Recently we encountered a couple of articles on how the IRS denied taxpayer deductions because the owner could not provide proper documentation. While the taxpayer presented canceled checks, spreadsheet or credit card statements, this proved use of funds but without the receipts there was no way to prove ordinary and necessary in the operation of the business. Let’s establish what is adequate business records based on the IRS definitions.
Receipts = physical or email notification from a purchase made by check, cash or credit card. To a business these should be treated like GOLD, especially if you pay cash. They can include vendor bills, credit card payment receipts, or emails. Sometimes the receipts are descriptive, most times not so much.
Create a Habit and Clear your Mind
We all have that ability to recall our driver’s license number or the address of the first house we owned. When it comes to business expenses and travel however, most of the times that ideal memory recall just isn’t there. That is why it is a good habit to capture info about your activity at the time it occurs. Writing on your receipts the following info will not only help your memory but also communicate coding to your financial team. Even the IRS notes, “A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall”.
Here are a few items to consider about any receipt you come across.
- Is it related to a specific client activity? Billable or not?
- Is it marketing related? Potential or existing clients?
- Personal or business related, or both?
We recommend keeping all receipts, regardless of the dollar amount spent especially if you paid cash. IRS guideline says documentary evidence is not needed if any of the following conditions apply:
- Expense other than lodging is less than $75
- Transportation expenses (our interpretation is that this refers to taxi, bus, train etc.)
IRS Guidelines Adequate Recordkeeping
To be considered an adequate record for IRS standards, all receipts must show the amount, date, place (name and address) and character of the expense. So a cancelled check or your credit card statement is NOT enough info to substantiate your business expense. While both of these items are adequate proof of payment because they don’t normally have the address of the vendor they are not adequate for proofing business related expense.
Here are a few normal business expense categories that will need a little “extra” info at time of purchase.
Tearing off the bottom of that paper diner ticket just isn’t going to cut it. Neither is just the signed copy of the credit card receipt. Now if you add # of people served then it qualifies. Here is the info the IRS considers adequate proof of a meal receipt.
- Name/location of restaurant
- # of people served
- Date/amount of the expense
Most business owners don’t separate meals from entertainment, but in case you throw a lavish event to celebrate your clients, your business or to lure prospects items to consider include:
- You or a team member must be present at all times, and you’ll need to prove this (not sure if they are asking for photographic evidence or time tracking)
- Detailed listing of the people that attended and their relationship to you and your business – that includes documenting spouses/significant others/children
- Business purpose for the expense or the business benefit gained or expected to be gained
Gifts – IRS limit $25/person per year
Cost, date and description are required here. Plus your tax professional is going to want to know how many people did the gift benefit because the IRS limit is $25/person. Anything over that amount is non-deductible as a taxable business expense. Perhaps you should have a conversation with your tax professional about what constitutes a marketing expense or look for logo branded items.
Great you have your airport ticket and hotel receipt. IRS also wants to know the PURPOSE of the travel or the business benefit gained or expected to be gained.
For more information please connect with your tax professional or review this IRS document.