Tax Prep Business Tips – Proving Business Expenses Using Receipts and Statements

Lack of proper documentation is by far the most common reason for perfectly legitimate business expense deductions being disallowed come IRS audit time. Taxpayers need to be aware that simply identifying and accounting for expenses in your bookkeeping software is not enough. You need to have physical documentation to stand behind your deductions, and that means receipts!

There are 2 elements of a credible business expense that your clients will need to prove in the event of an audit. They might sound redundant, but you must prove you bought it and that you paid for it.

• Proving you actually purchased the item or service
• Proving that it was paid for

This is easy if you pay with a check or credit card. There is a paper trail. You can deduct the expenses at the time of purchase and your credit card statement will show that you bought and paid for it. Obviously, the credit card statement or canceled check does not go into detail regarding the "business nature" of the expenses, and typically does not even identify what item was purchased. This is where the invoice or receipt requirement comes in.

Many people will say that simply jotting down notes on your credit card statement or canceled check will suffice for proving what was purchases and its' "business nature". The truth is that your hand written notes are pretty much worthless. What evidence do your personal notes prove? None! What you need to do is couple invoices or receipts which identify what products, goods, or services were purchased and lend credence to your claim of business nature of the purchase with your credit card statements and canceled checks.

Many clients ask: What is necessary for me to deduct work related travel, meals, and entertainment expenses? The IRS will make you identify 5 things if they choose to question your travel, meals, and entertainment expenses; Date, Amount, Place, Business Purpose, and Business Relationship. A receipt can identify three out of these 5 requirements. Be sure to get the "Check Copy" receipt whenever possible. Typically at a restaurant your server will bring 3 copies of receipts back to the table after you pay. The "Check Copy" will identify the name of the restaurant, the amount spent, number of people in your party, and the date you were there. The only remaining elements necessary for IRS proof purposes is a description of your business purpose and business relationship. These final requirements can be met by jotting down the names of the people entertained and the reason why you were entertaining them.

Something to be aware of now-a-days is the commonality of thermal printed receipts. These receipts typically do not have a very long shelf life, and we recommend digitizing these receipts, the sooner the better. A useful suggestion is using your phone's camera to simply take a picture of the receipt and then saving it in to a business receipts archive folder. For Blackberry and smart phone users, there are several apps that streamline this receipt saving process.