Required com­po­nents and in­for­ma­tion for a proper invoice

An error-free invoice is an important re­quire­ment for busi­ness­es who want to avoid legal conflicts with customers or the IRS. Though invoices are not subject to strict reg­u­la­tion in the US, and there are no input tax de­duc­tions that can be claimed from them like there are in many other countries, main­tain­ing proper invoices is nonethe­less important. We explain to you which com­po­nents an invoice should include and which ad­di­tion­al re­quire­ments there are for the issuance of a correct invoice.

An invoice is a written document where the supplier lists the goods and/or services provided in detail and requests payment from the customer. There’s no real oblig­a­tion to issue an invoice, since the claims of the contract partners - the money claim on the one hand and product liability on the other - are binding even without one. But legally speaking, it is always better to have clear doc­u­men­ta­tion of any claims you may want to make. For a com­mer­cial document to be legally rec­og­nized as an invoice in the United States, the following mandatory spec­i­fi­ca­tions are made in Title 19 §141.86 of the Code of Federal Reg­u­la­tions and the document must contain the following:

✓ Mer­chan­dise port of entry des­ti­na­tion (if imported)
✓ Name and address of both seller and recipient, as well as the date of sale
✓ Detailed de­scrip­tion of the mer­chan­dise
✓ Quan­ti­ties of mer­chan­dise in weights and measures
✓ Price of each item of mer­chan­dise
✓ Currency type, both according to system (i.e. dollars, euros, etc.) and kind (i.e. gold, silver, paper)
✓ All ad­di­tion­al charges on the mer­chan­dise (shipping, insurance, etc.)
✓ All rebates, drawbacks, and bounties, sep­a­rate­ly itemized
✓ Country of origin of mer­chan­dise
✓ All goods and services for the pro­duc­tion not included in the invoice price, such as dies, molds, tools, and en­gi­neer­ing work (if furnished outside of the USA)

As with sales tax, re­quire­ments regarding record­keep­ing vary from state to state. Be sure to check the leg­is­la­tion in your state of business to make sure that you’re compliant with the specific guide­lines. For countries other than the US, a VAT number or tax iden­ti­fi­ca­tion number would also generally be included in the invoice. The IRS does supply busi­ness­es with iden­ti­fi­ca­tion numbers for taxing purposes, but these are not required on invoices.

Here is where you list the date on which the delivery was received by the customer or the service was performed. For service per­for­mance dates, it’s pretty decisive - simply list the date when the service was completed. For the delivery date, you can either specify the date from the delivery note or write the expected date if the exact time hasn’t been de­ter­mined yet.

Numbering your invoices is the best way to keep track of your records and avoid any issues with missing doc­u­men­ta­tion. There are multiple methods of doing this, but all employ a sequence of con­sec­u­tive numbers. The unique invoice number is used to clearly identify the invoice. Com­bi­na­tions of number and letters are also possible, as is including the date of service or customer number.

Make sure that you include all delivered goods or all billed services in­di­vid­u­al­ly and with a com­mer­cial de­scrip­tion in the invoice. That way, you can simply use col­lec­tive terms like “Office furniture”, “Tableware”, “Drain­pipes”, etc. But terms that are too general, such as “Gift items”, aren’t suf­fi­cient de­scrip­tors. In the same line, enter the prices (total price and price per unit, if ap­plic­a­ble).

The charges (net and gross invoice), the tax amount (price plus sales tax), and the tax rate (sales tax in percent) must be listed in­di­vid­u­al­ly in the invoice. If the customer receives a tax exemption, then the invoice also needs to indicate which delivery or service the exemption is applied to. This also goes for any other re­duc­tions such as discounts, bonuses, etc.

As a small business, con­sid­ered by the IRS to be any business with assets under $10 million, there are some different reg­u­la­tions to pay attention to. Tax ex­emp­tions, returns, and payroll reg­u­la­tions are points of concern when running your own business and still at­tempt­ing to meet federal tax oblig­a­tions. Small Business Taxes: The Virtual Workshop, available on the official IRS website, is a spe­cial­ized resource for answering all taxation questions and keeping your small business tax compliant.

As with any kind of record­keep­ing, it’s rec­om­mend­ed to hold onto any tax-related records for as long as they are ap­plic­a­ble - if the expenses have yet to be filed or have just recently been filed, it’s a good idea to hold onto any paperwork. That way, if questions of proof arise, you will have them for reference. IRS rec­om­men­da­tions for record­keep­ing are available on their website.

As it so often goes, there are ex­cep­tions when it comes to invoicing. Special cases include credit items, advance payments or partial services, as well as travel expenses. There are also special rules for invoicing outside of the US.

Credit instead of bill

Credit is issued by the recipient. This doesn’t settle an invoice in the classic sense, where payment is collected, but instead the service provider receives a credit in the amount of the agreed price for the service rendered.

Here, sales tax reg­u­la­tions work just like they would with a regular invoice. The credit issued is treated just as a cash payment would be. It’s important that you identify the credit as such for the taxation au­thor­i­ties.

Advance payments and partial services

In general, invoices don’t have to be paid in advance. Customers are fre­quent­ly given the option to divide services and pay in in­stall­ments. For you as the company, it’s important that you record payments that have already been made in the final statement. Partial services must also be properly taxed.

Travel expenses in the invoice

Whether by train or plane or bus, travel expenses can also be submitted as invoices. These are dealt with as tax de­duc­tions by the IRS and include the following: ✓ Travel between home and business des­ti­na­tion
✓ Fares for taxis or other trans­porta­tion between locations (e.g. airport, hotel, work location, etc.)
✓ shipping of baggage or material between locations
✓ Car use while at business des­ti­na­tion
✓ Meals and lodging
✓ Dry cleaning and laundry
✓ Business calls while on business trip
✓ Tips paid for any expense-related services
✓ Other expenses related to business travel

Invoicing outside the US

When doing business with entities outside of the US, it’s important to check the rules and reg­u­la­tions of the country you’re doing business with to make sure both you and your business partner are in com­pli­ance. Tax reg­u­la­tions tend to follow vastly different, and much stricter, standards and therefore will likely require you to alter your invoice format. When doing business with partners in the EU, for example, including your company’s VAT iden­ti­fi­ca­tion number is an essential component of the invoice. Any North American business con­duct­ing business with an EU country should apply for a VAT number. Check the IRS reg­u­la­tions for in­ter­na­tion­al business as well as the reg­u­la­tions of the specific country or countries with which you are doing business.

Invoicing has the potential to be ab­solute­ly riddled with errors. By sub­mit­ting an incorrect or in­com­plete invoice with your taxes, you might be denied the right to deduct and be stuck with extra costs. These are the most common mistakes that happen while invoicing that you should be sure to avoid:

Required in­for­ma­tion is missing or in­cor­rect­ly entered

If you don’t take account of the re­quire­ments mentioned above when making your invoice, then you won’t fulfill the minimum re­quire­ments and your invoices will not be accepted for taxation. De­duc­tions aren’t issued if the necessary data is not complete and correct on the invoice. Small typing errors generally won’t deny your right to deduct, as long as they aren’t on important in­for­ma­tion. But in­cor­rect­ly listing the tax iden­ti­fi­ca­tion number can lead to sig­nif­i­cant problems.

Tax rate listed too high or too low

If you specify a tax rate that’s either too high or too low, this is a serious billing error. Always make sure that the correct in­for­ma­tion has been entered here. If, for example, you issue a tax rate that’s too high, you’ll have to pay that rate to the tax office. Your customer, though, can’t put the excessive tax rate toward their deduction.

But a tax rate that is too low also has con­se­quences. It’s true that the company applying the tax will only have to pay that rate on their product, but it also means that the recipient can only deduct at the specified rate.

Unau­tho­rized tax credit

Invoices that contain false data are referred to as unau­tho­rized tax credits. If, for example, you list the expense as office im­prove­ments but instead buy a game console for your own use instead of an office computer, the extra tax must be paid.

Invalid invoices

If an invoice has been drawn up without any services actually being performed or de­liv­er­ies taking place, it’s called a bill. Bills are also available if the invoice issuer isn’t actually a business. In such cases, the IRS reserves the right to refuse the invoice recipient’s request for de­duc­tions.

Click here for important legal dis­claimer.