Maybe you stash them away in a shoebox. Or maybe you keep them in your wallet until it’s busting at the seams. That’s right, I’m talking about receipts. Every business owner has them. Some hoard them, while others toss them. Whatever your policy, there are a few things you should know about receipts and taxes.
Small Business Record Keeping Tips Help at Tax Time
Keep your important records for at least 3 years
You should keep important records for at least 3 years, because that’s how far back the IRS goes for normal audits. If you severely underpaid your taxes (by 25% or more), they can go back as far as six years.
Keeping records doesn’t necessarily mean stashing receipts away in a shoebox. There’s a pretty good chance that your records are online, where years of transaction history is just a click away.
Your online bank account and credit card accounts can be mined for all kinds of great information about your spending. Did you pay for your medical expenses with your Amex? Check the Amex website. Do you have a mortgage? Check your lender’s website for payment history. The same goes for your student loans.
The $75 receipt rule
What if you spend $2 for parking? You may wonder if you need to keep every little receipt?
Generally, you don’t need receipts for items under $75, unless it is a lodging expense (who has a lodging expense for less than $75?!)
See the full details for the $75 rule in Publication 463.
Keep good records
What are good records?
If you get audited one day, dropping a bag of receipts on the IRS agent’s desk is probably the worst thing you could do. You need to be organized if you want to walk out of there free and clear.
The best way to stay organized is to start by knowing what records you need to keep. A good rule of thumb is to keep records for anything that can be deducted on your taxes. While you can usually defend your gross income by showing some simple bank records, you’ll probably have a harder time proving you actually deserved that medical deduction.
In a perfect world, you’d be able to back up your deductions with 2 things:
- The bill: The bill should include a detailed breakdown of costs. This is important because sometimes you can’t deduct the entire bill. For example, only a portion of your mortgage payment is deductible interest, the rest is a non-deductible principal payment on the loan.
- Proof of payment: You’ll need this to prove that you actually paid the bill.
Here are a few common things that you should keep copies of:
- Medical bills and receipts
- Mortgage bills
- Student loan bills
- Tuition bills
- Sales tax receipts (if you do a lot of purchasing for your small business)
- Charitable contribution receipts
- Mileage logs
- Tax documents sent to you by third parties (like 1099s, W-2s, etc)
Digital Records and Receipts
Even if most of your records are online, many bills are still mailed to you the old-fashioned way. You’ll probably store these in a folder somewhere in your house, but there’s nothing stopping you from going digital. A scanner isn’t even necessary, instead you can just snap a picture on your cell phone and email it to yourself. You can even upload them to the cloud where they’ll be safe forever!
The goal is to have a well-organized place where you keep your tax documents. Don’t be afraid to check in with your tax preparer if you have specific questions about your business. They’ll appreciate that you’ll be prepared and have everything gathered and organized. It’s never too late to in control of your taxes, so why not start now?
Helpful Tax Resources
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Editor’s note: A version of this article was published in August 2013, it has been revised for accurateness and completeness.