Record keeping – Keep the Receipt or Lose the Deduction

by Renee Daggett

Time after time, there are rulings from the IRS stating someone lost their deductions due to bad record keeping.

Karen Hough had to pay $100,849 in taxes because she “estimated” the business expenses. She relied on her testimony to prove the deductions, while the IRS required documentation. She did not have cancelled checks or receipts. The IRS could see she spent money, but because she could not prove the items purchased, the deductions were denied. There were no excuses.

I had someone ask me why they should keep their receipts when they charge all their business expenses on a credit card. The reason why you keep a legible receipt is that if you are in an audit, the IRS will NOT accept the line on a credit card statement saying you purchased items from Staples. They need the original receipt or a readable copy. If you don’t have the receipt, the auditor can say that you purchased school supplies for your kids and not believe you purchased office supplies for your business. The deduction would be denied. Do you save all your receipts? Do you copy the thermal receipts because they will fade after 2-3 years?

To keep your record keeping life as simple as possible, have one business checking account. Run everything through this account. This way you can track income and expenses in one place. I pay $1 a month to have my business checks mailed back to me so I don’t have to print copies of checks online. I know most banks go back months or even a few years, but if you are audited, it can be 3 years later and who wants to print each check online? Plus, I work with many banks and some don’t go back 3 years. I have had clients have to pay large bank fees to get copies of checks. No fun!

The IRS requires that you keep a log of your business miles. This includes starting and ending odometer, date, business miles driven and business purpose. Your calendar and your receipts will help indicate where you drove. Don’t forget to count your deposit runs to the bank!

You need to train yourself (and your staff) NOT to use cash. Cash is so hard to track. If you lose the receipt, you probably won’t remember what you purchased…thus missing a deduction you were allowed to take.

For meals and entertainment expenses, you are required to document who, where, when, why and how much. You have to indicate WHO you were with and why you entertained this person.

So how long do you need to keep your receipts? You can amend a tax return (or be audited) 3 years back. However, if you underestimated your income, the IRS can go back 6 years. If you did not file or filed a fraudulent return, the IRS can go back many years as they want. Also, if you purchase assets and they are depreciated over a period of years (5, 7, 15 years), you need the original receipt for that period of time.

Bottom line is that you need to PROVE everything you purchase for your business. Do you have written documentation that if you were audited there would be no change in the taxes due? I hope so!

Renee Daggett is the president of Administrative Bookkeeping Co., Inc. She received a bachelor’s degree from San Jose State University in 1989 and is an Enrolled Agent tax preparer (enrolled to represent tax payers before the IRS). Renee is also the author of “Your Financial Flight Plan: Pilot Your Business To Profitability.” In her book, she demonstrates in a creative way the reasons why every business owner needs to be a better manager of his/her business.

Renee Daggett, Enrolled Agent