If you want to take advantage of tax deductions for your therapy practice, you need to keep thorough records of every expense you deduct. But does that mean you need to save every little receipt you get—even paper ones? And are there any exceptions to the rule?
You’ve got enough on your plate running your therapy practice and helping your clients. The last thing you need is more paperwork. Luckily, with a few simple steps, you can make expense recordkeeping as painless as possible.
But first—what about those receipts?
Why keep receipts for your therapy practice?
When you claim a deduction on your tax return, it reduces the amount of income tax you pay.
For instance, if you earned $70,000 in revenue last year, but you spent $20,000 on deductible expenses you successfully claim on your tax return, you’ll pay income tax on just $50,000 of your earnings. This is called your taxable income.
Naturally, it may be tempting to instead falsely claim you spent $65,000 on business expenses, so you only pay income tax on $5,000. Many businesses have done so in the past, and continue to do so today. That’s part of why the IRS audits businesses.
You need receipts to back up your claims if you’re audited
If you’re audited by the IRS, they’ll ask that you prove you actually incurred the expenses you claimed on your tax return. Valid proof typically consists of receipts, paid invoices, or similar documents. In some cases, the IRS may ask for further documentation—like bank statements showing the transaction for the expenses you’re claiming.
Suppose you claimed $65,000 as miscellaneous expenses, and when the IRS audited you, all you could show them was a receipt for some paper clips you bought last July. What would happen?
Expense claims and the statute of limitations on tax returns
Most likely, it would trigger audits going even farther back into your history of tax filings. That could lead to criminal charges of fraud. At the very least, you would be required to pay significant IRS penalties. Learn more about IRS Penalties for Therapists.
The standard statute of limitations on tax returns is three years. Meaning, if the IRS decides to audit you after you file your 2022 tax return, they’ll audit you for your 2021 and 2020 returns as well.
If it looks like something seriously funky is going on with your finances, they could audit you as far back as six years. So if it’s your 2022 tax return that triggered the audit, the IRS could end up demanding receipts to support your expense claims in 2021, 2020, 2019, 2018, and 2017, too.
Being audited is rare, just like shark attacks and lightning strikes
Each year, the IRS investigates less than 2% of taxpayers. Why worry about keeping receipts?
Because, even if the likelihood of being audited is small, if you are audited and you can’t support the deductions you claimed, you could end up owing the IRS a lot of money. There’s no official cutoff, but if you owe them more than $70,000 in unsupported claims, they could launch a criminal investigation.
Keep in mind that this could happen even if you are—from your perspective, at least—completely innocent. Suppose you really did incur $65,000 in tax deductible expenses, but you just forgot to keep the receipts. Surely the IRS will give you a break—right?
Wrong. As far as the IRS is concerned, if you don’t have receipts, you didn’t incur the expense. So that $65,000 is a lie, and it could land you in big trouble.
Audits are rare—but if you don’t have receipts to support your claims, the outcome could be brutal. In this case, safe is much better than sorry.
The good news? Saving and organizing your receipts doesn’t have to be difficult or time-consuming. More on that in a moment.
Do I need paper receipts for expenses below $75?
The IRS requires a written record of all business expenses exceeding $75. In most cases, you must have a receipt for these expenses.
With that said, in the event of an audit, you need records to support every one of the deductions you claim.
For expenses below $75, keep a record of the payment amount, the business reason for the payment, the business name and address (if different from your own), the date of the payment, and the name of the person or company that you made the payment to.
What if I buy something but I don’t get a receipt from the seller?
There are cases where you may spend money on a legitimate expense for your business, but the individual you bought it from isn’t set up to provide a receipt—or even refuses to do so.
For instance, like a lot of self-employed therapists, you may turn to online secondhand shopping on sites like Facebook Marketplace or Craigslist to furnish your office.
Suppose you buy a $50 office chair for business use from a seller on Facebook Marketplace. How do you get a receipt?
The best plan is to show up with a receipt pad or printed receipt template and have the seller fill it out and sign it.
Office supplies stores sell receipt pads with carbon copy sheets in them that allow you or the seller to fill out the receipt by hand, with each of you keeping a copy.
You could also download a receipt template online, or create one in a word processing app. It doesn’t need to be fancy; it just needs to list:
- A receipt number
- Your identity
- The identity of the seller
- The amount of the transaction
- The date the transaction was made
- A description of what you purchased
The IRS recommends keeping supporting documents to further back up your claim. In this case, that could include:
- A screenshot of the listing, with the date included
- A record of your conversation with the seller online, with the date included
- The receipt for an e-transfer your sent the seller, or receipts from other online payment platforms
- A bank transfer showing the transfer of funds
The more documentation you have to back up your claim, the better.
What if the seller won’t give you a receipt?
Some people who make a portion of their income selling second-hand items are leery about leaving a paper trail.
It’s not your duty to hunt down potential tax fraud being committed by people selling office chairs on Facebook Marketplace. And threatening to run to the IRS if a seller won’t give you a receipt is unlikely to earn you positive user reviews.
If a seller is worried about signing a receipt, you can assure them that nobody but you will see the receipt or have any record of the transaction unless you are audited. Only in the case of an audit will the IRS be privy to your transaction.
If the seller is still concerned, it’s better to let the matter rest. Keep as much supporting documentation for your records as you can, and consult with an accountant before claiming the expense on your tax return.
How to save receipts for your therapy practice
Remember, the statute of limitations for tax returns can extend as far back as six years. Meaning, when you claim an expense on your tax return, you should plan to keep supporting documents on file for up to six years after.
Here are some best practices to make expense recordkeeping for your therapy practice as painless as possible.
Digitize everything made of paper
Paper receipts are fragile and easily misplaced. Take a photo with your phone of every receipt for a business expense. Apps like Expensify help you keep these photos organized.
If you use Heard, you can simply upload photos of receipts to your account, where they’ll be organized and saved.
Download local copies of digital receipts
Suppose a massive solar storm shut down the internet tomorrow but, miraculously, the hard drive on your work computer was saved.
Would you have all the records your therapy practice needs?
Many digital receipts exist in the cloud: As attachments to emails in your Gmail account, or within online accounts for utilities like phone service.
When you receive these digital receipts, make sure to download local copies to your computer. Back those local copies up on a monthly or quarterly basis, using a USB stick or external hard drive.
Digital documents are easier than paper to save and organize, but never assume that records in the cloud are safe or stable.
Set up a filing system
Don’t let your backup USB stick turn into the proverbial shoebox full of receipts under your desk. When you save your digital receipts, keep them organized according to date and expense type.
To get an idea of how to separate out different types of expenses, see our guide to creating a chart of accounts for your therapy practice.
Even if you have receipts to back up every expense you’ve claimed going back six years, if you’re audited, you need to provide those receipts in an organized fashion.
Don’t wait until you’re under pressure from IRS auditors to get everything in order. Disorganized records can turn an audit from a fairly simple process into a major headache.
If you’re going to save receipts for deductible expenses, you can save time by making sure you understand which expenses are actually deductible. Our complete guide to tax deductions for therapists shows you how.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.