A Receipt In The Hand
You have heard the old proverb that “A bird in the hand is worth two in the bush” as advice to be happy with what you have over risking it for something greater.
When it comes to the IRS, a receipt in hand is the only thing that matters and you risk losing everything if you can not produce it.
Tax code and, nearly as important, Tax Court, require that all business deductions be supported with contemporaneous documentation. The IRS defines a contemporaneous record as documentation that is created at the time the activity or expense is incurred, rather than after the fact. In other words, if you forget to get a receipt and just think you can explain it later, you will be out of luck under audit. While that may seem unfair, tax code was never intended to be fair and you don’t want to be like Dr. Sherman and lose all your deductions due to the simple fact that you kept no receipts.
What you should start doing now:
Always get a receipt. Whether you are grabbing coffees for your team or paying your Patterson bill, request a receipt. With the move to touchscreen payments and lack of paper receipts, you should start sending receipts to your email so they can be stored electronically.
The Who and What. To be deductible, business expenses must be “Ordinary” and “Necessary”. Therefore, the IRS would not spend much time auditing your dental supply bills as that is obviously ordinary and necessary. They would likely look into your meal and travel costs to determine deductibility. Documentation here is a case of quality over quantity, so ensure that you include the following on all meal and travel documentation:
Date (easy, it is on the receipt)
Costs (ensure that you keep the final receipt with tip amount)
Who was There (quick notation on the receipt of who you were traveling or eating with)
What was the Purpose (quick notation on the receipt noting why the expense was business related)
Track the miles. You simply can NOT take any auto related business expense unless you are tracking your miles. Thankfully, phone apps have made this process much easier. Check out our blog post on Maximizing your Auto Deduction.
Toss the Shoebox. Develop a system to store your receipts electronically and preferably in your accounting software. JNG Advisors clients have the ability to upload receipts directly to us through email or their phones so we can link all transactions with the accurate and contemporaneous receipts.
Make it a Habit. Just like brushing your teeth, make it a habit.
Since everyone’s spending and record keeping habits are different, there is no perfect solution… but we do have some best practices to assist in contemporaneous compliance.
If you are looking for ideas on improving your receipt tracking, please schedule a consultation with JNG Advisors today.