Balance Pro Staff
April 27, 2023
Throughout America, self-employed individuals and freelancers often find themselves burdened with the task of organizing paper receipts. These receipts can be misplaced, damaged, or illegible, causing undue stress for the business owner. Furthermore, by the time tax season arrives, the ink may have faded and the receipt itself may be little more than a scrap of torn paper.
Fortunately, there is a simple solution to this problem: paper receipts are unnecessary.
Many freelancers believe that paper receipts are essential for claiming every tax deduction. However, this is a common misconception that we can quickly dispel by referring to the IRS guidelines.
According to the IRS, you need to keep records that detail the following information about your business tax deductions: what you purchased, when you purchased it, and how much you spent. Notably, the IRS does not mandate paper receipts as a requirement for maintaining these records.
In fact, the IRS explicitly acknowledges that electronic information management has become the standard in the private sector. This stance represents a significant shift for an organization that is not typically associated with being at the forefront of technological progress. It is clear from the IRS's guidance that paper receipts are no longer necessary.
To fulfill the IRS's documentation requirements, you only need two straightforward things: your credit card and bank statements. These statements contain all of the critical information, including what was purchased, when it was purchased, and how much it cost.
By utilizing a tool such as Balance Pro to track your expenses, you can streamline the process even further. Balance Pro can automatically scan your financial accounts for eligible write-offs and generate the necessary records on your behalf. With this approach, you can save yourself the hassle of collecting and organizing paper receipts while still satisfying the IRS's documentation requirements.
While it's true that receipts aren't always necessary, there are still a few guidelines to keep in mind, especially when it comes to cash purchases.
The "Cohan rule," established in the Cohan vs. Commissioner Circuit Court of Appeals case, states that receipts are not always required for cash purchases. However, the purchases must be considered "reasonable and ordinary." As a general rule of thumb, it's wise to hold onto a receipt for any cash purchase exceeding $75.
For instance, suppose you treated a dozen clients to lunch at a high-end steakhouse and paid with cash. In that case, it would be prudent to keep the receipt in case the IRS requests documentation of the expense. By doing so, you can demonstrate that the purchase was "reasonable and ordinary" and, therefore, eligible for tax deduction.
If you've gone paperless and the IRS decides to audit your tax returns, there's no need to panic. The IRS is obligated to accept digital forms of proof for your write-offs, including bank and credit card statements. By keeping these digital records organized and readily accessible, you can quickly demonstrate the legitimacy of your deductions.
Even if you forgot to document a cash purchase exceeding $75, all hope is not lost. You can still use digital breadcrumbs like emails and calendar events as proof of the purchase. With a little bit of effort, you can retrieve the necessary documentation and ensure that your write-offs are properly supported.
Ultimately, the goal is to empower freelancers and contractors to claim the tax savings they deserve without being held back by outdated recordkeeping practices.
Large corporations take advantage of every available tax write-off, and you should too. The good news is that there's no need to let antiquated practices like paper receipts hold you back. By leveraging digital tools and keeping digital records, you can streamline the process and focus on growing your business instead of managing receipts. With a bit of effort and the right tools, you can unlock significant tax savings and achieve greater financial freedom.
This post is for informational uses only and is not legal, business, or tax advice. Please consult with an attorney, business advisor, or accountant with concepts and ideas referenced in this post. Balance Pro assumes no liability for actions taken in reliance upon the information contained in this article.