We’ve often mentioned the importance of adequate documentation to substantiate a business deduction. Ideally you should have a canceled check and an invoice marked paid with the serial number of the item purchased or a description of the work performed. While that may be viable for certain big-ticket assets, realistically, that’s not often the case for most expenses. And the IRS knows that.
There are many other ways to document expenses that are acceptable. However, you should be able to show that payment was made (e.g., a canceled check, credit card receipt) and the nature of the item purchased (e.g., an invoice with a description of the item).
On more than one occasion we’ve heard taxpayers say, “I’ll remember the facts if I’m audited”. Or “Fred will back me up.” First, chances are you won’t be audited until two years after the return is filed. And you may not be asked about the transaction until sometime later. Moreover, there’s a good chance the return was filed a year after the transaction. Many people will not accurately remember the details three or more years later. Will Fred back you up? Probably, if he’s still around and it doesn’t cause him a problem. Do not take a chance.
-Travel and Entertainment- there are separate rules for each of these
-Canceled Checks- payee and why the check was canceled
-Credit/ debit cards- account statements are required to be saved
-Invoices- saved for all purchased items
-EFTs- Proof or amount, date, and name of the payee
-Cash register tapes- summarizing many small purchases at the same location
-Reason for purchases- why did you purchase an item (seems obvious) but having reason backing can help support your purchase to the IRS
-Checks made to cash- try to avoid this, if you cannot make sure you write what the cash is used for
-Cash expense- save receipt and write on receipt what purchase was for
These are some but not all the expense documentation that should be kept by any business owner. If you are able to supply these documents when requested you will be able to support any documentation required to explain why you purchased the asset, on what day the asset was acquired, and the grand total for that asset.
Please feel free to reach out with any further questions on this topic as there are many more that are important to the success of your company!