If you pull out your plastic (whether it’s a debit or credit card), write a paper check, make an electronic transfer, pay with PayPal or any number of ways to make payments, there will be a record of the transaction. It’s no longer just cash passed between you and a seller: the bank becomes a third party to the transaction. Creating a record of the transaction goes a long way to justifying your business expense should an audit occur.
Paying with cash makes justifying that business expense that much more difficult. First of all, you have to make sure to get a receipt (and keep the receipt). Does the receipt show your business’s name on it? Does it show the seller’s name? Without this, you don’t have proof of who paid who. How about a description of what was purchased? The date? Or if you paid cash to an individual, their signature?
If you walk into a store like Office Depot, pay with cash, and keep the receipt, you’re going to be OK. The problematic situation is when the seller doesn’t want to report the cash income. They aren’t going to give you a receipt and definitely won’t sign anything for you. If you still want to do business with this person, that’s fine. You have to accept that the IRS may not allow that business expense because it hasn’t been documented well enough. That means you can’t deduct that expense from your income and will essentially be paying tax on that money. So when you run into somebody who doesn’t want to play by the rules, remember that it’ll boil down to either you or them paying tax on that money. I’d rather it be them, wouldn’t you?