No "Business Purpose" Expense
IRS Denying Well Documented Tax Deductions
I recently read an article about a California attorney that found himself in a bit of a mess regarding business travel expense deductions. The IRS refused to allow his recent business travel tax deductions. He had traveled the state to meet with current clients and held meetings with potential clients. The article went on to include that he made great efforts in documenting all amounts, times and places of the charges. He also had proof of his mileage as well as parking receipts and tickets.
He submitted his receipts, bank statements, credit card charges, and calendar which included the names locations and times of his meetings to the court as proof of his business travels. But according to the U.S. IRC Code 274, disallowance of certain entertainment expenses, etc. says that this was not quite sufficient data.
He eventually had to go to court and the court ruled that there was not efficient documentation to support such travel expenses. This information couldn't help them determine if this truly was a business purpose. The court wanted to see contracts of the clients he met with as well as other documents to verify and solidify his purpose in traveling. They even wanted to know what was discussed and what kind of work was done.
Here's where it got a little muddy for him. Sometimes, his family would accompany him on his trips and it was difficult to separate the expenses between business and personal. We've all done this. I've done this. I suggest that if you take your family along with you on a business trip that you only deduct the expenses that don't include them. Example, breakfast with the family=don't claim as a business expense. Business lunch with a client= claim as a business expense.
This is not the first time I've heard of such a case. These types of cases are growing in number everyday despite the accurate and thorough documentation made. The IRS wants to know who was present at a business meeting or meal and what was discussed. You can no longer write "meeting" or "conference" on your receipts or calendar. No more generic descriptions.
HERE'S WHAT YOU SHOULD DO...
1. Keep all receipts or documents when funds are spent for business purposes.
2. Write on the receipts/document who was present and what was discussed (if expense was for a meal or meeting).
3. Write on the receipt/document why and what the items were purchased for. Don't just write "office supplies". You must include, "office supplies for marketing department's mail campaign."
The IRS is cracking down on fraud. I'd have to say this is a good thing because we all know there are those out there that are not following the rules. This is a form of accountability. I know this makes it more difficult for those of us who are following the rules to a T.
One way to avoid an audit is to make sure you are cross referencing your W-2's with your employer tax returns. The IRS matches the amounts of the W-2 with the employment's tax return filed under the employer's ID. Once this red flag goes off, it's an open door for the IRS to perform a complete audit of your business.
H&R Bookkeeping is determined to help you business owner's avoid any audit. We do our best to stay up to date on any changes in laws as well as actions of the State of Federal Revenue office.
I know this topic probably opens the door of many questions. I'm sure we have in common the desire to never undergo an audit. The more questions asked, the better informed and prepared you will be you are ever audited. If you have any questions regarding this topic, please ask your bookkeeper or your CPA. And as always, we are available for any questions as well.