Business Receipts Guide
“Don't wait for opportunities, create them.” - Jesse Itzler
Your guide to business receipts
Remember in the old days when we kept our business receipts piles of them in folders, shoeboxes, desk drawers, wallets…if you were like me, they were rather scattered. When I needed to submit an expense report or pull together my tax back-up, it often took days.
Enter the internet with internet shopping and auto-payments. My receipt pile shrunk significantly! Why? Because most of my receipts were now kept in my email.
I did that for years. A folder for each year, every email with a receipt saved.
Now, was that the best system? Heck no! I still had to sort through receipts and document them. It took a few years of trial and error before I found something that worked for me.
First, I tried a few apps to track my expenses. At year end, I downloaded the data and BAM! It was organized and ready for my Schedule C. I took that and tied it back to each receipt. It was still time consuming, and I still had paper receipts to deal with. Let’s be honest, I’m pretty sure I lost most of those.
From there I moved to a spreadsheet. I set it up so I could capture all the information I would need, summarize the amounts by category, note where the receipt was kept, it was a thing of beauty. I used that for a few years. It worked great…as long as I filled it out. (We won’t discuss April 14, 2021 when I decided to start my taxes and found that I hadn’t updated the spreadsheet since March of 2020. It was a very long day.)
Now I have accounting software that handles all this for me. The expenses are logged, receipts are attached to the expenses, everything is categorized, and I can find what I need when I need it. But I kept that spreadsheet, because you never know when someone may need a good spreadsheet!
Regardless of how you organize your business expenses, you should be aware of the IRS requirements for business expenses and receipts. First, we’ll talk about what the IRS wants to see. Then we’ll talk about how to store them.
Before we begin...a disclaimer
I am not offering or providing tax advice or guidance. Please talk to your accountant, CPA, or tax professional if have questions, need advice or guidance about business expenses.
What the IRS Wants to See
The IRS requires that business receipts and records meet specific criteria to qualify for tax purposes:
1. Expense Date
The receipt should clearly show the date when the expense was incurred. This shows the timing of the deduction or expense, and ensures it falls into the correct tax year.
2. Expense Amount
The total amount paid should be visible, including any applicable taxes. If the receipt shows multiple items, make sure the amount corresponding to the business expense is clear.
Penny's ProTip: If you have a receipt that has both business and personal items on it, highlight the business expenses and manually calculate them. Don’t forget to calculate the sales tax also (if applicable.)
3. Description
The receipt should include a description of the goods or services you purchased. This ensures that the expense is related to your business or allowed deductions. Be specific. Don’t write “lunch”. Instead, write “lunch with (attendees) to discuss (purpose.)”
4. Name of the Vendor or Merchant
The receipt must include the name of the store, vendor, or service provider from whom the purchase was made. If it doesn’t, ask for one. You have to be able to prove who you made the purchase from.
5. Business Purpose
While the IRS doesn’t require the receipt itself to list the business purpose, you should note that information on the receipt. For example, "Office supplies for Q3" or "Client lunch meeting with..."
Penny's ProTip: What about digital receipts? You can add the purpose to the file name when you save it. If scanning a paper receipt, write it all down before you scan. (We’ll talk about saving receipts later.)
6. Payment Method
The receipt must show how the payment was made (e.g., cash, credit card, check). If this is not explicitly listed, you need to keep records of the payment method separately.
Penny's ProTip: You can add this to the file name of a digital file if you wish or keep your bank statements and check registers if the proof of payment method can be found there.
7. Proof of Payment
If the receipt does not indicate that the amount was paid, you might need additional documentation like a bank statement or credit card statement that shows the transaction information.
Penny's ProTip: It’s not a bad idea to make a copy of the statement to keep in your paper or digital file with the receipt.
8. Travel, Meals, and Entertainment Expenses
The IRS has special rules for these types of expenses. First, they have specific criteria for travel, meals, and entertainment expenses. The IRS Website is the best place to find the most recent rules.
Second, in most cases, only 50% of meals and entertainment expenses can be deducted. That is calculated AFTER you’ve determined how much of the expense is business related. (Please consult your accountant, CPA, or tax professional with any questions.)
Travel: Receipts should include details like the destination, dates, and purpose of the trip. You can include hotel/overnight accommodations and transportation costs under “travel”.
Meals: The receipt should list the names of the attendees, the business purpose of the meal, and the exact location of the meal.
Entertainment: If the expense relates to entertainment, note the specific business purpose and who attended.
One last note on travel, meal, and entertainment expenses. The more information you include, the better.
Organizing Receipts
How you store your receipts so that you can find them in case you are audited is vital. They need to be kept in an orderly fashion that you know and understand so you can put your hands on what you need quickly.
Below are some suggestions to help you organize your receipts.
Log Your Receipts: Log your receipts in a spreadsheet, ledger, or paper planner. It’s a great way to summarize your information and it’s a resource for you if you need to find something.
When you log them, include the Date, Expense Type, Place of Business, Purpose, Total Amount, and Notes. You can use the “Notes” column to list attendees and any other information you need to document. You may want to add a “receipt location” column as well so your log will tell you where the receipt is being stored (email, cloud, file cabinet, etc.)
At year end, you can give your log to your accountant, CPA, or tax professional. It goes over much better than a shoebox.
Paper Receipts: It is best to store paper receipts in a chronological order and categorize them by expense type (e.g., office supplies, travel, meals). You can do this with file folders, envelopes, multi-pocket expandable files, etc. A 12-pocket expandable file is perfect. Each pocket can be assigned a month and paper clips, binder clips, and rubber bands can be used to keep receipts together by category.
Digital Receipts: The IRS accepts digital receipts if they are clear, legible, and include the required information. You can keep receipts you receive via email by saving them to a cloud storage location such as Google Drive, Dropbox, SharePoint, iCloud, or One Drive.
Penny's ProTip: Set up a “taxes” folder. Inside that folder, set up a “year” folder. From there, decide how you want to organize your receipts and sort them into appropriate folders. Here’s a tip – when creating “month” folders, use the month number AND the month name: 01 January, 02 February, etc. That will allow you to sort your files by month.
You should consider scanning and storing your paper receipts. When you create the digital version, you can toss the paper copies and save file drawer space. Cell phones make it easy to scan and store receipts these days. You can take a picture or scan them using an app.
Questions About Receipts
How long do you have to keep receipts?
Keep your receipts and related documentation for at least seven years. Seven years is the typical rule for anything that might be needed for an IRS audit. Your accountant, CPA, and/or tax professional can provide more information if you need it.
What are considered “acceptable receipts?”
Paper Receipts: Store receipts for physical purchases. Think Staples, Home Depot, Target, Walmart, a restaurant, etc.
E-Receipts/Digital Receipts: These are typically sent to you when you make online purchase or make an autopay for a monthly expense. Online purchases would include supplies or courses. Autopay expenses would include things like Zoom, Google Workspace, monthly installment payments, etc. If you don’t receive a receipt, log into the account and download one.
Bank and Credit Card Statements: They support your receipts and documentation but are not a substitute for receipts. They are simply back-up. Banks allow you to download copies. Whether downloaded or paper, save them with the receipt so you can easily access them.
Penny's ProTip: If you have questions regarding anything to do with taxes, please contact your accountant, CPA or tax professional. They can provide the advice and guidance you need for your business.
Things to Remember
Make sure your receipts include
expense date
expense amount
expense location, vendor, or merchant
expense description
expense business purpose
payment method used
proof of payment
Additionally, travel, meal, and enteratinment receipts must include:
travel dates, destination, and purpose of trip
meal dates, location, business purpose, and attendees
entertainment dates, location, business purpose, and attendees
Have an organizational system in place that is easy to use and provides what you need to quickly find what you're looking for.
Check with your tax professional if in doubt about how long to keep your records.
