Question #2: Should I keep paper receipts?
This question comes up frequently, and it’s another one that isn’t easy to answer. The general rule of thumb is items under $50 do not require additional back up for audit purposes, but there are some exceptions to this rule.
If you have a dedicated bank account for your business (an account used solely for the purposes of business) then you should be using a debit card, or writing checks that will serve as sufficient back up for an auditor. Similarly, if you are using a credit card that is mostly for the business then transactions of all sizes will appear on the statements for that card and can be tracked by your bookkeeper and used for audit purposes.
Occasionally a business owner will pull out cash from their bank account or use personal funds to pay for items related to the business. In this case all receipts must be kept because these transactions will not hit the bank account or a credit card account that your bookkeeper tracks. In order to take a credit on these items they must be meticulously arranged so that no expenses slip through the cracks. It is always best to use the bank debit card or credit card where you can. Not only can you more easily track your expenses and income, you can also take advantage of perks and rewards (like airline miles) offered by many banks.
It is important to understand that bookkeepers and CPAs usually operate from a bank statement perspective; your accounting project will cost you more if you are providing a heap of receipts for them to go through. Receipts are generally printed on thermal paper, meaning that over time in hot cars or in bags where they rub against one another, these receipts will go blank. If you are tracking your receipts it is important to attach them to a piece of paper and copy them so you can preserve their legibility for the seven years required by the IRS. A rule of thumb is to organize your receipts by month and then by payment method (i.e. debit card, credit card, etc) to ensure that you can find a receipt should you need it down the road.
Tell your bookkeeper or CPA how you’ve been spending your money so that they can help with the receipts that you are saving. You don’t want to miss a single expense that could lower your tax burden at the end of the year.