Demystifying Petty Cash Deductions: A Comprehensive Guide

Petty cash, a small fund of cash used for minor business expenses, can be a convenient alternative to writing checks or using credit cards. However, claiming deductions for petty cash expenses requires proper documentation and adherence to IRS guidelines. This comprehensive guide will delve into the intricacies of petty cash deductions, providing a step-by-step approach to ensure compliance and maximize tax savings.

Eligibility for Petty Cash Deductions

Petty cash expenses are generally deductible if they meet the following criteria:

  • Ordinary and necessary: Expenses must be related to the operation of the business and not personal in nature.
  • Documented: Receipts or other supporting documentation must be retained for each expense.
  • Reasonable: Expenses should be commensurate with the size and nature of the business.

Documentation Requirements

To substantiate petty cash deductions, businesses must maintain meticulous records, including:

  • Receipts: Original receipts should be retained for all petty cash purchases.
  • Detailed descriptions: Receipts should include a clear description of the purchase, including the date, vendor, amount, and business purpose.
  • Petty cash log: A log should be maintained to track all petty cash transactions, including the date, purpose, amount, and employee responsible.

Step-by-Step Guide to Claiming Petty Cash Deductions

Step 1: Establish a Petty Cash Fund

Determine the appropriate amount for the petty cash fund based on the frequency and size of business expenses.

Step 2: Designate a Custodian

Appoint a responsible employee to manage the petty cash fund and ensure proper documentation.

Step 3: Replenish the Fund

When the fund runs low, replenish it by issuing a check from the business account. Record this transaction in the petty cash log.

Step 4: Document Expenses

Require employees to submit receipts or other supporting documentation for all petty cash expenses.

Step 5: Reconcile the Fund

Periodically reconcile the petty cash fund by comparing the balance in the fund to the total of the recorded expenses. Any discrepancies should be investigated and corrected.

Step 6: Claim Deductions

Deduct eligible petty cash expenses on the business tax return. Attach supporting documentation, such as receipts and the petty cash log, to the return.

Common Mistakes to Avoid

  • Mixing personal and business expenses: Keep petty cash separate from personal funds to avoid disallowed deductions.
  • Lack of documentation: Retain all receipts and supporting documentation to substantiate expenses.
  • Insufficient record-keeping: Maintain a comprehensive petty cash log to track all transactions.
  • Excessive fund size: Keep the petty cash fund at a reasonable level to minimize the risk of theft or misuse.

Claiming petty cash deductions can provide significant tax savings for businesses. By following the guidelines outlined in this guide, businesses can ensure compliance with IRS regulations and maximize their deductions. Proper documentation and meticulous record-keeping are essential for substantiating expenses and avoiding potential audits.

9 HUGE Tax Write Offs for Individuals (EVERYONE can use these)


Can you write off petty cash?

It might seem tedious to log every tiny expense in this way, but there’s nothing petty about petty cash expenses. You must document all of your petty cash expenses if you want to write them off on your taxes, just like you would any other income or expense.

What are the rules for petty cash?

All Petty Cash Funds must be stored in a secured device such as a safe or cash box in a locked cabinet. Only the Petty Cash Fund custodian should have keys to the box and cabinet. Funds should never be left unattended and unsecured. Funds within a box need to be locked and behind locked doors when not attended.

How is petty cash treated in accounting?

In accounting, you must treat petty cash funds as current assets. It appears as a petty cash balance with other cash accounts, such as savings or checking accounts. Once the custodian records the entry in the branch’s accounting books, they must receive the cash against it.

Can you write something off if you pay cash?

It does not matter whether you pay by credit card, check or out of a cash box. Just like other deductions, you still have to record the details of the purchase or payment. The IRS lists the information needed to backup a deduction on your returns, so log that directly on the receipt.

Should I write off petty cash on my taxes?

You must document all of your petty cash expenses if you want to write them off on your taxes, just like you would any other income or expense. Every once in a while, compare the petty cash balance recorded in your petty cash log with the actual remaining amount of cash in your lockbox.

Can a petty cash fund pay a check?

Any expense that’s too small to write a check for can be paid with cash from the petty cash fund. Note that it’s a good idea to set a maximum dollar amount for allowable expenses. The petty cash custodian is the person accountable for the petty cash fund.

Do you need a petty cash policy?

You have to craft a clear petty cash policy as it sets out the purpose and use of the petty cash fund. With a petty cash fund in place, you can pay for small expenses like postage stamps, office supplies, office food and drinks, fuel expenses, parking tickets, and other unpredictable expenses.

Can petty cash be used in accounting?

Once you’ve entered your petty cash transactions on the books, your bookkeeping can use them while creating financial statements—so you can accurately factor petty cash into your expenses. If you use accrual accounting, the top-up may be credited from accounts payable instead of cash.

Leave a Comment