The Receipt Rulebook: What the IRS REALLY Cares About
The IRS doesn’t want your junk drawer, they just want proof of everything. That’s why keeping your receipts is so important. If you are asked to provide proof that you really did spend $700 on a new computer for your business, you want that on hand!
The IRS’s Core Question
Essentially, the IRS is asking, “Can you substantiate this deduction?” They need to know:
What you bought, including the amount and vendor
When and where it was purchased
The purpose of the item and why it was necessary for your business
Remembering these three things will help you determine what you actually need to save.
Trouble Spots: How to Document Potentially High-Drama Items
Certain deductions tend to trigger a closer look into your expenses. These fall into three main categories; meals, travel, and mixed-use expenses. These are areas the IRS is more likely to look at and double check, so having proof on hand is necessary.
Business Meals
We’ve all heard people say, “I run my business. There we talked about business, so I can deduct this lunch!” It’s not quite that simple. Generally, the meal needs to be ordinary and necessary for your business. It could be with potential clients or employees and shouldn’t be over the top. Your tax pro can help you determine whether your meals are an issue or not.
Travel
Are you traveling strictly for business or are you throwing in some pleasure, too? It’s natural to want to enjoy your time in a new location and if you have a meeting somewhere, why not check out the entertainment in the area, too?
Keep all your airfare, hotel, and transport receipts, as well as your itinerary on the trip, so you can show exactly what you did and what portion counted for business purposes.
Mixed-Use Expenses
Anything that you use both for personal and business use can be a problematic deduction. This category includes things like your phone, car, home office, and internet. To properly deduct from your taxes, you need to calculate your business-use percentage and ensure you can show how you reached that percentage.
Next, keep the receipts and calculate the usage on each one. If you use your vehicle for business, for example, keep gas receipts, a car mileage log, and note what purpose each trip had. In the end, you may never need this, but it’s far better to have on hand than to scramble at the last minute.
A Simple 3-Step System
It’s super simple to stay on top of your expenses if you follow a system. Whether you choose to use software or a shoebox, you need to save the receipts for each expense you plan to deduct.
Step 1: Snap a photo of the receipt
Step 2: Upload to your app or add to a tax folder
Step 3: Label it with a category and note for explanation
It’s also a good idea to spend a few minutes each month to make sure your system is up-to-date. Come tax season, you’ll be glad of it!
Still Confused? Let Ask Anna Tax Help
Don’t get called out by the IRS come tax season. Contact Ask Anna Tax to find out how we can help you stay on top of any deductions.
