Let’s face it: expense receipts aren’t exactly the most exciting part of business life. But those slips of paper (or digital records these days) can be the key to getting reimbursed for work-related expenses and saving you money on taxes.
So, whether you're a seasoned entrepreneur or a new freelancer, this blog is your one-stop shop for understanding expense receipts and how to use them effectively.
What Is An Expense Receipt?
An expense receipt is basically a document that proves you spent money on something for work. It shows the date, amount, vendor (who you bought it from), and a brief description of what you purchased. Think of it as a tiny superhero for tax, helping you fight your reimbursement claims.
Why Expense Receipts Matter?
Your expense receipts are the easiest ways to:
- Get reimbursed: They’re proof you actually spend money on work-related stuff so your company can pay you back.
- Saving on taxes: The IRS allows businesses to deduct legitimate business expenses from their taxable income. Receipts are key documentation for claiming those deductions.
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What Kind Of Expense Receipt Is Accepted As A Valid Proof Of Purchase?
The IRS has some specific guidelines for what qualifies as a valid receipt for business purposes. Here’s a quick rundown of some of the most common expenses:
- Meal Expenses: You need the date, amount, location, and business purpose of the meal.
- Mileage: Keep a mileage log that includes the date, destination, miles driven, and business purpose of the trip.
- Transportation: Receipts for flights, trains, or rentals should show the date, origin, destination, and cost.
- Accommodation: Hotel receipts should include the date, location, and cost of your stay.
- Miscellaneous: For other expenses, ensure the receipt details the date, amount, vendor, and nature of the purchase.
What Are Adequate Records For The IRS?
Here are a general set of guidelines to follow when keeping expense records:
Keep It Organized
For your business expenses, you'll need to maintain detailed records. This can be done in an account book, diary, log, or any system that tracks your spending.
Receipts Are Key
On top of your records, you'll also need to back them up with proof of purchase. This usually comes in the form of receipts, canceled checks, or bills. These documents should show the amount spent, date, location, and what the expense was for.
Time Is Money (For Records)
The closer you record your expenses to when they happen, the better. Fresh details are more reliable than memories jotted down later.
Explain When Needed
Generally, you'll need to explain why an expense is work-related. But a written explanation isn't always required if the reason is obvious from the details (like office supplies).
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How Long Should You Keep Your Receipts?
The IRS generally recommends keeping receipts for at least three years after you file your tax return. This gives them enough time to audit your return if needed.
Does the IRS Require Receipts for Expenses Under $75?
The IRS generally does not require receipts for business expenses under $75 (with some exceptions). This is known as the $75 receipt rule.
Here's a breakdown:
- For expenses under $75 (except lodging): You don't necessarily need a physical receipt, but you should still have some form of documentation to support the expense. This could be bank statements showing the transaction, credit card statements with details, or detailed business expense logs.
- For lodging expenses: Regardless of the amount, the IRS typically requires receipts for lodging to claim it as a business deduction.
It's important to note that although receipts aren't mandatory for expenses under $75, keeping them whenever possible is always good practice. They can serve as strong evidence during an audit.
I’m Being Audited, What If I Don’t Have Receipts?
Nobody enjoys getting audited by the IRS. But if it happens to you, the lack of proper records (including receipts) can make things much more stressful.
Imagine this: you deducted office supplies but can't locate the receipts for those printer cartridges and sticky notes. Here are some steps to take:
Reconstruct Your Records
Use bank statements and credit card transactions to recreate your expenses for the year. Categorize them by office supplies, travel, marketing, etc. This can be a time-consuming process, but it's better than facing an audit unprepared.
The Cohan Rule: A Friend in Need (Maybe)
The IRS understands that sometimes receipts get lost. Businesses have some wiggle room under the Cohan Rule (based on a tax court case). Even without receipts, you might be able to convince the IRS of legitimate expenses based on past spending patterns and business justifications. However, this isn't a guaranteed get-out-of-jail-free card.
For example, if you spend around $500 a month on office supplies based on past records, the IRS is more likely to accept your explanation for a missing receipt for a similar amount, even without the actual paper slip.
Prevention is Key
The best defense against an audit nightmare is good record-keeping from the outset. Here's how to be proactive:
- Embrace Digital Receipts: Many vendors offer digital receipts via email or online portals. Store them securely for easy access.
- Develop a System: Create a clear system for collecting and organizing receipts. Whether it's a designated folder or a digital app, ensure your receipts are easily accessible.
- Invest in Receipt Management Software: Tools like Fyle can scan, categorize, and store your receipts electronically, automating the entire process and saving you time and frustration.
How Fyle Can Help with Expense Receipts
Managing a mountain of receipts can be a nightmare. But with a handy receipt management tool like Fyle that can scan, categorize, and store your receipts electronically you can spend your time doing what matters most–growing your business. Here’s how we can help:
- Say Goodbye to Paper Piles: Fyle lets you ditch the paper receipts. You can submit them via text message, through our mobile app, or even our email plugins for Gmail and Outlook. Fyle does the rest!
- Automated Categorization: No more manually sorting receipts into categories like "travel" or "office supplies." Fyle's clever AI can automatically read and categorize your receipts based on their information.
- Smart Matching: Fyle can match your receipts to the corresponding credit card transactions, saving you the hassle of manually pairing them up.
- Effortless Expense Reporting: With all your receipts organized and categorized, creating expense reports becomes a breeze. Fyle streamlines the process, letting you focus on more important things.
- Peace of Mind: Fyle stores your receipts electronically in a secure place. You won't have to worry about losing a crucial piece of paper or scrambling to find it when you need it.
