how do you track expenses you pay cash for?

St Louis MO · Member since 2019 · 18 posts · 6 votes

I am wondering how I can account for cash expenses. I have a rental property that I did not have time to paint so I paid a friend cash to paint the rooms over the coarse of a few days. I am wondering how can I track this expense for labor since I do not have an invoice for the work or a receipt from paying him. Should I just get one of those cash receipt notebooks and let him write me up a receipt for the work? Would that be sufficient at tax time in case of an audit? Additionally I had to replace a couple of broken appliances, which I purchased off craigslist also for cash. What is the best way to account for these expenses for tax purposes?

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

@Morgan Gruelle

Let's not confuse two issues:

1. Claiming a deduction at tax time. You're legally entitled to it no matter how you paid and whether you have a proof. Both labor of your friend and appliances are legit deductions. The trick is to not forget about them - so make sure you have a system to record all business expenses, including cash.

Such system can be as simple as a hand-written list on a yellow pad, more advanced like an Excel/Google spreadsheet or one of the many expense tracking apps like Expensify or TaxBot - or it can be a fully professional bookkeeping system like Quickbooks.

2. Defending this deduction if audited by the IRS. If you have a consistently used bookkeeping system - paper, app or QuickBooks - the IRS may very well trust a few unproven cash expenses here and there. But it's much better if you have some proof aka receipt. Yes, one of those receipt books works. You can also get a stack of index cards and improvise those receipts. Make pictures of your friend painting the property. Save Craigslist ads. All of that can be handy as a proof.

But the best of all - do not pay cash, ever. Use PayPal, Zelle, Venmo - all of these are easily trackable. Bonus: you won't have to worry about 1099s, either.

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Melody E Bergloff
CPA · UT · Member since 2019 · 55 posts · 19 votes
6y
@Morgan Gruelle
I recommend to my clients to use a credit card or check to create a paper trail. However, you can also use a cash receipt notebook to create a receipt.
The best way that I found for small business owners to track their income and expenses (whether its cash, check or credit card) is to leverage Quickbooks or a similar program. I would reach out to a tax professional and/or bookkeeper if this is unfamiliar territory for you.

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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
If I pay cash, then it is a loss for me come tax time... Plain and simple.
Everywhere is plastic friendly down to a vending machine- so that is a non-issue.
If it is for services and the negotiated price is for cash- then it is a loss. I have heard people on here say they negotiated a cash price and then tried to 1099 a contractor... ridiculous.
If I do not have an independently documented expense, then I don't take it.
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Morgan Gruelle
OP
St Louis MO · Member since 2019 · 18 posts · 6 votes
6y
i am not familiar with quickbooks, how can that help me track these types of expenses? Currently I just have a spreadsheet template I pulled off the inernet and have just been adding stuff on it, though i really havent been keeping it updated. I have just been trying to remember to keep all receipts in a folder for now. I just started with my first rental property back in August so this is all new to me still. Is it acceptable for tax purposes to buy a cash receipt notebook as @Melody E Bergloff suggested and have the person rendering the services to you write up a receipt for you out of your own notebook and use said receipt for expense tracking? Would this be acceptable say in the case of an audit from the IRS? I have ran into this twice already this week, once paying a friend cash to do some painting in a place and then again purchasing replacement appliances off of craigslist for cash. Not everyone takes plastic as previously stated. I have friends that I utilize to do some work for me at times who need the money and dont have a way to take electronic payments. Additionally its not feasible in most situations to go into a craigslist transaction with an E-payment. Most people off craigslist expect to be paid in cash.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Morgan Gruelle

You should be getting a receipt from these sellers/vendors.

Depending on your level of activity, you should also determine if you should be requesting them to fill out a W-9 to issue a 1099 at year end.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
@Morgan Gruelle

Let's not confuse two issues:

1. Claiming a deduction at tax time. You're legally entitled to it no matter how you paid and whether you have a proof. Both labor of your friend and appliances are legit deductions. The trick is to not forget about them - so make sure you have a system to record all business expenses, including cash.

Such system can be as simple as a hand-written list on a yellow pad, more advanced like an Excel/Google spreadsheet or one of the many expense tracking apps like Expensify or TaxBot - or it can be a fully professional bookkeeping system like Quickbooks.

2. Defending this deduction if audited by the IRS. If you have a consistently used bookkeeping system - paper, app or QuickBooks - the IRS may very well trust a few unproven cash expenses here and there. But it's much better if you have some proof aka receipt. Yes, one of those receipt books works. You can also get a stack of index cards and improvise those receipts. Make pictures of your friend painting the property. Save Craigslist ads. All of that can be handy as a proof.

But the best of all - do not pay cash, ever. Use PayPal, Zelle, Venmo - all of these are easily trackable. Bonus: you won't have to worry about 1099s, either.

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Patrick M.:
If I pay cash, then it is a loss for me come tax time... Plain and simple.

Aka shooting yourself in the foot. No reason to forego deductions for legitimate business expenses paid in cash.

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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
Ask them for a receipt.
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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Michael Plaks You can advocate your method, but I think it is a very dangerous and slippery slope.

1. You are not shooting yourself in the foot, someone who negotiates a "cash deal" will have built the discount into the deal- and likely, a greater discount. When I say "loss" it means that I am not going to claim it- it doesn't mean that I didn't get a better deal- I would have.

2. When, as in this case he is paying someone- Who I can only hope he paid more than $600 for painting "over the course of a few days" it would be ridiculous to advocate writing it down on an index card or square of toilet paper. It needs to be properly documented, as others have mentioned.

3. Some will say "Oh, you is commitin' fraud by payin' cash!" That is the nonsense of the internet. Sometimes you must. The problem would be when you present the IRS with an index card instead of a 1099.

3. Payments that can't be independently verified are a slippery slope. I have represented numerous people who went down that path- perhaps legitimately at first- but when they weren't called on it- it increased year after year. If you are showing up to an audit with a stack of handwritten cash receipts it ain't gonna go well.

There is no reason to not pay someone by check if you intend to claim the deduction. Any place where you purchase items will accept credit cards and provide you a receipt. If the person wants cash, then have a W9 handy and see how that goes over- I suspect like a lead balloon.

I am extremely cautious and my records are bullet proof, this does not stop me from taking advantage of all of my legitimate deductions and making a great profit.

Additionally, I suspect, that those of us who are not hobbyist landlords, will be under increased scrutiny when we take the 199A deduction.
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Erik W.
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
6y
Take this for what it's worth...

I have a friend who is an IRS auditor. The IRS has had it's budget slashed in recent years. Her OPINION is if you do not have at least $250,000 ($1/4 million) income, there is less than 1% chance you will be audited. They have limited resources and are after "big fish".

Let's also not blow this out of proportion. We're talking about ONE person paid for ONE job. I'm guessing it was less than $500? Odds are any auditor would pass that. I wouldn't make a habit out of it for $10s of thousands of expenses, but for a one-off I would not be at all concerned as long as the rest of your ducks are in a row.

IRS auditors aren't mean people. They just do their job, like all of us. Some are probably stricter than others, but overall they're trying to make sure we're doing what we're supposed to do. Cash expenses can be deducted like any other. I keep a carbon copy receipt book in my car for just such purposes.

When I negotiate a price, I don't ask for nor do I expect to receive a "discount" so someone can cheat on their taxes. I inform all contractors who ask to be paid in cash up front that if we go over $600 for the year, I will 1099 them. If they don't like that, I find another contractor.
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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Erik W. My god I love the internet! It is amazing the things people will say when it cannot be verified... Just like a self-serving receipt which cannot be independently verified.
My Friend is in the IRS- He said don't worry about getting Audited!
If you negotiated a cheaper cash price you are engaging in fraud! Oh- but wait, unless I only negotiate to pay them less then $600 then I'm not.
What poppycock!
The very basis of advocating the use of self-serving, non-verifiable receipts is eroded in your arguments: Just don't use too many. Really? How much is that? I can show up to an audit with 12,000 legitimate 1099's, I can show up with 10,000 cancelled checks, 6,000 credit card receipts. If I can't show up with 10,000 hand written, self-serving, unverifiable scraps of paper then they are not, by example, legitimate.
If you are paying contractors <$600 at a clip in cash and not receiving a negotiated benefit then it is ridiculous not to cut them a check so that you can have an independently verified receipt of the transaction.
You must always engage in best practices, because your habits and practices will grow as you grow. So while Erik's imaginary friend in the IRS (not imaginary? Can we get a name? no, no it's the internet) may not say you are a target, one day you might be.
Preparation and proper record keeping go a very long way.
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Morgan Gruelle
OP
St Louis MO · Member since 2019 · 18 posts · 6 votes
6y
well first off let me say im just getting started here. I purchased my first rental property (a triplex) back in late July. I have been trying to get organized and keep my ducks in a row but so far I have been utilizing friends around town that dont have real day jobs so I let them do work for me when I need it, because it helps them out and they also do the work for pretty cheap. I had a couple of different people cut the grass before I found a reliable lawn service and I paid those guys cash. I also am having another friend paint some rooms and cabinets for me, and i actually dont think these guys even have bank accounts one guy doesnt even have a car so its not really reasonable to pay him with a check nor have I ever really been the kind of person to write checks. The only other instance was the purchase of a replacement refridgerator off craigslist I paid cash for. None of these expenses are over $600. So I just have a few one off instances here where I want to be able to keep track of these expenses. This is definitely something I will try to get away from as I progress through my real estate career, but for now I am making due with the tools I have until I get a better system and workers in place.
Can anyone tell me what the significance of an expense being more than $600 is regarding a business expense?
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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Morgan Gruelle Claiming an expense over $600, paid to an individual, would require you to 1099. At least in my world. This is also required where you are paying an LLC or sole proprietor (plumber, electrician) who are pass throughs, regardless of by check or cash.

I would not put much faith in the "you'll never be audited, and if you do you they are great people!" Despite what was represented, this is a breakdown of audit #'s.

It is my belief, in my world, that Landlords will be under increased scrutiny - we are an easy target that everyone hates and because of the 199A deduction. We shall see.

Regardless- I have never felt more comfortable then when I listened to all of the corners being cut as well as, advocated to be cut, on here.

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Morgan Gruelle
OP
St Louis MO · Member since 2019 · 18 posts · 6 votes
6y
@Patrick M. What is the 199A deduction? I havent heard of that, how can it benefit me? Is that something I should be able to use this year?
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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Morgan Gruelle I would advise against it this year, but I believe you should prepare yourself to see whether you qualify for next year. It allows for a deduction from your income of 20% of your rental property income, but it requires you to qualify- and part of that qualifying is rigorous record keeping among other things. Research it to see if you "can" qualify, and then work at qualifying for 2020- I think it will be gone soon.
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Erik W.
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
6y
@Patrick M.....well, since nothing I can say at this point would convince you anyway, so I see no further reason to supply you with any information on this topic.
This is the Internet. I could be making everything about myself up. So could you. You can't verify me and I can't verify you. Neither can anyone else on BP. The difference is we take it for what it's worth. No doubt you read that line I purposefully and conspicuously placed at the top of my original post.
.
We can--however--verify one thing at least based on this thread: I am a polite person. ;-)
1 Reply
Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Erik W. you are indeed.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Patrick M.:
@Michael Plaks You can advocate your method, but I think it is a very dangerous and slippery slope.

Yes, I can advocate my method. Over 20 years of successfully defending my clients in IRS audits.
Do you have anything except bravado and insults?
4 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
@Morgan Gruelle

The 199A deduction mentioned here only applies if you have positive income after all deductions, including depreciation. For most small landlords with mortgage-financed properties, the result is a negative number (a loss), so 199A deduction is completely irrelevant.

For those who do have positive net income from rentals, 199A deduction is pretty much a given (except for very special cases like triple-net leases) and, contrary to the opinion stated by another person, does not require any complicated documentation or jumping thru the hoops.
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
6y
IRS form W-9 (your friend has income that needs to be declared to offset your deduction).

And a business check from your business account is the cleanest way.

You can get manual business checks and a binder for this.

And if you want to look like a big spender cash tipping use a petty cash system.

Good Luck!

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Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
6y
In answer to the original question get a written receipt always for the payment. People selling fridges on craigslist will not take a check but you can get them to write a receipt either on a piece of paper or on some form you run off. Date, amount, item, signature. I have done it for furniture and tools, also personally for cars. You sometimes have to show what you paid for something. For a service provider do the same, it proves you paid them. That said checks and credit cards are preferable documentation when they can be used.
For a service provider you pay over $600 a year you are supposed to provide them a form at the end of the year called a 1099 so they pay taxes on that income. If you deduct their services (over $600) from your rental income the IRS will expect you have sent them a 1099. For an audit a receipt for labor over $600 might be an issue. I doubt purchase receipt will be an issue.
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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Michael Plaks "199A deduction is pretty much a given (except for very special cases like triple-net leases)"
This is inaccurate, you must keep accurate records to reflect that you are a Qualified Business- Spending at least 250 hours in rental activity. You must also determine how your rentals are classified and whether the 250 can be spread across all. And you must keep accurate records- if you do not issue proper 1099's by the end of January you will pay increasing penalties.
Again, it is a mistake to keep sloppy records and fill out self-serving, un-verifiable receipts to yourself. I am very surprised it is being advocated by a professional.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
Cash is legal tender and business expenses paid in cash are absolutely tax deductible

easiest thing is to log it in whatever app you like then at the end of the year give to your tax person

simple
1 Reply
Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
Adding last time I checked the IRS stated that purchases for items under $ 75 do not need a receipt (last time i looked was several yrs back so verify number)
i suggest *strongly* that folks find a CPA that has experience in RE to help with these matters.
ETA: the ENTIRE marijuana industry is run on cash. Sooooooo....all it takes is good record keeping

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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Mary M. the $75 “belief” is incorrect and never was correct, but in this thread I don’t think that matters.
No one is disputing paying cash is legitimate- it is a more nuanced discussion which touches upon documentation of the expense.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
Documentation is easy. Get a reciept from those you pay, and if it is a small amount just recording the purchase in your log is good enough.
I have gone thru audits as part of my job and this has worked for the auditors. You just need a record.
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