Unfortunately, just incurring an expense and showing it as an expense isn’t always enough.
It’s on you to prove that your expenses are legit, so I recommend keeping as much as possible. You need to keep copies of your bank and credit card statements, along with any reconciliation reports. You also need to keep copies of cancelled checks (most bank statements have copies on them). In addition to those statements, here is what else is required:
- Obviously, you will want to keep any official tax forms you receive, like W-2’s or 1099’s. Also, if you have them, you should keep a copy of your financial statements that were used to prepare your tax return.
Meals, Travel & Car
- If you have any kind of travel (e.g., airfare) or lodging expense, keep actual receipts. You need to be able to show how many people were traveling and how many people were staying at the hotel, along with any extra charges you incurred for your hotel stay (minibar, room service, etc.) Keeping an itinerary is also a good idea and will support the expenses you are claiming.
- If you have meals and entertainment expenses, make sure to document who you were with, what was the business purpose of the meeting, along with where and when. You can keep actual receipts and write on them this information or if you don’t write on the receipts, keep a calendar up to date with your meetings so you can show the who, what, where of the expense.
- If you are deducting your vehicle as a business expense, you must keep track of your mileage. Keep a mileage log or use an app to stay on top of your business miles. You need to do this regardless of whether you are writing off actual expenses on your car or taking the mileage method. Read more about this here.
- Any other expenses, keep your receipts! It can be cumbersome to keep receipts for $1 parking here and there, but know that even if the expense is minimal, it can still be questioned by an auditor so you should try to keep as many receipts as possible.
- If don’t have the actual receipts, you should know the line items on your bank and credit card statements aren’t necessarily sufficient support. You still need to show how each expense is a business item. Referencing the example above, it will be easier to show an auditor a receipt from Target so they can see your actual business purchases than to convince them that the line item on your credit card statement to Target is a business expense.
- For income items, you should be able to produce copies of invoices to support the income shown in your bank accounts. If you have deposits of income into your personal accounts (from gifts or non-business income), you should keep a record of where that income came from. If you can’t show that it isn’t non-business, it could be reclassified as business income by an auditor.
Now that you are keeping a ton of records, you probably want to know how long you need to hang on to them.
The IRS’ statute of limitations on when they can pull your return for an audit is generally 3 years from the date that you file the return, (NOT the date the return was due) OR 2 years from when the tax is paid, whichever is later. There are certain situations where they can audit you for more than 3 years; for example if you exclude reporting more than 25% of your income, the can look at 6 years of returns. You should also check what your state’s statute of limitations is because it may be different than the IRS. At a minimum, you should keep your records for 3 years but if you want to be on the safe side, I suggest holding on to your records for 7 years.
After 3 or 7 years, you can toss the receipts, bank and cc statements and invoices. BUT you should keep copies of your filed tax returns forever. I would also keep any W-2’s, 1099’s, financial statements, and other tax forms with your returns forever.
If you have employees, you need to hold on to employment records for 4 years.
How should you keep these records so you aren’t overwhelmed in paperwork? Read more here about staying organized.