Did you know that the burden of proof is on the taxpayer? WTF does that mean? That means in order to be able to deduct your expenses, you have to be able to prove (substantiate) certain elements of them. Without the proper documentation, your expenses could be disallowed. Don’t let that happen to you by making sure that you are properly saving your business receipts.
Why save receipts in the first place?
The IRS states here how you can meet your burden of proof:
“Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses.”
What this all means is that if you’re audited, you need to be able to substantiate your expenses. If you can’t, your expenses will be disallowed – regardless of how legitimate they are.
Options for saving receipts
There are 2 basic ways to save your receipts – paper or digital.
How to save your paper receipts
Even though the real answer to this is “Don’t – save them digitally” we will still explain how to save paper receipts, if you choose to go this route.
We have to warn you that receipt ink is notoriously fast fading. If you solely rely on paper receipts you could end up in a situation where the receipt is blank and worthless. Please save your receipts digitally, not in paper form only.
If you do choose to save paper receipts:
- Keep them organized by month and year. If you used envelopes to store them, you’d have 12 envelopes of receipts for each year. Why do we suggest this? If you ever needed to find a receipt, you’d at least be able to narrow it down instead of digging through a shoebox with no rhyme or reason.
- Keep your receipts out of the heat and light. Keep them in a dark, cool place – preferably a closet, to help prevent fading.
How to not save your digital receipts
Before we get into the best way to save your digital receipts we want to discuss how to not save digital receipts, because it’s worth a conversation.
Do NOT save your receipts as embedded into transactions in your accounting software. Can you even believe we are saying this?
We know that QuickBooks Online commercials would lead you to believe this is the best method and honestly it’s not. Think about it for a second – if your ONLY method of saving receipts is attaching them to hundreds or thousands of individual transactions, what are you going to do if that QBO goes under? Or if their data gets messed up? Or if you ever want to change accounting softwares?
Also, if you ever did need the receipts for an audit, it will require a ton of clicking to get every. single. one. downloaded, saved, and compiled into an audit packet.
We think attachments on transactions can be great as a backup in addition to an alternate receipt storage method. In our opinion, this should never ever ever ever ever ever (ever!) be your one and only method.
If you’ve been saving your receipts in this way, that’s honestly commendable. Just please make sure you are saving the receipts somewhere else, too.
How to save receipts digitally
In the same way paper receipts can get out of control with piles in shoeboxes, digital files can get messy too. When crafting your digital file system, try to keep the end result in mind. If you’re ever audited, what is the best way to easily find and compile specific receipts in the future? Audits are stressful enough, you’ll regret making yourself need to chase down random receipts buried in your inbox in the middle of a tax nightmare.
Also, whichever method you choose, make sure you are backing it up on the cloud, preferably across multiple accounts to prevent any loss in data.
Saving receipts digitally using HubDoc
Our favorite method of saving receipts digitally is by using HubDoc because it’s easy to automate the otherwise painful process of keeping such detailed records. HubDoc is equipped with OCR and can extract key information from your receipts, saving you the time and energy of naming and organizing your receipts.
Want to know what this means in action? Let’s say you forward a receipt from ABC Company from April 14, 2023 for $1,000 to HubDoc. This is your first purchase ever with ABC Company. HubDoc will:
- Scan the receipt
- Rename the file to “ABC Company_2023-04-14_1000”
- Create a folder within HubDoc titled “ABC Company”
- Move your receipt to that folder
So – you did nothing more than forward an email and HubDoc did the rest. Please imagine having your receipts organized in subfolders broken down by vendor, and further broken down by date and amount. With almost no effort on your end. Sounds pretty great, right?
Some more HubDoc perks and highlights:
- All HubDoc accounts come with a custom email address, which makes it easy to get receipts out of your inbox and into HubDoc. Plus, with creative thinking and mail forwarding rules, you can automate this process.
- HubDoc has an app which makes it easy to turn paper receipts into digital receipts.
- Everything in HubDoc can be backed up to multiple cloud storage sites such as Google Drive, Box, and Dropbox – simultaneously.
- You can push receipts from HubDoc to Xero or QBO, making it easy to have your receipts in files and attached to individual transactions in your accounting software. This process can also be automated with rules.
Tips for substantiating auto, meal, and travel expenses
If you use your vehicle for work, you will want to track mileage (MileIQ is great for this!). But, more importantly than just tracking mileage is being able to prove you actually had the vehicle. We’ve heard stories of taxpayers not being able to deduct their auto expenses, even with logs of mileage records, because they could not provide proof they actually had the vehicle or what the total mileage was for the period.
The best and easiest workaround for this is to get a receipt at the pump, put the receipt on your dashboard near your odometer, and take a picture of the fuel receipt next to your mileage. This documents the date and mileage.
Vehicle registration renewals and oil change/maintenance receipts are also good for this purpose.
Before photographing your meal receipt, write on the top of the receipt who you dined with and what you discussed.
All business travel must have the place, dates of departure and return, number of days away from home on work, and business purpose of the trip. This sounds obvious – however, when faced with a ledger of various travel expenses, without proper documentation, it can be difficult and tedious to match everything up by trip. You might have flights booked in February with the lodging, meals, and taxis booked in November.
If you have any questions on setting up best practices for properly saving your business receipts, please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.