“Keep good records.” You’ve undoubtedly heard it before, but what exactly constitutes good records? Does the IRS require receipts or are your bank statements good enough? Do you need to hang on to the original receipts or can you scan them and keep digital records? We often advise clients on what expenses they can deduct, and how to record them. So in this post we will address these questions and more.
First of all, you need a record keeping system that clearly shows your income and expenses, and includes a summary of your business transactions. Your business checking account can be a good source for entries in your business books, although, you will need to provide supporting documents to any income or deductions you claim. Supporting documents must show the amount paid and display that the expense was for business purposes.
To put it plainly: you need to keep receipts. Receipts support the entries you make in your business books and on your tax return. Without them you will be unable to prove your business expenses were legitimate. You can keep the original paper receipts or you can scan them into your computer for more organized records. However you decide to store your receipts, it’s important that you organize them in a way that you’ll be able to produce a specific receipt in case of an audit. We highly encourage our clients to send us receipts, but they are not required.
If you are audited, any expense you deduct that is not properly documented, can be disallowed by the auditor. So good record keeping is of the utmost importance if you want to keep every deduction you make. If you have incomplete records, you must be able to prove an expense is legitimate. To do this, you must provide a personal statement containing specific information about the expense using other supporting evidence or documents.
Exception: Travel Expenses
Keeping a daily business journal is an effective way of documenting your travel expenses. If a travel expense is less than $75 (excluding lodging), the IRS will accept journal entries that show times and dates of travel as adequate evidence. However, when deducting meal expenses, you need a receipt and it must state the purpose of the meal and the business discussed.
Good record keeping and retaining receipts is the first step to getting through an IRS audit unscathed. Receipts are the easiest and most clear way to legitimize your business expenses in the eyes of the IRS. For more information on how to properly record and deduct business expenses, contact us today and set up a free consultation with one of our tax advisors.
Deductions for independent contractors, do I need to keep receipts, independent contractor, IRS, Receipts