Cash Business Taxes: Daily Sales Records the IRS Expects

How do cash businesses pay taxes, and how do I report cash income on my return?

A cash business must report every dollar of cash sales, whether or not it reaches the bank; tax is then figured on profit, which is business income minus business expenses, not on gross sales. The IRS tells owners to report all income received from the business, including income not reported to you on a Form 1099, and the Code taxes all income from whatever source derived, including gross income from business. A sole proprietor reports cash sales as gross receipts on Schedule C, line 1. A partnership or corporation reports the same receipts on its own return. This page covers businesses that take cash from customers, not the cash method of accounting; for that choice see cash or accrual for a small business.

What sets a cash business apart is proof. Anyone subject to income tax must keep books or records sufficient to establish gross income, and the IRS accepts any system that clearly shows income and expenses. Cash leaves no outside paper trail, so your own daily record is the evidence, and examiners make cash handling a primary focus.

A cash business is not simple when:

• days or months of cash sales were never written down;
• deposits are lower than the cash sales the register shows;
• deposits are larger than the sales you reported, or the cash share of your deposits does not match the cash share of your sales;
• cash goes out of the till for supplies, staff or the owner;
• several registers, locations or owners handle the cash; or
• the IRS has sent a letter, or a lender or buyer wants records you do not have.

Several of these mean the records must be rebuilt or someone must deal with the IRS; see Different for you? at the end.

Gather before you start: register close-out (Z) reports or daily sales sheets, deposit slips, bank statements, paid-out slips and the invoices behind them, and your sales tax returns.

What daily records prove my cash sales?

Each day's cash sales are proved by a record made that day, backed by the document that created the sale. Publication 583 lists cash register tapes, bank deposit slips, receipt books, invoices and credit card charge slips as documents that show gross receipts. Keep them in order, by year and type of income.

The Z report is a record examiners ask for. The IRS retail audit guide says the owner must keep each day's tape, because without the tapes an examiner cannot know whether every sale was recorded, and examiners match the tapes to the sales journal. Where sales documents are numbered, examiners also look for missing numbers.

Card sales, processor fees and card tips belong in the daily POS entry; see recording daily POS sales.

How do I count the till each day and record cash over or short?

Count the drawer at close, compare it with the register's cash total, and write down any difference. The sample system in Publication 583 works this way: cash counted, plus paid-out slips, minus the fixed opening float, equals the day's cash receipts, and that figure matches the day's cash sales plus sales tax. The IRS gives it as an example, not a required layout.

1. Keep the same fixed opening float (change fund) in the drawer every day.
2. At close, run the register's close-out report and count the drawer by bill and coin. List any customer checks on their own line.
3. Take what you counted, add the day's paid-out slips, and subtract the float. That is what you collected in cash and checks.
4. Compare it with the report's cash and check sales, plus any sales tax collected. The difference is cash over or short.
5. Enter cash sales at the report's amount and the difference on its own line, never inside sales.
6. Sign and date the sheet. Where staff allow it, someone other than the person who makes the deposit does the count; examiners ask who counts the cash and who takes it to the bank.

A small difference that evens out over a month is common handling error. A large or repeating shortage can mean an unrecorded sale, an unrecorded payout or a loss, so find the cause instead of leaving it in the books.

Can I pay suppliers or staff out of the till, and how do I record cash paid out?

Cash can pay a bill when the sale is recorded first at its full amount and the payout gets its own record. Publication 583 prefers payment by check to document expenses. When cash pays an expense, keep the receipt, and if you cannot get one, write an explanation at the time of payment. The IRS retail audit guide tells examiners to verify that income was reported before it was paid out, and notes that owners often keep a daily envelope or a file for cash paid out.

Write a paid-out slip each time: date, payee, amount, purpose and who approved it, with the invoice attached. Then record the full day's sales and classify each payout on its own: an expense, an inventory or equipment purchase, payment of something you owe, or owner pay. Paying in cash does not decide whether an amount is a deductible expense. Netting a payout against sales shrinks both numbers and leaves the day no longer matching the Z report. If a receipt is missing, see lost receipts for business expenses.

Three payouts need extra care:

• Wages. Pay to an employee is wages whether paid in cash or another form, with withholding and payroll reporting. An owner or officer who is responsible for withholding and willfully does not pay it over can be personally liable for 100% of the unpaid withheld tax (26 U.S.C. 6672). See workers paid in cash who may be employees and the trust fund recovery penalty.
• Owner use. Cash taken for personal use is not a business expense. Record it as owner pay, a draw or a distribution, depending on the entity, never as supplies; see personal expenses paid from the business account.
• Card tips paid in cash. The cash comes out of sales and never reaches the bank, so it needs its own record; see tips customers leave.

Do I deposit all cash, and how do deposits tie to recorded sales?

Deposit your cash receipts, and pay bills by check where you can. Publication 583 tells owners to deposit all daily receipts in the business checking account, note on each deposit slip whether the money is business income, personal funds or a loan, keep copies, and reconcile the account every month. Cash that does go out of the till needs its own slip, and the monthly tie-out below subtracts it. Business cash that goes into a personal account is still business income, and examiners analyze the owner's personal accounts too.

Deposits then tie to sales by arithmetic. Each month:

Deposits include the sales tax you collected. A tax imposed on the buyer and passed to the state is generally not part of gross receipts, so deposits run above recorded sales by that tax; a tax imposed on you as the seller is included in gross receipts. Timing explains most gaps. Cash taken on the last day of a month, or over a weekend, is deposited in the next period; list it as a deposit in transit and clear it the next month. Depositing only part of the cash and spending the rest breaks the tie. The IRS checks the cash share of your sales against the cash share of your deposits.

How does the IRS test a cash-heavy business?

The IRS checks whether your records agree with each other and with your return, and it rebuilds income from outside figures when they do not. The retail audit guide and the Examination of Income manual describe these tests. Both are IRS guidance for examiners, not law, and the retail guide dates from 2009.

When records are missing or do not reconcile, the examiner may rebuild your income from outside figures such as deposits or purchases; the manual calls this an indirect method. It says the bank deposits method fits poorly where much of the cash is not deposited, and calls the markup method effective for businesses such as restaurants, taverns, liquor stores, gasoline retailers and jewelry stores. That is why purchase invoices matter: they are the base of a markup test.

Books that cannot be reconciled to the return, or deposits larger than reported income, are what lead to a deeper look at income. For how an audit runs, see how an IRS audit of a small business runs.

Will depositing more than $10,000 raise a flag with the IRS?

Only cash triggers the bank's currency report. Depositing checks, or receiving card payouts, does not, whatever the amount, because currency means coin and paper money. A large cash deposit makes the bank file a routine report, which is not a penalty and does not accuse you of anything. A bank must file a Currency Transaction Report for currency (cash or coin) transactions of more than $10,000 by or for one person in one business day, and FinCEN says there is no general ban on handling large amounts of currency. Deposits in the same business day are added together across all of the bank's branches, and deposits made at night, over a weekend or on a holiday count as received on the next business day. A weekend of cash banked together can cross the line that each day alone would not. A bank may exempt some businesses that often deal in more than $10,000 of currency from these reports (31 CFR 1020.315); that does not change what you must record.

The IRS can see these reports. The Examination of Income manual lets examiners use them as leads to unreported income. Large cash deposits should therefore tie to recorded sales; the daily sheets and the monthly tie-out are what show that they do.

Splitting deposits to avoid the report is the legal risk. 31 U.S.C. 5324 makes it a crime to structure transactions to evade the bank's report, with up to five years in prison and more in aggravated cases. The money involved may also be seized and forfeited (31 U.S.C. 5317). Structuring is illegal even when the money is legal, and the deposits need not exceed $10,000 at any one bank or on any one day to count; the test is the purpose (IRM 4.26.13). Structured deposits may lead the bank to file a suspicious activity report. Depositing cash as it comes in, in the amounts actually taken in, is the ordinary case.

When do I file Form 8300 for cash from one customer?

You may need to file Form 8300 when your business receives more than $10,000 in cash from one payer, in one transaction or in related transactions. The form is due within 15 days of receiving the cash (IRS reference guide); for installments, within 15 days of the payment that takes the total above $10,000. Get the payer's name, address and taxpayer ID number when the cash arrives, because the form asks for them. This usually reaches a business that takes a large payment from one customer, such as a deposit for an event or the sale of a high-priced item. The test is per payer: small sales to many different customers are not added together, but related payments from one customer are.

More on Form 8300, from the IRS reference guide and the form instructions:

• What counts as cash. Currency always. Cashier's checks, bank drafts, traveler's checks and money orders of $10,000 or less count in designated retail sales, such as collectibles, and in any sale where you know the customer is using them to avoid the report; the form instructions list the sales. Personal checks and wire transfers are not cash. The statute also counts digital assets as cash (26 U.S.C. 6050I(d)); the IRS instructions and reference guide do not say how, so ask before accepting them.
• Electronic filing. A business that files at least 10 other information returns in a year, such as Forms W-2 and 1099 (Form 8300 does not count), must file Form 8300 electronically through FinCEN's BSA E-Filing System, and a paper form is then late. Waivers and a religious exemption exist (form instructions).
• Customer notice. Give each person named on the form a written statement by January 31 of the next year, and keep copies of the form and statement five years.
• Splitting a customer's payment. Breaking a payment up to avoid the form is also structuring under 31 U.S.C. 5324. A late or incomplete form carries civil penalties for each form, and willful failure to file is a felony.

How long do I keep register tapes, deposit slips and bank statements?

Keep them until the IRS's time to assess tax on that return runs out. That is generally 3 years after you file, with a return filed early treated as filed on the due date (IRS). The period is six years if you left out income of more than 25% of the gross income shown on the return (for a business, gross receipts before costs), and there is no limit for a year you never filed or for a fraudulent return (Topic 305). Keep employment tax records at least four years; other records have their own periods.

If you scan paper to throw out the originals, Publication 583 says the electronic storage system must meet IRS requirements and be tested first. The full retention rules are in how long to keep business records.

What if my cash sales were never recorded, or my deposits do not match the sales I reported?

Start the daily sheet today, then rebuild the missing period from the records that still exist and compare the result with what each return reported. Rebuilt figures are estimates until they are tied to source documents, so label them as rebuilt, with the date and the sources.

1. List every month with no daily record.
2. For each month, start with stored register reports or receipt books (a computerized register often keeps past daily totals). Processor reports give card sales only, not the missing cash. If you must use deposits, take the cash deposits, remove money that is not sales (loans, transfers, owner money, buyer-imposed sales tax), add cash paid out, adjust for cash on hand and deposit timing, then add gross card sales once. Treat purchase invoices and your usual markup as a cross-check, not a source.
3. Add up each year and compare it with gross receipts on that year's return and with the sales tax returns.
4. If a return reported less than the rebuilt figure, the return may need correcting. Which years, and whether to amend, depends on facts a professional should review.

Tax left off a return is still owed, the IRS charges interest on it, and penalties can apply to the underpayment. How far back the IRS can look and which penalties apply depend on the facts; see how an IRS audit of a small business runs. For the rebuild itself, see rebuilding books from bank statements.

Example

All figures are in US dollars and are illustrative.

A nail salon whose cash, card and paid-outs tie

A salon rings up $20,000 in a month: $12,000 cash and $8,000 card. It deposits $10,500 of the cash and pays $1,500 to suppliers from the till on signed slips. The daily sheets show cash sales of $12,000, the deposit slips show $10,500, and the slips show $1,500, so the month ties to $20,000 of sales, assuming the same cash on hand at both ends of the month and card sales shown before processor fees. Without the slips, the $1,500 gap could look like cash that was taken in and never reported, and the lower cash share of deposits would have no explanation.

A restaurant that deposits daily, and one that splits

A restaurant takes $9,500 of cash on Monday and $9,500 on Tuesday. Depositing each day as it comes in is the ordinary case; each deposit is under the bank's reporting line, so no report is triggered. If the owner instead holds both days' cash and deposits it as two $9,500 deposits at two banks on the same afternoon so that neither bank files a report, that is the conduct 31 U.S.C. 5324 calls structuring, which turns on the purpose of avoiding the report, even though the cash is real and legal. A single $19,000 deposit would simply be reported by the bank, with no penalty.

A market vendor whose books stop short of the cash

A vendor sells about $150,000 a year, mostly for cash, but the books and the return show $110,000 because slow weeks were never written down. The vendor's purchases, marked up by the trade's usual margin, point to about $150,000. With no daily records, the vendor cannot show that the $40,000 difference is wrong. If that $40,000 was real sales left off the return, it is more than a quarter of the $110,000 reported, so the IRS would generally have six years from filing, not three, to assess tax on that return. A rebuild from stored register reports, deposits and purchase invoices is how the vendor would try to document those weeks.

Different for you?

• You have an IRS letter or exam notice, or your deposits are larger than the sales you reported: the records, the years involved and who deals with the IRS decide how this goes. See how an IRS audit of a small business runs, and get bookkeeping help before you reply.
• Years of cash were never logged: the rebuild is a bookkeeping job. See rebuilding books from bank statements and catching up on overdue books, with bookkeeping help.
• A lender, buyer or landlord wants financial statements and the cash was never logged: statements built on missing daily records may not match your deposits, so the records come first. See rebuilding books from bank statements and bookkeeping help.
• Several registers, locations or partners handle cash, or the monthly tie-out never balances: the daily sheets and the tie-out are a monthly bookkeeping routine; see bookkeeping help.
• Returns for those years were never filed: see catching up on unfiled business returns.
• You have been splitting deposits to stay under the bank's line: this raises a criminal-law question that a tax attorney can advise on before you answer the bank or the IRS. The records can be rebuilt afterwards with bookkeeping help.
• Most of your sales are card or app payments: see recording daily POS sales and business payments received through payment apps.
• You run vending machines: see vending machine business books.
• You collect sales tax on cash sales: see filing sales tax returns.