There is no doubt about it – receipts are a pain! However without proper documentation, this relatively small annoyance could quickly turn into a massive migraine come tax season. It doesn’t matter if you are a brand new business owner or someone who has been in the field for many decades, a key component to good record keeping is simply hanging on to your receipts.
But do you really need to keep all of your business receipts? What information needs to be clearly marked? How long do you need to keep your receipts? How can you keep track of the abundant amount of receipts you’ll undoubtedly accrue?
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Which business receipts do you need to keep?
According to the IRS (https://www.irs.gov/businesses/small-businesses-self-employed/why-should-i-keep-records), “You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.”
When it comes to hanging on to your business receipts, it’s best to adopt an attitude of “better safe than sorry” and keep anything and everything that relates to your business. You will need to keep a record of those transactions that you plan to deduct as a business expense (such as utility bills, office rent, home office expenses, etc.) in order to have all the documentation you will need to claim them on your taxes. The following is a baseline for some of the expense records you should be keeping:
Gross Receipts: This is the income you receive from your business. You should keep supporting documents that demonstrate the source and amount of your gross receipts. Documents for gross receipts include things such as invoices, cash register tapes, receipt books, deposit information (cash and credit sales), and Forms 1099-MISC.
Inventory: If you buy inventory to sell to your customers or purchase raw materials to craft your trade, then hang on to any documentation that identifies the payee, the amount, and proof of payment for the item. If it is not possible to also obtain a receipt, keep the invoice and cancelled check (which is proof that the person you wrote it to cashed the check).
Assets: Assets are the property you own and use in your business, such as machinery, furniture, computers, or vehicles. You must keep records to verify specific information about your business assets. You will also need to figure out the annual depreciation of your assets as well as the gain or loss of any property you have sold. Because of this, make sure you keep a record of any money spent on your assets – from upgrading your computers to servicing your oven. According to the IRS, asset documentation should include the following:
- When and how you acquired the assets
- Purchase Price
- Cost of any improvements
- Section 179 deduction taken
- Deductions taken for depreciation
- Deductions taken for casualty losses, such as losses resulting from fires or storms
- How you used the asset
- When and how you disposed of the asset
- Selling Price
- Expenses of sale
Such information may be found in purchase and sale invoices, real estate closing checks, canceled checks, or other documentation that can identify the payee, amount, and proof of payment or electronic funds transferred.
Employment Taxes: There are specific employment tax records that must be kept for at least four years.
Purchases: Purchases are the items you buy and resell to customers. If you are a producer or manufacturer, this encompasses the cost of all raw materials or parts purchased from manufacture into finished products. Your supporting documents should show the amount you paid as well as the amount it was purchased for. Supporting documents include cash register tape receipts, invoices, credit cards receipts and statements, as well as cancelled checks or other documents that identify the payee, amount, and proof of payment.
Other Expenses: The majority of your business receipts will likely fall into this broad category. If you plan on writing off such expense on your taxes, then you must have the documentation to support it. Keep all receipts or invoices on things such as:
- Advertising: This can include business cards, ads in magazines or online, billboards, web hosting, etc.
- Vehicle: Keep receipts for things such as gas (the standard deduction amount changes from year to year, so keep up to date) and maintenance. You must be able to substantiate certain elements of the expenses.
- Educational: Keep your receipt or the invoice, as well as you bank records showing that you paid for any continuing education classes.
- Entertainment: Taking a client out to lunch can be tax deductible but be careful, you will need to do more than just keep the receipt. In addition to logging the amount, place, and time of the expense, you must also show that your activities were directly business related.
- Networking: Just like the educational expenses, attending a conference or trade show may be tax deductible. You will need to keep your receipt or the bill and your bank records as evidence of purchase.
- Office Supplies: Printer paper, paper clips, staples, etc. are all tax deductible, so make sure to keep your office supply store receipts!
- Contractors and other Professional Services: Keep all invoices and receipts for any lawyers, graphic designers, or other contractor.
- Travel: Once again, you must be able to validate certain elements of the expenses. Similar to entertainment expenses, you must show the amount of the expense, the time and place for the expense, as well as the business purpose for the expense.
What information do you need to have clearly marked?
People often try to pass off vacations as business trips, which means travel, entertainment, and meal deductions are always at the top of the IRS radar. As such, you must document the following five things whenever you incur any business-related entertainment costs in order to prove that the expense does indeed pertain to your business:
- The Date: The date the expense took place will be listed on a receipt or credit card slip. Dates are typically preprinted on each page of an appointment book or dayplanner, so entries on the appropriate page automatically record the date of the expense.
- The Amount: The amount that you spent, including tax and meal tips.
- The Place: Generally the nature and place of the meal or entertainment will be printed on the receipt, otherwise you can record it in an appointment book.
- The Business Purpose: You must prove that the expense was incurred for business (to encourage continuing business relationships, obtain future business, etc.). Exactly what you need to show depends on whether the business conversation took place before, during, or after the meal or other entertainment.
- The Business Relationship: You need to also show the business relationship of people at the event. For example, you can list their names, professions, and any additional information needed to establish their business connection to you.
It’s important to note that the IRS does not require businesses to keep receipts, canceled checks, credit card slips, or other supporting documents for entertainment, meal, gift, or travel costing under $75. However, you will still need to document the five facts listed above. This guideline does not pertain to lodging, meaning hotel or similar costs must have accompanying receipts even if they are less than $75.
All of this record keeping is not as difficult as it may seem. The information does not have to be all in one place and can be logged several different ways. You can record the above five facts with:
- A receipt, credit card slip, or similar document
- An appointment book or calendar entry alone (if the expense is less than $75)
- A receipt combined with an appointment book entry.
How long do you need to keep business receipts?
The basic rule of thumb here is that you should keep receipts for as long as a taxing authority (such as the IRS) or the state’s department of revenue can audit you. The majority of audits can only go back three years from the date you file your tax return, but in some cases where fraud or sever tax underpayment is suspected, they can audit you back as far as six years (again, from the date you file your tax return.)
What is the best way to keep track of receipts?
The business you are in directly affects the type of records you will to to hang on to for federal tax purposes. Six years worth of business receipts is a whole lot of paper to hang on to – luckily there is nothing that says you have to keep the expense receipt in its original form. You may select any type of recordkeeping system (filing away the hard copy, digitizing it, etc.) that best suits your business as long as it clearly shows your income and expenses. It should also include a summary of your business transactions, which is usually logged in business books (such as accounting journals and ledgers). Your books need to show gross income, along with all deductions and credits. The business checking account is the main source of business book entries for most small businesses.
There are several services out there that can help you organize and store your receipts digitally. Accounting software such as FreshBooks, Quickbooks Online, and Xero allow you to snap a photo and attach it right to your transaction, that way everything is kept in one place and you can trash the hard-copy receipt. Check out similar software such as Receiptmate, Cam Scanner, Shoeboxed, NeatReceipts, or the Quicken app’s Snap and Store feature to see if they might be of record-keeping assistance to you.
No matter which way you choose to record your expenses, you need to do it in a timely manner. This does not necessarily mean on the day you incur it – often it is sufficient to record them on a weekly basis. However, if you tend to forget things easily then it is best to set yourself a reminder and get everything into writing that you will need for your records within a day or two of the completed transaction.
As a business owner, you want and deserve every tax deduction that you are entitled to. As such, you must make sure that you have a sure-fire system in place to aide you in managing all of your receipts and expenses. Consistency and organization is crucial – a weekly bookkeeping schedule may be just the thing you need to help you stay on track and minimize tasks from piling up too high. Though record-keeping is not the most exciting part of owning a business, it is certainly an essential one!