If you want to take deductions on your taxes, business receipts are essential. Every dinner you go to and pay for with a client may count towards your business receipt expenses. The question is, do certain expenses require more than a receipt if you want to use them as a business expense?
There is an answer to that question and more about business receipts. There’s also the criteria you use for claiming them as a business expense or business tax deduction. The information provided below answers some of those questions.
Business receipts need to be kept, recorded, and used in any accounting program. That’s because they are an essential part of keeping track of your business expenses for tax deductions. Business receipts are so important the IRS has a whole page dedicated to how long you need to keep business receipts on their website.
How Long Should You Keep Your Business Receipts?
The IRS suggests you keep your business receipts and any paperwork backing up the receipts for three years. But there are exceptions to the three-year rule. The exceptions for how long to keep your business receipts are:
- You keep your business receipts six years if you don’t report all your income to the IRS.
- When the income you didn’t report is more than 25% of your gross income, you need to keep your business receipts for six years.
- If you don’t file your tax return at all or skip some years, keep your business receipts and back up paperwork indefinitely.
- If you file a fraudulent tax return, keep your business receipts and back up paperwork indefinitely.
Many accountants and bookkeepers use the saying, ‘if you had too much fun, you can’t take your business receipt as a deduction.’ There is some truth to that statement.
The Four Informal Rules of Business Receipts
There are four informal rules about keeping business receipts. These rules go over what you can and can’t use for tax deductions even if you have the business receipt. They are as follows:
- Talk about business. You can take the tax deduction if during a business dinner you talked about business. But, if you talk about everything except business, then don’t try to take the dinner receipt as a tax deduction.
- Stay sober. The business receipt shouldn’t show a large volume of alcohol being purchased. The IRS views large quantities of alcohol as a party and not a business dinner or event.
- If you want to deduct 100% of a party you are having as a business expense, you need to open up your party to clients, employees, and the public. 50% can be deducted if the party is for clients, possible clients, and independent contractors you do business with.
- Don’t use a receipt for a 5 star or first-class restaurant or event if your business budget is conservative.
Keep your paperwork and be prepared for the IRS to do an audit at all times. It is better to be safe than sorry.
More Information About Business Receipts
There are more rules and tips about business receipts that can help you with your business’s overall accounting, tax returns, and profits. When you are ready to move forward with growing and developing your business, reach out to us. We’ll show you a path to success!