Recently when speaking to a few of the attendees of our small business workshops the topic of business expenses came up and one of the attendees was under the impression that all a business owner needed to validate an expense was their bank or credit card statement. Unfortunately it gonna take a little more than that for it to fly with the IRS.
The IRS defines a business expense as a cost that is ordinary and necessary to carry on the trade or business. Expenses are typically deductable if the business is out to make a profit (i.e. not a hobby). If a small business owner is audited, and a review of the business expenses is warranted, it is important for a small business owner to have more than just their bank or credit card statements to substantiate their purchases. The IRS is looking for proof that the purchase was for a business purpose and most statements only provide the date, amount, and the vendor, not what was purchased. A prime example of the IRS not allowing statements as evidence of business purposes can be uncovered in KEITH J. FESSEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent a quick Tax Court case that I recently came across (I like to read stuff like this).
In summary Mr. Fessey was not allowed a large portion of his business expenses due to his poor recordkeeping. So what is a small business owner to do?
Small business owners need to keep the receipts and attached them to each statement so that they are easily recognizable and locatable. There are times however that the receipt can fade and the ink is no longer readable. In these cases, a small business owner can use technology as a backup. By scanning the receipt (and the bank/credit card statements) into a file and either store the file within their accounting software, their hard drive or the clouds. There are a great deal of scanning vendors out there for small businesses to use so be sure to Google “receipt scanners” to locate one for your small business.
By retaining your receipts and having a backup, a small business owner can ensure that their bank and credit card statements are not too broad for the IRS.
For more information on business expenses be sure to speak to your tax professional or read IRS Publication 535.
The Tech Accountant