Keeping track of receipts for tax-deductible expenses can be a hassle. File cabinets stacked with invoices and wallets filled with paper receipts take up time and space and can become downright annoying.
One solution to this problem is to convert paper receipts and other tax-related documents into digital files. That’s correct, the IRS does not require original paper receipts in the event of an audit. In fact, the IRS has advocated for “electronic storage systems” for tax-related documents since 1997. With the advent of smartphones and easily accessible file hosting services, the solution is more practical than ever.
In order to properly store digital copies of your tax-related documents, the IRS provides the following guidelines:
- Make sure the digital scan or image contains the name and address of the vendor, along with the amount paid and the date of the transaction.
- Make notes for each receipt documenting the business purpose and any other information that may be required. For example, the rules regarding meals and entertainment expenses require you to document the names of the people entertained.
- Be able to print a hard copy if necessary, in the event of an IRS audit.
- Make sure the digital files are properly backed up. “My hard drive crashed” is not a valid excuse in the event of an IRS audit.
So how does one go about going paperless for tax receipts? There are a number of smartphone apps that provide users with the ability to organize and store digital receipts, such as Expensify and Shoeboxed. Another approach is to setup up a “tax receipt” folder on a file hosting service such as Dropbox, and simply upload scanned images from a computer or photos directly a smartphone.
For example, after entertaining a client for lunch, a business owner might make a handwritten note on the receipt to document the name of the client and the business purpose, and then simply take a photo of the receipt. Once she confirms that the photo is clear and legible, she can upload the receipt to a “Meals and Entertainment” folder on her Dropbox site using the Dropbox app right on her phone. Once that process is complete, the paper receipt can be thrown away.
Whichever approach you may take, the most important thing is to be consistent, add notes where necessary in a timely manner, and follow the guidelines outlined above. As for the paper, good riddance.
Contact us for any questions about tax planning and record keeping.