IRS receipt requirements: What to know

Keeping a paper trail of your business receipts isn’t just a best practice for a business of any size. It’s also a legal obligation for proper tax documentation. But what constitutes a business receipt and how do you know which ones to hold onto?

Tax compliance for business receipts may be less complicated than you think, especially once you know the rules.

In this article, we explain exactly what business receipts are and why they are important, as well as the Internal Revenue Service (IRS) receit requirements for documentation and compliance. We also provide guidance on how to stay organized and overcome common challenges when filing business taxes.

What is the IRS requirement for receipts?

Business tax receipts are supporting documents that provide evidence of your business expenses for tax purposes. According to IRS guidelines, these receipts should clearly document:

• What was purchased (specific description of items or services)
• Amount paid (total cost including applicable taxes)
• Date of purchase (when the transaction occurred)

Business tax receipts are supporting documents that provide evidence of your business expenses for tax purposes. According to the IRS receipt requirements, these receipts should clearly document:

• What was purchased (specific description of items or services)
• Amount paid (total cost including applicable taxes)
• Date of purchase (when the transaction occurred)

Why are business receipts important?

Receipts are crucial evidence for supporting tax deductions on your business income tax return. Your tax liability is determined by earnings minus applicable deductible expenses. Proper documentation, including receipts, helps maximize your tax deductions and ensure compliance with IRS requirements.

For a business expense to be deductible, the IRS defines that it must be "ordinary, necessary, and reasonable." That means things like office supplies, business travel, and marketing expenses typically qualify. But personal expenses like vacations won't—even with receipts.

Without proper documentation, the IRS may not allow or reject certain deductions, resulting in additional taxes, interest, and penalties. For tax deduction tips, especially for sole proprietors, knowing how to document expenses correctly can significantly reduce your taxable income.

Types of business receipts

Expense receipts can be split into two main categories: proof of purchase to document expenses and receipts of income to document funds coming in.

Proofs of purchase include itemized receipts like credit card or bank statements, cancelled checks, and invoices from digital payments. And receipts of income include things like cash register tapes, receipt book stubs, cleared checks, and tax forms.

All of these documents serve as crucial evidence if you’re audited or if the IRS questions deductions claimed on your return. More specific types of business receipts you should keep include:

• Expense Receipts: Documentation for office supplies, utilities, travel expenses, business meals, and professional services
• Purchase of Goods: Records of inventory, equipment, and software acquisitions for your business
• Operational Costs: Receipts for rent, insurance premiums, and fees for licenses and permits
• Employee Expenses: Documentation of payroll, reimbursement receipts, and costs for professional development
• Marketing and Advertising: Records of advertising costs, promotional materials, and marketing campaigns
• Miscellaneous Receipts: Documentation of bank fees, shipping costs, and business subscriptions

What are the IRS receipt requirements for compliance?

The IRS requires proper documentation to substantiate your tax deductions. Here's what every IRS-compliant receipt must include:

• Vendor's details: Include name, contact information, and tax identification (if applicable
• Date: Clear transaction date within the relevant tax year
• Amount: Total paid, including taxes and service charges
• Description: Specific details of purchased items or services
  • Example: "Printer paper, toner cartridges, and file folders" rather than just "office supplies"

Without proper vendor information, receipts may be deemed insufficient during IRS audits. Consider implementing robust vendor contract management to maintain accurate vendor records. Save receipts in case of future audits.

Does the IRS require receipts for purchases under $75?

The IRS offers some flexibility for smaller business expenses. For purchases of $75 or less, you may not need to keep the actual receipt if you have other supporting evidence, like a credit card statement or accounting record entry.

This flexibility stems from the “Cohan rule” which allows taxpayers to deduct "reasonable and credible" business expenses even without receipts for business expenses. However, this doesn't mean you should be careless with documenting small expenses.

Be sure to maintain proper cash documentation with detailed notes since these don't generate automatic records like credit card purchases. Establishing a consistent practice of documenting all business expenses, regardless of amount, is better for your tax position and overall financial record-keeping.

How to keep track of business expenses for taxes

Now that you understand what business receipts are, what’s the best way to keep them organized? Here are a few best practices to consider as you manage your receipts for tax season and all year:

• Always document your receipts: For dual-purpose expenses (such as meals, travel, and vehicle use), note the business purpose directly on the receipt or in your accounting records. Demonstrate that the primary purpose was business-related, not personal.
• Exclude all personal expenditures: Personal expenses don't qualify for business deductions, even if they are used partially for business purposes. It’s best to maintain separate records for business and personal expenses.
• Implement a consistent filing system: Manual processes like spreadsheets and shoeboxes full of receipts won’t keep you organized that way a digital expense management system can
• Create an expense policy: With proper expense guidelines, everyone who works with you will understand which receipts to keep, how to document them, and the reimbursement process

Common challenges in IRS receipt management

Even the most diligent business owners can fall into common traps when managing receipts for tax purposes. Understanding potential challenges can help you establish better practices and avoid unnecessary complications with the tax authorities:

• Failing to maintain timely and accurate records: Delaying receipt tracking leads to forgotten transactions and misplaced documentation, so you could miss deductions or be unprepared for an audit. Stay ahead by using accounting software that automatically categorizes and records expenses.
• Incomplete receipt information: Ensure every receipt clearly shows the date, amount, place of purchase, and business purpose. For larger expenses like travel or meals, add brief notes for clarity. Use digital tools to attach details to receipts, and train employees to follow the same process.
• Mixing personal and business finances: When accounts are mixed, proving which expenses are business-related becomes difficult. Keep business finances separate from the start with dedicated accounts and credit cards.
• Poor organization and storage of receipts: Paper receipts fade, get damaged, and can be misplaced, while scattered digital files waste time during tax prep. The IRS accepts digital copies as long as they clearly show required details. Implement a system that digitizes receipts immediately, categorizes them by year and expense type, and stores them securely in the cloud for easy access.
• Overlooking small expenses: Make sure to keep a complete record of all your receipts for business expenses big or small. That way there will be no discrepancies when it comes to determining your tax liability.

IRS receipt management made simple with Ramp

Managing your receipts manually takes time and effort that could be better spent on your small business. Ramp reimagines the entire approach to IRS receipt requirements and management with intelligent tools designed for the forward-thinking finance team.

From expense report automation to digital receipt storage, Ramp simplifies IRS receipt management for your business.

Explore how Ramp can help your business with receipt management.