Do you know what the IRS requires when it comes to receipts? Are you keeping a shoebox full of receipts unnecessarily? Read on to find out what the IRS does and does not require regarding receipts and some solutions that will benefit your business.
The IRS says "You may choose any recordkeeping system suited to your business that clearly shows your income and expenses... Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place." (here).
Deductions
Your business pays taxes just like you do every year. Similarly, your business can reduce its tax burden with tax deductions and credits. Deductions can reduce your business' tax obligation. These tax deductions can include qualified expenses as well as qualified purchases
The IRS requires "supporting documents" as proof of those eligible deductions. However, a receipt alone is not always enough to prove that an expense is deductible for your business. Expenses must be made solely for business purposes and should be considered “ordinary, necessary, and reasonable", per the IRS.
You may need to provide supplementary written proof for an expense if its purpose is not clear. For example, a business dinner receipt must be accompanied by a brief explanation of the purpose of that dinner.
Supporting Documents: An Overview
Think of "supporting documents" generally. When it comes to expenses, you’re looking for an itemized proof of purchase. This means you may use real estate closing statements, an itemized bill for any digital purpose, your bank or card statements, or even canceled checks (with some extra information) for the purpose of supporting documents.
Your business should also be keeping supporting documents about its income as well. Some of these include:
Cash register tapes
Receipt book stubs
Invoices with digital payments
Bank statements
IRS 1099 forms
Business Tax Receipts: What Are Those?
The IRS requires businesses to keep supporting documentation that shows what they bought, how much they paid for it, and when they bought the item. In case of a future audit, you will be required to show your business' tax receipts with all of the information just listed.
Do I Need To Keep EVERY Single Receipt!?
The IRS requires businesses to keep receipts for all business expenses of $75 or more. Note: if your business is audited, you'll still need to be able to provide basic information about any expenses for amounts under $75, such as the date of the purchase and its business purpose.
Additionally, you will want to keep ALL receipts, regardless of amount, if the expense pertains to lodging or meals.
Managing Your Business' Tax Receipts
The IRS requires that your business tax receipts be easily accessible and organized in case of an audit or other tax questions. The information that the IRS requires is already automatically tracked typically through your digital bank statements, purchase histories, credit card statements, and even your online banking records. This makes the requirement super easy to satisfy.
You are absolutely allowed to keep digital copies of your paper receipts as well. How nice, right!? No more shoeboxes full of papers or a kitchen counter pile.
The IRS has accepted digital copies of receipts since 1997 (details on that here).
In today's digital world this is by far the easiest option.
There are some software programs that make the uploading and organizing process super easy. QuickBooks' mobile app (click to download) is one of those super easy solutions. It integrates directly into your already-existing accounting software and can connect those receipts to their respective transactions. It could not be any easier.
Some people even snap a picture with their phone camera or an app and upload those receipt images to organized files within a program such as Google Docs. Organizing by year and month makes it super easy to find those receipts again if needed for tax purposes.
Remember that you should be backing up or saving, preferably somewhere easily accessible, those digital files so they can be accessed easily for years to come.
Other Things To Consider
Reimbursements may require extra documentation.
Sometimes a business owner may make a business-related purchase from their personal account. While technically legal, this can create extra documentation needs from the IRS' perspective. You will need to provide documentation that shows relevant information pertaining to the reimbursement: what was purchased, when, and for how much. You’ll also need to include clear details that show the original payment method and the total reimbursement amount.
Cash
Cash transactions can be harder to keep track of because of the lack of a digital trail. Large cash expenditures should always come with an itemized receipt for tax purposes. Smaller cash purchases are not required to have as much documentation as larger expenses.
No Receipt? It May Be No Problem!
The Cohan rule allows taxpayers to deduct business-related expenses even if the receipts have been lost or misplaced—as long as the amount and reasoning are considered “reasonable and credible.”
This means that the IRS must allow business owners to deduct some business expenses, even if they don’t have receipts for all of them. That means if you’ve lost the receipt for a smaller cash purchase, it’s usually not a big deal. Although you should, of course, try to keep all receipts whenever possible.
How Long Should You Keep Your Business' Receipts For?
Generally, the IRS recommends keeping receipts for three years. However, there are sometimes circumstances that make keeping documents for up to seven years more reasonable (here). During an audit, you may be asked to supply records dating back three years if your deductions are questionable.
Bridging The Gap Financial Services LLC can help!
Categorizing and digitizing all of your receipts can be a pain, but when you work with Bridging The Gap Financial Services LLC, we can manage that for you! We’ll take care of your business' bookkeeping by importing, reviewing, and categorizing all of your expenses every month.
Our accountants ensure that your books are accurate and up-to-date, this gives you peace of mind when tax season rolls around.
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