Thursday, April 26, 2012

Credit Card Statements Aren't Enough

So often when we begin working with a new client, they’re surprised to hear that the IRS does not accept credit card statements as proof of expenses. And to be honest, even some very educated and experienced financial professionals also assume statements are considered proof of expense. But statements alone do not provide the details needed in case of an audit. Receipts or invoices will prove the full business name, business address and details on what was purchased. The IRS must confirm that the purchase was necessary for your business. And honestly, you could have bought anything from Costco. The IRS will not take your word for it.

This can be a labor intensive task to keep up with especially when several employees have a credit card. The best method I’ve used is to have a designated folder for each employee’s credit card. Then decide whether you should sit down with the statement monthly or weekly. If you have a lot of charges, weekly might be best. Confirm that you have a receipt for each transaction and hunt down any missing receipts as soon as possible. In the case of restaurant receipts, it’s also a good idea to keep a record of who was present and the purpose of the meal (Ex. John Smith (CEO) and Jane Jones (CFO) lunch meeting to discuss Q3 financial goals). Once cardholders realize that you’re very serious about this, they become more cooperative. Once all receipts are gathered, securely attached them to the statements and file. The hard work is all well worth it in comparison to losing all your deductions. And as always, look to your bookkeeper for guidance on processes and best practices!