Unlike business people in most other walks of life, contractors and construction workers typically work at several sites during the year, while maintaining a home base. If you work in the industry, you are frequently out in the field or taking meetings with customers, incurring substantial travel and entertainment (T&E) expenses. Of course, qualified T&E expenses are tax deductible within certain limits, but the recordkeeping rules are stringent. And due to the potential for abuse, these expenses are a prime target for IRS auditors. Here’s a summary of your main responsibilities spelled out in IRS Publication 463 (Travel, Entertainment, Gift & Car Expenses).
Substantiate Expenses
Tax law expressly prohibits deductions for T&E expenses without proper substantiation. This means you had better have proof you made the payment and the expense qualifies for a deduction. This often creates a recordkeeping burden for owners who are actively involved in the firm’s daily activities.
IRS Travel and Entertainment Deductions Exceptions to Recordkeeping Rules
Normally, you can substantiate T&E expenses with a cancelled check and an invoice from the payee, along with documentary evidence. However, documentary evidence isn’t required if:
- You use a government-approved per diem method to account for expenses;
- Your T&E expenses (other than lodging) are less than $75; or
- You incur a transportation expense for which a receipt is not readily available.
Note that the IRS authorizes the use of per diem rates, subject to annual adjustments, based on the allowances used for federal government employees. (You can find the rates for the 2015 fiscal year here.) Using the per diem rates will reduce some of the paperwork burden.
Caveat: The per diem method cannot be used for expenses incurred by self-employed contractors or taxpayers who own 10 percent or more of the firm. The proof is in the records: The IRS requires either that you keep “adequate records” as proof of your expenses or other sufficient evidence backing up your financial statements. Generally, this means written records. The IRS, not surprisingly, considers written details to be more reliable than oral evidence.
To keep the IRS satisfied, follow these steps:
- Keep track of expenses in an account book, diary, log, statement of expenses, trip sheets or similar record. Records on a computer or other electronic file will be treated as adequate written records.
- Keep documentary evidence supporting the required element of a deductible expense. This includes receipts, canceled checks and bills (see right-hand box).
Documentation will normally be considered adequate if it shows the amount, date, place and essential character of the expense. A canceled check, together with a bill ordinarily establishes the cost.
However, a canceled check alone is not sufficient if you have no other evidence showing it was incurred for a business purpose. You are not required to record information that duplicates your other records as long as your records and receipts complement each other in a logical and orderly fashion.
To qualify for T&E deductions, you must document the following:
- Date the expense was incurred, usually listed on a receipt or credit card slip. Appointment books, day planners and the like may have dates preprinted on each page, so entries will automatically show the date of the expense.
- Amount of how much you spend including taxes and tips.
- Place and nature of the meal or entertainment, usually shown on a receipt or in an appointment book.
- Business purpose of the expenses such as obtaining future contracts, or fostering existing business relationships. You must show that a substantial business conversation occurred before or after the entertainment or meal.
- Business relationship of those at the event with you. Include names, occupations and other information establishing the business connection.
- Meticulous data that does not include approximate or estimated amounts that will not be deductible.
Timing Is Everything
It is important to record the elements of a T&E expense at or near the time you incurred them and include documentary evidence. A contemporaneous record has more value than a statement prepared later, because then it is typically more difficult to recall events accurately.
But this doesn’t mean that you have to write down the elements of every expense during work. This can be nearly impossible if you’re out in the field on the job. As long as you maintain a log on a weekly basis, you should be in good shape tax-wise. Refer to your documentary evidence to fill in any cracks, but don’t wait until tax return time to assemble your records.
Remember that you are required to provide a written statement of the business purpose of an expense. However, the degree of proof varies, based on the circumstances. If the business purpose is clear from the circumstances, you don’t have to provide a written explanation.
Lessons
This is only one, brief summary of the recordkeeping requirements for T&E expenses. Special rules may come into play in other situations. For instance, a separate set of requirements applies to deductions for vehicles used for business purposes. This is an area of tax law where you cannot be overly cautious. The IRS often goes through T&E records with a fine-toothed comb, looking for inconsistencies and inaccuracies. Make sure that your records are detailed, complete and will be able to withstand any challenge the tax agency may mount.
If you have questions about recordkeeping requirements for T&E expenses, please contact Gray, Gray & Gray.
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