January 10, 2022
Do I Really Need To Save Receipts?
When it comes to business and taxes, saving your receipts is one way to protect yourself and your business from the IRS. Does this mean you need to create space in your office for all the different folders, and eventually boxes, that will be filled with your receipts from the tax year? No. You may certainly choose to keep the physical paperwork if that is your preference, but in the event of an audit, you will most likely be asked to submit your proof digitally, so you may as well digitize it now, and save floor space for something other than file cabinets. Let’s answer that age old question “Do I really need to save receipts?”
Why should you keep a record of your receipts? Though tedious, saving your receipts can be helpful, especially in an audit setting. They show exactly what you bought, how much you spent, the sales tax, and even the date and time you bought the item(s). Not only is this great for tax purposes, it can also help you track your expenses month to month, year to year and can even assist you in increasing the profitability in your business.
Do you have to save every single receipt? No. Technically, any cash purchase under $75 you do not need to save the receipt for. However, we highly recommend that you save a digital copy of each and every receipt that is for your business (and personal if it translates to a tax deduction).
How to save your receipts electronically- I recommend taking a picture of or scanning the receipt you are going to use for business purposes. If you do this, make sure the receipt is legible and that you save the copy in more than one place, one of those being a cloud drive, before you throw the receipt away. While it is easier to take a receipt and throw it in a folder or a box, paper receipts will fade with time and eventually become illegible. They are also at the mercy of outside elements. While computers are as well, you can use a cloud drive to save your records so you can pull them up anywhere, regardless of what computer you are using. You should also keep a back up on something that you physically own as well, your computer or an external backup drive. Never reply on one single source to keep records safe, things happen and you do not want to find yourself with nothing when you need it most!
The IRS offers guidance on electronic books and records in Revenue Procedure Code 97-22:
- Taxpayers can scan complete documents and store them electronically
- The taxpayer must ensure the integrity and reliability of the storage system
- The taxpayer must be able to reproduce legible and readable hardcopies
- All documents be accessible electronically
The taxpayer is responsible for making any backups of the data either electronically or hardcopies offsite
How long do I need to keep my receipts and records? According to the IRS, at least three years after the return is filed, possibly longer depending on your situation. You should save at least the last three years of tax returns, although we recommend for business owners at least five years. These previous year tax returns will help your tax preparer prepare the current year, if and when business assets are destroyed or sold, as well as could be helpful in an audit setting.
Here is what NOT to do when it comes to receipts and records:
- Don’t use your bank statements as your way of record keeping – bank statements do not show exactly what you bought, which is what an auditor will be looking for to determine if the receipt you wrote off was actually for business purposes.
- Don’t commingle business with personal – in other words, keep your business shopping separate from your personal. This is easier for you in the long run.
- Don’t save your receipts in the form of paper. Scan them and if you like, toss the paper, if you are audited by the IRS or a State Taxing authority, they will convert everything to digital anyhow. Mostly having a digital back up, especially at another location or in the cloud ensures that you will be ready for any questions any time!
Caution on using third party “apps” to store your data.
While some popular accounting apps such as QuickBooks Online offer the luxury of being able to snap a pic with your phone of a receipt “on the go” and having it captured in your accounting records, this should never be the only way you track and store your receipts. Customers data files have been completely lost in cyber space never to return, and no matter how big the company, sometimes there is nothing that can be done to get it back.
So go ahead and send it to your accounting program, but also take a moment to snap a pic in your phone to be saved to a drive at a later date “just in case”. Seriously when it comes to the tax man, it’s a best practice to be a little overcautious and diligent.
Want more information regarding recording keeping for tax purposes? Click here.
Here are some ideas of how to organize scanned receipts and turn them into reports:
- Choose a common format for each record: PDF, Excel, Word, HTML, Digital Images
- Create a standard naming convention for your records such as: Date, Vendor, Payment method, Category. i.e. 2022-05-11-Office Depot-Visa-Office Supplies
- Choose the sorting method: by Date, Amount, Vendor, Payment Type, or Tax/Accounting Category
- Personally my favorite is either save by month or quarter depending on the volume
At the end of the day, proper documentation is going to be what saves you from an unexpected tax liability because you didn’t save your evidence of valid deduction. So put in the extra work now to get organized and stay on top of things, that way you have nothing to worry about if you get selected for an audit. “No Change” audits happen often for taxpayers that are organized and prepared!