Good business record keeping includes retaining documentation to support your business expenses. Per the IRS, documentary evidence includes receipts, cancelled checks, or bills. In general, you must have documentary evidence to support all business expenses in the event of an audit. The exceptions to this rule are for the following:
- Your expense, other than lodging, is less than $75.
- You have a transportation expense for which a receipt is not readily available.
In the case of meals, entertainment, & travel, receipts should also include the following:
- The name and location of the hotel.
- The dates you stayed there.
- Separate amounts for charges such as lodging, meals, and telephone calls.
- The name and location of the restaurant.
- The number of people served.
- The date and amount of the expense.
When a charge is made for an expense over $75, or for any lodging expenses, the business owner should be saving a receipt or bill somewhere/somehow, in an organized manner.
Most small business owners are using debit cards, credit cards, and PayPal to pay business expenses. For charges under $75, these statements are adequate for record keeping purposes when the description and type of expense are obviously business related (e.g. monthly business software subscription).
When charges come through on a credit card statement with a very general description, like “Amazon”, you also should be saving the Amazon bill to to support that the item purchased was business related. I recommend this for all purchases, even if under $75, made via vendors where you are often purchasing personal items.
When purchasing assets such as computers or equipment, documentation must be kept to validate the total purchase price and the type of equipment. This requirement is specific to supporting the rules used for depreciating the asset.
The IRS guidelines for maintaining business records ranges from 3 – 7 years depending on the situation. I still recommend 7 years to be safe.
So how are you keeping your supporting documentation? Paper receipts in a box meet the requirement, but will you be able to match a business expense on your tax return to the receipt if necessary?
I recommend a digital approach such as the following:
- Scan and store via a cloud storage tool (e.g. Dropbox, OneDrive). File by month/year and clearly label the scan with the type of expense and where the expense was charged (e.g. on credit card)
- Use a tool with a smart phone app that allows you to take a picture of the receipt and upload to a cloud storage site that will organize the information for you.
- Use a tool with a smart phone app and scanning capabilities that will upload the receipt to software that will classify the expense and link to the transaction in your accounting software.
- Use a service where you can physically send in your receipts and they will sort and classify for you.
- Use credit cards with “receipt match” functionality built in.
There are numerous tools available to make this process easier and minimize your risk of an expense being denied by the IRS.
Some of the tools I recommend are:
- Receipt Bank
- Neat Receipts
Let me know if you need help in this area and we can determine the best solution to meet your needs.