There’s a reason people joke about business owners keeping receipts in shoe boxes – because they do! It happens every year. Someone comes into their accountant’s office with a big box (or bag, or folder), and the accountant is stuck sorting through crumpled receipts and trying to decide what’s important and what isn’t.
Save yourself and your accountant time and money by keeping up with your physical receipts, but only if you need them.
So how do you know if you need to keep the physical receipt?
As a general rule, you are required to keep documentation (receipts, canceled checks, bills, bank statements) to track all business expenses. But not always.
You don’t have to keep a physical receipt if the expense is less than $75.
Hold on. While you don’t HAVE to keep receipts for these expenses, it’s still a good idea to keep them. Why? Because if your business is audited by the IRS, the IRS is going to want to see proof of your expenses. If you don’t have the receipt, it doesn’t mean they’ll disallow it. If you can provide the amount of the expense, the date it occurred, the place it occurred, and the purpose of it, the IRS will typically allow it.
You don’t have to keep a physical receipt older than three years.
If you’re holding on to receipts from more than four years ago, you might not need to. The IRS has a three year period of limitations for income tax returns. That means that within three years you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. You’ll want to make sure you have all the documentation you need while you are within the three year period. After that, you can destroy them. However, to be on the safe side, you might want to hold on to them awhile longer – just in case.
You don’t have to keep physical receipts if you have a digital copy.
Let’s go back to that shoebox. It’s a pain for you to gather up all those receipts, and a headache for your accountant to sort through. And then you have to keep up with them for three years! While you can keep all those physical receipts in a fireproof safe in your home, you do have another option. The IRS now accepts digital copies of documentation – as long as they are identical to and contain all accurate information from the original copies.
So instead of throwing that receipt in your wallet, take a picture of it. Some software even allows you to take a picture and upload it directly into the software, so you’re creating a digital receipt and logging the expense all at once. Digitizing your receipts is a great way to save time and space – and cover yourself in case of an audit. Use a secure cloud service like Box, Dropbox, or Evernote, and consider having a backup on a physical hard drive as well. You’ll want to make sure you have plenty of backups in case something happens. The IRS won’t care that your computer crashed and you lost your documentation!
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.