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Thursday, August 11, 2016

Factors you must prove to document & substantiate business expenditures


The tax law requires All business owners to keep accurate and complete business records that clearly reflect income and expenses. The tax law also requires specific records be kept that document and substantiate various expenses reported on the tax return.

Failure to comply with the tax law could result in the IRS disallowing the deduction and also subject the taxpayer to additional taxes, various penalties, and interest charges.

Below are some record keeping rules all business owners should  follow for various expenses that are often high audit targets.

Automobile Records (Appointment Book, Calendar, Automobile Use Log etc.)

            Date-Date of each business use of the vehicle.

            Place-Destination by name of state, city or town.

            Total Mileage-Total mileage broken down into business mileage & non-business mileage.

            Business Purpose-Business reason or nature of business benefit derived or expected to be derived.

            Business Relationship-Occupations or other information about persons visited such as, name, title, & organization which establishes the business relationship.      

Business Gifts

            Date-Date of each gift.

            Amount-Total cost of gift.

            Description-Description of gift item.

            Business Purpose-Business reason or nature of business benefit derived or expected to be derived.

            Business Relationship-Occupation or or other information about recipient, such as name, title, & organization which establishes the business relationship.

            (Note: The tax deduction allowed for business gifts is limited to $25 per recipient per year)

Entertainment & Meals

            Date-Date of each entertainment & meal or use of qualifying facility.

            Place-Name and address of place of entertainment/meal.

            Amount-Total amount of each expenditure.

            Business Purpose-Business reason or nature of business benefit derived or expected to be derived, and, the nature of business discussed.

            Business Relationship-Occupations or other information about persons entertained such as, name, title, & organization which establishes the business relationship.

            (Note: The tax deduction allowed for entertainment & meals is limited to 50% of the total allowed expenditure). (Other deduction limitations also apply to certain entertainment).

Travel Away From Home Overnight

            Date-Dates of departure and return and number of days attributable to business activities.

            Place-Destination by name of state, city, or town, (or foreign country, if applicable)

            Amount-Amount of each separate expenditure for travel, local transportation, lodging, entertainment, meals, and other incidental expenses.

            Business Purpose-Business reason for travel or nature of business benefit derived or expected to    be derived.           

            Business Relationship-Occupations or other information about persons visited such as,name, title, & organization which establishes the business relationship.

Casual & Contract Labor

            Each year, every independent contractor MUST provide a completed Form W-9 Request For Taxpayer ID Number

            Contractor's bill/invoice detailing date work was performed and a description of work completed on each project.

            Proof of payment (canceled check, credit card statement)

            Form 1099-Miscellaneous Income to the contractor

            NOTE: Even though you may not be required to issue a Form 1099, doing so will document and substantiate you business expense

CLIENT COSTS INCURRED: Are either reimbursed or not reimbursed.

Client Costs ARE Reimbursed. (Reimbursed Expenses ARE Taxable Income)

            Date-Date expense was incurred

            Description- Description of expense incurred

            Amount-Amount of each expense

            Amount-Amount of each reimbursement

            Business Purpose-Business reason or nature of business benefit derived or expected to be derived, and, the nature of business discussed.

            Business Relationship-Name and business relationship of the party for whom the expense was paid for.  

Client Costs ARE NOT Reimbursed. (Client cost is a Deductible ordinary & necessary business expense)

            Date-Date expense was incurred

            Description- Description of expense incurred

            Amount-Amount of each expense

            Business Purpose-Business reason or nature of business benefit derived or expected to be derived, and, the nature of business discussed.

            Business Relationship-Name and business relationship of the party for whom the expense was paid for.  

Supporting Documents AND Proof of Payment   

Bank Statements

Credit Card Statements

Canceled Check

Electronic Funds Transfer Confirmation

Vendor Invoices & Receipts/Work Orders/Purchase Requests

1099's 

Expense Record Logs

Other

Employees & Independent Contractors

If you hire employees, you MUST do the following-failure to do so could result in substantial penalties and interest charges.

1-Have every employee provide you with a completed Form I-9 (Employment Eligibility Verification)

2-Have every employee provide you with a completed Form W-4 (Employee Withholding Allowance Certificate) (this should also be updated every year with each employee)

If you hire independent contractors, you MUST do the following:

1-Have every independent contractor provide you with a completed Form W-9 (Request for Taxpayer Identification Number).

2-Give every independent contractor a Form 1099-Miscellaneous Income at the end of the year.

            (even if an independent contractor is not required to be issued a Form 1099 Miscellaneous Income Statement, by doing so you will protect yourself if you are ever audited and the IRS requests documentation and substantiation of your deduction for this expense).


This article was written by  Donald M. Scherzi, CPA, CFP, LLC 
Mike Lupo, SCORE Counsel

 

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