Like most business owners, you are keeping receipts for tax time or bookkeeping purposes. Do you really need to hold on to them? They are valuable, but you don’t have to keep every receipt. Yes, your bookkeeper needs documentation, but there are better ways to organize your receipts. Here are a few tips about tracking those expenses for your business.

A Quick Look at Tax Deductions

You want to keep a document trail for your taxes. If you have struggled to save every receipt from the past year, you can relax. The IRS does require receipts for your business expenses, but you don’t need physical copies of them.

Why do business owners keep those receipts? Tax deductions. Your business is considered a taxpayer by the IRS. Every year, you must file income tax returns and pay any taxes owed to the IRS. That amount is determined based on how much your business earns minus any business expenses or tax deductions.

You can reduce the tax burden by deducting qualified expenses and purchases from your business earnings. For example, if you bought a new computer for your business, you can subtract that amount from your earnings. All of those deductions will reduce your income. In turn, that lowers your tax obligations to the IRS.

Business owners can take a tax deduction in various areas, provided with the required documentation. Some deductible expenses can include:

• Office furniture
• Technology
• Business travel expenses
• Meal expenses
• Marketing expenses
• Contractor fees

A receipt is not enough proof that your expense is a legitimate business one. If you want to deduct these expenses from your taxes, they must be “ordinary, necessary, and reasonable.” Taking a tropical vacation is usually not a business expense. Writing it off as a deduction might raise some eyebrows from the IRS.

What Is a Business Tax Receipt?

If you want to include those business expenses as a deduction on your tax return, the IRS requires you to have supporting documentation. This documentation will show how much you paid, what you bought, and when you purchased it.

Why keep receipts? If the IRS has questions about your tax return or you get audited, those records can help prove that you needed the expenses for your business.

A few individuals confuse these receipts with a business tax receipt. These are two different types of documents. A business tax receipt is legal permission to issue sales tax in a particular state, while a business tax receipt is your documentation of a business-related expense. They both have the same name but two different purposes.

What Business Receipts Do I Need To Keep?

When you need supporting documents, it can be a broad category. Remember, you need to have itemized proof of those business purchases. In many cases, this is a printed receipt, but it can also include:

• Bank statements
• Credit card statements
• Canceled checks
• Itemized invoices of digital payments
• Real estate closing statements

While you need to prove your business expenses, you also must track your income. Always keep those receipts of income, such as:

• Receipt stubs
• Cash register receipts
• Invoices with digital payments
• Canceled or cleared checks
• IRS 1099 forms
• Bank statements

How Long Should I Keep Business Receipts?

You need to keep those business receipts for three years in most cases. In some situations, the IRS might require you to hold on to those receipts for six years. Always keep records on hand if you have underpaid your taxes by more than 25 percent. While you can always download documents and statements from an online source, many financial institutions will not keep them after a year or two.

You can always store receipts by digitally downloading PDFs and saving them to the folder for the month and year. Remember to back up that folder and keep it in a place where you can access it for several years to come. With an organized filing system, your bookkeeper will thank you when it comes time for taxes.

Managing Business Tax Receipts

An audit is very unlikely, but they do happen. In that event, you must have all documentation on hand. While small business accounting services can help with those bookkeeping tasks, you should take steps to manage the receipts.

Think about storing those documents and receipts with a digital app. You can track all of that required information for the IRS through your credit card statements, digital bank statements, online banking records, and purchase history. Paper receipts for large cash purchases don’t have to be stored as a physical document. Most financial apps allow you to snap a picture of the paper receipt and store it in a document tracking system.

According to the IRS, digital copies are sufficient proof to document your tax deductions. If you want to store your records, download those digital statements and keep them in organized folders. When it comes to tax time, you can locate all relevant paperwork for your business.

You will want to keep a close eye on cash and reimbursements. For most business owners, cash purchases can be harder to track. When you pay with cash, you will not have a generated purchase statement. It is up to you to keep the physical receipt of the purchase. Large cash expenditures should come with an itemized receipt for tax purposes.

It is not uncommon for business owners to use a personal credit card or bank account to make a business purchase. After the transaction, the owners usually pay themselves. That is known as a reimbursement. If you want to track your reimbursements, keep all of your receipts. You will need to show the original payment method and proof that you paid yourself for the purchase.

Keep Track of Your Expenses

With these tips, you can manage and save all receipts for your bookkeeper. As long as you have proof of your purchases, you don’t need to keep boxes of physical receipts for tax time.

Need an accountant for your small business? Reach out to TMD Accounting. We have been helping the Gloucester County community with their tax and payroll needs for over 40 years. You can schedule a consultation by calling 856-228-2205.

When you prepare your business tax returns and claim deductions, you likely understand the importance of gathering your receipts to substantiate the expenses you claim. While you likely know that you need to keep copies of your returns for several years, you might wonder how long you should also keep your receipts. Here is what you need to know about keeping copies of your receipts from our accountants at TMD Accounting.

What is Considered a Business Receipt?

Whenever you conduct a business transaction, you are either given a receipt or give one to the other party. Receipts normally show the items or services purchased, their purchase date, and the cost of each item or service.

Receipts are important for your business. They give your customers proof that they bought their items and own them. They also include information that can help you resolve issues your customers might have by allowing them to make returns or exchanges. Finally, business receipts are important for tax reasons. They help to substantiate your transaction history and support the information you report on your business tax returns.

How Long to Keep Business Receipts

Trying to figure out how long you should keep copies of your business receipts is not difficult. It’s best to be safe and keep them for a long time just in case you are audited. In general, you should keep copies of your receipts for as long as you might be audited. The statute of limitations for audits is generally three years, but it can be extended to six years if the IRS finds you have made substantial errors on your returns. You should keep your receipts for at least three years to substantiate your expenses and your sales in case you are audited.

Some other reasons why you should keep your receipts for a longer time include the following:

• If you didn’t file a return
• If you claimed deductions for worthless securities or bad debt
• If you underreported income on your return

You should speak to an accountant if you are uncertain about how long you should keep your receipts. If you are concerned about the ink on receipts fading away, you can always scan them into your computer and store them electronically or take digital pictures of your receipts.

Exceptions to the Rule

The thought of keeping every last receipt might seem overwhelming. However, the IRS has stated that you are not required to save every single receipt for your business.

Some of the types of receipts you don’t need to keep include the following:

• Expenses under $75 unless for lodging
• Transportation costs for which receipts aren’t available

If you claim expenses on your tax return for items under $75, you should still specify the expense’s date, amount, purpose, and location.

Why You Should Keep Business Receipts

Keeping track of business receipts and organizing your paperwork can be a hassle. However, saving your business receipts helps to keep your business’s books current and accurate. Even though the thought of keeping your receipts for three to six years might seem like an overwhelming amount of paperwork to save, you can take photos and store them in digital form. Business receipts can help your business by providing the following benefits:

• Ease the preparation for an audit
• Substantiate the information you have reported on your tax returns
• Make it easier to balance your books and maintain their accuracy
• Help you to identify all deductions for which your business might be eligible

If you receive a notice from the IRS of its intent to audit you, having your receipts for the targeted return can help you prepare. During an audit, the auditor will look for inconsistencies in your tax return. If you do not have business receipts, it is harder to show the auditor that the information on your return is accurate. You should always keep records to substantiate your tax returns in case you are audited.

Saving your receipts can also help you when you are reconciling your books and your accounts. If you do not have receipts, your books might be off. Record your receipts on a regular basis to maintain the accuracy of your books. Add the information from your receipts in your books as soon as possible so that you can have a realistic financial snapshot of how your business is doing.

Find an Accountant for Your Small Business

Saving your receipts does not have to be a hassle but should instead be a routine part of your business operations. If you can make a habit of taking a quick picture of your receipts at the time you receive them and uploading the photos into your accounting software, the process can be much simpler. For help with small business accounting services, contact TMD Accounting today by calling us at 1-856-228-2205.

Receiving a notice of audit can inflict fear on any small business owner. It can be even worse if you receive an audit notice and do not have any receipts to support the deductions you have claimed for your business. If you are being audited and do not have receipts, there are some ways you can reconstruct your records to support your expense deductions. Here is what you need to know from our tax professionals at TMD Accounting.

What is an Audit?

Taxpayers have the responsibility to file returns and pay taxes to the IRS each year. They can also write off work-related expenses to offset a portion of their taxes. When the IRS reviews the deductions taxpayers have claimed and the taxes they have paid as a result, the agency sometimes finds some missing or unclear reporting of income or itemized deductions it believes warrant additional scrutiny. When the IRS follows up on these types of issues through a formal inquiry, the process is called an audit.

In most cases, the IRS will send an audit notice to the taxpayer within seven months of when the tax return was filed. However, the agency can send a notice within three years of the return’s filing date. The notice always comes in writing in a letter and not via a phone call. In the letter, the IRS will inform the taxpayer that it intends to conduct an audit and will ask for specific types of documentation for the taxpayer to provide within 30 days of the notice. If you have received an audit notice but need more time to organize your materials, you can request an extension of 30 days.

What To Do If You Don’t Have Receipts

Receiving an IRS notice that you have been chosen for an audit might be concerning especially if you have missing receipts. However, the IRS might allow you to substantiate some of your expenses in other ways. You will only need to present evidence that the business expense deductions you claimed were valid. If you do not have receipts, you will need to reconstruct a history of your expenses.

It is a better idea to recreate your business’s expenses at the time you are preparing your taxes when you do not have receipts than to wait until you receive an audit notice. Don’t base your deductions on an estimate to ensure that the expenses you deduct can be substantiated if you are chosen for an audit later.

How to Reconstruct Records For The IRS

It is important to get started immediately to reconstruct your expenses for the audited tax year when you receive an audit notice. It can take some time to recreate your expenses, and starting immediately can help you meet the response deadline.

You can reconstruct your records or provide a good explanation of your deductions. If the IRS rules against you, you can file an appeal. You might also have to argue against an assessment of penalties by presenting facts about how you tried to comply. In many cases, having no records can result in a 20% penalty for negligence.

Follow the tips below to reconstruct your business’s records in response to an audit:

•  Review your credit card and bank statements – Checking your credit card and bank statements can help you identify different expenses you have paid. They can also be a substitute if you have lost your receipts.
• Ask for copies from suppliers and vendors – Suppliers and vendors might have duplicate copies of your invoices and receipts. You can ask them if they can provide you with copies.
• Review your appointment books – If you have claimed travel and meal expenses, you can look at your old appointment books to find relevant information about your travel, its frequency, and the number of clients for whom you provided services.
• Look at your cell phone records – Your cell phone records might help you to establish your service dates and help to reconstruct your business expenses.
• Use online map tools to reconstruct mileage – Use map tools online to substantiate your mileage claims. Do not estimate the number of miles traveled per week and multiply it by 52 to arrive at your mileage deduction. Instead, take into account holidays and other periods during which you did not travel for work.

If you estimate your expenses in a different way than the IRS, make sure to draft a declaration and sign it under oath.

About The Cohan Rule

Lost and missing receipts is a very common issue. The United States Court of Appeals for the Second Circuit created a rule in 1930 about how the IRS should move forward in those types of cases in its decision in Cohan v. Commissioner, 39 F.2d 540 (1930). In the case, George M. Cohan, a Broadway actor, claimed business deductions without documentation. He claimed that he didn’t have enough time to document all of his entertainment and travel expenses that he deducted on his income tax return. The IRS tried to disallow all of his deductions, but the court found that it was clear that he had incurred some expenses even if the exact amounts could not be substantiated. The court then outlined the Cohan rule through which taxpayers without receipts can still claim reasonable and credible expenses.

If you don’t have receipts, you will not be allowed to claim all of your expenses, however. Instead, the IRS will only allow you to deduct the minimum standard amount for the service or item based on its calculations. The U.S. Tax Court has limited the use of the Cohan rule in several decisions and has stated that taxpayers should supply information to support their expenses.

What Happens After The Audit?

After your audit, one of the following three things will occur:

• Your audit ends with no changes if the IRS substantiates your return.
• You agree to the IRS’s proposed changes and pay what you owe or set up an installment agreement.
• You disagree with the IRS’s proposed changes and either appeal the decision or ask for a conference with a manager at the IRS.

Unless the IRS determines that you engaged in tax evasion or tax fraud, you don’t need to worry about going to jail. In most cases, you might owe some taxes and have to pay them.

Find an Accountant for Your Small Business

If you have received a notice of an audit, you should talk to TMD Accounting about our small business accounting services. Call us today at 1-856-228-2205 to request a consultation.

Many small business owners find tax season to be stressful. Filing taxes can be even more stressful when you consider the potential of an audit. The Internal Revenue Service (IRS) announced in late 2020 that it planned to increase the percentage of small business audits by 50%. While your chances of being audited are still relatively low, it is still a good idea to ensure that your books are in order to reduce your risks in case you are selected. Here is some information from TMD Accounting about how far back the IRS can go if it decides to audit your business.

How Far Back Can The IRS Audit You?

The general statute of limitations for an IRS audit is three years under 26 U.S. Code § 6501, which means that the IRS can audit your tax returns for the most recent three years. However, there are multiple exceptions to this general rule. For example, if an auditor determines that you have made substantial errors on your returns, they can add more years to the scope of the audit. According to the IRS, it will generally not go back more than six years unless the agency suspects that you might have committed fraud or have failed to file your required tax returns.

Statute of Limitations on IRS Tax Audits

As previously noted, the IRS generally has a three-year statute of limitations for tax audits from the date you file your return or the date that it is due, whichever is later. For example, if you file your tax return early, the statute of limitations will run from the due date rather than your filing date.

If you substantially understated your income, the statute of limitations for an audit is six years. A substantial understatement of income occurs when you omit 25% or more of your income. If you failed to file a tax return, the IRS will not have a statute of limitations to audit you since the time period will not start running until a return is filed. Similarly, if you filed a fraudulent return, the IRS can go back and audit it regardless of how long ago it was.

What Triggers an Audit?

In a majority of cases, the IRS chooses returns to audit randomly. However, the following red flags can increase the likelihood that you will be audited:

• Failing to report all income
• Being a high-income earner
• Claiming a large charitable deduction
• Making calculation errors
• Claiming excessive deductions
• Filing schedule C as a self-employed taxpayer
• Claiming the home office deduction
• Claiming deductions for business travel, meals, and entertainment
• Claiming that a hobby is a business
• Claiming you used a personal vehicle 100% for your business
• Claiming the Earned Income Tax Credit (EITC)

The IRS distinguishes between businesses and hobbies by using a standard for profitability. If your business was profitable for three out of the past five years, the IRS will likely consider it to be legitimate. If your business claimed losses for three of those years, the IRS might consider your business a hobby and select you for an audit.

Tips For Avoiding Tax Audits

Here are some tips for avoiding a tax audit.

1. Avoid Reporting Net Annual Losses

Reporting small net annual losses for your business can trigger an audit. While you have to report all of your income, you are not required to report all of your expenses. It might be a good idea to leave some of your expenses out if doing so will allow you to report a small net profit.

2. Specify Your Expenses

As much as possible, avoid categorizing your expenses under “other expenses” on your return. Instead, explicitly list each expense by itemizing them.

3. Provide Additional Detail as Needed

If you had a major drop or increase in a category of expenses, you should attach additional paperwork to your return to explain what happened in detail. This might help to answer questions an IRS agent might have about the sudden changes if your return is triggered.

4. File Your Returns on Time

Filing your returns and paying your taxes on time shows a history of compliance. This might help to avoid a potential audit. You should also try to avoid amending your returns to help establish your history of compliance.

5. Double-check Your Paperwork and Math

Make sure that the numbers on your forms match what you report on your return. You should also double-check your calculations to ensure that you have not made any math errors. The numbers you use for deductions should also vary from year to year. Don’t claim the same numbers for your deductions from year to year.

6. Avoid Claiming Excessive Deductions

Don’t claim excessive deductions by overestimating your donations, meals, travel, or home office expenses. If you claim excessive amounts on your deductions, your return could be triggered for an audit. Similarly, claiming many deductions you haven’t claimed before can also make it likelier that your business return will be audited.

7. Don’t Leave Blanks On Your Tax Form

You should answer every question on your tax form, including those for which your answer is $0. Leaving blanks could result in an oversight that triggers an audit.

How Do I Find an Accountant for My Small Business?

Working with a qualified accountant to prepare your business tax returns can reduce your chances of being audited since your returns should be fully accurate. While there will still be a chance that the IRS will select your business’s tax returns for an audit, having the help of the small business accounting services at TMD Accounting can help you to achieve a better outcome if you are audited. Call us today for a consultation at 1-856-228-2205.

If you use your vehicle for business purposes as a part of conducting your small business, you can claim vehicle-related tax deductions. While you might not give tax filing season much thought throughout the year, you can reduce your business’s tax liability and maximize the deductions you can claim by keeping accurate records year-round. Keeping records about your business’s use of your vehicle can help you potentially save hundreds of dollars through the mileage tax deduction. Here is some information about the mileage tax deduction, how to track mileage, and whether you might qualify to claim it.

What Is the Mileage Tax Deduction? How Does It Work?

The mileage tax deduction is a deduction that can be claimed on your tax return as long as you use your vehicle for business purposes and meet certain conditions. You can deduct your mileage if you drive your vehicle for qualified business purposes.

The Internal Revenue Service (IRS) sets the standard rate each year. In 2022, the mileage rate is $0.58 per mile. You calculate the deduction by multiplying the rate by the qualified miles you drove for business purposes. You can also choose to use your actual expenses instead of keeping logs of your mileage. We’ll discuss this more below.

Who Can Deduct Car Expenses?

You do not have to use your vehicle all of the time for your business to claim the mileage tax deduction. You can claim the deduction for trips you take to purchase supplies for your home office and other similar trips even if you primarily work from home. However, commuting to and from your home and a separate office does not count, and you can’t claim those miles. If you work from a home office, you can count the mileage between your home and any work-related errands or meetings.

Which Car Expenses Can You Write Off?

There are expenses you can deduct only when you use the actual expense method and some that you can deduct with either method. If you use the actual expense method, it will replace the mileage deduction you would claim if you used the standard mileage method. You can write off the following expenses with the actual expense method:

• Fuel
• Vehicle lease payments
• Auto insurance
• Vehicle maintenance costs
• Depreciation

You can also write off the following expenses under either the standard mileage or the actual expense method:

• Tolls
• Fees from the Department of Motor Vehicles
• Parking
• Car washes

If you use the actual expense method, you will have to calculate the percentage that you used your car for business purposes. Estimate how much of your mileage on your vehicle is used for business purposes instead of commuting or personal tasks. You don’t have to be exact and can guesstimate.

How to Write Off Car Expenses: Actual Method vs Mileage Method

You can either use the standard mileage or the actual expense method. To use the standard mileage method, you can keep a vehicle mileage log in your vehicle or on your smartphone. With this method, track every mile you drive for business purposes and multiply the total by the standard IRS mileage rate.

With the actual expense record, you won’t have to track every mile you drive. You will instead just determine the business-use percentage of your vehicle and your vehicle-related expenses and write off the percentage you can allocate to your business use.

The actual expense method is simpler for most people since they don’t have to keep logs of their mileage. In most cases, the actual expense method will also result in a larger deduction. However, if the following situations apply to you, the standard mileage method might be a better option:

• You drive more than 30,000 miles per year for work
• You have a gas-efficient, older vehicle and won’t benefit from depreciation
• You have an electric vehicle and do not have gasoline expenses

Even if you do have an electric car, you might still benefit from the actual expense method if your vehicle is fairly new since electric vehicles are generally expensive to purchase.

Find an Accountant for My Small Business

Calculating the mileage tax deduction can be complicated whether you are using the standard mileage method or the actual expense method. In addition to the mileage tax deduction, there are also other deductions you might be eligible to claim for your business. The small business accounting services from TMD Accounting can help you to reduce your tax liability while maximizing your deductions. Contact us for an appointment today by calling us at 1-856-228-2205.

As a small business owner, knowing what you need to gather to file your business tax returns can seem difficult. Keeping accurate records throughout the year can go a long way to helping your business at tax time. If you are a new small business owner, filing taxes for your business for the first time can be overwhelming. Changes in the state and federal tax laws can also make tax filing even more daunting for business owners who wait until the last minute to pay taxes and then have to scramble to gather all of their receipts, calculate business income and profit and loss statements, and figure out the transactions your business has conducted during the past year. Here is some information from our accounting professionals here at TMD Accounting about tax filing for small businesses and the documents your accountant will need.

Why You Should Work With an Accountant

Many small business owners don’t have a good understanding of business taxes and finances, making it likelier that they will make mistakes when they file their business tax returns. You might also miss some business tax deductions that could reduce the amount your business might have to pay. It will likely be in your interests to retain an accountant to help with your business taxes. An accountant can help you identify the documents and information you will need to file your return and pay your taxes so that you can focus your attention on your business’s day-to-day operations.

Working with an accountant will cost less if you gather as much information as you can before you meet with the accounting firm. Since businesses differ from each other, so will the information that you might need to bring with you to your accountant’s office. However, some general information your accountant will need includes information about your business’s profits and losses, gross income, records of goods your business sold, client invoices, sales records, salaries, receipts, and your business’s tax return from last year if applicable. While you can try to file your business taxes yourself, your business might end up paying significantly more than you should if you instead work with an accountant who can identify credits and deductions that your business can claim.

Tax Filing Dates For Businesses

Businesses have different tax filing deadlines based on how their businesses are structured. They also have to pay different taxes and file different forms based on their business entity whether their business is structured as a limited liability company, sole proprietorship, S corporation, partnership, or C corporation.

You might need to pay the following five types of taxes for small business owners:

• Self-employment tax
• Employment tax
• Excise tax
• Estimated tax
• Income tax

Once you have calculated your earnings, deductions, and credits, the following forms and dates apply to the different business structures:

• Sole proprietorship or single-member LLC- Report business profits and losses on Schedule C filed with the business owner’s personal income tax return on April 15 of each year
• Multi-member LLC- Use Form 1065 and Schedule K-1 for each member and file by March 15 each year
• Partnership – Form 1065 and Schedule K-1 for each partner due either on March 15 or on the 15th of the third month following the end of the business’s tax year
• C corporation – Form 1120 due on April 15 or four months following the end of the corporation’s tax year
• S corporation – Form 1120 S and Schedule K-1 for all shareholders due by March 15 or three months following the end of the company’s tax year
• Self-employed – Form 1040-ES each quarter to pay quarterly taxes

What Documents Do I Need to File Business Taxes?

Instead of waiting until the last minute and feeling stressed out, you should gather the documents your accountant will need well in advance. With some basic organization and preparation, you can make filing your business taxes less of a hassle. Gather the following documents for your accountant:

• Identification information – Social Security number and identification card (driver’s license, state-issued ID, military ID, green card, passport, or etc.)
• Past year’s tax return if applicable
• Profit and loss statements
• Gross receipts from services or sales
• Accounts receivable if using the accrual accounting method
• 1099-INT for business accounts or business bank statements
• Information about business assets
• Receipts
• Beginning and ending inventory amounts
• Inventory purchases
• Advertising expenses
• Phone, computer, and internet expenses
• Travel expenses for business travel, including mileage logs and maintenance records for business use of a vehicle locally and airfare and hotel expenses for travel out of the area
• Contract labor expenses for amounts paid to subcontractors
• Fees and commissions
• Business insurance
• Office lease expenses
• 1098-T to calculate home office deduction
• Payroll expenses
• Employee benefits paid for employees
• Estimated taxes paid

Additional Tips About Filing Taxes

If you work with your accountant throughout the year, filing your business taxes will be much easier. You can send your accountant your business’s bookkeeping records for reconciliation throughout the year so that you will have a better idea of where your business’s finances stand. Your accountant can also advise you about the types of records to keep and ways you can claim deductions you might not be aware of. The key is to keep accurate records, save receipts, and keep your business’s financial records organized.

Get Help From an Accountant for Your Small Business

When you are trying to run your business, thinking about filing business taxes might seem overwhelming. TMD Accounting’s small business accounting services can help your business to file accurate and on-time business tax returns. To learn more, contact us today at 1-856-228-2205.