A credit card statement shows when you spent, how much, and with whom. It doesn't show what you bought, and that missing detail is what a tax auditor asks about. Stephen Brown covers four reasons receipts matter: proving deductibility, making coding easier, approving employee and card spend, and being ready for a financial audit. He closes with the three categories of app that capture receipts so you don't need a filing cabinet.
Income Tax
Why Keep Receipts for Business Expenses
5 min
Transcript
0:00 Four reasons to keep receipts
I'm Stephen Brown with LedgerGurus. We free businesses from the burden of doing their own accounting and empower them to build with better numbers.
In this video I'm going to talk about why keep receipts for business expenses. There's four key reasons to keep receipts. Tax justification, accounting simplification, expense approval, and audit readiness. After discussing these four points, I'm also going to discuss some options for automating the scanning and storage of receipts.
0:38 Tax justification
Reason number one, tax justification. If you go look at the IRS website, you're going to see that they recommend keeping all sorts of documentation to support your business financial activities.
When it comes specifically to receipts, you're looking to prove that an expense occurred and that it was tax deductible. A receipt answers four key questions. When the transaction occurred, how much it was, whom it was spent with, and most importantly, what it was spent on.
Now if you get a tax audit, an auditor may ask you for supporting documentation, and they're going to want you to produce that information that can support the evidence of that tax deductible expense. You may be able to prove that that expense occurred by your credit card statement, but the statements are missing the what. The receipts prove what was being spent on.
And so by having those receipts, and having them readily available close to your accounting information, it is going to be easier to prove in a tax audit that what you spent was actually deductible. What was being spent is seen most acutely with something like a Walmart. Were you buying groceries for your home, or printer paper? The receipt will tell the story.
1:57 Accounting simplification
The second reason to keep receipts is accounting simplification. By having the receipt readily available, it makes it easier to answer the question, what was this expense for? Whether that's you or your accountant, you want to be able to have that information somewhere that can be easily accessible.
2:16 Expense approval
The third reason to keep receipts is for expense approval. Now expense approval can come in the form of reimbursement of employee expenses, or reviewing corporate card expenses. In either case you need to make a determination, was that spend appropriate?
Let me give you a story here. Years ago at a Fortune 500 that I worked at, I had a colleague in my office tell me about some guys in the field that loved to go to a strip club for dinner. Now that was against the corporate policy for appropriate behavior, but they were hiding it. Now the receipt may or may not have told the story, but if the name was something inappropriate you would probably know that was not a good use of spend.
The other thing that you'll find is having receipts will be more accurate, because an employee could fudge that amount, maybe raise the amount a little bit and get a little bit extra reimbursement. Having the receipts will allow you to also determine the appropriate amount of reimbursement.
3:19 Audit readiness
The final reason to keep your receipts is for audit readiness. Now an audit, unlike a tax audit, is looking at if the spend actually happened, versus was the spend tax deductible.
An auditor is going to go in and look at your accounting information and try and determine if there's supporting documentation that proves that spend occurred. So the receipts will provide that evidence of spend. It will also show you the what. So if your proof of spend was a credit card statement, you're still missing the what.
An auditor can go in and start poking around anywhere in your accounting information and say, tell me more about this, tell me more about that. By having the receipts you're ready for that audit and can support that the information you provided is accurate.
4:05 Apps that capture receipts
Now before you go out and buy a big filing cabinet, let me tell you there are some better options for keeping your receipts, and that is digital. There are a number of apps that will allow you to capture your receipts. Let me talk about three types of apps.
The first is your accounting software. QuickBooks Online, Xero, both have great apps that allow you to take a picture of those receipts and store it in your accounting software.
The second group of apps are receipt focused apps. This would include things like AutoEntry, now by Sage, Hubdoc by Xero, and Receipt Bank. These apps go beyond just simple receipt capture, but also look at extracting the information from those receipts automatically and then allowing you to automate those pieces of information, either pushing them into accounting software or other apps for financial usage.
The final group are expense management apps, things like Expensify and Concur. They go a step further from capturing the receipt image and extracting the information, but also look at additional steps like approval of those receipts.
In any case, you should be using some sort of automated tool to capture receipts and store them.
If you found this video helpful, please like it, ask me a question in the comments, and subscribe to our channel. And if you're struggling with managing your receipts or your accounting, reach out to LedgerGurus for help.