If you are wondering what IRS Receipt Requirements you’ll need to know as a business owner, you’re not alone.
In this blog we will be discussing the exact receipts you’ll need when the IRS comes knocking.
- Section 1: What Is A Receipt?
- Section 2: What Is A Business Expense Receipt?
- Section 3: What Receipts To Keep For Taxes
- Section 4: How Long To Keep Business Records & Receipts
- Section 5: How to Organize Receipts For Taxes
- Section 6: Best Software For Tracking Business Receipts
Let’s jump right in!
Section 1: What Is A Receipt?
A receipt in accounting is a formal financial record that proves that a financial transaction happened. Receipts are intended to answer as many of the “5 W’s” that are relevant to a transaction as possible (who, what, when, where, and why).
For this reason, most receipts will include the item that was purchased (what), the date of the transaction (when), and the location where the transaction took place (where).
But what TYPE of receipts should you be keeping for a business audit? Do you need to save every receipt from every purchase and have a room full of filing cabinets or are there only certain receipts you need to keep track of?
For most small and large businesses, the answer is fairly simple: you need to keep track of all expenses that relate to your business income. If you’re not sure if an expense is business-related, the general rule of thumb is that if the expense was incurred in order to generate income for the business, then it is considered a business expense. This would include expenses such as marketing materials, office supplies, travel expenses, etc.
Let’s dig a little deeper.
Section 2: What Is A Business Expense Receipt?
A business expense receipt is documentation that proves that a business owner or employee incurred a business-related expense. This type of receipt is important for tax purposes but can also be used to track business expenses for accounting or for budgeting purposes. An auditor will likely request receipts for any business expenses that are claimed on the tax return.
The five W’s that the IRS will want to know on business transactions are as follows:
- Who – the vendor or payee
- When – the date of the expenses
- What – a description of what was purchased
- Where – the location where it was purchased or incurred
- Why – the business purpose or reason for the expense (If the purpose of an expense is not clear, you may need to provide written justification for it. The IRS requires more than just “meals” on a receipt, it needs an accurate description of what the meal was for. A better example would be “business lunch with client XYZ to discuss project ABC”).
Note: Even if you have a receipt or another way to show that you spent money on something, it does not automatically make the purchase deductible. In order for expenses to be eligible for deduction, they must fall into certain categories:
- Being part of regular business operations
- And reasonable in amount
Be careful of claiming expenses for meals or travel expenses that are extravagant or could be considered lavish. The IRS is more likely to scrutinize these types of expenses.
Section 3: What Receipts To Keep For Taxes
You need to keep track of most receipts associated with your business income and expenses but there are a few key categories you definitely want to make sure you don’t overlook.
The first category of receipts you’ll want to keep are those associated with capital expenses. Capital expenses are the costs associated with long-term investments in your business, such as the purchase of equipment or property. This could also include items like computers, office furniture, vehicles, or machinery.
For capital expenses, In addition to the 5 W’s, you’ll want to keep records of:
- Any associated costs (like installation or delivery fees)
- Cost of improvements (if any)
- Deductions taken for depreciation or casualty losses
- When/how an asset was disposed of (if applicable) and the selling price/expense of the sale.
Note: In some cases, more than one type of supporting documentation may be required to prove all aspects of the expense.
Another important category of receipts to keep are those associated with operating expenses. Operating expenses are the costs associated with running your business on a day-to-day basis. Operating expenses are only deductible if considered “ordinary and necessary” for running your business and may include:
- Advertising and marketing expenses
- Bank fees
- Business insurance
- Office expenses (like rent, utilities, or supplies)
- Professional services (like accounting or legal fees)
- Salary or wages paid to employees
- Vehicle expenses (like gas, maintenance, or repairs)
- Website expenses (like hosting or domain fees)
Finally, you’ll also want to keep receipts for travel, entertainment, and gifts. This includes receipts for things like airfare, hotels, meals, and rental cars. However, there are strict rules about what travel expenses are deductible so make sure you save all relevant documentation. For more specific information, check out the IRS Guidelines for Business Travel Expenses.
As a general rule, the IRS will want to see a receipt if the amount of goods you bought and deducted from your taxes was more than $75. Anything under that amount is considered a de minimis expense and can be deducted without a receipt. However, it’s always best to err on the side of caution and keep track of all your expenses, regardless of the amount. (Note: This exception does not apply to hotel or travel expenses, which always require a receipt regardless of the amount).
If you don’t have a receipt for a business expense, the IRS may still allow you to deduct the expense if you can prove that it was incurred. This is called substantiation. There are a few different ways you can substantiate an expense:
- Bank records, such as canceled checks or credit card statements.
- Invoices or documents that show the dates, places, amounts, and business purpose of the expenses.
- Records that show you paid for the expenses with your own personal funds.
Keep in mind that although it’s possible to obtain documentation from past years online through bank records or merchant websites, this isn’t always reliable since older documents may not be stored on these sites.
You also won’t have access to records for accounts that you closed or stores that closed down or changed their website domain. You may want to consider scanning and saving electronic copies of older receipts as well, just to be on the safe side.
Section 4: How Long To Keep Business Records & Receipts
In the majority of cases, the IRS won’t need to keep your business records (past tax returns) and receipts longer than 3 years. This is because the IRS won’t typically audit business owners further back than 3 years.
Of course, with anything, there are a few exceptions to the rule. In some uncommon situations, the IRS can audit you as far back as 6 years if you underpaid on your taxes by more than 25%.
If you would like to see some of the less common reasons the IRS may choose to audit you up to 7 years after filing your taxes, check out this IRS’s article → Here.
Section 5: How To Organize Receipts For Taxes
Create a System
The most important thing when it comes to organizing your business tax receipts is to have a system in place that works for you and that you can stick to. There are a few different ways you can go about doing this:
- Use a physical filing system: This can be as simple as using an accordion file or creating manila folders labeled with each different type of expense. Then, whenever you get a new receipt, you can just pop it into the appropriate folder.The benefits of using a physical filing system is that it’s easy and cheap to set up. Plus, you can easily access your receipts if you need them for any reason. The cons are that it can take up a lot of space and be difficult to keep track of if you have a lot of receipts.
- Another option is to create a folder on your computer specifically for storing receipts. You can also take photos of your receipts and save them in this folder. The benefits of using an electronic filing system is that it’s very easy to keep track of your receipts and you can access them from anywhere. The downside is that you have to be diligent about uploading new receipts and keeping the system organized.
- Use an electronic filing system: This is probably the most popular option, since it doesn’t take up any physical space and you can access your records from anywhere. There are a few different ways you can go about setting up an electronic filing system. One option is to use a cloud-based accounting software like QuickBooks. These platforms typically have a place where you can upload and store your receipts electronically.
No matter which method you choose, the key is to be consistent with it. Once you have a system in place, make sure to put all of your receipts into it right away so that you don’t have to play catch-up come tax season.
Separate Personal Business Expenses
When possible, keep business and personal spending separate by making two different transactions. This way you will have a receipt showing solely business costs. If you do make a mixed purchase, save the receipt and circle the business items that you plan to deduct.
Cash purchases are harder to track and document than credit or debit card purchases since there’s no physical record of the transaction. Therefore, it’s important to be extra diligent about keeping track of these expenses. If you do make cash purchases for your business, make sure to get an itemized receipt from the seller and keep it in your records. You can also use a ledger to keep track of cash expenses.
Section 6: Best Software For Tracking Business Receipts
While there are a lot of software programs out there that will do a great job of helping you keep track of your receipts, we recommend using Quickbooks.
With QuickBooks you are able to take pictures of your important business expense receipts and upload them into your fully digital bookkeeping system so that you are following IRS receipt requirements to the T. Check out some of our Quickbooks Tutorials → HERE
If you are looking for help getting your e-commerce or retail business bookkeeping in order – book a Free Strategy Session with us today.
What other Bookkeeping questions do you have? Let us know in the comments!