Why You Need to Keep Your Receipts (And Other Record-Keeping Essentials)
By: Jessica Myers, CEO
When I first started going on business trips, it took me a while to get into the habit of asking for a copy of my receipts for my expense reports. After my boss rejected some of my expenses, I learned pretty quickly to snap a picture of each receipt on the go.
If you're a business owner, the IRS's business tax deduction requirements follow the same rules as employer expense policies—namely, no receipt, no credit. And besides lost deductions, there are a few other serious consequences for poor record-keeping. Let's examine why keeping your receipts is essential for the health of your business and the easiest ways to keep track of all of them.
Good record-keeping is a sign of your business's integrity. Your receipts are proof you spent money for legitimate business reasons, not on a new gadget or weekend getaway. And while bank statements are handy summaries, they only show the total amount spent, not the items purchased, and can't be used to support your deduction claims. So instead of saving $1,000 in taxes on your new home office, you could owe as much as $600.
Aside from helping your business maintain its profitability, great records are vital if your company gets audited by the IRS. An audit means that someone from the IRS will review your bookkeeping, bank statements, invoices, and receipts to verify the information provided on your tax return is correct. The IRS won't let you know if you missed a deduction, but they will let you know if you owe them more money.
Did you know that the IRS audits 1% of all the tax returns it receives? I know what you're thinking, "That's not very high, it probably won't happen to me." As an entrepreneur you are ten times more likely to be audited than other taxpayers; if you make more than 250K per year that likelihood doubles; if you make more than 1M it doubles again. Still think you're not likely to get an audit during the lifetime of your business?
Integrity allows some missed documentation to slide. Think of missing records as bees. Two or three bees to an auditor are annoying, but they can ignore them. 10-20 bees and the auditor is seriously upset and unlikely to accept your explanations for poor record keeping. To an auditor, bad records are a sign that you are doing some shady business, even if you aren't. It can also cost you money. A lot of money.
If the IRS determines your company owes more than $5,000 or 10% of the original tax paid after completing the audit, you'll have to pay the amount owed, plus a 20% penalty. That's how people go bankrupt and close the doors of their business for good.
The great thing is this scenario is simple to avoid! As part of our services at Digit Keeper, our clients use an app called Receipt Bank. You can use the app to take pictures of any receipt for a business expense, click submit, and then throw the receipt away. Once you submit the photo, we use our integrated bookkeeping system to attach the receipt to the right expense in your books. Then anyone can select the expense and see precisely what it was for. This type of record-keeping is fantastic. It's simple, in the cloud, and, let's face it, a little sexy. Now you can look cool at a business lunch by using technology few people know about. Look at you, you trendsetter.
This type of receipt tracking system can also help you input bills from vendors and track those expenses as well. If you don't have a printed receipt, you can give the vendor your personalized receipt bank email and have it input that way. And if you already have a ton of receipts in that shoebox that you need to scan? Don't worry; it's not too late! Mail them to Receipt Bank, and they'll scan them for you.
Receipt tracking is one of the simplest things you can implement for your business and has some of the biggest benefits. Making your receipts digital reduces your stress. They can't fade or get lost, and they're automatically matched to the expenses in your books, so you, your accountant, or an auditor don't have to hunt them down. Apps like Receipt Bank keep your bookkeeping clean, help you maximize your tax deductions, and sail through an audit with no stress.
(And we're not being compensated for this glowing review of Receipt Bank. We just really, really love them.)
Want to start saving money and increasing profits via easy record-keeping? Talk to us.
