How to Categorize Receipts for Taxes: Small Business Edition
Let's be real, keeping track of receipts isn't exactly the most exciting part of running a business. But if you've ever scrambled to find receipts during tax season or wondered if you're missing out on deductions, you know how important good record-keeping can be.
In this article, you'll learn how to categorize receipts for taxes (small business edition).
You'll figure out exactly what you need to keep, and how to make the whole process a lot less painful. By the end, you'll have a simple system that works for your business (and keeps the IRS happy).
Why It's Important to Categorize Receipts for Taxes
Proper management of your business receipts helps you stay more organized, protects your business, and maximizes your tax deductions.
When you keep good records, you can:
Prove your expenses if you're audited
Claim every tax deduction you're entitled to
Track your business's financial health
Make better spending decisions
Save time (and stress) during tax season
Plus, having organized receipts makes it much easier to spot trends in your spending and identify areas where you might be able to cut costs.
What Receipts Should I Keep for Small Business Taxes?
The short answer? Keep receipts for anything related to running your business.
Specifically, you should definitely hang onto receipts for:
Office supplies and equipment
Business travel expenses
Vehicle expenses (if you use your car for business)
Marketing and advertising costs
Professional development (courses, conferences, etc.)
Client meetings and business meals
Software subscriptions
Professional services (legal, accounting, etc.)
Rent and utilities for your business space (including your home office)
Insurance payments
You should keep receipts for anything that's "ordinary and necessary" for your business. If you're ever unsure, it's better to keep the receipt and ask your tax professional later.
How Should Business Expenses Be Categorized?
Figuring out how to organize small business receipts can be overwhelming. Start with these simple steps:
Set broad categories (more on this later)
Be consistent with how you categorize similar expenses
Use subcategories when it makes sense for your business
Label everything clearly
Update your categories regularly
It takes time to get your filing system right, so don't be afraid to experiment until you find a way that works for you. Your goal is to make tax time easier and ensure you're claiming all your legitimate deductions.
Common Business Expense Categories
Here are the main categories most small businesses will have for organizing business receipts:
Operating Expenses: All the day-to-day costs of running your business, including office supplies, software subscriptions (accounting software, project management tools), utilities, business insurance premiums, and rent or lease payments for your business space. These are typically your most predictable monthly expenses and form the foundation of your business budget.
Travel and Transportation: Any costs related to business travel and getting around for work purposes. This includes airfare and hotel stays for business trips, meals while traveling (usually only 50% deductible), and vehicle expenses if you use your car for business. If you use your vehicle for both business and personal puposes, you'll need to track the percentage used for business.
Marketing and Advertising: All expenses that come with promoting your business. This covers your website, social media ads, traditional advertising methods (print materials, business cards), and email marketing services. Also includes any costs for marketing consultants or agencies (like if you're hiring a social media manager or a copywriter).
Professional Services: Fees you pay to other professionals who help you run your business. This includes legal services, accounting services, consulting fees, and membership dues for professional organizations in your industry.
Equipment and Assets: Major purchases of the physical items you need to operate your business. This includes computers, phones, office furniture, machinery specific to your industry, and major software purchases or licenses. These items often fall under special tax rules like depreciation or the $2,500 expense rule, so keep detailed records of purchase dates and costs.
Learn more about sneaky tax loopholes for small businesses to save money during tax filing.
Organizing Receipts: Digital vs. Physical
You have options for how you want to organize your tax receipts! Digital receipts and paper receipts are both valid options for keeping records.
Digital Receipts
Going digital with your receipts has major advantages.
You can search for any receipt in seconds (no more digging through shoeboxes!), and you don't need any physical storage space. Your receipts can't be damaged by water or fire, and most systems automatically back everything up to the cloud.
Many digital systems also integrate with your accounting software, making tax time way easier.
The downside is that you'll need to spend some time getting everything set up initially. But for most business owners, the time saved in the long run makes this totally worth it.
Paper Receipts
Some business owners prefer the old-school approach of physical receipt storage. It's straightforward - all you need are some folders and a filing cabinet. There's no technology to learn, and some people just like having tangible records they can touch.
But physical receipts come with some real headaches.
They take up space and can be damaged or lost. Not to mention that finding a specific receipt can be like searching for a needle in a haystack. For most businesses, it's better to store receipts digitally.
Setting Up Your Small Business Receipts System
There are many ways to organize receipts for tax purposes, but here's my simple method as a tax professional.
Choose your digital storage solution: I like using Hubdoc! You just need to take a photo of your receipt and the software will do everything else for you.
Create a folder for each year: Typically, the IRS requires keeping receipts for at least 3 years after filing. But it may be a good idea to keep important receipts (like major purchases) even longer.
Create monthly subfolders: Within each year folder, create 12 monthly folders. Label them consistently ("01," or "January"). This makes it easy to find receipts by date later.
Create a consistent format for all receipt names: A good format is [Vendor][Date][Category] (ex: "Zoom_03-15-24_Subscription").
Set up your receipt processing routine: I'd recommend capturing receipts immediately after purchases, but you can also do this weekly. The important thing is to avoid letting your purchase receipts pile up.
Eventually, keeping track of your receipts will become a habit and practically second nature.
If you want to learn more, listen to the Revive Her podcast episode I was recently a guest on!
Common Receipt Management Mistakes
As a tax professional, I see many small business owners make these common receipt mistakes:
Waiting too long to process receipts
Missing important receipt details
Not backing up digital receipts
Mixing personal and business expenses
Keeping unnecessary receipts
Not categorizing consistently
Forgetting to record cash expenses
Losing receipts for major purchases
Not having a system for digital receipts
Relying only on bank or credit card statements
Learn more about good bookkeeping habits you should adopt as a small business owner.
FAQs
How Do You Categorize Receipts for a Business?
Create clear categories based on your business type and stick to them consistently. Use digital tools to automate where possible, and process receipts as soon as you get them (ideally). The key is having a system that's simple enough that you'll actually use it.
Can I Use Bank Statements Instead of Receipts for Taxes?
Bank statements are helpful, but they're usually not enough on their own. The IRS wants to see detailed receipts for your expenses, especially for larger purchases. Bank statements don't show important details like specific items purchased or business purpose.
Should a Business Keep All Receipts?
Yes, but with some common sense applied. Keep receipts for all business expenses, but you can usually skip receipts for very small personal purchases that have no business connection. When in doubt, keep it.
What Is the $2,500 Expense Rule?
The IRS allows businesses to deduct certain items costing $2,500 or less immediately instead of depreciating them over several years. This is called "de minimis safe harbor election" - but you still need to keep the receipts!
Does IRS Ever Ask for Receipts?
Yes, especially during audits. The IRS can request receipts for any expense you've claimed on your taxes, which is why good record-keeping is so important.
Is a Picture of Receipt Valid for Taxes?
Yes, the IRS accepts digital copies of receipts, including photos, as long as they're clear and show all the important information (date, amount, vendor, items purchased).
How Many Years Worth of Receipts Should I Keep?
Keep receipts for at least 3 years from the date you filed your return or 2 years from when you paid the tax, whichever is later. For certain situations (like property or other big purchases), it's a good idea to keep them longer. When in doubt, consult with your tax professional.
What Is the $75 Rule for Receipts?
The IRS doesn't require receipts for business expenses under $75, but you still need to record these expenses in your records. For lodging expenses, you always need receipts regardless of amount.
What Are the IRS Rules on Receipts for Business Expenses?
Receipts must show: the amount, date, place, and business purpose of the expense. For meals and entertainment, you also need to note who you met with and the business discussion that took place.
Get Monthly Bookkeeping to Have Your Most Profitable Tax Season Yet
Don't let receipt management overwhelm you. Start with a simple system, stay consistent, and consider working with a bookkeeper who can help keep everything organized.
The time and stress you'll save during tax season will be worth the effort - and you might just find some extra deductions along the way! 😉
To get started, learn more about our monthly bookkeeping and tax services.
