Poor Records, Lost Deductions: What the Tax Court Wants Business Owners to Know

Running a business is about more than selling products or delivering services, it’s about protecting what you earn. One of the most common ways businesses lose money is by failing to maintain proper financial records. A recent U.S. Tax Court case highlights just how costly that mistake can be.

At THF, we work with business owners to implement practical recordkeeping systems that support compliance, tax savings, and growth. Here’s what happened in this case, and how you can avoid the same outcome.

The IRS and Recordkeeping: Why It Matters

No matter the size of your business, the IRS requires accurate documentation of:

• Income and expenses
  
• Assets and liabilities
  
• Business use of vehicles, tools, and property
  

If you’re ever audited and can’t prove your deductions, you may lose them, even if they were legitimate.

The Case: A Costly Example of Poor Documentation

In Tax Court Memo 2025-12, a taxpayer who worked in storm response partnerships and owned a salon and rental property lost major deductions due to poor records. Among the problems:

• No contemporaneous mileage logs for vehicle expenses
  
• Missing or unclear receipts for tools and supplies
  
• No documentation of partnership basis, making it impossible to deduct losses
  

The IRS denied most deductions, and the court added a 20% accuracy-related penalty.

6 Recordkeeping Best Practices for Businesses

Want to avoid tax headaches later? Follow these six essential practices:

1. Separate Business and Personal Finances

Open a business checking account and credit card. Mixing personal and business expenses invites confusion and audits.

2. Keep Real-Time Records

Don’t wait. Log vehicle mileage and business expenses when they happen. Use apps or digital tools to track on the go.

3. Use Accounting Software

Platforms like QuickBooks® or Xero help automate categories, reduce human error, and create audit-ready reports.

4. Save Source Documents

Keep digital copies of invoices, receipts, bank statements, credit card transactions, and 1099s. These are your proof in an audit.

5. Know How Long to Keep Records

The general rule: keep tax records at least 3 years. But payroll, property, and underreported income records may require up to 6 years or more.

6. Establish Internal Controls

For businesses with employees, require dual signatures, review approvals, and segregate duties to reduce fraud and errors.

Recordkeeping Saves More Than Taxes

Accurate records don’t just protect you from the IRS. They help with:

• Tracking profitability
  
• Securing financing
  
• Making smarter decisions
  
• Improving operational efficiency
  

Poor records put all of that at risk, not to mention your peace of mind.

Work with a CPA Who Understands Business Realities

The taxpayer in the court case made one mistake many business owners do, assuming good intentions would be enough. But without proof, you could lose thousands in deductions.

Our team at THF CPAs can help you:

• Set up or evaluate your recordkeeping system
  
• Identify red flags before the IRS does
  
• Understand which expenses are deductible and how to document them
  
• Stay ready for audits or inquiries
  

📞 Let’s make sure your records and deductions are protected.Contact us today or visit www.THF.cpa.