Since 2001, we provide tax expertise & strategies for: Corporations, Partnerships, LLCs & Trusts.

How To Prove Business Tax Deductions or Expenses?

TaxBizPro, LLC Posted on: August 17, 2009 17:00

Generally, you cannot deduct amounts that you approximate or estimate. You should keep proper records to prove your expenses or have sufficient evidence that will support your own statement. You must generally prepare a written record for it to be considered Proper. This is because written evidence is more reliable than oral evidence alone. However, if you prepare a record on a computer, it is considered a proper record.

What Are Proper Records?  You should keep the proof you need in a log, account book, diary, statement of expense, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.

         Exception.   Documentary evidence is not needed if any of the following conditions apply.

·     You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. (Accountable plans and per diem allowances)
·     Your expense, other than lodging, is less than $75.
·     You have a transportation expense for which a receipt is not readily available.
Proper evidence.   Documentary evidence ordinarily will be considered Proper if it shows the amount, date, place, and essential character of the expense.  For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information.
·     The name and location of the hotel.
·     The dates you stayed there.
·     Separate amounts for charges such as lodging, meals, and telephone calls.
A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information.
·     The name and location of the restaurant.
·     The number of people served.
·     The date and amount of the expense.
A cleared check, together with a bill from the vendor, ordinarily establishes the cost.  However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose.
Timely-kept records.   You should record the expense at or near the time of the expense use and support it with sufficient documentation. A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall.  If you maintain a log, diary or account book on a weekly basis that is sufficient and considered a timely-kept record.
What If I Have Incomplete Records? If you do not have complete records to prove that an expense was for business purpose, the following would be required:
·     Your own written or oral statement containing specific information about the specific expense, and
·     Other supporting evidence that is sufficient to establish the business purpose.
This chart should help you with understanding it better.
If you have expenses for: THEN you must keep records that show details of the following:
  Amount Time Place or
Business Purpose
Business Relationship
Travel Cost of each separate expense for travel, lodging, and meals. Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Dates you left and returned for each trip and number of days spent on business. Destination or area of your travel (name of city, town, or other designation). Business purpose for the expense or the business benefit gained or expected to be gained.
Entertainment Cost of each separate expense. Incidental expenses such as taxis, telephones, etc., may be totaled on a daily basis. Date of entertainment. Name and address or location of place of entertainment. Type of entertainment if not otherwise apparent. Business purpose for the expense or the business benefit gained or expected to be gained.
For entertainment, the nature of the business discussion or activity. If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity.Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you.
For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal.
Gifts Cost of the gift. Date of the gift. Description of the gift.
Transportation Cost of each separate expense. For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Date of the expense. Your business destination.

Business purpose for the expense.

Exceptional circumstances.   If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Reasons beyond your control include fire, flood, and other casualty.

Separating expenses.  Each separate payment is generally considered a separate expense. For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. You must record them separately in your records.
Combining items.  You can make one daily entry in your record for reasonable categories of expenses. Examples are taxi fares, telephone calls, or other incidental travel costs. Meals should be in a separate category. You can include tips for meal-related services with the costs of the meals.
Car expenses.  You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use.
Allocating total cost.  If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. To do so, you must establish the number of persons who participated in the event.
If your return is examined.  If your return is examined, you may have to provide additional information to the IRS. This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed.
How Long To Keep Records and Receipts? You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. A return filed early is considered filed on the due date. For a more complete explanation of how long to keep records, see Publication 583.
Posted in:Business Tax ArticlesThis article was written by TaxBizPro, LLC 2023, all rights reserved ©.  

Comments are closed.

Important Tax Disclosure
IRS Circular 230 Legend: Any advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax payments or penalties. Unless otherwise specifically indicated, you should assume that any statement in this website or articles that relating to any U.S. federal, state, or local tax matter was written in connection with the promotion or marketing. Disclaimer: Any articles herein is designed for general information only. The information presented at this site should not be construed to be formal legal or tax advice. Each taxpayer should seek advice based on the taxpayer's particular circumstances.

1501 Broadway 12th Floor
Manhattan, NYC, 10036 USA
(212) 465-3337