Business Expense Substantiation
Many people often assume that a bank statement or credit card statement is sufficient proof of substantiation when your tax return is examined. Unfortunately, this is not the case. At a minimum, proof of payment is typically required as is an invoice or receipt. In a recent Tax Court case (Mark Stroff, TC Memo 2011-80) the taxpayer was allowed a portion of claimed expenses for casual labor when he presented a list of 13 individuals’ first names that corresponded to names on his weekly planner, though there was no record of actual payment. However, the taxpayer was denied deductions for meals and entertainment, vehicles, telephone, and legal fees due to lack of documentation. While he lucked out on the casual labor, he lost on many of the other expenses.
The importance of good books and records cannot be understated, especially when it comes to expenses related to travel, meals and entertainment. Meals and Entertainment expenses fall under Section 274 of the Internal Revenue Code which requires at a minimum:
- The amount of the expense
- The time and place of the meal, entertainment, etc.
- The business purpose of the expenditure
- The business relationship of the various parties in attendance – who attended and what is their relationship to the event?
In other words, Who, What, Where, When, and Why is required for all meals and entertainment expenses. The best recommended strategy is to write on the back of the receipt as soon as possible after the event is over the names of the people that were in attendance and a brief description of the purpose of the meeting and what was discussed. This, in combination with the information on the receipt and a good calendar or planner that you can refer back to goes a long ways towards providing adequate substantiation during an examination.
As always, if you have questions feel free to give us a call.
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