The ability to deduct expenses on your tax return often boils down to whether you've kept the proper records or not. This is especially true when it comes to write-offs for travel and entertainment expenses. Tax law has a special set of rules for these expenses. Here's what you need to know.
- Understand the basics. Generally, you're required to substantiate expenses for traveling away from home on business, including meals and lodging, local transportation, and entertainment and business gifts. The specific information you'll need for each expense consists of five items.
1. The amount
2. The time and place
3. The business purpose
4. The business relationship of the person being entertained
5. The date and description of business gifts.
- Do it now. Records for travel and entertainment expenses must be "contemporaneous." Although this doesn't mean you have to log your expenses as soon as you shut off your car engine, you can't wait until tax filing day, either. Compiling the records on a weekly basis is generally sufficient.
- Be adequate. Another requirement for travel and entertainment expense deductions is that records must be "adequate." According to the IRS, adequate evidence shows the amount, date, place and main character of the expense. For example, keep receipts from hotels when you stay overnight on business, and restaurant and bar tabs for entertaining business clients. Credit card statements can also corroborate the receipts. As a last resort, the IRS says you may offer a written or oral statement containing specific information to help prove an element of the expense with other supporting evidence.
The IRS has a long history of targeting travel and entertainment expenses during audits. Make sure you establish a recordkeeping system that will stand up to scrutiny.
Ong & Company is a professional accounting, tax, and advisory services firm. Our team of CPAs specialize in helping small businesses and individuals minimize tax expenses and maximize after-tax income. Headquartered in Corporate Woods in Overland Park, Kansas, we serve clients across the United States.