Recordkeeping the right way: Business Meals & Vehicle Expenses

A good system for keeping business records is crucial, especially If you are claiming deductions for business meals or auto expenses.  The IRS likes to keep a close eye on these types of expenses.

Tax auditors are adept at rooting out inconsistencies, omissions, and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.

Facts of the case
In this case, the taxpayer ran a notary and paralegal business. She deducted business meals and vehicle expenses that she asserted incurred in connection with her business.

The deductions were denied by the IRS and the court. Tax law “establishes higher substantiation requirements” for these and certain other expenses, the court noted. No deduction is generally allowed “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer of the person receiving the benefit” for each expense with adequate records or sufficient evidence.

The taxpayer in this case did not provide adequate records or other sufficient evidence to prove the business purpose of her meal expenses. She gave vague testimony that she deducted expenses for meals where she “talked strategies” with people who “wanted her to do some work.” The court found this was insufficient to show the connection between the meals and her business.

When it came to the taxpayer’s vehicle expense deductions, she failed to offer credible evidence showing where she drove her vehicle, the purpose of each trip and her business relationship to the places visited. She also conceded that she used her car for both business and personal activities.

Best practices for business expenses
This case is an example of why it is critical to maintain meticulous records to support business expenses for meals and vehicle deductions. Here is a list of “DOs and DON'Ts” to help meet the strict IRS and tax law substantiation requirements for these items:

DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they are complying with all the rules.

DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event.

DO require employees to submit monthly expense reports.

DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account should not be used for personal expenses.

DON’T be surprised if the IRS asks you to prove your deductions. Meal and auto expenses are a magnet for attention. Be prepared for a challenge.

With a little bit of organization and supervision, your tax records can stand up to scrutiny from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (“the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.

Please reach out to your Rudler, PSC advisor for assistance 859-331-1717.

RUDLER, PSC CPAs and Business Advisors

This week's Rudler Review is presented by Kendra Anderson, Staff Accountant and S. Gregor Lamping, CPA.

If you would like to discuss your particular situation, contact Kendra or Greg at 859-331-1717.

 

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