how do you track expenses you pay cash for?

[Morgan Gruelle]

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?

[Michael Plaks]

@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.