Guest post by Erika Petersen, Hawkins Cloward & Simister
Increased scrutiny by the Internal Revenue Service (IRS) has reinforced the need to properly substantiate and document tax deductions. Ensure your preparedness for four types of expenses regularly deducted by business owners for which records are often insufficient to defend against an IRS audit.
When the main purpose of a trip can legitimately be classified as business, then travel deductions are possible. Expenses for travel, meals and lodging are tax deductible when traveling away from the taxpayer’s tax home (note of caution: your “tax home” is not necessarily your place of residence). Deductible travel expenses include, but are not limited to:
— Commuter bus, taxi, airfare or limousines
— Baggage and shipping
— Laundry and dry cleaning
— Equipment rental
A receipt or equivalent documentary evidence is needed to substantiate travel expenses, except in those cases where a receipt is difficult to obtain, e.g., bus fares or payment of cash tips. In all cases, document the time, place and purpose of the expenditure for which a deduction is claimed.
Meals can be 100-percent deductible if they are:
— Provided on the employer’s premises for the convenience of the employer
— Included as taxable compensation to the employee
— Promotional activities available to the general public
— Provided by an employer as a social or recreational event for benefit of employees
Any meals not fitting the above criteria are only 50-percent deductible and typically include meals consumed while traveling and other “business lunches.”
Keep an account book or log of each business meal. In addition to documentary evidence such as receipts, canceled checks or credit-card statements, be sure to keep a written record of the time, place and purpose of each meal. Include who attended and a brief summary of what was discussed. Make sure expenses are reasonable and necessary; the IRS can disallow expenses they consider lavish or extravagant.
See IRS Publication 463 for additional information on Travel and Entertainment deductions.
Personal vehicles are rarely used solely for business purposes, so the auto deduction is limited to the business use of the vehicle. The deduction can be taken as either 55.5 cents per mile of business travel or the business percentage of ALL costs to own and maintain your vehicle. In order to take either deduction, taxpayers must maintain a contemporaneous log of their driving activity. Such logs should include the miles driven, date and purpose of each trip, and whether the trip was business, personal or commuting. Failure to maintain and produce an adequate log substantiating your auto expenses may result in the IRS disallowing the entire deduction.
To qualify for the home-office deduction, your home office must be used regularly and exclusively in your trade or business. “Regularly” is met with working a minimum of 10 hours a week in the office. “Exclusively” means only used for business. This can only be substantiated through documentation. Create a log which details when and why the office is used, classify home repairs properly and keep receipts and cancelled checks.
Erika Petersen is an intern at Hawkins Cloward & Simister, one of Utah’s largest independent accounting firms. She graduates in April 2012 with a master’s degree in accounting, tax emphasis, from Brigham Young University.
This article should not be construed as tax advice from Bank of American Fork. Please seek tax advice from a qualified tax professional.