As a business owner, you know that you need to keep a document trail for tax purposes. But what exactly do you need to keep? If you’re doing your best to keep every single receipt, just in case, you can relax. You don’t need a giant file cabinet full of paper receipts to meet the expectations of the Internal Revenue Service.
IRS receipts requirements aren’t as stringent as you might imagine. While you do need to keep a document trail of your expenses, you don’t need to store physical copies of every receipt as proof of your deductions.
A quick guide to tax deductions
Let’s start with the basics. Like you, your business is a taxpayer. Every year, your business must file income tax returns with the IRS and pay any taxes that are owed. The amount of taxes you pay is directly correlated to how much money your business earns, less any tax deductions for business expenses.
You are allowed to reduce your tax burden by deducting qualified purchases and expenses from your earnings. For example, if you buy a new desk and computer for your business, you can subtract the amount you spent on that setup from your earnings as you file your taxes. Deductions reduce your income a bit and therefore reduce your tax obligation as well.
There are many areas of possible savings through tax deductions, provided you have all of the required documentation. Deductible expenses can include:
- Transportation expenses for business travel
- Meal expenses or lodging expenses from company trips
- Office furniture
- Marketing expenses
- Contractor fees
Remember, a receipt alone is not enough to prove that an expense is deductible. Expenses must be for business purposes and must be what the IRS calls “ordinary, necessary, and reasonable”—that tropical vacation probably won’t qualify.
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What is a business tax receipt?
If you plan to include business expenses as deductions on your tax return, the IRS requires you to keep supporting documentation that shows what you bought, how much you paid, and when you bought it. If they have any questions about your return or your tax return gets audited in the future, the records you’ll be required to show are called business tax receipts.
This type of business tax receipt is not to be confused with the legal permission to issue sales tax in a particular state, which can also be called a business tax receipt.
What receipts do I need to keep? What about other documentation?
Think of supporting documents as a broad category—when it comes to expenses, you’re looking for an itemized proof of purchase. This might be a printed receipt, but it might also be:
- Credit card statements
- Bank statements
- Canceled checks
- Itemized invoices with digital payments
- Real estate closing statements
Don’t get so hung up on providing proof of your expenses that you forget to document your income as well. You’ll also need to hang onto receipts of income. These might be:
- Cash register tapes
- Receipt book stubs
- Invoices with digital payments
- Cleared or canceled checks
- Bank statements
- IRS 1099 forms
Does the requirement to keep supporting documents mean your small business must find a way to store every paper receipt for the entire year? Not at all!
These receipts may be paper, of course, but they also might be digital files, which are much easier to store and organize.
How do I manage and organize my business tax receipts?
In the unlikely event of an audit, you’ll need to have your documentary evidence at hand and well-organized. So what’s the best way to store all of your documents and receipts to be prepared for any potential IRS audit?
Digitally, of course.
The information that the IRS is looking for is already automatically tracked through our digital bank statements, purchase history, credit card statements, and online banking records. Even paper receipts for large cash purchases don’t have to be stored as physical documents. Many financial apps will convert paper receipts to digital ones for electronic storage in your larger documentation management system.
Digital copies of these records are sufficient to meet IRS receipts requirements, which means much of the job is already being done for you. That means it won’t take much effort to go paperless with your record-keeping.
To adequately store these records from banks or merchants, you need only download your digital statements and save them in categorized folders. If you have the time and resources (and want to stay ahead of your bookkeeping), you can make a point of organizing these expenses on an ongoing basis. Come tax time, it’ll be easier to locate relevant deductions if you’ve kept on top of your records.
There are two areas, however, that might need a bit more attention in terms of documentation: cash and reimbursements.
Cash purchases, unlike credit card transactions, are much harder to keep track of. There’s no automatically generated statement that tells you where and when you spent that money, so it’s up to you to make note of where your cash is going. That’s why it’s always best practice to track your use of cash very closely.
Large cash expenditures should always come with an itemized receipt for tax purposes. Smaller cash purchases are not required to have as much documentation as the larger expenses.
The Cohan rule allows taxpayers to deduct business-related expenses even if the receipts have been lost or misplaced—so long as they are “reasonable and credible.”
This ruling means that the IRS must allow business owners to deduct some business expenses, even if they don’t have receipts for all of them. That means if you’ve lost the receipt for a smaller cash purchase, it’s usually not a big deal.
It’s not uncommon for business owners to make purchases using a personal credit card or bank account on behalf of the business and then pay themselves back out of the business account. Reimbursements like these happen in large organizations as well, and they’re perfectly legal.
Just be sure you keep the documentation to show the reimbursement along with the relevant information about what was purchased, when, and for how much. You’ll also need to include clear details showing the original payment method and the reimbursement amount.
How long do I need to keep my receipts?
In general, you should keep business receipts for three years. In some special circumstances, the IRS might even require you to keep your receipts for up to six years. For example, you’d need records on hand for up to six years if you underpaid your taxes by more than 25 percent.
In some cases, you can mine for documentation from previous years through online bank records or merchant websites. But it’s not guaranteed that older documents will be stored on these sites, and you won’t have access to records on accounts you’ve closed or stores that have closed or changed their websites.
The best practice for storing receipts is to download digital PDFs (if available) and save them to a folder for each month and year. Paper receipts can be scanned using a digital receipt app. Remember that the folder should be backed up or saved, preferably somewhere easily accessible, so it can be accessed for years to come.
How Bench can help
As a small business owner, you’ve got enough on your plate. With Bench, you don’t have to worry about proper document storage: your bank statements are automatically imported each month and we store your receipts in the cloud. Your Bench bookkeeper ensures that your books are accurate and up to date, which means peace of mind when tax season rolls around. If you upgrade to our Premium plan, we’ll even take care of filing your taxes.