an expense workflow within 48 hours. When one tax year was selected for review, the auditor accepted the digital files and the organized binder; no adjustments were made. Consistency and contemporaneous notes made the difference.

Preparing for an auditor: what to include

  • A one-page summary of the expense reporting method used that year
  • Tabbed sections: receipts/invoices, bank/credit card statements, contracts and payroll records
  • Mileage log and vehicle expense worksheets (if applicable)
  • Supporting documentation for travel and client entertainment (agendas, emails)

Further reading and authoritative sources

Related FinHelp resources

Professional disclaimer

This content is educational and not a substitute for personalized tax advice. For complex situations or audit representation, consult a licensed tax professional or CPA.