Business Expense Deductions: What are Adequate Records?

June 2, 2015

If you travel for business purposes, you may be eligible to take tax deductions for ordinary and necessary job-related expenses – but your records can’t be haphazard if you want to satisfy the Internal Revenue Service’s substantiation requirements.

To document a business expense properly, you should keep an account book, diary, log, statement of expense, trip sheets or similar record. Along with your record, keep documentary evidence to support each element of an expense.

Travel – When traveling away from home overnight, break down the amount of expense among travel, lodging, meals and incidental expenses. You also need to record the dates that you left and returned for each trip and the number of days spent on business. Include the travel destination. And perhaps the most important item to record is the business purpose of the trip.

Entertainment – Record the cost of each separate expense. For example, if you take a client to a basketball game, separate the cost of the basketball tickets from the cost of the food and beverages consumed at the game. Also disclose the location of the entertainment. The business purpose of an entertainment expense is very important. You must document the dates, places, nature and durations of the business discussions as well as the identity of the persons who took part in these discussions. Document that either you or someone from your company was present during the entertainment.

Gifts – Document the cost and date of the gift. Include a description of the gift.

Transportation – The requirements under this category depend on whether you are using the standard mileage rate or the actual expense method. You are required under both methods to document the date, destination area, business purpose, and beginning and ending odometer readings of your car. In addition to these items, under the actual expense method, you must also segregate each type of transportation expense. Examples of these expenses would be gas, tolls, parking, repairs and maintenance.

Generally, a canceled check with a bill or an invoice from the payee as backup establishes the cost. A canceled check by itself will not be sufficient because it does not establish a business purpose.

You don’t need to write down the elements of every expense on the day of the expense. If you maintain a log on a weekly basis that accounts for the use during that week, the log is considered to be timely kept. Anything beyond a week is not considered contemporaneous.

If you follow this guidance, you will be able to document your business expenses properly and avoid any potential problems with the IRS regarding disallowed expenses. If your employer is reimbursing you, you should maintain this documentation as part of your expense report for your employer’s required substantiation.