“Receipts.” Those who are new to keeping track of deductible expenses generally utter that word as if it were a mantra. So do some of those with experience in tracking their expenses. The former need to learn, and the latter should know better.

Receipts are important. If offered one, I urge you to accept it. You may not need it if the expenditure is not tax deductible, but businesses also use them as a way of helping keep their employees honest, as in “free order of French fries if we don’t give you a receipt.” You can always throw the receipt (or the fries) away later.

But receipts should never be your primary method of record keeping. You do not always get a receipt. You lose receipts; anybody who says he has never washed a pair of jeans with receipts in the pocket is a liar. Sometimes receipts provide almost no information—a generic cash register tape with only the date and amount is not much use to anyone. And let’s not even talk about what you get if you ask for a receipt in a Chicago taxicab.

Different Needs for Different Purposes

As I see it, the issue is distinguishing data from the evidence supporting it. You need data about your deductible expenses to prepare your income tax returns each year. You need the evidence only if the IRS asks you to prove your tax forms are more truthful than James Frey’s memoirs, and that is a rare occurrence.

The data you need has only three elements: when (so you know which year to claim the deduction), what it was for (so you can put it on the right line) and how much (duh). As evidence, you add an element (proof you didn’t make it up) and go deeper on two others (establishing an exact date and demonstrating the business purpose). Receipts, because they are inherently incomplete, are useful for both purposes but not sufficient for either.

Benefiting from Your Own Laziness

What is the largest purchase you would pay cash for? I mean real cash, the engraved pictures of famous Americans. Most people say about $20. Beyond that, they will plop down a piece of plastic (credit or debit) or write a check.

This means your bank or credit card company is already doing the heavy lifting. Once a month, they send you a nicely-organized document detailing what you spent and where. Three minutes with a pencil and highlighter, and you have identified your business expenses for the month. From these two dozen documents, summarizing your data at year-end is a simple task.

Or you can do the same thing electronically, using Quicken or one of the competitive bits of software. If you are moderately fearless technically, you can even download your credit card and bank statements and not have to re-enter them. You do need to check downloaded data carefully, however, to make sure everything is categorized and categorized correctly. These programs assume payments to a particular merchant always belong in the same category, and that is not true. A purchase at Amazon.com might be a script (deductible) or your sister’s birthday present (not deductible, even if your sister is a casting director). Or Walgreen’s: did you buy office supplies, make-up or a pint of Ben and Jerry’s?

Ahem: Cash?

Oh, yes, those pesky cash payments. You can minimize them by using plastic or a check whenever possible for business expenses. Beyond that, some people figure tracking the cash payments is not worth the effort. Since the larger transactions are made by card or check, they reckon that they have captured 99+ percent of the dollars by tracking perhaps 90 percent of the activity. They may well be right.

Others jot down the daily cash items on the pages of their appointment diary (or do the electronic equivalent on their Palm or other pda device) as they go, figuring it cannot take too long to summarize these relatively few items at year-end. They, too, may well be right. Each person’s balance of time, compulsion and tolerance for the task is different.

Weight of the Evidence

In an IRS audit, the nicest part of using information from neutral third parties is that they are neutral third parties. Compared with, say, your girlfriend’s testimony, these records are much more credible evidence of how much you spent, where and when.

But the nature of the expenditure and its business purpose are not always manifest. This is where receipts come back into the picture. They, too, are neutral third party documents that show just what you bought at Amazon or Walgreen’s. Some will not be informative, and some will be missing, but perfection is not expected. If most items have most elements supported, and many have all elements supported, an IRS auditor is likely to believe you on the rest. It’s the same process trial attorneys use, building a case one fact at a time till the judge or jury is convinced.

The likelihood that you will ever need to produce the receipts as evidence is slim. So if you do not need them for data, the receipts can simply be stashed—unsorted and unnotated—in a large envelope labeled “tax receipts, year 20xx.” If you haven’t needed the receipts seven years after filing your tax returns, throw the envelope away.

Coming Attractions

The United States Institute for Theatre Technology (USITT) is having its Annual Conference in Louisville at the end of March, and I will be among the speakers. My talk on “Freelance Lighting Design Economics” is Friday afternoon. If you are among the 3,500 planning to attend the USITT conference, please join us for this session.

And These Deductions Might Be....

For a free copy of my “Checklist of Potentially Deductible Items for Persons in the Arts,” just write, call or e-mail me at my office.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.

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