If your small business claims deductions for meals, entertainment, auto and travel expenses, be aware that the IRS may closely review them. Too often, taxpayers don’t have the necessary documentation to meet the strict requirements set forth under tax law and by the IRS.
Guidelines for documenting meals, entertainment, auto and travel expenses
DO keep detailed, accurate records. Documentation is critical when it comes to deducting meals, entertainment, vehicle and travel expenses. You generally must have receipts, canceled checks or bills that show amounts and dates. In addition, there are other rules for specific expenses. For example, you must record the business purpose of entertainment expenses, as well as the names of those you entertained and their business relationship to you. If you reimburse employees for expenses, make sure they comply with the rules.
DON’T re-create expense logs at year end or wait until you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. Require employees to submit monthly expense reports.
DO keep in mind that there’s no “right” way to keep records. The IRS website states: “You may choose any recordkeeping system suited to your business that clearly shows your income and expenses.”
DO respect the fine line between personal and business expenses. Be careful about trying to combine business and pleasure. For example, you can’t deduct expenses for a spouse on a business trip unless he or she is employed by the company and there’s a bona fide business reason for his or her presence.
The Bottom Line
These are general rules and there may be exceptions. Just know that with proper guidance, you can maintain records that can stand up to IRS scrutiny. Also, please keep in mind that any business expenses must meet the ordinary and necessary threshold to be deductible. Read this article for more information.