Special Expense Deduction Rules

In many cases, if you don't have records of a particular business expense, but it's obvious that you must have incurred it, in an audit situation the IRS will estimate the amount of your expenses and allow you to deduct them. An example would be a retailer who has incomplete records of inventory purchases — the IRS will come up with a reasonable estimate of what the purchases should have been.

However, certain types of expenses, which the IRS has found to be particularly susceptible to cheating, are subject to special documentation rules. The following expenses must generally be proven by adequate records or other evidence; if you have no records, the deduction will be completely disallowed:

• expenses for travel away from home (including meals and lodging while traveling)
• meals and entertainment expenses
• business gifts
• cars and other means of transportation
• computers, and other property of a kind that is generally used for entertainment or recreation

For meals, entertainment, business gifts and computers, you must keep receipts for any expense that is at least $75. You must have a receipt for all lodging expenses whatever the amount. For transportation expenses, a receipt is not needed if it is not readily available.

You must also substantiate each individual expense as to:

• amount,
• time and place, and
• business purpose.

For entertainment and gift expenses, you must also note the business relationship of the person(s) being entertained or receiving a gift.

These things can be noted on the back of the receipt, or recorded in a formal expense log. For vehicle expenses, you'll also have to keep a mileage log.

Save Time There is no requirement that you keep a contemporaneous log of your business deductions. However, the closer in time to the expenditure or use that you record the expense (and provide necessary documentary evidence), the more valuable it will be to prove the deduction is appropriate. Also, if you get into the habit of systematically recording your expenses and all the necessary supporting facts and records, you may discover that you have many more perfectly legitimate deductions than you thought!

© 2024 Wolters Kluwer. All Rights Reserved.