Now that we know the qualifications for these deductions, let's talk substantiation and record keeping...
Detailed records documenting the amount paid, time and place of the expense, people attending, business purpose, and nature of the meeting are always required. For travel related meals you can either maintain your receipts or use a standard meal allowance, or per diem for the destination.
Documentation is critical, but there is no “right” way to keep your business records. The IRS says there is no particular method of bookkeeping you must use in your business, but the method you choose must clearly and accurately reflect income and expenses. When you are at the mercy of the opinion of an individual IRS auditor, it is always best to be as detailed as possible. IRS agents look for personal meals or other deductions that don’t satisfy their substantiation rules.
- Keep your receipts! This may seem obvious, but keeping your receipts organized can require a little work. However, it is worth the effort because it is the most critical thing you can do to support a deduction. If you have trouble keeping all your receipts in order, we suggest scanning them to a folder or taking pictures of receipts. Your deduction will likely be thrown out without a receipt.
- Keep records of any reimbursements you receive to cover your out of pocket. Only your net out of pocket cost is deductible.
- If you are an employee (not self-employed), and your unreimbursed business expenses are fairly small in total for the year, you may not be able to utilize the deduction. Only deductions in excess of 2% of your adjusted gross income can be deducted if you itemize. If you take the standard deduction, you would need a very large amount of out of pocket expenses to see any benefit.
- Maintain bank or credit card statements showing the charges being charged to you and being paid as well as the original vendor’s receipt.
- Separately track marketing expenses and entertainment expenses as marketing is fully deductible while entertainment is only 50% deductible.
- Don’t try to re-create records at the end of the year or later. Stay on top of your records throughout the year. These expenses attract a lot of attention from auditors, and you need to be prepared to defend the deductions when challenged.
- If an expense is both personal and business related, be sure to only deduct the business-related portion.
- When in doubt, give us a call! If you have questions, give us a call! If you need clarification or more information on anything, give us a call! Seriously, we like talking to you and want to help you get the maximum benefit of every deduction available. We enjoy having informed clients and staying off the IRS’s radar, so please never hesitate to reach out to us.