Do you ever wonder whether it’s really necessary to keep receipts to document your small business or self-employed tax deductions? Does the IRS expect you to maintain detailed records as proof of business expenses?<\/p>\n
The answer to that question is “Yes.” Sure, there are a few exceptions to virtually every tax law. But generally speaking, it is true: no receipt, no deduction. In other words, if you get audited, and you don’t have the documentation to substantiate the deduction, be prepared to lose the deduction. And if you lose a deduction, that means your taxable income will be increased by an amount equal to the lost deduction, and you will incur additional tax liability that will now be paid late, meaning you’ll have to pay late payment penalties and interest.<\/p>\n
In fact, just to say you need a receipt isn’t always enough. What the IRS is after is proof of purchase. You must be able to prove that you really bought what your tax return says you bought. If you keep the receipt, you have proof that you bought something. The receipt should indicate the date, amount, and place of purchase, along with a brief but clear description of the item purchased.<\/p>\n
Sometimes a receipt will contain all that information. Sometimes it might not. This is often the case with regard to the description. So this is where an invoice from the vendor comes in handy. The combination of both the receipt (proving payment) and the invoice (proving what exactly was purchased) is the ideal combination of audit-proof documentation.<\/p>\n
If you only have proof of payment, you could have problems. For example, if all you have is a cancelled check, bank statement or a credit card statement, all you can prove is that you made a payment for a certain dollar amount on a certain date at a certain place, but you really don’t have written verification of the nature of the purchase. You have proof that you spent $100 at a particular store, but you really don’t have the proof that you spent the money on a business-related item. That’s why having both the cancelled check or bank statement as well as the receipt is the best defense against IRS scrutiny.<\/p>\n
The bottom line is simply this: establish the habit of saving all receipts and other documentation for business expenses. Make a photocopy of the receipts upon returning to the office and file it in the appropriate expense folder. Save it for at least three years, along with all bank and credit card statements, and you’ll have all the necessary paperwork for an audit.<\/p>\n","protected":false},"excerpt":{"rendered":"
Do you ever wonder whether it’s really necessary to keep receipts to document your small business or self-employed tax deductions? Does the IRS expect you to maintain detailed records as proof of business expenses? The answer to that question is … Continue reading