Every year I run into a couple brand-new business owners who really, truly don’t understand the importance of recordkeeping and retaining documentation of business deductions. Quick as I can, I straighten them out and teach them the basics of what they can deduct, what receipts to keep and so forth.
Much more surprising, however, is the number of small business owners that I meet that think they’re keeping great records, but aren’t. See if this scenario sounds familiar:
A self-employed business owner deducted his expenses on Schedule C (of the Form 1040). His proof for many of the write-offs was his American Express credit card statements, which listed the payee, date and amount of the transaction. The IRS denied many of his expenses for lack of documentation.
The U.S. Tax Court ruled in favor of the IRS, leaving the business owner with a significant tax due bill. They held that the credit card statement is not proof of the business purpose of an expense. The business owner should have had receipts or other evidence to prove the exact items purchased. Just showing that a payee is an office supply store like Staples is not enough. [Fessey v. Commissioner, T.C. Memo. 2010-191]
Sound familiar? I’ve had clients who thought a PayPal statement was adequate documentation. Other clients swear that the Visa statement proves that the money was spent at Staples, so it has to be business-related. Not according to the IRS!
Each business expense deduction should be backed up by a receipt or other documentation that shows the payee, date, amount and details of the items or services purchased.
Worried about all the space those receipts are going to take up? Check out my earlier post on digital receipts.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.
I know a good friend who uses Shoeboxed and just takes a photo of his receipts on his phone. http://www.shoeboxed.com/mobile-receipts-business-cards/
Do you think that would be sufficient from a digital records perspective?
Shoeboxed would certainly fit the bill, so long as they are able to produce a readable copy of a given receipt. For instance, if you are audited for the meals and entertainment expenses on your tax return, you’ll need to produce the receipts that add up to the totals you claimed. If you can do that using the Shoeboxed service, you’ll be all set.
Bill at FamZoo says
The IRS just loves to create busy work! Thanks for the informative post. Also liked the helpful pointer to Shoeboxed in the comment.