It’s a well-known fact for all entrepreneurs that they have to keep receipts to claim deductions when it comes to filing taxes. But if you are launching a business for the first time, you might be interested in all types of documents to keep.
Business owners should understand that there is no need to keep all receipts “just in case,” so they won’t need an entire office to keep all documents.
The Internal Revenue Service (IRS) doesn’t require keeping physical copies of all receipts a business may produce. As long as a business keeps track of its expenses and can prove these expenses, the IRS won’t impose any penalties.
Keep reading the article to learn more about what types of digital or physical receipts businesses should keep. The article also contains information on how to store documentation properly.
Tax Deductions: A Short and Comprehensive Guide
Every taxpayer (individual or a business) in the US must report their income and then pay taxes. The very first step is to determine taxable income to report it to the IRS. But to determine taxable income, one must claim applicable deductions and credits.
The amount of taxable income is directly related to how much a business makes in a year and what business expenses can be written off as deductions. Taxpayers can deduct certain business purchases to decrease taxable income.
For instance, if a company buys a printer, computer, and other items necessary for business operations, then the accountant can write off these expenses. Repair and maintenance bills also can be written off as deductions. As a result, a business reduces its tax burden.
If a company keeps all documents and receipts proving these purchases, then it’s possible to claim these deductions. Here are some of the deductions a business can claim:
- office furniture and equipment;
- transportation and business travel costs;
- meal and lodging costs during business trips;
- machinery;
- marketing and advertising costs;
- contractor fees;
The list can be extended and depends on the industry. But the key takeaway here is it’s mandatory to claim only those expenses that help operate a business. You can check what business expenses the IRS recognizes on their official website.
What is a Tax Receipt for a Business?
All taxpayers who plan to claim business expenses as deductions to reduce their tax burden must keep the required documents in case the IRS requests proof. These documents should include the following data:
- type of purchase;
- price;
- date of purchase.
If the IRS has questions and decides to audit the business, this type of documentation can prove the business’s legal claims. The document that the IRS requests is typically called a receipt.
Note: this type of business receipt shouldn’t be confused with the state’s permission to issue sales tax in a specific location. A business tax receipt, in this case, is a document proving the purchase of items or services.
What Receipts and Documents to Keep
Typically, a business receipt is a document proving a purchase. But there are other types of proof accepted by the IRS. Here are a few examples:
- bank statements;
- credit card statements;
- check cancellation;
- itemized invoices that have digital payments;
- real estate closing statements.
It’s also crucial to keep documents that prove the business’s income. Here are a few examples of documents proving the company’s income:
- invoices with digital payments;
- bank and credit card statements;
- receipt book stubs;
- tapes from a cash register;
- cashed out or canceled checks;
- any 1099 forms.
When it comes to storing paper receipts, taxpayers get confused. Some claim they have to keep documents for years, while others say they should keep receipts only during one fiscal year. So, what’s the truth?
The truth is that you don’t have to store paper documents as long as you have digital files to prove purchases. It’s much easier to store digital files. As for terms, we will describe this topic further in the article.
How to Manage and Keep Business Tax Receipts?
It’s important to have all documents organized in case of an audit from the IRS. Such an occurrence is unlikely, but nonetheless, businesses have to maintain their documentation. Even if the IRS decides to audit your business, it’s still not a bad sign. But what is the best option to store business receipts? Any digital method is optimal.
The good news is that all financial records are tracked by banks through bank and credit card statements, purchase history, and online banking records. Even if a business purchases cash, it’s not necessary to store paper receipts.
Companies interested in storing digital records can use apps that convert paper receipts into digital copies and upload copies to the cloud. The IRS accepts these copies as legal documents. This means that all a company has to do is take care of digital accounting software to store receipts.
It’s a lot easier with accounting software. You just have to take care of a scanning app to convert paper to digital receipts. Create separate folders for each category, and it will be much easier in the future to calculate taxable income and claim deductions.
But there are a few nuances when it comes to keeping documentation reimbursements and cash.
Reimbursements
Business owners often use their private bank accounts to pay for various business purchases. Then they use business accounts to transfer the money back to personal accounts.
It’s legal, but the problem is that they might forget to claim these business expenses. Or, when it comes to reducing the tax burden, they can’t find necessary digital documents. That’s why it’s critical to either use a separate business account or keep track of these financial records and have digital proof.
Cash Documentation
It’s more difficult to keep track of cash purchases than credit/debit transactions. The problem is that during a cash purchase, you don’t get a digital statement that tells how much and when a business spent money. That should be the task of a person making a purchase, and they must keep the receipt and preferably convert it to a digital document.
Make sure to keep an itemized receipt for tax purposes whenever having large cash expenses. However, the IRS does not require to keep much documentation of smaller expenses.
Businesses should also be aware of the “Cohan rule.” According to the rule, businesses may still claim deductions even if a receipt was lost as long as the purchase was reasonable and credible.
How Long to Keep All Receipts?
The good news is that you shouldn’t be worried about keeping digital or paper business receipts at all times while your company is operating. Typically, companies and organizations must keep business receipts for three years.
Note: if a business was underpaying taxes by more than 25% for under six years and now has to take care of back taxes, then it must keep the documentation for six years.
Some companies prefer to keep this documentation as online records in online banks and merchant websites, but it’s clearly not the best option. It’s impossible to tell whether these websites will still exist in three years. You may not have access to these websites, etc.
The safest way is to keep necessary documents in digital form for the entire three years and for six years if you believe that your company may be underpaying taxes.
Some experts even recommend downloading copies of digital receipts from the cloud to a computer and storing them as PDF files. It’s also recommended to store all digital receipts by creating folders for each month. But others claim it’s enough to store digital receipts by using cloud services.
Most cloud services are safer than computers or other physical storage options. Even if a server goes down, cloud services automatically create digital backups. You may access your documents from any place at any time.
Final Thoughts
Keeping records of transactions and receipts that prove them is a requirement from the IRS. Businesses must keep their receipts for three years. The best and most convenient way to keep your documents is to digitalize them. Consider using a scanning app to convert paper receipts into digital documents. The app automatically uploads receipts to specific folders.
