Across America, 1099 contractors and freelancers everywhere continue to stuff their wallets & glove compartments faithfully with paper receipts. However, the idea that you must have receipts for every tax deduction is a common misconception when it comes to self-employment taxes.
Keeping track of paper receipts is not only pointless, but also quite stressful. Little pieces of paper are easy to misplace, liable to get torn or smudged. By tax time, nine months later, the ink has likely rubbed off and paper mangled into crumpled pocket lint.
For the sake of stressed-out freelancers everywhere, let’s show that you can use a business expense tracking app and put this misconception to rest -- once and for all.
Click over to the IRS website and you’ll find a very clear outline of what constitutes a sufficient record for a business tax deduction. Basically, this kind of document needs to show what you bought, when you bought it, and how much you spent. It’s not rocket science.
And guess what? Nothing mentions needing paper receipts. Instead, the IRS mentions credit card statements, and then goes on to state, quite bluntly, that “Electronic information management has become the standard in the private sector…instead of continuing to use traditional paper books”.
For an organization not exactly known for being progressive, that’s about as clear as it gets: paper is out.
Let’s play a game. What do we all have that automatically records our purchases? That’s right -- a credit card and bank statement. It contains all the critical information -- what, when, and how much.
Even cash purchases don’t need receipts, as long as they’re “reasonable and ordinary.”We call this principle the “Cohan rule,” established in the famous Cohan vs. Commissioner Circuit Court of Appeals case. As a rule of thumb, most goods under $75 count.
Contrary to popular belief, the IRS isn’t some kind of uncompromising bully. Unless you’re guilty of tax evasion, there’s no need to worry. Yes, they will ask for documentation, but they also prefer that documentation to be digital. They are legally required to accept digital forms of proof, including bank and credit card statements.
At worst, you might need to look up receipts for your bigger expenses -- a new laptop from Best Buy, a desk from Amazon -- that kind of thing. Still, most merchants have digital records. Emails and calendar notes might also be requested.
The only exception to this rule is, essentially, large cash purchases.
If you took a dozen clients out for lunch at the best steakhouse in town and then paid with cash, you should probably hold onto that receipt.
Even so, you’d probably be okay without it. Modern technology leaves behind enough digital breadcrumbs to constitute the proof you need. Calendar events, emails, or just giving the restaurant a call can all take the place of a paper receipt.
It’s amazing how fear and misunderstanding complicate our lives. If you’re self-employed, odds are that you have enough things on your plate as it is. Oh, and if your accountant is giving you trouble, get a new one. When there’s no downside to being hyper-conservative, it’s no surprise that some accountants continue to insist on the recordkeeping practices of the 1930s.
At Keeper Tax, we’re on a mission to expose these kinds of regressive misconceptions , whether it’s the mileage tracking myth, the home office myth, or the business meals myth. We just hate to see hard-working freelancers and contractors held back from getting the tax savings they deserve. You can bet that corporations claim every write-off possible -- and so should you. You deserve it.
Keeper finds tax deductible expenses among your purchases ... automatically! Save $1000s a year claiming the tax write offs you’re eligible for as a contractor.