Reflection of the Week
Your Critical Receipts Checklist
Happy Friday, all!
As a business owner, keeping accurate and organized records is crucial for smooth financial management and ensuring compliance during tax season and in case of an audit. Receipts serve as proof of business-related expenses, and the IRS requires that you maintain proper documentation to back up your tax filings.
Clients are often confused about what substantiation they need to keep. So here’s a breakdown of the critical receipts business owners need to keep for tax and audit purposes.
1. Business Meals
Business meal expenses can be deductible, but only when directly related to your business. To qualify, you must document the meal’s date, amount, location, attendees, and purpose. Keeping receipts that include where and what you ate is essential, along with making notes on what business discussion took place or the business purpose.
2. Travel Expenses
Travel expenses incurred for business purposes, such as airfare, lodging, car rentals, and meals, are deductible. Make sure to keep receipts for all these expenses and include documentation showing the purpose of the trip, such as meeting schedules, conference details, or client information. You can include this information on your work calendar. If you use your personal vehicle for business purposes, you must document mileage, gas, and maintenance expenses. This documentation usually includes some sort of travel log.
3. Office Supplies and Equipment
Receipts for office supplies like pens, paper, and printer ink, as well as larger equipment purchases such as computers, printers, or furniture, are essential. They serve as proof of purchase and help distinguish between one-time capital expenditures, which may need to be depreciated, and regular operational expenses. This documentation is especially important if you’re making purchases at stores that sell a lot of things (Amazon, Target, etc.). An auditor will request you prove that you made these purchases for your business rather than you personally.
4. Employee and Contractor Payments
If you have employees or independent contractors, retaining receipts and records of payroll, benefits, and any other payments is essential. These records help ensure you properly document wage expenses, withholdings, and contributions for tax purposes. For contractors, maintain receipts for payments made and copies of 1099 forms issued.
5. Rent or Lease Payments
Whether you rent office space, equipment, or vehicles, you’ll need to keep receipts or invoices for all rental payments. This documentation is necessary to substantiate your rental or lease expenses, which can often be a significant deduction.
Questions of the Week
- How do you currently track your receipts?
- Can you prove that your meal or travel expenses were business rather than personal?
- Do you keep a separate card or bank account for business transactions?
Tool of the Week
As the year wraps up, it’s the best time to organize and prepare for tax season. Here are a few best practices for organizing receipts
- Go digital: Store your receipts digitally using accounting software or cloud storage. Apps like QuickBooks or Expensify allow you to upload and categorize receipts for easy retrieval.
- Document context: For each receipt, note the business purpose to avoid confusion later.
- Maintain receipts for at least three years: The IRS recommends keeping tax-related documents for at least three years in case of an audit.
Keeping the correct receipts and organizing them properly will prepare you for tax season and avoid potential issues during an audit.