How To Track And Manage Your Business Receipts?

When customers get asked at check-out if they want a receipt, most folks say, "No thanks." People view receipts as just clutter, but for a business, receipts are your armor when an audit arrives. 

Why? Because receipts help keep your books straight, protect your tax deductions, and provide the hard data you need to make smart business decisions.

No, it is not fun wading through different receipts and trying to get them into some semblance of order. 

However, it is non-negotiable to ensure your business remains compliant with regulations. This guide will show you how to transform the "paper chase" into a streamlined, automated process that saves you time, money, and headaches.

What Exactly is a "Receipt"?

A receipt is a document that serves as proof of a financial transaction. For an expense to be valid for tax purposes, the IRS requires that the receipt or record include four key elements:

• The amount of the expense.
• The date and place where the expense occurred.
• The business purpose of the expense.
• A clear description of the item or service purchased.

Why Should You Keep Track of Business Receipts?

Apart from developing sales and customer relationships, maintaining accurate records is also a crucial aspect of building, sustaining, and growing a business.

Keeping A Good Business Record

Keeping receipts is essential for maintaining accurate business records and ensuring spending visibility. They help you keep track of your business's progress. It enables you to answer the following questions:

• Are you spending more than you projected on something? 
• Are the actual costs of raw materials lower than you expected? 
• Is it affecting your profit margin? 
• Are you earning, or are you just staying afloat? 
• Do you need to adjust your prices? 

Keeping receipts can help you answer these questions by providing you with actual figures you can work with. 

Preparing For Tax Returns

Receipts are proof of deductible expenses when you file your tax returns. In case of an audit, these receipts are your only accepted proof to substantiate your claims.

Preparing Financial Statements

Receipts are essential for preparing accurate financial statements for your business. Factual and accurate financial statements are vital when dealing with creditors or applying for a business loan, as they show your business is transparent and in order.

Proof Of Sale

Keeping receipts means you have a record of an actual transaction that occurred. If there is dissatisfaction with the service received, that receipt goes a long way in proving that: 

1. There was indeed a sale and 
2. It was between the two parties involved. 

Should any refund or exchange of any kind be required, the amount must be reconciled with the actual receipt. 

How to Keep Track of Receipts for Taxes?‍

You can either stick to the traditional methods of managing receipts or upgrade to a modern, digital system.

Organize Your Paper Receipts Properly

If you prefer to keep paper copies, organization is key.

• Organize as you receive them: It's best to organize receipts right away. Keep separate envelopes for personal and business receipts to save a headache come tax season.
• Note the purpose: Make notes on them to help you recall each receipt's business purpose. A receipt for ten new desks is easier to remember than a restaurant receipt, so a note about the client you met for lunch can save you later.
• Use binders and folders: Use a filing system to categorize your receipts, separated by month and then by type of expense. Keeping them organized like this will make tracking them more accessible.

Digitize Your Receipts

Keeping a soft copy of your paper receipts is a smart move. Not only does it provide a backup in case of a fire or loss, but digital documents might even suffice when filing income tax returns.

• How to digitize: First, take a picture with your smartphone or use a scanner. Then, upload it to your computer or a cloud storage service.
• Benefits of digital: This works best for teams that have started doing hybrid work, as not everyone can submit receipts in person promptly. Digital copies are also easier to store and retrieve when needed.

Use A Receipt Tracker

The easiest and most reliable way to track receipts is by using a dedicated receipt tracker app or software. Choosing the best receipt tracker for your business depends on the nature of your business and what you want to get out of your chosen tool. You can find one that also helps you track paper and online receipts and offers features like 24/7 live chat support.

The Dangers Of Ineffective Receipt Management

When your receipts are not in order, your books are also not in order. Ineffective receipt management can lead to significant financial and legal consequences.

• Not knowing what goes on in your business: When your financial records are unorganized, it becomes difficult for you to identify department costs, compare projected vs. actual income, or understand how much it costs to generate a dollar in revenue.
• Inability to strategize: Without a clear picture of your finances, it's hard to devise a sound business strategy. Well-organized books enable you to set goals properly, monitor progress, and keep track of milestones.
• Having problems with cash flow: You can better grasp your business finances when you track your expenses and payables properly. When you clearly see how much you spend and earn, you can also foresee cash flow hurdles before they even happen.
• Not being able to optimize your pricing: If you have no idea what your expenses are because your receipts are messy, you risk not being able to price your goods and services accurately and strategically. Without optimized pricing, you cannot strengthen your profit margins.
• Missed tax deductions and penalties: A disorganized system will inevitably lead to missed tax deductions, resulting in a higher tax bill. In the worst-case scenario, you could miss the tax deadline and incur penalties.
• Paying for unnecessary expenses: Disorganized books and receipts can lead to penalties, overdraft fees, or late fees from vendors and lenders, as well as tax-related penalties.

IRS Rules and FAQs Around Record-Keeping for Businesses

The IRS has a simple, yet crucial, rule: deductible expenses must be "ordinary and necessary" for your business. 

An expense is "ordinary" if it's common and accepted in your industry. An expense is "necessary" if it is appropriate and helpful for your business operations.

Does The IRS Require Receipts For Business Expenses?

• The "Burden of Proof": Yes. The IRS requires taxpayers to keep records to substantiate their deductions. This is your "burden of proof" in case of an audit.
• The $75 Rule: However, the IRS has a "de minimis" rule where receipts are not needed for non-lodging expenses under $75. Even in this case, you must still provide a record of the expense's details (amount, date, place, business purpose).

How Long Should I Keep My Business Receipts For Tax Purposes?

• The 3-Year Rule: The general rule is to keep records for 3 years from the date you filed your tax return.
• Exceptions: Longer timeframes apply in specific cases, such as for claiming a loss from bad debt or worthless securities (7 years) or if you missed reporting more than 25% of your income (6 years).

Can a Credit Card Statement Serve as a Receipt?

A credit card statement can serve as a record of payment, which is one part of substantiation. However, it may not contain all the details required by the IRS, such as the business purpose or a detailed description of the purchase. The IRS may request additional documentation if the credit card statement lacks sufficient details.

Are Digital Receipts or Photos of Receipts Valid for The IRS?

Yes. The IRS has accepted scanned and digital receipts as valid records since 1997. The key is that the digital record must be clear, legible, and contain all the information from the original receipt, including the vendor name, date, amount, and business purpose. The records must also be stored in an organized way that is easily accessible and reproducible if requested by an auditor.

How Do You Categorize Receipts For A Business?

Receipts should be categorized according to your business's chart of accounts. A chart of accounts is a systematic listing of all the financial accounts in your general ledger, which helps you organize transactions and create financial statements.

• Five main account types: The chart of accounts is organized into five main types: assets, liabilities, equity, revenue, and expenses.
• Customization for your business: While the main categories are standard, the accounts underneath can be customized to suit your business. For example, within "Expenses," you could have subcategories for "Utilities," "Office Expenses," and "Rent".
• The importance of consistency: Maintaining the same structure consistently over time is crucial for accurate financial comparisons and compliance with accounting standards like GAAP.

What is The Easiest Way to Track Receipts for Businesses?

The manual tracking of receipts, whether on paper or in a spreadsheet, is a significant time sink that is prone to human error. The most reliable and efficient way to track receipts for a business is through a modern, automated software solution.

Fyle is the perfect solution for this. It automates the entire process, from tracking and capturing receipts to generating reports, with zero manual effort.

• Real-time capture: Fyle's conversational AI allows you to snap a picture of a receipt and send it in via text message. It then automatically extracts key data from the receipt, categorizes the expense, and creates a digital audit trail.
• Automated data extraction: Fyle’s AI automatically extracts key data from receipts, categorizes the expense, and creates a digital audit trail.
• Seamless integration: Fyle syncs all receipt data with your accounting software, automating reconciliation and providing real-time visibility into all your expenses.

In Conclusion

Good bookkeeping can often be one of the major reasons why any business sustains against its competition. Receipts provide a host of information for your business and can serve as one of your barometers for growth while also helping you with pricing.

Additionally, being organized will also help you save a lot of time and money in the long run, as you’re always aware of how much you spent, when you spent it, and where it was spent.

By embracing a modern, automated solution, businesses can transform receipt management from a daunting chore into a streamlined process that saves time, maximizes tax deductions, and provides the financial clarity needed for growth.

If you’re ready to ditch the paper chase and gain complete control over your business receipts, schedule a Fyle demo today.