Record Keeping That Withstands Scrutiny
When the IRS sends an audit notice—and eventually many small businesses receive one—the difference between a minor inconvenience and a financial catastrophe comes down to one thing: records. Woodworkers who track every board foot, every receipt, and every payment can prove their numbers. Those who don’t are at the mercy of IRS estimations.
Good record keeping isn’t just about surviving audits. It helps you price accurately, identify profitable product lines, manage cash flow, and make informed business decisions. The audit protection is a bonus.
What You Must Keep
Income Records
Document every dollar that comes into your business:
- Invoices: Every sale needs a written invoice with customer name, date, description of work, and amount. Keep copies of all invoices you issue.
- Deposit records: Bank statements showing all deposits. Match each deposit to corresponding invoices.
- Cash sales: If you sell cutting boards at a craft fair, keep a log of each sale. Use a simple receipt book.
- 1099 forms: If a customer pays you $600+ in a year, they should issue a 1099. Keep these—the IRS has copies too.
- Commission tracking: Record referral fees, gallery commissions, or any income that comes to you indirectly.
Expense Records
Every deduction you claim must be supported:
- Receipts: For every purchase, no matter how small. Use a receipt scanner app to digitize them immediately.
- Credit card statements: Helpful backup but not sufficient alone—you need actual receipts.
- Check images: Download copies from your bank for larger payments.
- Invoices from suppliers: Especially for lumber, hardware, and equipment purchases.
- Mileage logs: If you deduct vehicle expenses, keep a contemporaneous log of business miles.
Material Inventory
Track your wood and supplies:
- Date purchased
- Species and board feet (or sheet goods count)
- Supplier name and cost
- Project allocation when used
- Current inventory on hand
This inventory tracking allows you to calculate cost of goods sold accurately and supports your material expense deductions.
Equipment Records
For tools and machinery:
- Purchase date and cost
- Receipt or invoice
- Depreciation schedule if applicable
- Maintenance records
- Sale or disposal documentation
Employee/Contractor Records
If you pay anyone:
- W-4 or W-9 forms
- Payment records (dates, amounts, purpose)
- Time sheets if applicable
- Copies of 1099s or W-2s issued
- Contractor agreements
How Long to Keep Records
Standard retention periods:
- General tax records: 7 years (IRS can audit 3 years back normally, 6 years if income is substantially understated)
- Employment records: 7 years after employee leaves
- Property and equipment records: 7 years after you dispose of the asset
- Contracts: Duration of contract plus 7 years
- Corporate documents: Permanently
When in doubt, keep it longer. Storage is cheap; reconstructing records is expensive.
Setting Up Your System
Option 1: Simple Paper System
Works for low-volume businesses:
- Monthly folders for receipts
- File cabinet for completed project folders
- Physical checkbook register
- Spreadsheet for income tracking
Pros: No subscription fees, works without internet. Cons: Hard to search, vulnerable to loss/damage, time-consuming.
Option 2: Cloud-Based Accounting
Better for most established shops:
- QuickBooks, FreshBooks, or Wave for bookkeeping
- Automatic bank feed imports
- Receipt scanner app connected to your accounting
- Digital invoice creation and storage
Pros: Searchable, backed up, generates reports automatically. Cons: Monthly subscription ($15-$50), learning curve.
Option 3: Hybrid Approach
Common for many woodworkers:
- Digital accounting software for bookkeeping
- Physical folders for important original documents
- Scanned receipts organized by month/year
- Spreadsheets for specialized tracking (inventory, projects)
Daily, Weekly, and Monthly Habits
Daily
- Photograph/scan any receipts from purchases
- Record cash transactions immediately
- Log mileage for business trips
Weekly
- Process receipts into accounting system
- Reconcile any discrepancies
- Review outstanding invoices
- Update inventory for completed projects
Monthly
- Reconcile bank and credit card statements
- File processed receipts
- Review profit and loss statement
- Update inventory counts for lumber and materials
- Prepare quarterly tax payments if applicable
Project-Specific Record Keeping
For each custom project, maintain a folder containing:
- Proposal and contract: What you agreed to build and for how much
- Design documents: Sketches, CAD files, specifications
- Material costs: Receipts or allocations for wood, hardware, finishes
- Time tracking: Hours spent on design, fabrication, finishing, installation
- Change orders: Any modifications with associated pricing
- Final invoice: What the customer actually paid
- Delivery/completion documentation: Signed receipt, final photos
This project documentation supports your income claims and provides data for improving future estimates.
The Mileage Log Requirement
Vehicle deductions are a common audit trigger. The IRS requires a contemporaneous log—meaning you recorded it at the time, not reconstructed later.
For each business trip, document:
- Date
- Starting and ending locations
- Business purpose
- Odometer reading or miles driven
Use a mileage tracking app (MileIQ, Stride) to automate this. The app runs in the background and logs trips for you to categorize as business or personal.
Home Office Documentation
If you claim a home office deduction, keep:
- Floor plan showing dedicated business space
- Photos of the workspace
- Square footage calculation (business space ÷ total home)
- Mortgage interest or rent receipts
- Utility bills
- Home insurance costs
- Property tax statements
The space must be used “regularly and exclusively” for business. Document this clearly.
Surviving an Audit
If you receive an audit notice:
- Don’t panic. Most audits are correspondence audits focused on specific items.
- Respond on time. Deadlines in IRS notices are firm.
- Provide only what’s requested. Answer specifically, don’t volunteer extra information.
- Be organized. Present documents neatly, labeled and in order.
- Consider representation. A CPA or enrolled agent can communicate with the IRS on your behalf.
The auditor’s job is to verify your claims. Good records make that verification quick and painless.
Common Record Keeping Failures
Mixing personal and business: Use separate accounts. Personal purchases in your business account raise red flags.
Throwing away receipts: That $30 hardware store receipt proves a deduction. Keep it.
Reconstructed mileage logs: Creating a log at year-end from memory doesn’t satisfy IRS requirements.
Missing deposit documentation: If you can’t explain a deposit, the IRS may treat it as unreported income.
Cash transactions without records: Craft fair sales, lumber from a private seller—document everything.
Technology Tools Worth Using
- Accounting software: QuickBooks Self-Employed or QuickBooks Online
- Receipt scanning: Dext (formerly Receipt Bank), Expensify
- Mileage tracking: MileIQ, Stride
- Invoicing: Wave, FreshBooks, Square Invoices
- Document storage: Google Drive, Dropbox, OneDrive
- Inventory: Spreadsheet or dedicated inventory apps
Most of these have free tiers suitable for small woodworking businesses.
The Bottom Line
Every board foot tracked, every receipt scanned, every mileage log entry is protection for your business. The hour you spend weekly on record keeping prevents the dozens of hours you’d spend scrambling during an audit—and potentially saves thousands in disallowed deductions.
Start today. Set up a simple system. Make it a habit. When that audit notice eventually arrives, you’ll be ready.
