Protect Yourself: Digitize Tax Receipts

When would you call a credit card statement or check book, naked? If receipts or invoices do not support a credit card statement or check book, it is referred to as ‘naked’.

Make digital receipts to save time and deductions.

Lack of proper documentation is a significant reason taxpayers lose deductions during IRS audits.

Regardless of whether it is sophisticated accounting software like QuickBooks or traditional handwritten ledgers, there is one key understanding that is essential to grasp. Your accounting records are not the only proof that you are entitled to any tax deductions. You need backup documentation to prove your expenses to the IRS.

Even today, a receipt is considered the best documentation; however, storing and keeping track of it can be a hassle, especially when dealing with a large number. The good news here is that you can streamline your receipts by making digital copies.

Why do you need receipts?

For all tax-deductible business expenses, you need to prove both:

What you bought, and
That you paid for it.

Proving that you paid the money is easy when you pay by credit card or check.

Depending on how you operate your business and whose name is on the credit card, the credit card charge can count as a payment of the money and a tax deduction on the day of the charge.

As a cash-basis taxpayer, you deduct the money spent by check on the date you write, mail, and/or deliver the check. The cancelled check serves as proof of payment.

But a cancelled check or credit statement alone does not prove to the IRS that your purchase was business-related. All a cancelled check proves is that you spent the money on something. It doesn’t show what you bought.

You can write a note on your check stating what you purchased, but why should the IRS believe what you write on your check?

When you combine a cancelled check, credit card statement, sales receipt, invoice, cash register tape, or similar document with the item listed on the receipt, you have concrete proof that you purchased the item. It is straightforward: the check or credit card statement proves that you made a purchase, and the receipt confirms what that purchase was.

Lawmakers pay the IRS to be suspicious. By statute, tax law requires the IRS to look at specific details when you deduct travel vehicles, meals and gifts. In general, for these expenses, you need to document the following:

Date
Amount
Place
Business purpose
Business relationship

You can use a receipt to establish all five facts, but be cautious when selecting the receipt. You want the receipt with the details.

For example, you have a business lunch with a colleague where you learn how to manage your business better. You pay the bill with a credit card. The waitperson brings three receipts to the table:

Merchant copy
Customer copy
Check copy (shows items purchased and number of guests)

Among the three, the most critical receipt copy for your tax records is the check copy because it proves exactly what you purchased and how many people were present. On the merchant copy, you likely enter a gratuity. Do the same on your customer copy so that the total from the customer copy is the total charge that appears on your credit card statement.

Now, with the customer copy and the check copy, you have the name, location, amount, date, and nature of the business meal.

Thus, you already have three of the five facts you must document.

Next, you need to describe the business purpose and business relationship simply by recording

The names of the people you dined with, and
Why you dined with them

You can write the who and the why directly on your receipt or credit card slip before digitizing it or in your appointment book or calendar (digital or hard copy).

The $75 Rule

The IRS does not require that you keep receipts for vehicle and out-of-town overnight travel expenses that cost less than $75. But you must still document the five facts listed above. If you are using cash to pay the costs for which you don’t need receipts, the IRS might want to see a nice audit trail that shows where you got the money for those under -$75 expenses.

Why are digital receipts the best?

According to an old Chinese proverb, the palest ink is more reliable than the most retentive memory. Receipts printed on thermal paper fade over time. When the IRS audits your returns sometime later, you could realize that most of your paper receipts are unreadable due to this fading problem. The answer lies in taking a photocopy of your receipts for hard copies. Another easier way is to make digital copies.

For digital copies, you need a scanner. But today, scanners are no longer required. If you have an iPhone, iPad, Android device, or another smartphone with a camera, you can easily take digital photos of your receipts.

Since you likely carry your phone with you, this is a straightforward and convenient process. For example, after a business dinner, you can make a digital copy of the merchant receipt and the customer’s check and then discard the paper copies. Now that you have a digital copy, you don’t have to worry about losing the paper, storing the paper, or having the ink disappear from the paper.

There are cheaper smartphone applications available to copy and track receipts, such as Shoeboxed.com, Expensify, Dext, Zoho Expense, SparkReceipt, Neat, and Fyle.

Using the above apps, you can take digital photos of your receipts with your smartphone and add notes or other information. Then, upload these digital receipts to an online account for sorting and permanent storage. The apps can automatically categorize your expenses and then export your data to QuickBooks, FreshBooks, Quicken or other accounting software.

BergerCPAFirst, with over 30+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.