Keep records of all of your gross receipts. They are needed so that you can properly report gross income from the business activity and self-employment taxes owed on your net earnings. Self-employment taxes are equivalent to social security taxes paid by both an employee and the employer.

You must keep proper track of all expenses that are potentially deductible. To this end, keep track of compensation paid to employees and independent contractors, repairs, rents, taxes and licenses, bank charges, business insurance, utilities, postage and shipping charges, and travel and entertainment expenses, among other items.

On the subject of travel and entertainment expenses, there is some good news. Documentary evidence of business travel and entertainment expenses is not necessary for expenditures under $75.

Keep permanent records of assets that you depreciate. Keep receipts of how much you paid for the property and records showing when you placed assets in service or changed them from personal to business use. Also, keep records of capital improvements.

If you use your car in business, whether you base your deductions on actual expenses or you use an IRS standard mileage rate, there are a number of records that you must keep. They include records of business miles and total miles, records showing when you started using your car in business and its basis, records of actual expenses if you do not use the standard mileage rate, and a number of other items regardless of which alternative you use.

Similarly, very specific and detailed recordkeeping is required when you use a portion of your home in your business. Records must show the part of the home that is used for business and that such use is exclusive. Records also are needed to show the depreciation and expenses for the business part of the home.

The IRS has issued a revenue procedure applicable to taxpayers who maintain books and records using an electronic storage system. The IRS defines an electronic storage system as a system that prepares, records, transfers, indexes, stores, retrieves and reproduces records by either imaging hardcopy records or transfers computerized books and records to an electronic storage medium. The IRS has issued guidelines to insure the integrity of the system and governing controls, inspections and quality assurance. Although the taxpayer may destroy paper records if it has a system within the IRS's guidelines.