It is never an easy task to keep receipts in good condition for the desired period and especially for many small businesses. Some even don’t know which receipts to keep and in which form. Others stash them away in unsafe places. IRS encourages proper record keeping to help you monitor the progress of your business, identify sources of income, prepare your tax returns, prepare your financial statements, and support items reported in your returns.
How long should you keep your receipts?
It is a good practice to keep the most vital records for at least three years. This is because that is how far back the IRS or any state’s department goes for normal audits. In some cases, for example, when you poorly paid your taxes (by 25% or more), IRS can audit you back to six years.
Do you have to keep the actual paper receipts?
It is acceptable to digitize your receipts. Imagine keeping paper receipts for six years? It is not only tiresome, but this also eats up your precious space. And since there is nothing that limits you to keep them in original paper form, then it is up to you to decide.
Organizing your receipts
Which receipt do you need to keep?
You don’t need to keep all the receipts you have. Just maintain good records. For example, you don’t need to keep a receipt for $2 you spent on parking. It is not worth it to keep receipts for items under $75. You can learn more here about the $75 receipt rule. Basically, if you were ever to be audited, here are two things you could use to back up your deductions.
- The bill. The bill indicates a breakdown of all costs. This is crucial because sometimes it is not possible to deduct the entire bill. For example, just a fraction of your mortgage payment is deductible. The rest is a non-deductible principal payment on the loan.
- Proof of payment: You actually need to show you paid the bill.
With that in mind, here are a few receipts that you must keep:
Buying materials to design into things to sell? Buying inventory to sell to your customers? Make sure to keep all documents that show proof of payment for the items. If possible, make sure you have receipts for all the purchases you made. If, for one reason or another, you can get a receipt, make sure to keep the invoice and canceled checks.
Have you ever tried to deal with assets on your taxes without any assistance? How was the experience? Let us guess. You had a rough experience because of concepts like depreciation, right? You can avert such a similar experience by keeping records of where you spend money on your assets. For example, keep a record when you buy new computers. Also, keep a record when you unload your assets.
- Other expenses
A good number of receipts fall here. For the best experience, for example, when planning to write off something on your taxes, make sure you have proper documentation that shows you made that purchase. Below are business-related purchases you might make. Make sure to keep the receipts if you can.
- Education expenses
Did you enroll to learn something new? Do you have to get continuing education in your business? If yes, make sure to keep a receipt plus your bank records to prove that you actually paid for the education.
For example, expenses on business cards, web hosting, billboards, ads on magazines, etc.
IRS has guidelines on deducting entertainment expenses. For example, if you took a client out for lunch, that expense can be tax-deductible. For activities such as taking a client for lunch, make sure to keep records that show they were directly business-related.
- Travel expenses
In case you travel to attend a business meeting or see a client remember to stash your receipts or bills well. You can learn more about IRS travel guidelines here.
- Office supplies
Paper clips, printer papers, staples, etc.. All these are tax-deductible, so remember to keep the receipts as well.
- Car and truck expenses
If you in a position to deduct car and truck expenses, consider keeping receipts for things like maintenance and gas.
Just like the educational expenses, if you attend a tradeshow or a conference, make sure to keep the receipt and your bank records as proof of purchase.
- Professional contractors or services
Any time you hire an expert, for example, an SEO agency, a web developer or graphic designer, make sure to keep the receipts when you pay the bill.