If you think (or you’ve been advised by your tax preparer) that keeping your credit card statements is enough by itself to prove business tax deductions, you could be in trouble if your return ever comes up for examination.
That’s the message I got today at the IRS national phone forum on record keeping requirements for small business owners and self-employed entrepreneurs.
Please don’t start shredding your credit card statements; they’re certainly better than no documentation at all and in some circumstances they might be enough proof. The point of the IRS warning is that in many cases, you’ll also need supporting documentation to prove your tax deduction.
And, yes, I realize that for some purchases, there might not be any other documentation. Some vendors who you order from on-line or by phone don’t provide written order confirmations. In those cases, I suggest you make your own notes about such purchases and keep them in your files.
Remember that the IRS says that for an expense to be deductible for your business, it has to be ordinary and necessary and for a business purpose. A line on your credit card statement that says, for example, that you spent $54.89 at Office Depot on October 15, 2008 does not prove that you bought office supplies. You could just as well have purchased computer games for your kids.
That’s why the IRS suggests that you keep the original store receipt that will show details of the various items that total the amount on the credit card statement. And it wouldn’t be a bad idea, they say, to make a note on the receipt regarding the business purpose for the items.
If you’ve been scanning the receipts into your computer, the IRS says that’s OK. But they add that they know how easy it is to mess around with electronic files. If they call you in for an audit, they’ll test the authenticity of your scanned documentation by having you provide original copies of some of the receipts.
So you probably should just save all of them. If you’re concerned that the original paper might deteriorate and become unreadable, make a copy of it as soon as you get it and file the copy with the original.
This advice might not save trees, but it could save you from an unpleasant audit and a higher tax bill.