Expense receipts: what counts as a proof of purchase?
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What is an expense receipt?
An expense receipt is a document that serves as proof of a purchase made by an employee or as part of their work for the business. The individual would submit this receipt to their employer for reimbursement for job-related expenses.
In this article, we'll break down what can be used as proof of purchase for reimbursement and tax purposes and how to keep track of these expense receipts. We'll also outline best practices for making your own receipts and automating your expense tracking for a more efficient workflow.
What can be used as proof of purchase?
A receipt, invoice, credit card statement, or a digital confirmation like an email or app notification can all serve as proof of purchase. Because there are many types of work expenses, there are a variety of options for what can be used.
For travel expenses, there are airline tickets, hotel bills, car rentals, mileage tracking in personal vehicles, and meal receipts. If employees are attending a conference, they might have receipts for the registration or event fees on top of business expenses.
Other examples include invoices from office equipment suppliers, purchase orders, and credit card and bank statements that document transactions. These all might be physical paper receipts or email receipts.
Why do you need receipts for expense reports?
Receipts serve many roles in business accounting. For starters, they verify an employee's expense claims to ensure they’re properly reimbursed for their business-related spending. Requiring employees to attach receipts helps make sure that any transactions are in line with your company’s expense policies. This streamlines the process for reimbursement as well.
Looking beyond individual employee purposes, receipts include helpful details about business expenditures (dates, prices, items purchased, etc). This information is essential for your company's record-keeping, future financial planning, and budget allocation—as well as any potential lawsuits or audits.
The audit piece is important because receipts are the documentation that allows your business to claim tax deductions on its payments and provide a paper trail the IRS can verify. That's another incentive to develop a highly organized system for collecting and maintaining receipts and other documents. It's all part of ensuring compliance with tax regulations and avoiding legal issues, which gives your business the chance to save money and grow.
How long do I need to keep my receipts?
Business owners in the U.S. should hold onto expense receipts for at least as long as the IRS can audit their records. Three years at minimum is the general advice, since an audit from the agency can include tax returns filed within the past three years.
If auditors identify significant accounting errors, however, they might want to look at financial records and receipts going back even further. According to the IRS, that additional time period usually doesn't extend beyond the last six years. That's why many experts recommend keeping seven years' worth of receipts and other documentation.
Other factors might play into how long a particular business should hold onto its receipts, like industry-specific regulations or legal obligations. Any receipts related to contractual agreements, insurance claims, investor or lender needs, property purchases, or other company-specific issues must be maintained for the relevant durations, which could exceed 3–7 years.
That said, your paper trail need not be literally made out of paper. Indeed, business owners don't have to keep paper copies of all those receipts going back years—so long as they have digital versions. There are many ways to upload receipts and store them digitally, which makes it easier to present financial records in the event of an audit. Just make sure that your preferred accounting software keeps this documentation secure and maintains accuracy.
Can you make your own receipt?
You can make your own receipts for expense reports, which might be needed if for some reason you don't receive one from a vendor or if the information is completely illegible. As you create your custom receipts, you'll want to include the date of the transaction, the amount paid, the description of the item or service, the name and location of the vendor or service provider, and the method of payment. Be aware of any additional requirements from the company or another governing body regarding the format or content of your self-generated receipt (or if they're not allowed in certain cases). These types of documents might be subject to greater scrutiny from the IRS, so make sure everything is clear, accurate, and legible.
In the case of cash payments, you might not even receive an official receipt, so creating one yourself is the way to document the purchase. Add as many details as possible, including contact information for the payee, clear descriptions of each item or service, dates and times, and anything else that seems relevant. In general, keep close track of the way you use cash in a business capacity, as these types of payments can cause challenges in the auditing process.
What are the consequences of non-compliance?
When the IRS audits a business, the agency typically asks for certain documents, like expense receipts. These records are necessary to substantiate the company's income, expenses, deduction claims, and other financials reported on its tax returns.
Having an organized system with all business receipts allows small business owners to provide the IRS with the evidence needed to review and check the accuracy of their claims. Once the agency examines the provided documentation, there might be follow-up questions for further clarification.
If the auditor finds errors or discrepancies, they may recalculate what’s owed and impose penalties. Business owners who disagree with the findings can appeal, in which case having clearly organized receipts will further come in handy to support the re-examination.
Automate your expense receipts with Ramp
Keeping track of expense receipts can be a big hassle, especially for small business owners who have to maintain, review, and confirm all of that documentation. That's where Ramp's expense management tools come in. With our platform, you can automate your expense receipts, reimbursements, and reporting, freeing up time for more productive work.
With Ramp, employees can take receipt images and upload them in real time using our mobile app. We’re also integrated with apps like Outlook, Uber, Amazon Business, so receipts are automatically collected from those platforms. The result is completely automated expense reports, rather than hours spent manually creating them—increasing your business’s productivity.
Learn more about Ramp’s expense management software.