Many small business owners saddle themselves with boxes of paper receipts for fear that an auditor might disallow electronic records. In fact, the Internal Revenue Service has advocated accepted “electronic storage systems” for business records and tax-related documents since 1997. As long as you follow all five of these guidelines, you should be able to shred your paper trail without fear.
5 Small Business Tax Tips
1. Collect all the information the IRS might want
According to the IRS, a valid electronic receipt must contain the name (and preferably the address) of your vendor, the date of the transaction, and the amount you paid. In your notes related to each receipt, you should catalog what you purchased and its use in your business, in case an auditor asks for this information later.
2. Keep your receipt database current
IRS officials recommend entering receipts and notes into your system as soon as possible after you make a purchase. That way, you’re not hard pressed to come up with business justifications if you’ve forgotten why you made a purchase, or if the staff member who authorized an expense has left your company.
3. Make regular data backups
The IRS requires businesses to make routine, secure backups of all financial documentation stored electronically. Best practices at many businesses now include keeping an online backup and a local backup on a secure, external hard drive. Make data retrieval procedures a routine part of your company’s disaster recovery planning, and test your backups throughout the year.
4. Make sure you can still print hard copies
Because a handful of IRS regulations still require that investigators work with printed materials, your receipt storage solution should be capable of printing legible hard copies of your scanned receipts. Make sure that your receipts look good when you first add them to your system, since blurry or faded receipts won’t print well.
5. Track the people you entertained
IRS rules regarding meals and entertainment expenses require you to list the names of everyone your company treats to a business lunch or dinner. You’ll streamline your internal reports and your potential audits when you capture your guests’ employers and an agenda of the business you discussed during your trip or your meal.
Although you can implement a basic receipt-tracking system with a scanner and a spreadsheet, a host of online services want to earn the privilege of handing this task on your behalf. Lemon and OneReceipt both focus on receipts you get via email from hotels, airlines, rental car agencies, and retailers.
Shoeboxed, Expensify, and Planet Receipt enable you to scan (or mail in) paper receipts for permanent, online storage. Many of these tools also offer companion smartphone apps that let you snap pictures of cash receipts and other paper trails that normally don’t get backed up with credit card statements.
Joe Taylor Jr. has covered personal finance and business for more than two decades. His work has been featured on NPR, CNBC, Financial Times Television, Fox Business, and ABC News. He recently completed a personal finance book entitled The Rogue Guide to Credit Cards; (Rogue Guide Books, 2012).
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