Understanding IRS Receipt Requirements: Essential Information to Note
As a business owner, you’re aware of the importance of maintaining records for tax compliance. But what specific documents are necessary? If you’re diligently saving every receipt just to be safe, there’s no need to stress. You don’t require an overflowing file cabinet packed with paper receipts to satisfy the Internal Revenue Service’s requirements.
Your simple guide to tax deductions
Let’s start with the basics. Just like you, your business needs to pay taxes. Every year, you have to report your income to the IRS and pay taxes on it. But did you know you can reduce how much you owe by deducting certain business expenses?
Here’s how it works: let’s say you buy a new desk and computer for your business. You can subtract the cost of these items from your income when you file your taxes. This reduces the amount of income you’re taxed on, which means you pay less in taxes.
There are lots of expenses you can deduct, as long as you have the right paperwork. Some examples include:
- Transportation costs for business trips
- Meals and lodging during company travel
- Office furniture
- Technology purchases
- Marketing expenses
- Fees paid to contractors
But remember, just having a receipt isn’t enough to prove an expense is deductible. The expense has to be for your business, and it has to be considered “ordinary, necessary, and reasonable” by the IRS. So, that fancy vacation probably won’t count as a deductible expense.
What is a business tax receipt?
Don’t confuse this with the legal permission to collect sales tax — a business tax receipt refers to the supporting documentation you need to substantiate your expenses on tax returns. Think of it as proof that you actually spent the money you’re claiming as deductions.
What receipts do I need to keep? What about other documentation?
The good news is you don’t need to hoard every single receipt (phew!). However, for expenses you plan to deduct, the IRS requires that you keep documentation that includes:
- Payee: Who did you pay? (Business name or individual)
- Amount: How much did you pay?
- Date: When did you pay it?
- Description: What did you pay for? (Be specific!)
- Proof of payment: This could be a canceled check, credit card statement, bank record, or other official document showing the transaction.
For certain categories like travel and entertainment (T&E) expenses, specific rules apply. If the T&E relates to a qualified business event, detailed logs can suffice instead of individual receipts. But remember, these logs need to be thorough, documenting things like purpose, attendees, amounts spent, and event duration.
Beyond receipts: Remember that receipts aren’t the only game in town. Invoices, purchase orders, and other business records can also play a crucial role in supporting your deductions.
How long do I need to keep my receipts?
Generally, the IRS requires you to keep business receipts for at least three years after filing your tax return. However, some situations might necessitate longer retention periods:
- Underpaid taxes: If you underpaid your taxes by more than 25%, you’ll need to keep records for six years.
- Assets: Records for depreciable assets like machinery and furniture should be kept for their lifespan plus the year of disposal.
Remember, even after the minimum retention period, certain records might have legal or compliance requirements that necessitate longer storage.
How BookkeeperLive can help them?
BookkeeperLive, an outsourcing accounting firm, can provide invaluable assistance to businesses in managing their financial affairs. By leveraging BookkeeperLive’s services, businesses can offload the complexities of bookkeeping and accounting tasks to professionals who specialize in these areas. Whether it’s maintaining accurate financial records, managing accounts payable and receivable, reconciling bank statements, or tax preparation service, BookkeeperLive offers comprehensive solutions tailored to the specific needs of each client.
With their expertise and efficiency, BookkeeperLive enables businesses to focus on their core operations while ensuring that their financial matters are handled with precision and compliance. By partnering with BookkeeperLive, businesses can streamline their financial processes, improve accuracy, and gain valuable insights into their financial performance, ultimately contributing to their growth and success.
