Yes, you need a receipt

It’s that time of year... tax season is upon us! For many small business owners, that means it’s time to gather receipts from the various places you may have stashed receipts throughout the year. Trust me when I say that bookkeepers and tax preparers have seen it all, from the highly organized and fully documented receipt files to the completely unorganized box full of relevant and irrelevant papers.

Why do receipts matter so much? If you’re deducting expenses for your business, your chances of being audited automatically increase. While the overall chance of being audited is relatively small, the chances increase based on specific criteria, such as sole proprietors who file a Schedule C with their tax return.

Receipts are your proof that a valid, deductible business expense occurred. Your credit card statement isn’t enough, as it doesn’t provide all the necessary information. In fact, even the receipt alone isn’t enough if audited-you also need documentation of who you met with, the purpose of the meeting, and so on.

Whether you’re gathering receipts for your 2017 tax return or documenting them along the way for 2018, here are important things to document for each business expense.

Date and time

Date and time seems pretty simple to capture from a receipt, but it’s not always listed on every receipt. When you incur a business expense, check the receipt to ensure the date and time are printed on the receipt. If not, write it on the receipt before filing the receipt or submitting it to your bookkeeper.

People involved

The IRS has very specific rules surrounding meals and entertainment expenses for business deductions. If your expense involves a meal or other entertainment (such as sporting event), it’s critical to document who attended the meeting or event.

And no, setting up shop at the local Panera and working for a few hours while you eat breakfast doesn’t count as a deductible business expense. It can be an expense the company pays for, but it isn’t one you can deduct on your taxes.

Purpose of meeting or expense

It’s also important to document the purpose of the expense. Why did you need 100 pens? What business topics were discussed at that lunch meeting? How much business did you conduct on that trip to Florida? If audited, the IRS will expect documentation on what business topics were discussed or how other items were used for your business.

The best practice for all business owners is to write these details on the back of a receipt at the time of purchase and then file them in a specific place so they’re easy to find come tax time next year. You’ll need the receipts to enter into your bookkeeping software, but you’ll also need to store them for several years in case of an audit. The more organized you are with your receipts, the easier it will be to prepare taxes and respond to an audit.

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