One thing you can always count on during an audit is a
request for documentation supporting meals and
entertainment expenses. The IRS has found that these
expenses are heavily abused and are an easy way to generate
additional tax revenue, not to mention additional revenue
from penalties and interest.
You don't have to spend a lot of time reading tax cases to
find one where meals and entertainment expenses were
disallowed specifically because of improper documentation.
*Here are a few examples from recent cases:
The taxpayer's business meal expenses did not satisfy the
substantiation requirements because they did not include
the taxpayer's relationship to the parties involved or
specify the business purposes of the meals.
The taxpayer's meals and entertainment deductions were
disallowed because the taxpayer couldn't provide anything
to tie the deductions to specific copies of receipts,
checks, or other documents. Plus, in the few records the
taxpayer did provide, there were duplications and other
irregularities in the records making them unreliable
altogether.
A spreadsheet listing the numbers the taxpayer put on his
return was insufficient to substantiate or use to
reconstruct business expenses for meals and entertainment.
This means that even if a meal or entertainment expense is
perfectly legitimate, it can be disallowed if the
documentation is not proper!
How to Protect Your Meals and Entertainment Expenses:
In my teachings, I dedicate an entire session to Travel,
Meals and Entertainment. One of the strategies I share is
how to use the IRS rules to make money on your meals and
entertainment by turning your current non-deductible
expenses into legal tax deductions. One of the key parts
to making this strategy work is protecting your meals and
entertainment deductions by keeping proper documentation.
Use this short checklist for all of your meals and
entertainment expenses and your deductions will be well
protected:
____ Amount of each separate expense
____ Date of expense
____ Location of expense
____ Business purpose of expense
____ Names and business relationship of the people involved
It may seem like quite a bit for each and every meal and
entertainment expense, but here are a few ways to make this
process very simple:
Get a receipt! The first 3 items - amount, date and
location - are usually printed on the receipt. Then simply
write the remaining 2 items - business purpose, names and
business relationship on the receipt.
I always recommend scanning your receipts so you have an
electronic copy. Many receipts tend to fade in just a year
so your documentation could disappear! A scanned copy
won't fade and can help reduce the clutter of receipts.
If you don't get a receipt, then document all of the items
listed above (either write them down or type them up) and
then attach support for the payment. Here are a few
examples:
If you paid by check, attach a copy of the check and your
bank statement showing it cleared your bank account.
If you paid by debit or credit card, attach a copy of your
bank or credit card statement showing the debit or charge.
If you paid by cash, try your best to get a receipt!
Otherwise, make sure your documentation is precise and make
sure a very small percentage of your expenses fall into
this category of paid by cash and no receipt.
**Important Tip!
Don't force it! If a meal or entertainment expense doesn't
meet the business purpose requirement because it was a
personal expense, then don't deduct it. If the IRS finds
personal expenses being deducted, then all of your other
expenses will be heavily scrutinized, putting your
legitimate deductions at risk for the slightest reason.
----------------------------------------------------
Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on these strategies, Tom is an adjunct professor
in the Masters of Tax program at Arizona State University.
For more information please visit
http://www.provisionwealth.com
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