If you are a small business owner, it is not enough to record the appropriate expense. We also need to keep appropriate documentation to support the deduction. The IRS does not specify the exact documentation you need for each expense your business incurs. Not all auditors are created equal, so it's best to assume a stickler will be looking at your records and keep documentation accordingly.
The IRS is not going to look at your documentation unless you are audited. In an audit the IRS comes in and compares your IRS tax returns to your supporting documentation. Supporting documentation takes many forms. It can include accounting records, bank and credit card statements, cancelled checks, invoices and receipts. The IRS will look to see if you actually made what you said you made and if you actually spent what you said you spent, as well as verifying these are legitimate business transactions and not personal.
Your accountant may or may not ask you for your supporting documentation when preparing your accounting records. A quality tax preparer will ask for documentation to be sure that the information you are providing is complete and accurate. If your accountant is preparing your taxes, they may be held accountable if they knew or should have known of errors or omissions on your return. Ensure your tax preparer signs your return and does not have you sign as though you prepared it yourself.
When deciding what documentation to keep, ask yourself if your documentation proves the expense was incurred and that it was for your business. Imagine showing the documentation you have to an auditor and if you would expect them to be able to tell from the documentation itself that this was a legitimate expense used for a business purpose.
Monthly Recurring Expenses
Some expenses are the same amount every month. Examples of this would be a monthly website subscription, a recurring advertisement or monthly fee for an accounting system. If you pay a monthly fee, a bank or credit card statement showing the date, vendor name and amount may be sufficient. There is little doubt you purchased your Quickbooks monthly subscription when $20 hits your account every month on the 10th with the description "Recurring payment authorized Intuit Quickbooks." You would also be able to show the IRS auditor you use Quickbooks for your accounting books.
When deciding appropriate documentation for non-recurring expense, it's important to look at what the documentation shows. If you buy something at the office supply store, the credit card or bank statement is not going to show what you purchased. It will only show the name of the store, date and amount. You could tell an auditor you purchased a printer but the auditor's job is to verify, not take your word for it.
The appropriate detail for this purchase is a detailed receipt. That will show the name, type and cost of the printer as well as the date and location purchased. The auditor can verify that printer is sitting in your office, not at your house. Without the detailed receipt, the auditor may suspect you bought a printer and something personal as well. The auditor will want to see the receipt to know only business expenses were deducted.
Proper documentation for non-travel business meals includes the date, what was purchased, amount, location, who attended and the business purpose. Meals may be disallowed if not for a business purpose as personal meals are not deductible. The credit card receipt from your meal will not show sufficient detail so if you did not save the detailed meals receipt, write down the additional information. If you did save the detailed meal receipt, write who you ate with and the business purpose on the receipt or create a log with this information. Without this an auditor can question if the expenses was a personal meal rather than a business meal. See Business Meals and Parties: Full vs. Partial Deductions for more information on meals deductions.
Entertainment expenses are no longer deductible. Thus, if you incur entertainment expense and meals together you need a separate receipt for the meals to show the exclusive cost of the food. Receipts that combine entertainment and meals will not be accepted.
The IRS has a separate rule for travel expenses. See IRS Publication 463 for more details. There are three times when you do not need a receipt for a travel expense. Note, these exceptions do not apply to non-travel expenses.
Your travel expense, other than lodging, is less than $75.
You have a transportation expense for which a receipt isn’t readily available.
Per diem rates represent an amount you can reimburse yourself when you travel in lieu of actual expenses for meals and incidental expenses. Incidental expenses are fees and tips given to servers and service providers. Self employed persons can only use the per diem rate for meals and incidental expenses (M&IE), not to include lodging. Lodging expenses need to match actual expense incurred and you need a detailed receipt. The M&IE per diem rates for the 48 contiguous states are published by the GSA. The per diem amount is less on the day of travel than for a full day away from home.
Note: The GSA only lists per diem rates for the 48 continuous states. For Alaska, Hawaii and US territories use the the most recently dated Civilian Per Diem Bulletin and search for the location to which you are traveling. For foreign travel, use the Office of Allowance Foreign Per Diem Rates by Location lookup. Be sure to use the M&IE rate.
Per Diem Example: Let's say you are going to the Not Your Typical Psychotherapist Summit in Ft. Lauderdale, Florida in May 2020. You book your flight to go the day before the conference starts so you arrive bright and fresh on May 27, 2020. You will leave the evening of May 30, 2020. Rather than bother with tracking your travel meals, you decide to give yourself the per diem rate. You use the GSA Per Diem Lookup. Enter zip code 33316, the location of the hotel and the dates of travel. On the search results page, you scroll down to the section that says "Meals & Incidentals (M&IE) Breakdown" and see the per diem rate for meals and incidental expenses is $66 for a full day, and $49.50 on the first and last day of travel (travel days are 75% of the full day rate). Your per diem rate is:
May 27: $49.50
May 28: $66.00
May 29: $66.00
May 30: $49.50
Now you can eat during your trip and not keep track of what, where or how much! See Business Related Travel: What is Deductible if you are planning a business trip.
There are no receipts for mileage but you do need to create your own documentation. This can be in the form of a log or an app. The documentation needs to include the start and end location for your trip and the business purpose of the trip. The standard mileage rate is updated each year. See Business Use of Your Car: Mileage and More for additional details.
Your documentation does not have to be in paper form. You are free to scan your receipts in and shred the paper. Bank and credit card statements are usually saved by the financial institutions electronically which is sufficient.
Missing or No Receipts
It may occasionally happen that you lost or never received a receipt for an expense, or that through a disaster your documentation is lost. First, write down as much as you remember about the expense(s) and keep any documentation you do have. If your purchase is listed online, you may be able to print out the online advertisement. It is up to you and your tax preparer to decide if you are comfortable deducting the expense.
Ultimately you want to keep reasonable, sufficient supporting documentation to show you 1) actually incurred the expenses you deducted on your taxes and 2) the expense was related to your business operations.
Questions: email [email protected]
Jennie Schottmiller, LMFT, CPA is a licensed marriage and family therapist who practiced as a CPA prior to becoming a therapist. She has an active solo therapy practice and runs a facebook group for clinicians and offers courses to help small business owners with accounting, tax and financial analysis matters.
Disclaimer: This blog is for education only. Please consult with a qualified professional when you have any questions about your personal accounting, tax or legal situation. Information contained in this post is for informational purposes only and not intended to replace professional advice.