Receipt collection inspires the same adage and advice, again and again. “Make sure you keep your receipts!” is nearly always the first thing to come out of people’s mouths when discussing self-employment. However, anyone who has ever made consistent receipt collection their New Tax Year’s resolution after a particularly frustrating tax season will have hit all the same road-blocks since tracking and collecting receipts is frustrating
Why Is Saving Receipts Important?
The easiest way to justify tracking and managing receipts is to compare this process to transaction insurance in case of an audit. Receipts prove that your transactions are business related, and are therefore legitimate business expenses. Additionally, if retail items are purchased, receipts record whether sales tax was paid upon purchase, preventing additional tax and penalties on the goods.
In case of a normal IRS audit, a transaction that is ambiguous in whether it should be a business or personal expense, may be dis-allowed, causing Net Income to increase, thereby increasing Self-employment and Federal taxes due. If this dis-allowed expense was from a previous year, late penalties may also be assessed
When considering whether the process of saving receipts is worth it to you, keep in mind the potential risks of that transaction in an audit situation.
Which Receipts Need Extra Attention?
There are some receipts that owners should think critically about.
- Meals & Entertainment Receipts: Because of the rules and regulations surrounding Meals & Entertainment (M&E), be sure to manage them properly. When a viable M&E expense occurs, write who the meeting was with, and what was discussed on the receipt.
- Asset Purchases: When purchasing equipment, software, furniture, vehicles, or other assets, keep the receipts with your records. Your tax preparer will thank you.
- Cash Transactions: Any purchases in cash (From Craigslist, Offer-Up, or similar) should have some record made by the owner. That way cash withdrawals can be proven as expenses, instead of an owner’s distribution. Templates for this type of receipt can be found easily online.
- Business Travel: Because travel, like meals, can easily be either a business or personal expense, be sure to write the purpose of the travel on the receipts.
- Ambiguous Transactions: For transactions and vendors that could be for both business or personal use, be sure to add any notes or details to help prove that they are viable business expenses. I.E. if a Real Estate Agent purchases a house warming gift for a client from a boutique store that sells clothing, home goods, and jewelry, they should write “Smith Housewarming Gift” on the receipt.
As accounting technologies and document storage move to the cloud, there is no longer a need to keep original paper receipts. If paper receipts and their organization speaks to you, then collect paper receipts; however, try and avoid the annual shoe box method. Even separating receipts out by monthly envelopes will save time and frustration for you, a tax preparer, an accountant, or an auditor.
Alternatively, look to using digital or cloud solutions for receipt management; either a digital folder on your desktop, a GoogleDocs or DropBox account, or a paid solution like HubDoc or ReceiptBank.
At BalanceMonkey, we set up all our clients with a HubDoc account for their document management needs. HubDoc has an app that can be used to snap photos of receipts, and automatically uploads them to your account. Once a legible photo is snapped of the receipt, feel free to toss that slip of paper in the recycling.