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Good records, stronger business: Lessons from a recent tax court case

Good records, stronger business: Lessons from a recent tax court case

Running a small business is more than serving customers or delivering great work. What happens behind the scenes — especially how you manage your records — can make a big difference in your financial health and your taxes. Good recordkeeping isn’t just about being organized. It can mean the difference between keeping valuable deductions or losing them in an IRS audit.

A recent U.S. Tax Court case is a reminder of why strong records matter.

Why good records matter

The IRS expects every business — no matter the size — to keep accurate records of income, expenses, assets, and debts. Without them, it’s tough to:

Simply put: good records protect your business and your wallet.

What went wrong in this case

In Tax Court Memo 2025-12, a taxpayer claimed large losses and business expenses from several ventures, including a rental property and a salon. But when the IRS asked for proof, his records fell short.

  • Some receipts were missing or unclear.

  • Vehicle and travel expenses weren’t backed up by mileage logs.

  • Business and personal use weren’t separated.

  • Documentation of his partnership contributions wasn’t available.

As a result, the court denied many of his deductions — and on top of that, added a 20% accuracy-related penalty.

This isn’t unusual. Each year, business owners lose money because they can’t back up their deductions with the right records.

Six ways to protect your tax breaks

Here are six steps you can take now to strengthen your recordkeeping:

  1. Separate business and personal finances. Use a dedicated business bank account and credit card.

  2. Record expenses right away. Keep mileage logs and jot down the purpose of trips as they happen.

  3. Use accounting software. Tools like QuickBooks® , Xero, and others make it easier to track and categorize expenses.

  4. Keep supporting documents. Save receipts, invoices, bank statements, and 1099s. Scan or snap photos so they don’t fade or disappear.

  5. Know how long to keep records. In most cases, three years is enough, but payroll, property, or cases involving underreported income may require more.

  6. Put controls in place if you have employees. For example, require dual signatures for big expenses or separate responsibilities for handling money and keeping records.

How Padgett can help

The bottom line: even legitimate deductions can disappear without reliable documentation. Don’t let poor recordkeeping cost your business money.

Your local Padgett advisor can help you:

  • Set up a recordkeeping system that works for your business

  • Understand which expenses are deductible and how to track them

  • Review your books to catch issues before the IRS does

  • Represent you if the IRS challenges your deductions

Good records are an investment in your business’s future — and we’re here to help you protect it.

We encourage you to contact us with any questions.

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