Does your business need to keep paper receipts? This article explores IRS rules for keeping records of expenses, and how businesses should respond.
The Rules for How to Manage Paper Receipts are Vague
If you’ve ever done a Google search on managing paper receipts for businesses, you’ll quickly find that it’s difficult to get a straight answer to this question. That’s largely because there isn’t one. The IRS’s answer is decidedly vague. Its website currently states, “you may choose any recordkeeping system suited to your business that clearly shows your income and expenses.”
So does that mean you could pay for everything in cash and not keep any receipts?
Well, sort of. In Cohan v. Commissioner, the Cohan Rule allowed a big-spending Broadway producer to write-off large travel and entertainment expenses without receipts, because he argued that being a flashy guy who paid for everything in cash was part of his business.
Of course, George Cohan had to spend a great amount of time and money on lawyers to prove his case.
Ask Your Accountant How You Should Manage Your Receipts
So if your business doesn’t involve schmoozing with celebs in 20s cocktail lounges, how should your business manage paper receipts?
The most common response is “ask your accountant.” That’s pretty good advice. Your accountant’s reputation is on the line, and he or she is likely to be keeping tabs on current regulations to help guard your business from tax audits.
OK, we understand. How do you know your accountant is actually giving you the right answers? And what if they’re being overly cautious?
Some of the Types of Records You Should Keep
IRS Publication 583, Starting a Business and Keeping Records is the official guide for how you should be documenting your expenses. It delineates “some of the types of records you should keep.” Still sound vague? You’re right, it is.
As of the day this blog post was made, the applicable section on recordkeeping states the following (italics added):
What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.
Documentary evidence. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.
Exception. Documentary evidence isn’t needed if any of the following conditions apply.
- You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging.
- Your expense, other than lodging, is less than $75.
- You have a transportation expense for which a receipt isn’t readily available.
What does all that mean exactly? We suggest you ask your accountant.
How Do Other Businesses Manage Paper Receipts?
Many businesses, both small and large, use expense management software systems to record expenses, reimburse employees, and flow expense data into accounting systems like Quickbooks Online. The best of these systems capture receipts digitally, record travel purchases at the time of booking, allow for approvals from management, and then send data to their business’s accounting team.
Best-of-breed expense management systems can be set up to synch with your company’s expense recording policies. So, for example, if your business decides to set a receipt threshold at $25—then it can request that employees only submit paper or digital copies of receipts over $25.
Did we mention “expense recording policies?” We did. Establishing and documenting expense policies is an HR best practice. Work with an HR specialist, or your accountant, on how you should set and document receipt threshold levels.
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ExpenseWire is a wholly-owned subsidiary of Paychex, a trusted name in the HR business that serves over half a million small and medium-sized businesses nationwide. Our expense management software captures expense data at the time of purchase, then flows that information into your reimbursement process and accounting systems.
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