Key Takeaways
- At Easeify, we like to recommend that our clients keep a record of all of their digital receipts and invoices for business transactions for a minimum of last three years. These receipts can be kept within QuickBooks Online, a Google Drive Folder, or somewhere else stored on your computer.
- The IRS can audit tax returns filed within the last three years, and if they find a substantial error, they are allowed to go back even further. However, they usually do not go back more than six years.
- It is critically important to save all of your business receipts as these serve as supporting documents if your business was to be audited. For example, if you claimed certain business expenses, but you can’t provide the auditor with the receipts to validate that these were in fact real and for business use, you may be liable to pay extra taxes and penalties.
Summary
Deciding which receipts and invoices to retain is one of the most familiar challenges for business owners, especially when balancing your desire for tax write-offs against the tedious collection and filing of every receipt and invoice. The "simple" answer to this question is that every receipt ought to be kept on hand to maintain complete protection during an audit.
Best practice is to keep all receipts digitally within your computer, accounting software, or another kind of software. Credit card statements, while useful records, do not provide anywhere near the depth of detail required by the IRS and auditors to substantiate expenses; they do not indicate what explicitly was purchased, and for whom it was purchased.
Travel-Related Expenses
The IRS' "75 Rule” limits your firm's receipt liability for travel-related expenses to expenses over $75. This means that any travel expenses under $75 they may not require a receipt.
One exception to this rule is that lodging expenses under $75 must still have an itemized invoice from the place of lodging. This includes lodging like airbnb’s and hostels too. However, at Easeify we still encourage you to keep all of your receipts for a minimum of three years. to ensure you have great record keeping for your business.
For all travel expenses, you should still be prepared to provide information on the nature of the expense, such as how much was spent, and where and when the expense occurred for under that $75 limit.
Meal Expenses
When claiming meal expenses, they should not be lavish or extravagant under the circumstances. Good records for meal-related expenses will always feature two things: Once, an itemized receipt. Two, a memo with indication of attendees and purpose of the expense. This memo rarely needs to be complex, but it should be clear what the purpose of the expense was and who benefited from it.
Other Business-Related Expenses
As many business owners rely on monthly software subscriptions that are most easily charged to company credit cards, it's worth noting that these essential services require invoices to be deducted on your taxes as expenses. You can save yourself a little bit of time — and often money — by opting for annual contracts, and thus having to pull only one invoice once a year.
Invoices are superior to credit card statements, due to the details like they provide. Without having the backup details for your expenses, the IRS could question whether the expense was truly business-related.
How to tell if I can write-off an expense?
Business owners should generally assume that if they are making valid expenses pertaining to their business, that they will be tax deductible. If you are considering significant expenses over $2,500 or more, that might have questionable tax treatment, then seek the advice of a tax professional for planning purposes.
Certain industries, such as those that are asset or property-heavy such as manufacturing or real estate, will have more complicated tax treatments such as capital assets and should expect to seek advice for tax planning from a qualified tax professional. The de minimis safe harbor election is usually great to use.
Final Thoughts and Recommendations
Saving your business receipts is a beneficial practice not only from a tax compliance and audit perspective, but also encourages accountability and attention to detail across your company.
At Easeify, we encourage our clients to either upload receipts to QuickBooks Online and we will match them to your transactions, or, save them to a Google Drive folder, labeled by month, and then by year. A minimum of saving receipts for the last three years is what small business owners should aim for. If you can maintain those receipts for another three years, even better.
For example, within Google Drive you could have one folder for January 2023 receipts, another folder for February 2023 receipts, etc. Then, One 2023 receipts folder for each month’s folder to then be stored inside. This is the easier and most preferable method for most of our clients. When an auditor see's that you are this organized, it makes your books and audit position way better.
Sources:
IRS Related: Record Keeping, Audits
If you need assistance with bookkeeping for your small business, and your books are on the cash-basis within QuickBooks Online, reach out to us! We'd love to help. We specialize in service businesses and non-profits.
What's the cash-basis? Check out our blog post on that topic.
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