This guest post is brought to you by Bench, the online accountants that use your Shoeboxed receipts to build you tax-ready financial statements.
George Costanza dreamed of a world where all of his receipts could be carried in his pocket. This way, if ever questioned, he would have immediate, unequivocal proof of a purchase.
However impractical the Costanza wallet, business owners can learn something from George. Having detailed receipts for expenses is one of your best defenses in an audit. Receipts also act as a log, allowing you to jot down additional information about the expense if necessary. This provides critical information when collaborating with your tax accountant, bookkeeper, and auditor if the IRS decides to poke around. Of course, not all expenses are created equal, so we’ve compiled a list of five, highly scrutinized expenses for which you’ll want to keep receipts.
1. Meal & Entertainment Receipts
Winning clients and building relationships are two of the many reasons we like to break bread with business contacts. Unfortunately, the line between “contacts” and friends is often blurred making this an expense the IRS likes to scrutinize most. For that reason, it’s best practice to keep receipts handy and properly documented in case of an audit. At Bench, we recommend this even for receipts under $75 (see IRS publication 463 for more information). In practice, the more proof provided the happier an auditor is. Another thing to note is it is required to document who attended the meal and the purpose. This can be written in shorthand, such as including the initials of everyone who attended, followed by a quick description of meeting purpose.
2. Receipts from Out of Town Business Travels
Out of town travel for business generates a ton of receipts from airline tickets, taxis, meals, laundry, lodging and more. Of course, travel can also be for “pleasure”, making this another IRS favorite. Receipts verify what was purchased and also act as a travel log of where time on the business trip was spent. Some important factors that determine eligibility include: how much of the trip was personal in nature, if the trip was away from your tax home and if the amounts are justifiable.
3. Vehicle Related Receipts
“Mixed use” assets, like a vehicle used for both personal and business purposes, require extra care to distinguish when they are being used for business and when they are not. Since only the portion of use that is for business should be counted in the company’s books, keeping clear and detailed records of when, where and why a vehicle is used for business purposes helps to establish what portion of use is business related. That portion of use that is business related (e.g. 20% of use is for business) can then be applied against any vehicle related expenses (maintenance, parts etc). As such, always have a detailed receipt (as opposed to a credit card statement) that lists what item or service incurred the vehicle related expense. Remember, if an auditor can’t easily establish that a payment to Costco was for car tires and not for Tide, chances are that vehicle-related expense won’t be considered for business purposes.
4. Receipts for Gifts
Gifts are a thoughtful way to build rapport, however, there are several nuances to be aware of. For example, whether concert or sporting event tickets are considered ‘gifts’ or ‘entertainment’ depends on whether or not the gift giver goes with their client or business prospect. Documenting this kind of information on the gift receipt is key to allowing your accountant to treat the expense correctly for tax purposes. For more detailed information on gift expense limits and interpretation, check out this publication.
5. Home Office Receipts
Like vehicles, a home office is considered “mixed-use” and the expenses associated with claiming a home office are therefore closely scrutinized. The key to properly accounting for home office expenses is to establish what portion of the home and the home’s expenses the office represents. If the home office makes up 20% of the home’s space, for example, then this proportion of expenses is deemed common to both the home and home office such as rent, electricity, internet to name a few. Keeping the bills and proof of payment for the home expenses with the business’ files is important in case these home office related expenses are challenged. Be sure to read the IRS publication on home office expenses for more information on what shared use items do or don’t qualify.
Thankfully, in today’s world, Costanza’s dream has come true. With services like Shoeboxed, it is not only easy to store and track business receipts, but also possible to carry them all in your pocket.
Saving receipts, however, is only half the battle. For accounting purposes, they also need to be reconciled against you bank and credit card statements to ensure paper trail follows the money. Further, keeping them professionally categorized to accounting standard ledgers is also expected. Bookkeeping services like Bench take care of this for you. Finally, when it comes to claiming expenses it’s always best practice to work with a tax accountant, to ensure everything is deductible in the eyes of the IRS.
Regardless of what system you decide to use, getting into the good habit of hanging on to even the small receipts will help ensure you’re giving your business’s books a bit of financial serenity.
Ian is CEO at Bench.co, an online accounting firm that provides monthly, tax-ready financial statements from $100/month. When you work with Bench, your Bench accountant collects your Shoeboxed receipts and bank statements to create your financial statements and remove the pain of bookkeeping from your business life. Shoeboxed customers get a $50 discount on their first month of service.
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