Keep your receipts.
When I talk to business owners or anyone who needs to document expenses or deductions, that’s the number-one piece of advice I give. So I’ll repeat it in bolder type:
Keep your receipts.
The IRS doesn’t really say what a business should keep in order to prove expenses. See, for example, IRS Publication 583, starting on page 11 (“Recordkeeping”).
Basically, you can use a variety of methods in order to prove your income and expenses.
But my professional opinion is that receipts in conjunction with bank statements, canceled checks, etc. are the ideal way to go.
Receipts will show the date of the purchase, the amount of the purchase, and what was purchased. This, combined with proof of payment (bank statements, canceled checks, credit card statement, etc.) provides the ideal documentation. Not just for the IRS but also for basic recordkeeping and business management purposes.
Sometimes you need to keep receipts for certain expenses, such as for meals and entertainment expenses.
It’s sometimes necessary to keep receipts in non-business settings too. One example is the the tax credit for daycare expenses. Keep the receipt from the daycare.
One time Iowa audited a client’s daycare credit that was claimed on the Iowa return. The client handed the auditor a stack of carbon-copies of checks written to the daycare, but the client couldn’t find the receipts. For whatever reason, the daycare couldn’t or wouldn’t provide receipts.
The state rejected the daycare credits for several years worth of tax returns because there were no receipts.
In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.
PS: If you don’t like the idea of massive stacks of paper, you can scan your receipts, so long as the scanned copy contains a complete copy of the receipt, is legible and is easily accessible.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”