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Petty Cash: Do I Need Receipts to Prove My Deduction?

Kathy (online entrepreneur) asks:

I run an online business. A friend told me that I’m allowed to spend a certain amount of cash for business expenses every week without having to keep receipts to prove where I spent the money. He says this is called a “petty cash” fund. Is this true?

Answer:

Keeping a petty cash fund is a very common practice for businesses. It simplifies the recordkeeping by compiling all the bookkeeping entries for these tiny expenses into one larger entry.

However, it’s not the same for taxes. If you’re audited, the IRS is going to require receipts (or some other supporting documentation) to prove your expenditures. If you can’t provide that, you’re almost certain to lose your deduction. If that’s a risk you’re willing to take, go ahead and use a petty cash fund for miniscule, legitimate expenses. (Assuming they really are small amounts, it won’t be a financial tragedy if the deduction is disallowed.)

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