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
- 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.