Tax records for the self-employed: how to keep them simply and correctly

If you run your own business as a self-employed person and are not a statutory accounting entity, you are most likely keeping tax records. This is a simpler alternative to double-entry bookkeeping that most sole traders in the Czech Republic can use. That said, it comes with its own rules — and if you don't follow them, you risk running into trouble during a tax audit. In this article, we'll show you how to keep tax records correctly, clearly, and without unnecessary stress.

We draw on the current wording of Act No. 586/1992 Coll., on Income Taxes, specifically Section 7b, which governs tax records, and on the current methodological guidelines of the Czech Financial Administration.

What tax records are and who they're for

Tax records are a system for the ongoing recording of income, expenses, assets, and liabilities (receivables and payables) for the purpose of determining the income tax base. Compared to double-entry bookkeeping, they are significantly simpler and do not require knowledge of accounting charts of accounts or complex entry systems.

The legal basis for tax records can be found in Section 7b of Act No. 586/1992 Coll., on Income Taxes. The Act stipulates that tax records must contain information about:

1. Income and expenses, broken down as needed to determine the tax base
2. Assets and liabilities (receivables and payables)

The basic components of tax records

Tax records consist of several interlinked registers. Each one serves a specific purpose, and together they provide a complete picture of your business finances.

1. The income and expense ledger (cash journal)

The income and expense ledger is the heart of your entire tax record system. You record all monetary transactions related to your business on an ongoing basis — every payment you receive and every expense you pay.

Income and expenses must be classified at a minimum into:

• Taxable income — business income that enters the tax base (revenue from goods, services, commissions, etc.)
• Non-taxable income — income that does not affect the tax base (loans received, owner contributions, monetary gifts, returned deposits, etc.)
• Tax-deductible expenses — expenses incurred to achieve, secure, and maintain income (purchase of materials, fuel, rent, phone, insurance)
• Non-deductible expenses — expenses that do not affect the tax base (loan repayments, personal consumption, income tax payments, health and social insurance contributions for the self-employed)

Practical example of entries in the income and expense ledger

2. Records of receivables and liabilities (payables)

In addition to the income and expense ledger, you must keep records of receivables (amounts owed to you by others) and liabilities (amounts you owe to others). These records capture the position at any given point in time and are essential for the year-end stock-take.

Each entry in the receivables and liabilities register should include:

• Document number (invoice number)
• Business partner (debtor or creditor) — name, company registration number, address
• Type of receivable or liability — what it relates to
• Amount (excluding VAT and including VAT, if you are VAT-registered)
• Date of issue and due date
• Date of payment — once the receivable or liability has been settled

3. Asset records

If you use assets in your business, you must keep records of them. These are divided according to the type of asset:

Long-term tangible assets (above CZK 80,000)

For each item of long-term tangible assets, you maintain an asset card containing:

• Name and description of the asset
• Date of acquisition and date placed in service
• Acquisition cost (valuation method)
• Depreciation group and chosen depreciation method (straight-line or accelerated)
• Annual depreciation for each period
• Date and method of disposal (sale, liquidation, donation)
• Any registered pledge or easement

Minor assets (up to CZK 80,000)

Assets with an acquisition cost of up to CZK 80,000 are not depreciated — the full acquisition cost is recorded directly as a tax-deductible expense in the year of purchase. Nevertheless, it is advisable to keep at least basic records of minor assets, particularly for higher-value items (e.g. a mobile phone costing CZK 30,000, a printer costing CZK 15,000). Keeping records will help you during the year-end stock-take and in the event of a tax audit.

Inventory

If you operate in trade or manufacturing, you must also keep records of material and goods inventories. Inventory records include:

• Type of inventory (name, description)
• Quantity and unit of measure
• Unit price and total value
• Date received and date issued

4. VAT records (VAT-registered persons only)

If you are registered for VAT, you must keep VAT records in addition to your basic tax records, as required by Section 100 of Act No. 235/2004 Coll., on Value Added Tax. These records contain the information needed to prepare your VAT return and control statement.

How to keep tax records in practice

The law does not prescribe the format in which you must keep your tax records. You can choose from several approaches, each with its own advantages and disadvantages.

Paper-based format

The traditional approach, where you manually write everything into prepared forms or notebooks. It is used less and less today, as it is prone to errors and searching through paper records is time-consuming. That said, the law still permits it.

Excel or a spreadsheet

The most widely used solution among smaller sole traders. You create a table with the relevant columns and record income and expenses on an ongoing basis. The advantage is that Excel can automatically calculate totals and subtotals. The downside is the lack of automatic checks and the need to enter every record manually.

Accounting software

Specialist programs (both desktop and cloud-based) offer comprehensive tax record solutions, including automatic report generation, bank account integration, and data export for tax returns. Investing in accounting software is particularly worthwhile when you're dealing with a high volume of documents.

Digital tools and AI assistants

The most modern approach, which uses artificial intelligence to automatically recognise and categorise documents. Simply photograph a receipt or invoice and the system processes it automatically — reading the amount, date, and supplier, and assigning the correct income or expense category.

Tax-deductible vs. non-deductible expenses

One of the key aspects of tax records is correctly distinguishing between tax-deductible and non-deductible expenses. This distinction directly affects the size of your tax base.

Conditions for tax deductibility

For an expense to be tax-deductible, it must meet the following conditions (under Section 24 of the Income Tax Act):

1. Verifiability — a document exists for the expense (invoice, receipt, contract)
2. Business connection — the expense was incurred to achieve, secure, and maintain taxable income
3. Recorded — the expense is properly entered in the tax records
4. Reasonableness — the amount of the expense reflects normal market conditions

Practical real-world examples

Year-end stock-taking

The law (Section 7b, paragraph 4 of the Income Tax Act) requires taxpayers keeping tax records to determine the actual position as of the last day of the tax period (i.e. 31 December) for:

• Inventory (materials, goods)
• Tangible assets (including minor assets)
• Receivables (unpaid issued invoices)
• Liabilities (unpaid received invoices and other payables)

The results of the stock-take serve as the basis for preparing your tax return and must be retained in case of a tax audit.

Archiving tax records and documents

Proper archiving is just as important as keeping the records themselves. If you cannot produce the required documents during a tax audit, the tax authority may disallow your expenses and issue a tax assessment.

Retention periods

Retention periods depend on whether you are VAT-registered and the type of document being archived:

Format of archiving

Documents can be archived in paper, electronic, or mixed form. Electronic archiving is fully compliant with the law, provided it meets the following conditions:

• Authenticity of origin — it is clear who issued the document
• Integrity of content — the content of the document cannot be altered after the fact
• Legibility — the document must remain legible throughout the entire retention period

For electronic archiving, the PDF/A format is recommended — it is an internationally recognised standard for long-term archiving. Documents should be stored in a secure location with regular backups.

The most common mistakes in tax record-keeping

Based on experience from tax audits, here is an overview of the most frequent mistakes made by self-employed persons:

Switching from tax records to full accounting

In certain situations, a self-employed person must switch from tax records to double-entry bookkeeping. This happens when:

• Turnover in the previous year exceeds CZK 25 million — obligation to keep full accounts from 1 January of the following year
• Registration in the Commercial Register — obligation applies immediately
• Voluntary decision — a self-employed person may choose to keep full accounts even without a legal obligation to do so

When making the switch, a transition adjustment must be carried out — a one-off adjustment to the tax base reflecting the value of receivables, liabilities, inventory, and other items. We recommend consulting a tax adviser for this process.

Tax records and the tax return

The output of your tax records forms the basis for Appendix No. 1 of the personal income tax return (form 25 5405/P1). In the appendix, you enter:

• Total business income (sum of taxable income from the income and expense ledger)
• Total expenses (sum of tax-deductible expenses)
• The difference = partial tax base under Section 7

Practical tips for hassle-free tax records

To wrap things up, here is a summary of practical recommendations to help you keep your tax records without any headaches:

Summary

Tax records are a core obligation for most self-employed people in the Czech Republic. While they are significantly simpler than double-entry bookkeeping, they still require a systematic approach and compliance with the relevant legal rules. The key to getting it right is recording transactions on an ongoing basis, correctly distinguishing between tax-relevant and non-tax items, carrying out a proper year-end stock-take, and observing the required retention periods.