What business expense receipts should I keep to satisfy the IRS?
Deciding which receipts and invoices to hold on to is one of the most familiar challenges for business owners, especially when balancing the desire for tax write-offs against the tedious collection and filing of every receipt and invoice.
The "simple" answer to this question is that every receipt ought to be kept on hand to maintain complete protection during an audit — but even for sole proprietors, this level of record-keeping is frustrating. For firms with employees, it's downright impossible. Fortunately, a few rules of thumb can help maximize audit protection while minimizing drudgery.
Rule #1: any claimed travel-related expense over $75 requires a receipt or invoice
For many, the question of receipts comes up when reimbursing employees for out-of-pocket expenditures made on business trips, or when justifying travel expenditures made directly by the owner for sole proprietorships or small firms.
The IRS's "75 Rule" limits your firm's receipt liability for travel expenses to those above $75. However, you should still be prepared to provide information on the nature of the expense, including how much was spent and where the expenditure occurred. Credit card statements will often suffice, with occasional supplemental information.
One important, although increasingly rare, exception to this rule is that lodging expenses under $75 must still have an itemized invoice from the place of lodging. This includes non-traditional lodging like AirBnBs or hostels.
Rule #2: claimed non-travel expenses should have a receipt or invoice
As many business owners rely on monthly software subscriptions that are most easily charged to company credit cards, it's worth noting that these essential services require invoices in order to be tax deductible. You can save yourself a little bit of time — and often money — by opting for annual contracts if the software is essential, and thus requiring only one invoice per year. This is especially true for subscriptions at the company-wide level; rather than having employees claim reimbursement for monthly services that could be immediately charged to the company instead (like LinkedIn Sales Navigator), have the company pay for the annual subscription and minimize your paperwork burden.
But invoices are still superior to credit card statements, even if you're claiming small amounts throughout the year. This is especially the case when the business tends to offer services that can be used by consumers, too, e.g., ecommerce sites, telecommunications and equipment rental. Details like what was actually sold, or to whom it was delivered, are not readily apparent on credit card statements and could cause the IRS to question whether the expense was truly business-related.
The good news: it's getting easier to keep every receipt
Fortunately, modern tech is making the hard work of staying IRS-compliant a little less burdensome. Receipt-saving apps like Expensify and Shoeboxed make recording receipts at the time of purchase as easy as taking a photo on your phone. Brex is another trusted name in the space, offering a powerful receipt-to-expense matching platform alongside its corporate credit card platform. And most services offer electronic billing, making finding and downloading to your records an easy task.
Few things protect you better than a well-written expense reporting policy
Finally, a proper versatile expense reporting policy can help minimize the administrative burden of enforcing proper reporting among your employees of expenses as well as ensuring proper record keeping. But it also sets you up for long-term financial health.
“Expense reporting policies are critical for maintaining tax and regulatory compliance. In many ways, however, these are just the table stakes," says Phil Debaugh, CPA and founder of Tesseract Advisory Group in Baltimore. "A strong policy will align with the company’s values and mission. Policies should thus encourage financial stewardship of the firm resources from top to bottom and provide for appropriate oversight … these policies are often overlooked, but in many organizations, they are the most visible evidence that the firm has an attention to good financial hygiene."
Eventually, you'll want a policy fully customized to your firm's needs. But to help you get started, we've prepared a versatile, all-purpose expense reporting policy that can be plugged into your existing organization as-is or even customized for your unique needs. Best of all, it's free to use!
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