‘Tis the season for gym memberships and buyer’s remorse. Whether you’re tallying up your holiday spending or trying to return Grandma’s horrid sweater, there are plenty of reasons to hold onto your receipts this time of year.
What people don’t talk about, though, is that receipts matter all year-round—especially if you’re a freelancer, self-employed professional, or small business owner. Mismanaging receipts costs these folks thousands of dollars every year, and can even make them a target for the tax authorities. It doesn’t help that there’s a lot of bad business advice and misinformation being perpetuated about receipts.
If you’re starting (or already running) your own business, keep reading.
1. Myth: I can use credit card statements to support my tax claims.
Fact: This one drives accountants a tad mad. Credit card statements provide some information, but they’re not a replacement for receipts, and they definitely won’t stand up in an audit.
The problem is that credit card statements show the total amount you spent at a store, but they don’t show what you actually bought. To prove something is a business expense, you need to show what you bought. On an item level. In other words, ya need the receipt.
Think about it this way: If you go to Staples and buy a card reader for your business for $50, then the only thing your credit card statement will show is that you spent $50 at Staples. That money could have been spent on anything, personal or business related. You could have purchased bird food. Seriously, they sell that at Staples. And unless you’re running a zoo out of your house, this doesn’t count as a business expense. A receipt provides the item-level details to prove that what you bought was actually a business expense.
2. Myth: I need paper copies of my receipts for returns and taxes. Digital copies aren’t valid.
Fact: This is one of the biggest receipt myths out there. Lucky for you, digital copies have been accepted by retailers and tax authorities alike for 20 years. Don’t believe me? See for yourself.
Here’s how Canada, the U.S., and the U.K. approach digital record keeping:
- U.S. – The IRS has accepted digital receipts since 1997, stating that electronic record keeping is admissible as long as it complies with “basic recordkeeping principles”.
- Canada – The CRA accepts digital copies of receipts kept in “an accessible and readable electronic format”.
- The U.K. – With HMRC’s Making Tax Digital initiative officially rolling out in 2020, digital record keeping isn’t just allowed, it’s essential!
3. Myth: My physical receipt storage methods are secure.
Fact: People’s hackles go up when we talk about storing receipts digitally. Having a physical copy of a receipt has the illusion of being more secure, but in reality, the control people feel over their file cabinets and shoeboxes is purely psychological. Paper receipts are easily lost, flimsy, and generally unreliable. Because they’re printed on delicate thermal paper, even the most diligent, color-coded, temperature-controlled, organization system won’t protect them long-term. Heat, light, oils, and humidity all cause them to fade—a big problem if you need them for an audit a few years down the road.
It’s good to think about your data privacy and security, there’ve been enough high profile data breaches to warrant the concern. As a rule of thumb, avoid standalone apps when it comes to storing sensitive information.
4. Myth: I won’t get audited!
Fact: No one ever thinks they’re going to get audited. And then they get audited. If you’re a small business owner, you’re actually 3X more likely to be audited by the tax authorities—and that likelihood increases the more that you earn. If you’re claiming $100,000 or more, you’re up to 8X more likely to get audited!
Just because you’ve been lucky in the past doesn’t mean you’re in the clear, either. Depending on where you live and what kind of claims you’re making, you can be audited up to six or seven years following a tax claim, which means you need to hold onto records for that long. Seven years worth of receipts is a lot of receipts. And paper receipts don’t stand the test of time. Digital receipt management is the only way to make sure you’re audit-proofing your business… and it’ll clear up some office space, too.
5. Myth: I don’t need to save receipts; I don’t buy a lot of materials for my business, so I don’t have much to claim.
Fact: Sure, some professions incur more business expenses than others, but even if you don’t buy a lot of supplies, that doesn’t mean you shouldn’t claim them. Here’s the thing about expenses: they add up, so think twice before throwing out that $10 receipt.
Whether it’s intentional, due to a lost receipt, or simply a lack of knowledge, studies show that self-employed professionals miss out on up to 30% of their tax claims! If you fall in the latter group, here are a few small business tax deductions that you might be missing out on:
- Client & employee entertainment (includes coffee and food)
- Home office, home office supplies & utility bills
- Cell phone bills
- Travel & transportation
- Continuing education
- Computer Software/Tools
Of course, these vary depending on your usage and location, so do your research. It’s worth it.
6. Myth: I have an accountant/bookkeeper so I don’t need to worry about receipts.
Fact: Accountants are lifesavers, and they can’t be substituted with a receipt management system, no matter how robust. That said, what properly organizing your receipts can do is save you a lot of money in your accounting fees.
If you’re handing your accountant a shoebox of disorganized receipts every quarter, then they’re likely spending (and billing you for) hours worth of organization. Building good everyday habits can cut down on your accounting fees substantially.
Of the small business owners that outsource their accounting tasks, they spend on average $5,000 a year on fees alone. Ouch.
If you’re starting or running your own business, understanding the nuances of receipt management could save you time, money, and more importantly, undue stress. So, if your New Year’s Resolution is to spend smarter and focus on your mental #WellnessGoals, a digital receipt management solution might be for you.
What else can you do with a digital receipt tool? Find out here.
Header image created using Creative Common assets from Pablo Stanley.