Document, document, document!

Yep, that headline is a takeoff on the real estate agents’ mantra. And just like the original, it is repeated three times for emphasis, and so you’ll remember. It’s the number one rule in bookkeeping and accounting.

Most business owners know it is important to keep track of receipts for every expenditure from advertising to office supplies to utility bills. Why? Because even though the odds are in your favor of NOT having an audit by the IRS, approach record-keeping as if your tax return was going to be examined. So what does this mean in practice? Is a receipt all you need? Will check stubs suffice for things like rent? Do I need the itemized restaurant receipt as well as the credit card slip?

Here are a few tips for keeping good records as you go; the IRS values documentation recorded at the time or near the time of the expense over statements prepared at a later date.

Five questions

You know the old journalism questions, the 5 Ws, or sometimes known as the 5 Ws and an H? Answer those questions about any receipt and you’re well on your way to having good documentation. It should detail the place, date, amount, and character of the expense. Okay, I know; that’s four. Most receipts given out by retailers these days give you this information in spades, so you’re covered for office supplies, etc. And vendors usually provide this info on their invoices or work tickets. But the receipt for a business lunch would not have all the info, so here’s where thinking of the 5 Ws and an H comes in handy:

  • Who: Number of people served, name(s), and the name of the company(s)
  • What: What you discussed that was relevant to business
  • Where: The name and location of the coffee shop or restaurant
  • When: The date of your expense
  • How (much): The total amount

Physical or Digital Receipts?

Physical receipts have always been accepted for audit and record-keeping purposes. As of 1997, the IRS accepts scanned and digital receipts as valid records for tax purposes. Revenue Procedure 97-22 details the specific requirements; suffice it to say they are generally acceptable as long as you can deliver a copy of them to the IRS when necessary.

I lost it!

What if you lose a receipt? As soon as you can, jot down all pertinent info and file it where you would have the actual receipt. Even if the IRS ends up denying that item, you’ve done the right thing by your business, and you’ll have something to jog your memory when the bank or credit card statement comes in.

Of course, now that you have the documents you need, a good filing/organizing system is desirable. It can be elaborate or simple, but make sure it’s well marked and accessible.

I tell all my clients that this timely record-keeping allows peace of mind in the unlikely event an audit is announced. If an audit should come about, rather than fainting, my client’s first response will be, “I’m ready; when will you be here?”

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