The Receipt Rule: When You NEED ‘Em & When You Don’t!
Time for some straight-talk on receipts!
People ask me this question ALL the time:
“Do I really need to keep my receipts? I have my credit card statement…”
The answer is YES! In fact…
…The #1 way that the IRS nails business owners in an audit is with receipt rules!
So what are these receipt rules… and WHY does the IRS want me to keep receipts…
The reason IRS says you need to keep copies of receipts is that they want proof of your expenses… The knee jerk reaction to this statement is, “Well I have proof because it’s on my credit card statement.”
And you do have proof that you spent money somewhere… but let’s dive a bit deeper with an example:
Imagine you sent an employee to Walmart to get some office supplies, with the understanding that you would reimburse them for the expense….
The next day your employee shows up with a copy of their credit card statement showing they spent $5,000 at Wal-Mart… And they want you to reimburse the charge…
Looking at that credit card statement, can you tell what they ACTUALLY purchased?
Absolutely not! That $5,000 line item tells you NOTHING! What if that employee got a wild hair, and instead of just buying office supplies, they then decided to “let you” buy them a new big-screen TV?
I would hope this would never happen BUT there is NO WAY you’d be willing to reimburse that amount of money without a receipt to prove what had been purchased…
And guess what? The IRS expects the same proof for your deductions.
A receipt can PROVE that what you bought is a legitimate expense for your business… It helps substantiate that it was necessary for your business… It shows that you bought pens and printer paper, or a new computer for the office…
Receipts are the tool that the IRS uses to makes sure people don’t abuse the system and run their personal grocery bill through their business.
It’s also how MOST business owners lose their audit…
Most business owners have all their transactions classified in an accounting software program, or they simply expect their bank statement to be enough proof… But you can actually see the blood drain from their faces when they get the request from the IRS to see the receipts to back it all up!
Without those receipts, it becomes a SLAM DUNK win for the IRS…
Now, there are a few exceptions to the receipt rule, which I will cover in a minute…
But first, I know what you are thinking: “Keeping track of all those loose and crumpled receipts would be a totally pain in the neck!” We get it – and this is the reason why many business owners don’t do a great job keeping them organized.
It was for this very reason that we created the Taxbot® app to help!
Keeping receipts is no longer tedious when you use Taxbot.
With Taxbot® keeping track of receipts is as “simple as taking a selfie!”
Seriously, just snap a picture of your receipt and Taxbot takes over. Taxbot can read the receipt, and match it up with your credit card statement charges. So, you’ll have all the back-up you need!
Not only that but Taxbot can also import receipts from your email inbox… and do the same matching…. only this time, you don’t even have to take the picture!
Want to see a quick video demonstration on how it works? Check out this video here: www.taxbot.com/z/demo
And if you are currently not a Taxbot customer, you can try it for FREE for 14 days by clicking this link: www.taxbot.com/magic
Now, I promised I’d tell you about a few exceptions to the rule so let’s dig in…
Some Exceptions to the Receipt Rule
There are a couple of scenarios where you don’t need a receipt. However, I am always hesitant about teaching them to my clients because they FORGET that they are EXCEPTIONS to the rule… and they get confused and start to believe they ARE the rule…
Because of this, I tell my clients to keep receipts for everything when possible because it creates good habits… and even if you don’t need receipts for some transactions, it makes you look ultra-prepared in an audit… and if you are buttoned up, they are more likely to stop the audit early because it appears that their search will not result in much money for the IRS.
But, I am going to cover them now because some of you are super curious… for those of you who just want to keep it simple, just keep receipts for everything.
Exception #1: Meals UNDER $75.00 do not need a receipt. So, if your business meal was $74.99 then you don’t need a receipt. If it is $75.00 you are required to keep a receipt. However, ALL MEALS, regardless of the receipt rule, require you to keep a WRITTEN log of WHO you met with and WHAT business was discussed over the meal to justify it as a business expense.
If you don’t keep a log of this stuff then you are doomed – even if you have the receipt! For those of you that knew this rule, and still didn’t keep the receipt… can you honestly say that you wrote down WHO you were with and what you discussed in a journal somewhere? I would be extremely surprised and impressed if you did… which again, is why I teach my clients to keep the receipts for meals AND to document who they met with and why immediately after the meal happens.
Exception #2: Travel Expenses Under $75.00 fall under the same requirements as meals. This is per transaction. Any transaction that is above the threshold needs a receipt and you still need to write down WHERE you are going, WHY it should be considered business, and WHO you are traveling to meet. Note: It can be confusing about when you are “traveling” in the eyes of the IRS. These rules are complex, so just snag a receipt anyway. It’s easier than understanding when you don’t need one.
Other than these tiny scenarios you need a receipt. Students will often falsely confuse this and start to think that the $75.00 rule applies to other categories like office supplies, or equipment purchases.
Without receipts, you can’t prove WHAT you bought for your business. If you are relying on a bank statement you only have documented WHERE you bought it and HOW MUCH you spent. The IRS requires you to be able to prove what you bought..
… And if you don’t have receipts then you could get nailed in an audit (lack of back-up documentation like receipts is #1 reason why the IRS wins almost 9 out of 10 audits!).
The good news is, technology can make it easy to stay compliant… Taxbot® can help you automate the whole process. So keep it simple.
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