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Tax Deductions and Receipts

1. Keep all receipts.
This point cannot be overstated. One tax professional was recently helping a client with an audit in which the IRS agent asked for every receipt to support the client’s travel expenses taken during the year. There are arguments on keeping all receipts and credible evidence or rely on IRS Publication 463 which states that you don’t need to keep receipts for expenses under $75, but why get into a fight? Arguing with the IRS can cost you a lot more time and money than just keeping your receipts.

2. Make notes on receipts about their business purpose.
This is an especially great idea for dining and entertainment expenses. It can be easy to remember why you bought a fax machine (Do people still buy fax machines?), but it could be a lot harder to remember who you went to dinner with at Red Lobster three years ago and what the business purpose was.

3. Scan receipts and keep them at least six years.
Believe on not the IRS can come knocking on your door asking for documentation and audit you up to six years back in some cases. But the real issue is hoping that the ink on your Home Depot receipt hasn’t faded away is a whole other issue. The IRS allows taxpayers to scan receipts and store them electronically. But keep a back-up, because crying about your hard drive crashing isn’t going to help you any more than “My dog ate my receipts.” We recommend that you scan the receipts and at the end of the year transfer them to a cd and put them in a safety deposit box or use the cloud for storage.

4. Take a picture with your smartphone.
With today’s technology, it’s easy to say “Forget the receipt, I’ll just make a note on the receipt and then take a picture of it”. This is a great idea and there are a whole host of apps for the iPhone and Android that can help you better track your expenses. (See tomorrow’s blog post)

5. Keep a daily business journal.
A daily journal for your business may sound like overkill, as if you weren’t all busy enough. However, it can be simply accomplished by keeping a good calendar in your Outlook or Google Calendar. While in an audit representing a taxpayer about a year ago, the auditor actually asked for a printout of my client’s Outlook calendar to substantiate various deductions being claimed. There are also several good legal and other reasons to keep a detailed schedule of your day, even if you add these details at the end of the day.

6. Don’t rely on credit-card statements and canceled checks.
These are important, yet insufficient without receipts. The IRS may see that you spent $378 at Staples, but it doesn’t know what you bought. It could be movies and useless technical gadgets, and not computer paper and supplies for which you expensed them. For bookkeeping purposes, these records are fantastic, but the detail is critical for an IRS auditor. A few years ago I was talking with a friend who purchased “office supplies” at Wal-Mart and threw away the receipts. He stated, how are they going to prove it wasn’t cleaning supplies, paper, etc. I let him know that he had to prove it not the IRS.

7. Stay away from cash.
Using cash for expenses is the worst way to keep your business books. It seems to be the absolute hardest thing to for clients to keep accurate track of for good bookkeeping records and documentation for an audit. The biggest issue is cash is hard to track, easy to spend and nearly impossible to reconcile with receipts. We encourage our clients to stick to debit and credit cards to better track your expenses and then combine them with receipts. We can win the cash argument in an audit, but do you want to spend that money fighting that fight?

It’s no secret that audits will continue to only increase and the rules will be only more strictly enforced. The best course of action for small-business owners is to be prepared with a better set of books and receipts for all of their expenses, in order to stay one step ahead of the “tax man.”

Posted on by LBS Tax
Tax Deductions and Receipts

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