Obviously, every deduction claimed needs to be documented, but many taxpayers aren't clear on what is adequate proof. The IRS does require more than just a few jottings in a notebook, but not much more. First, each deduction must be recorded with a copy of an invoice or bill. For example, if you are claiming your utilities expenses as a deduction, you need to keep a copy of each month's bill. In addition to proving the expenses were incurred, you must also prove they were paid. So along with that utilities bill, you may want to staple the canceled check or credit card statement that covered the charges. Receipts, bank statements, and even invoices stamped "paid" also count as evidence that the expenses were have been taken care of.Along with documenting business expenses, all deposits must also be adequately documented to prove that you are reporting your profit correctly. If the funds are from payment for a service or product rendered by your company, you should attach a copy of the payment to the invoice it covers. Not only will this serve as documentation for the IRS, it will also help you keep track of paid and outstanding invoices from customers. Loans and other sources of company income must also be accompanied by all related paperwork.Additional documentation is also required when a home-based business owner keeps his or her children, spouse, or other relatives on staff in order to claim their wages as a tax-deductible company expense. For the record, always pay every staff member by check and have each person keep a written record of their work, including total number of hours, date of work, and type of activity accomplished. In addition, you should also request a written estimate from a professional for the same services. For instance, if your spouse maintains your company's web site, you need to find what a professional Webmaster charges in order to substantiate your spouse's salary.