Business Expenses: Receipts
We all know that person that keeps a shoe box full of receipts for that just in case moment when they might need just one of those receipts for a past purchase. I’m not saying that person has the right idea, but when it comes to business expenses you absolutely need a system to keep track of receipts.
Why keep receipts
Before we get into the details of what to keep and how to keep them, let’s talk about why you need to keep receipts for your business expenses. The receipt for a business expense is the only proof you have that the expense was actually incurred by your business. At the end of the year, when you prepare your tax return, one of your main goals is to legitimately reduce your taxable income by including all of your business expenses. By reducing that taxable income, you are also reducing your tax liability, thus having to pay less money to the IRS.
If the IRS were to select your tax return for an audit, they would ask you to provide support for the business expenses you claimed. If you have nothing to show them for those business expenses, they could disallow any or all of your expenses thus increasing your taxable income and resulting in more money that you need to pay the IRS (sometimes they add on fines and penalties, but that is not always the case).
I don’t say any of this to scare you, my goal is to tell you why it’s important and then help you set up a simple system so that should you be audited, you can mitigate an already stressful situation knowing you have the support you need to justify your business expenses.
What counts as a receipt
In general, the more detailed the receipt the better. In addition to traditional paper receipts from stores, bank and credit card statements, canceled checks, and pay stubs are all acceptable forms of documentation for the IRS. When making purchases from Target, Staples, Walmart, or other stores that sell a variety of products, it is best to keep those paper receipts showing the detail of the items purchased proving that no personal items were mixed into the transaction.
As business owners, many of us subscribe to services or purchase online and receive email receipts or statements. Those emails are just as good as the traditional paper receipts when it comes to supporting your business expenses so be sure to hang on to those too!
How to store business receipts
The method you choose for storing and maintaining your support for your business expenses is 100% up to you. The key is finding a solution and system that works best for you and your business. I highly recommend an electronic storage system so that you have access to it whenever and wherever you are. It does not have to be anything complicated, a simple Google Drive folder that you use to store pictures of the traditional paper receipts, as well as downloaded copies of your bank and credit card statements, is a great starting point.
If you are using accounting software such as QuickBooks Online, you can upload photos of receipts, as well as PDFs of email receipts as an attachment to the business expense so you will have the documentation attached to the transaction. This solution will allow you to quickly identify which expenses you have support for and the ones you still need to track down.
The shoe box filled with receipts and bank statements is always an option as well, just be sure you know where that shoe box is should you need it for easy access. There are a variety of other software tools out there that can help scan and organize receipts if you are looking for a recommendation please reach out.
How long to keep receipts
The IRS can audit your tax returns up to 3 years from the filing date of the returns. If the IRS suspects you failed to report 25% or more of your income, they have up to 6 years to inspect your accounting and expense support. So at a minimum, keep your support for three years from the time of filing your tax return.
If you are a new business owner take the time right from the beginning to establish good solid procedures with your business expenses. For those of you that have been in business for a little while, it may take some time and some dedication to make the necessary changes to your procedures but the amount of time you will save your future self and the stress over the situation is invaluable.
Always reach out to your accountant, CPA, or bookkeeper if you have questions pertaining to your specific situation. If you don’t have an accountant, reach out, I would be happy to help you set up a system!