What Constitutes Valid IRS Documentation for a Business Expense?

The Internal Revenue Service has clear guidelines as to what does and does not constitute valid documentation for both your gross receipts and your expenses. Below are simple guidelines to help you maintain proper records and documentation.

Gross receipts are the income sources for your business. Documents that show both the amount and source of the purchase must be kept. The following generally serve as valid supporting documents: invoices or statements sent to your customers, receipts, deposit tickets, and receipt books or logs.

Purchases and expenses are items you buy and costs you incur that are directly related to your business. Valid documents for proof of purchase and payment of expenses include:

  • Canceled checks with supporting documents that identify payee, amount, date, and description of product or service (often this information is all contained on the invoice or bill received from your supplier or vendor).
  • Receipts (e.g., office supplies purchased at a retail store or online). If the receipt is not specific, write on the receipt what was purchased and the business     reason for the purchase.  

Travel, transportation, meals & entertainment, and gifts must be substantiated with the reason that it was a business expense. For example, if you have airfare and hotel bills, you must indicate the date(s) and business reason for the trip (conference, client presentation, etc.). If you take a customer out for dinner, you must indicate on the restaurant receipt, the date and business reason for the meeting (e.g., discuss new proposal) and the names of all the individuals that you paid for.    

Fixed assets are items owned and purchased by your business. You must keep documentation that includes proof of purchase and any documentation related to the purchase price e.g., real estate closings, subsequent improvements, trade-ins, selling expenses.

Credit card statements are NOT valid receipts. You must still keep all the valid documentation listed above to substantiate the charge.  

Payroll records and employment taxes. There are specific employment tax records that you must keep, including:

·        Employee records (name, address, social security number, employment dates)

·        Time sheets

·        Wage and salary reports

·        Tax deposit records

·        Payroll tax returns filed

·        Fringe benefit payments

·        Forms W-2 and W-4

IMPORTANT NOTE: Even if you use an outside payroll service, it is your responsibility to make sure appropriate records are maintained, so verify that your service is maintaining all necessary documentation on your behalf.

How long must records be maintained?

Income tax records. The IRS requires that business tax records and supporting documents be kept for a minimum of three (3) years from the time of filing. However, for a failure to report income, the IRS can demand up to six (6) years of records, and in the case of bad debt deductions, it is seven (7) years. To be safe, keep all records permanently if feasible.

Payroll tax records. The IRS requires that businesses keep all employment tax returns, substantiating documents, and proof of withholding tax payments for at least four (4) years after the payroll tax return was filed or the taxes were paid, whichever is later.

The IRS provides several publications that give detailed information regarding what types of records and receipts you should keep.




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