“I don't need receipts. I can use the bank statement.”
How many of you have said that? I’m raising my hand because I once did. I specifically said that when I was working as an auditor for a CPA firm, where supporting documentation was, and is, a must.
Many freelancers, entrepreneurs, and other small business owners have made the above statement.
And that statement is not wrong. However, it can be improved upon.
Your bank statement is fine. With receipts, however, the integrity of your financial data goes from “fine” to “WHOO HOO!!” because the receipts support the data within the bank statement.
Let’s go into detail on why you should save your receipts:
Receipts make it easy to track deductions for tax purposes because they help you categorize what you buy as well as the associated cost.
Here is an example: You spend $300 shopping on Amazon for your business. The receipt not only shows $300 as the total, it also shows $75 for coffee, $50 for a business related book, and $175 for t-shirts to provide to employees.
In this example, the tax-deductible categories are office supplies (coffee), education expenses (business related book), and employee uniforms (T-shirts), respectively.
Catch and Correct Errors
A colleague of mine went to lunch. His receipt shows that he spent $4.92, which he also signed for. When he looked his bank statement, he saw that his lunch was processed for $492.
Using my receipt, I returned a book that cost $52. I went online and saw that my bank posted $5.20 as the return amount.
These mistakes happen all the time! Having your receipt increases your ability to get those transactions corrected.
Monitor and Track Expenses
Receipts also give you the ability to closely monitor your expenses because they provide the breakdown of costs.
Using the same Amazon example, it’s nice knowing that you spent $300 from Amazon, as listed on your bank statement. However it is better to know that you spent $75 on coffee, $50 for a book, and $175 on t-shirts.
Over the course of a few months, you might notice that your business has been, for example, ordering a lot of t-shirts.
Because of the receipt, you will have the ability to investigate further in order to understand why and how often your business purchases t-shirts.
Proof That The Expenses Are Appropriate
Do your employees travel for business? Receipts can act like a Jiminy Cricket, also known as one's conscience. Sure this concept might be “old school” however it is all too human to go crazy with someone else’s money.
Using a real life example, say you review your employee’s hotel receipt and see some charges for porn…and your business is not involved in the porn industry…you will know not to reimburse that employee for those charges.
Or, if the charges are for you (no judgment here), you know to place that expense as personal while the rest is for business.
Finally, if you establish a daily allowance for your business travel, receipts provide proof that the allowance was honored.
IRS Audit Readiness
Okay, back to the IRS.
IRS audits do happen, even if you are a W-2 employee (true story!). Unfortunately bank statements are not considered to be good enough in the case of an audit. However, your receipts and other supporting documentation are.
Keep the receipts associated with any item that can be deducted.
Stay tuned for the next article where we (yes, we are in this together!) share tips for saving receipts.