When do I need to attach a receipt to my expense reports?

When do I need to attach a receipt to my expense reports?
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It’s month-end and your finance team is now chasing employees for weeks of overdue expense receipts. Now they have to dig through receipts spilling out of a briefcase, shoved in pants pockets, or spilling out of purses. It’s enough to want to procrastinate on reporting expenses.

You need disciplined staff and a robust expense management system to manage the reimbursement process. Small businesses often find themselves stuck with inadequate solutions that are often manual and time-consuming.

As more vendors skip paper printouts in favor of electronic receipts, business owners are left wondering if digital copies would hold up under an IRS audit. If your company creates expense reports regularly, when do you need to attach receipts?

This article will explain why receipts can be critical and when they’re needed under IRS guidelines.

Why Keeping Receipts Matters

Receipts are essential for record-keeping. When you entrust employees to spend money on behalf of your business, expense reports and receipts help ensure accountability. A well-structured process gives employees a simple way to be reimbursed. Any disputes about expense approval can be settled by checking the receipt.

By offering proof of company spending, receipts support valid business travel tax deductions on your company’s return. Receipts are not required when submitting the return, but the IRS can ask for supporting proof during an audit. If the IRS disallows reported deductions, your company could be liable for additional taxes, penalties, and interest.

IRS Rules & Exemptions on Receipts

By following IRS guidelines for documenting expenses, you may be more confident in the tax deductions taken (though for tax advice, please contact your tax professional). There are two primary components of documentary proof, which must generally be in written form.

  1. Proof of purchase: Evidence of expense paid. For example, a canceled check along with an invoice offer proof of funds paid.
  2. Documentary Evidence: A company needs to prove that its expenses have a business purpose to be deductible on a tax return.

IRS Pub 463 Table 5-1

Most reimbursable employee business expenses come from the travel & entertainment expense category. For T&E, the IRS requires documentation for any expense greater than $75. Keep in mind that just providing expense reports and receipts isn’t always enough. The documents you keep should list necessary information to show that the expense has a business purpose, including:

  • Date of the transaction
  • Who was paid
  • What the disbursement was for
  • How much was paid out

According to the IRS, the “degree of proof varies according to the circumstances in each case. If the business purpose of an expense is clear from the surrounding circumstances, then you don’t need to give a written explanation. For example a restaurant receipt will be adequate if it includes:

  • The name and location of the restaurant.
  • The number of people served.
  • The date and amount of the expense.”

A well documented expense report captures the payee, the amount paid, the nature of good or service, the date the cost was incurred, and remarks linking the expense to a business function.

Exceptions to T&E documentation

Tracking down receipts for every single business trip transaction is fairly mind-numbing. The IRS specifically lists a few exceptions to their documentation requirements. These occur under the following conditions:

  • The expense is less than $75 (except for lodging, which should be documented anyway)
  • You have a transportation expense where you can’t easily get a receipt (for example a tuk-tuk ride in Thailand).
  • Meals and lodging expenses while traveling at least 100 miles from a tax home. This would have to be under an accountable plan where a per diem allowance is used.

An accountable plan is an arrangement where employers reimburse employees for out of pocket business spending. By definition these expenses need to be adequately accounted for. The process must also allow for a return of excess reimbursement. Otherwise excess reimbursement qualifies as employee income and is subject to payroll taxes for the company.

Under an accountable plan employees can use a standard mileage policy for business travel or per diem for meals and lodging.

Business travel using standard mileage

The IRS sets a Standard Mileage Rate that guides how much an employee or business owner can claim. For business travel, it’s currently at 57.5 cents per mile.

The standard mileage rate is adjusted annually to match prevailing inflation rates. It takes into account variable and fixed costs directly involved in operating the vehicle like gas, repairs and maintenance, oil, insurance, and depreciation over a one year period.

By using this method, employees keep a mileage log instead of saving receipts. If employees report actual expenses instead, which is allowable in some cases, they would have to keep all receipts.

Per Diem

Per diem allowances are paid at a fixed rate per day to cover lodging, meals, and incidental costs for employees working away from home. These payments allow simpler accounting and more predictable employee travel expenses.

The General Service Administration sets per diem rates for meals, lodging, and incidental costs depending on location. For example, the per diem rates for Chicago, Illinois for November 2020 are $294, broken down as $218 for lodging and $76 for meals and incidentals (M&IE). Meal expenses and incidentals usually don’t require receipts, as long as the business purpose of travel can be confirmed.

Rise of E-Receipts

Since 1997, the IRS has accepted digital documents to support business expenses. The IRS accepts electronic or paper receipts as long as they are secure, retrievable, and legible. Scanned receipts, credit card statements, and digitized expense reports can qualify as sufficient record. The same rules still apply about substantiating the business purpose and proof of purchase.

For example, for business-related travel and entertainment expenses an electronic report should contain:

1) a description of the expense and the business purpose served

2) for each entertainment expense, the names and business relationship of the persons entertained in addition to the date of, place of, duration of, and participants in any business discussion that occurred directly before or after the entertainment

Given the rise of digitization, the IRS has also issued guidelines for electronic storage. Expense reporting can be kept as digital records or transferred to optical disks or computer databases. Data transfer must be complete and accurate. Precise indexing, storage, retrieval, and reproduction of stored data is crucial. Records should be kept for at least three years.

Realities of proof of purchase

Despite the listed exceptions for documentation, the IRS can always ask for further evidence during an audit. Receipts not only provide proof of purchase but also serve as valuable backup evidence.

Since the burden of proof is on the business being audited, having more documentation is usually better than less. In practice, company expense policy dictates the actual thresholds for receipt requirements, whether it’s $75 or less.

Replace your expense reports with spend management

How your company prepares and maintains business expense reports guides expense policy for attaching receipts. Receipts should not only fully document the expense, but also be easy to read and find. If your company still prepares manual expense reports, requiring an employee to attach receipts is sound practice but also an obstacle to compliance.

The expense reimbursement process is littered with missing receipts or poor documentation. Since employees submit their expense reports and receipts after the fact, there is no control over how money is actually spent. If the employee makes an unauthorized purchase or overspends, the company won’t know until after the damage has been done. Not only do unapproved and unauthorized expenses waste time and money, the company may end up with fewer or inaccurate deductions on their tax return.

Using a technology-based spend management system, you can replace manual expense reports with software-enabled credit cards. Applying safeguards prevents unauthorized spending and lost tax deductions. With electronic reporting, management sees spending in real time.

 


About the Author: Anna Yen
Anna Yen, CFA, has nearly 2 decades of experience spanning financial markets, cryptocurrencies, and digital marketing. Currently she manages digital assets at FamilyFI, working to empower families with financial literacy.