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Keeping Track

Most ordinary and necessary business expenses are tax deductible. However, business owners should retain the correct documentation to support their deductions in case of an IRS audit.

If an audit is conducted, the IRS may require the business owner to show the type of item purchased and evidence that payment was made. Here are some examples of acceptable documentation.

Checks. The IRS will accept a canceled check as proof of payment if it has the name of the payee and shows the cancellation on the back. Highly legible image's of checks are also acceptable for businesses that do not receive paper copies of cancelled checks from their financial institution.

Credit/debit card transactions. The IRS will want to see an account statement that shows the amount of the charge, the transaction date, and the name of the payee.

Electronic funds transfers.The business will have to provide an account statement that shows the amount of the transfer, the date the transfer was posted to the account by the financial institution, and the name of the payee.

Invoices. The IRS requires invoices or some other form of documentation showing what was purchased. Canceled checks, credit/debit card statements, and records of electronic funds transfers only provide proof of payment.

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