No “business purpose” documentation equals no expense deduction

So have you collected the right justification for all those travel or meals and entertainment receipts?

Many court cases are showing how a new IRS approach is denying otherwise well-documented tax deductions. One attorney deducted travel on his IRS Schedule C, provided amounts, times, places, mileage, parking, locations of meetings; submitted receipts, bank statements, and a copy of a calendar that included names, times, and locations. But, under IRC §274, Disallowance of certain entertainment, etc., expenses, this was not quite enough. ​The court ruled that the documentation was not sufficient for it to determine the business purpose of the travel or even if there was a business purpose. ​

Read on to find out what the court really wanted to see as justification of those travel expenses, and for a quick checklist to use before sending receipts to your bookkeeper. 

The court wanted to see contracts with clients or other substantiation of why he made each trip and what was discussed or what work was done. Also, family members sometimes accompanied the taxpayer on the trips, and he did not provide enough detail to separate business from personal travel expenses in his documentation. [Near v. Commissioner, T.C. Memo. 2020-10]

So I ask again, have you collected the right justification for all those travel or meals and entertainment or for any business expense for that matter?

Here's a quick checklist to use before submitting your receipts to your bookkeeper. 

• Receipts must include 
  • Date
  • Time
  • Vendor
  • List of item(s) purchased
  • Total Amount
  • Payment Type (Cash, Credit Card, Gift Card, etc....)
• Justification for a receipt must include
  • Customer/Contract/Job/Project the expense should be put against noted on it
  • Business meetings and meals
    • Note describing who was present
    • Note describing the business issues discussed (Submit your agenda to your bookkeeper to attach to the expense in your accounting system)
  • Office Supply Stores
    • Note such as "Supplies for office, marketing department and personnel" 
    • Separation of personal purchases via a note
  • Business vs. Personal Expenses must be clearly noted
    • Travel
      • Provide an itinerary that clearly shows business highlighted vs. personal travel
      • Highlight business leg of trips on flight receipts for easy reference
      • Highlight business traveler's meals, again for easy reference
      • Make sure you note any extra nights at a hotel for personal travel as such 
    • Work completed by the expense can be written on the receipt or put in an email to you bookkeeper, who can attach it to the expense in your accounting system. 
• Justification of Mileage
  • An accurate paper book or electronic mileage log must include the miles stated on the vehicle at the beginning of the year and for each use of the vehicle., and the mileage at the end of the year 
  • You should track business and personal use. 
    • Date
    • Starting mileage
    • Ending mileage
    • Business purpose or Personal Use 
      • Business Purpose Examples: 
        • Mobile notary business:
          • "Smith Loan Signing"
          • "Doe Debt Resolution"
        • Service business:
          • "Johnson contract" be sure you have the contract to back this up come audit time.
          • "Doe Meeting: Site walk through and permit discussion"
      • Personal Use Examples:
        • Groceries
        • Soccer
        • School

Your business purpose notes don't have to be long journals, but they need to be clear enough for someone that doesn't know your business to determine a clear connection between the expense and the business purpose. 

If you are a nonprofit or small business looking for bookkeeping that makes your expenses tracking easier, contact me! cmweaver [at] cwbookkeepingservice [dot] com or 865-951-7407.