Avoid these receipt mistakes in your business
Many business owners opt to use a business credit card for all their business spending. After all, it keeps all purchases in one place and a monthly statement clearly shows the transaction. However, many business owners make the mistake of thinking their business credit card statement is all they need to substantiate their business expenses. If you follow this philosophy, you are mistaken and could be in for a surprise with an IRS audit.
PART ONE: Your business credit card statement
In addition to making a business purchase on a business credit card, the IRS requires proper documentation for the transaction. The credit card statement offers only ONE part of the documentation requirement. As far as the IRS knows, you could have spent the money on just about anything rather than bonafide tax-deductible business expenses. Therefore, it is essential to keep copies of your receipts to justify your credit card purchases.
To satisfy the IRS and their documentation requirement, you need:
- The credit card statement – This clearly proves you paid money out. In addition, the IRS can follow the money trail and see you paid this credit card from a business bank account.
- Detailed receipts – This proves the reason for the transaction and confirms the purchase was for a specific business purpose. For example, the restaurant receipt shows the number of diners as well as the quantities of meals and drinks.
PART TWO: Your detailed receipt
Today’s paper receipts are usually produced on thermal paper. The thermal paper is heavily laden with chemicals and heat transfers when printing to make it appear like ink on paper. However, there is a complete absence of ink. Yes, there is NO ink there! The visible heat imprinted details of the transaction will eventually fade away, returning back to the paper’s original state. What does that mean for you? It’s a dangerous practice for any business owner to keep their receipts in a shoe box for many months and plan to categorize them at the end of the year. You’ll find completely blank receipts when you eventually re-open that shoe box and a loss of valid business expenses.
How to prevent losing details on your receipts
- Fold your receipt so that the “print” is on the “inside” before placing it in your wallet.
- Make a digital copy of it as soon as possible.
- Take care not to touch anything except the edge of the receipt.
- Don’t highlight anything on your receipt – it will make it disappear.
- Don’t put tape on the “print”- again, it will make it disappear.
- Never leave your receipt in a hot car. Chemical paper reacts to the heat quickly.
- Never cram a receipt in your pockets. Your body heat will start the disappearing process almost immediately.
Without the detailed receipt and a business credit card statement, the IRS cannot verify your business expenses. Therefore, it would be discounted as a legitimate business expense and it could be taxable income to you.
Paragon Accounting & Tax Solutions specializes in small businesses in Canton, GA; Woodstock, GA; Marietta, GA; Alpharetta, GA; and Kennesaw, GA. Your success is important to us. When you work with us to keep your monthly accounting up to date, we will advise you of rookie mistakes that could cost you serious money.