Do You Have To Keep Paper Receipts For Taxes? The Great Tax Myth
Across America, 1099 contractors, freelancers, and small business owners everywhere continue to stuff their wallets & glove compartments faithfully with paper receipts. However, saving your paper receipts for taxes is a common mistake when it comes to personal or self employment taxes.
Keeping track of paper receipts for taxes is not only pointless but also quite stressful. Little pieces of paper are easy to misplace, liable to get torn, smudged, lost or thrown away. By tax time, nine months later, the ink has likely rubbed off, and the paper is mangled into crumpled pocket lint. Leaving you exposed and vulnerable for IRS audits and large tax bills.
For the sake of stressed-out small business owners and freelancers everywhere, let’s put this misconception to rest. The easiest way for taxpayers to save receipts for taxes is to use a business expense tracking app that lets you automatically organize and store them online.
This way they are safe from sun damage, floods, fires, natural disasters or an aggressively clean spouse with OCD tendencies. Additionally, they are accessible from anywhere with a data or internet connection.
This guide will show you:
- IRS guidelines on receipts.
- The personal and business expenses you must save your receipts for.
- How to retrieve your receipts during a dreadful IRS audit.
- The best way to store your digital and paper receipts.
IRS Guidelines on Saving Receipts For Taxes...
The IRS legally requires you keep all your records used to prepare your taxes for the last three years from the date you filed the return. The reason is the IRS is allowed to audit you within the last three tax years. If they find a large error, they will dive deeper into your past until they find all your dirty little secrets. It is advisable to save your records for the last eight years for both your personal and business taxes.
Your books must show your gross income, as well as your deductions and credits. For receipt record keeping, the IRS concludes that you need a record and proof of payment. Click over to the IRS website and you’ll find a very clear outline of what kind of records you should keep. Basically, your record needs to show what you bought, when you bought it, and how much you spent. The IRS accepts receipts, canceled checks, copies of bills, and bank statements to verify expenses.
As odd as it sounds, nothing in their guidelines 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”.
The IRS assumes that you will have an electronic record of your expenses. But just because everyone else is always using a credit card does not mean you can’t still use cash. You just have to take responsibility for saving your receipts in the most secure way.
The most simple way to organize your business is to use an app that automatically classifies and sorts your tax deductible expenses. Have all your receipts and expenses tracked in the same place to avoid any transactions slipping through the cracks. Bonus points if you have a free personal bookkeeper approve your tax deductible expenses, more on how you can do that later.
How To Organize Receipts For Taxes
In this section you will learn the best way on how to organize receipts for taxes or keep a detailed record of your expenses. We will also settle the paper receipts versus bank statement debate, provide the exact IRS guidelines for expense tracking as well as the personal and business deductions you must save your transaction history for.
Paper Receipts vs Bank Statements
Stop being stressed out about losing your receipts. They will not prevent you from being able to write off expenses to lower your tax bill. In the future use your debit and credit card because bank statements are the future.
The IRS allows you to use bank statements to track receipts for taxes. They only need to know what the transaction was for, when it happened, and for how much. This method is approved by the IRS but can be a nightmare if your business and personal expenses are mixed or if you pay primarily with cash.
You need an accounting software that will securely connect to your bank account using secure end-to-end encryption, so it can sort your transactions into personal, business and tax deductible. This is incredibly useful because you don’t have to spend time going over each transaction to find your tax deductible expenses and calculate the percentage owed yourself.
What the IRS Says About Receipts For Taxes...
Your books must show your gross income, as well as your deductions and credits. In regards to what the IRS says about receipts for taxes is that basically, you just need a record and proof of payment. 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. So the IRS accepts receipts, canceled checks, and copies of bills to verify expenses. 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. Accounting software that automatically organizes your tax records, receipts and tax documents are in. An app can make itemizing a breeze at the end of the tax year.
What About Cash Purchases for Tax Purposes?
Some cash purchases might not need receipts, as long as they’re “reasonable and ordinary.” This principle is called the “Cohan rule,” established in the famous Cohan vs. Commissioner Circuit Court of Appeals case. This means that for most goods under $75 count, you might not need a receipt. But if the IRS comes knocking at your door, you better pray that you did good record keeping.
Qualified Personal Expenses
You should keep a detailed record of not only your business expenses but also your personal expenses.
There are many everyday purchases or bills that individuals incur that are potentially tax deductible. Don’t miss out on lowering your income tax bill by losing or not saving your receipts for medical expenses, childcare, or work related expenses for some states.
Keep a record of these medical expenses:
- Health care premiums for dental, medical, vision, Medicare B or D that you did not pay for using pretax money.
- Co pays for vision, medical or dental plans.
- Medical exams or test fees.
- Medical equipment, such as eyeglasses, contact lenses, prescription medicine, braces, wheelchairs, hearing aids, crutches, lactation aids, and breast pumps.
- Costs associated with guide dogs.
- Acupuncture, chiropractic appointments, podiatrists, psychiatrists, psychologist, and occupational or physical therapy.
- Nursing care or hospital stays.
- Programs to help you stop smoking, lose weight for obesity or other conditions diagnosed by a doctor.
- The cost of gas, parking fees, road tolls and transportation. This applies only when you are going to or from most medical professionals, medical facilities, ambulances, or hotel stays for medical travel.
These bills are not only eligible if you paid them for yourself but also if they were for your spouse, dependents, or any of your kids that you didn’t claim because of a divorce.
It is important to note that these expenses only qualify if they are used to help you or your spouse look for or get to work. To be eligible you and your spouse must both make an earned income, unless your spouse is a full-time student or disabled. Additionally, your dependent has to be under the age of 13, or disabled in some way.
Qualifying child care expenses:
- Baby-sitters, day care, after school programs or some other care providers.
- If the child care is provided in your residence, then you might be able to write off a maid, cook, housekeeper, and other hired caretaking services.
Sales Tax Deduction
If you don’t deduct your local and state income tax, then you can deduct any potential sales tax you paid if your state has one. The IRS only allows you to deduct one of these taxes from your return. The best decision is to deduct the highest amount to lower your tax bill. This deduction works best for people who spend less on income taxes than on sales tax through a large purchase or many small ones.
Examples of purchases that have a high sales tax:
- Vehicles, such as a car or RV
This deduction is popular for retired individuals who pay less income tax than sales tax because of purchases and a lower income. Use the official IRS sales tax deduction calculator to decide if this deduction is right for you.
Unreimbursed Employee Related Expenses
Though not allowed on a federal tax level since 2018, some states still allow you to write off your work related expenses that weren’t reimbursed by your employer.
Track these employee related expenses:
- Work equipment, tools or supplies
- Required uniforms that can’t be worn outside of work and protective gear
- Professional dues, including union memberships
- Subscriptions to professional journals
- Work required medical examinations
- Expenses you pay when looking for a new job.
Business, Freelance and Self Employment Expenses
Whether you are a small business owner, freelancer or classified independent contractor you will need to keep track of your 1099 income and business expenses if you want to lower your tax bill as much as humanly possible. To understand how much you will owe before your business tax deductions, use a 1099 tax calculator for the best estimate.
The most common tax deducts for businesses:
- Office equipment
- Marketing and advertising
- Work related travel
- Internet and phone bills
- 50% of business related meals
- Business vehicle, gas mileage, interest and insurance.
- Loan interest
- Health or business Insurance
- License fees
- Education Materials
- Office space expenses, or the home office deduction
There are several other business expenses that are classified as itemized deductions. For more in depth knowledge on deductions for independent contractors or business owners, check out this article.
What If There’s an IRS Audit?
At the same time, the IRS isn’t some kind of uncompromising bully. Unless you’re guilty of tax evasion, you probably won’t go to jail for an audit. Yes, they will ask for your tax documents, and record keeping, but they prefer it to be digital. They are legally required to accept digital forms of proof, including bank and credit card statements.
Why risk it when you can have an accounting software provide the IRS with a detailed record of all your tax deductible expenses and paper receipts.
Many novice tax filers make the mistake of writing off the wrong expenses or incorrect percentages. Sometimes even experienced business owners have a slip up, so they hire a CPA for $300 or more to go over their taxes.
One Exception: Large, Undocumented Expenses
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 2020, People! Stop Hoarding Tax Receipts
It’s amazing how fear and misunderstandings can complicate our tax situation as well as our lives. Tax preparation for your income tax return can be quite simple.
If you’re self-employed, odds are that you have enough things on your plate as it is. Do yourself a favor and avoid piling up your paper receipts for taxes. You are opening yourself up to lose money potentially or get penalized during an audit. To be extra safe, always have your work doubled checked by a tax professional, because mistakes are common when it comes to record keeping. Instead, use a tax receipt organizer.
But if your tax professional or accountant is giving you trouble, get a new tax preparer or bookkeeper. Stop listening to lousy tax advice. When there’s no downside to being hyper-conservative, it’s no surprise that some accountants continue to insist on the record-keeping practices of the 1930s.
At Keeper Tax, we’re on a mission to expose these kinds of regressive misconceptions. We are dedicated to making your tax season less stressful. Whether it’s the mileage tracking myth, the home office myth, or the business meals myth we will simplify it for you. We just hate to see hard-working freelancers and contractors get held back from the tax savings they deserve. You can bet that corporations claim every tax write-off possible -- and so should you to lower your taxable income. You deserve it.