Audits - Travel and Entertainment Deductions - Your Burden of Proof
A first step in avoiding costly hassles with the IRS is identifying potential red flags before filing your business’s tax return. For example, a common source of audit conflict between the IRS and small businesses is the documentation of travel and entertainment expenses. The IRS often has the edge in these disputes because the tax law spells out detailed rules about how these expenses must be verified and documented. Most companies sincerely attempt to comply, but often fall short anyway.
Fortunately, that is one problem for which some relief is available due to a wrinkle in the tax law that waives otherwise rigorous substantiation rules when a particular expense is below a certain minimum dollar level. Put simply, employees don't technically need receipts for non-lodging expenses of under $75 that are reimbursed by their employers. Although this is a big break, it doesn't mean that all recordkeeping can be ignored. Receipts are still needed for all lodging expenses (even if the cost is under $75), unless the company pays traveling employees only the IRS-approved per-diem rate. Those incurring the expense still have to record the time, place, business reason, and amount of each travel and entertainment expenditure (unless a per-diem is used, in which case amounts don't have to be recorded at all). Businesses should note that an expense for more than $75 unaccompanied by a receipt does not receive a minimum $74.99 deduction by default; an IRS examiner will treat the expense as $0.00 instead.
With this in mind, you may want to consider reviewing your travel and entertainment recordkeeping and substantiation procedures as you adjust your recordkeeping practices. Setting up separate procedures for your own internal tracking of expenses probably makes sense, too. For example, you may want to require employees to show you receipts for non-lodging expenses costing less than $75 before approving them, even though businesses are not required to keep them.
Please call if you have any questions on the travel deduction rules or would like us to review and update your travel and entertainment recordkeeping procedures.
IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, information contained in this article is not intended by TOPC Potentia P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.