Savings Receipts to Substantiate Business Expenses

What kind of documents are needed to prove business expenses?

It is absolutely necessary that a taxpayer documents and saves receipts for all business expenses for which they take a tax deduction. No deduction is allowed for any travel, entertainment, business gift, or property business expenses unless properly substantiated by adequate taxpayer records. The records maintained by the taxpayer should contain the following information to support the business expense deduction:

 

Savings Receipts to Substantiate Business Expenses

  • The amount of the expense.
  • The time and place of travel or entertainment
  • The business purpose of the expense.
  • The business relationship of the taxpayer to the person entertained (or receiving the gift).

 

The following are some of the types of records you should keep for tax purposes:

  • Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
    • Cash register tapes
    • Bank deposit slips
    • Receipt books
    • Invoices
    • Credit card charge slips
    • Forms 1099-MISC
  • Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:
    • Canceled checks
    • Cash register tape receipts
    • Credit card sales slips
    • Invoices
  • Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:
    • Canceled checks
    • Cash register tapes
    • Account statements
    • Credit card sales slips
    • Invoices
    • Petty cash slips for small cash payments

The best way to record this information is through a diary or note book that has columns for all the above information. Documentary evidence, such as itemized receipts, is required to support any expenditure for lodging while traveling away from home and for any other expenditure of $75 or more. If a taxpayer fails to keep adequate records, each expense must be established by a written or oral statement of the exact details of the expense and by other corroborating evidence. This is a much less reliable method and therefore it is recommended that detailed records are kept to ensure the no issues upon an IRS audit.

 

What is Deemed Substantiation by the IRS?

Instead of reimbursing actual expenses for travel away from home, many employers reimburse employees with a per diem allowance, a flat dollar amount per day of business travel. Of the substantiation requirements listed previously, the amount of the expense is proved, or deemed substantiated, by using such a per diem allowance or reimbursement procedure.

The amount of expenses that is deemed substantiated is equal to the lesser of the per diem allowance or the amount of the Federal per diem rate.

 

Federal Per Diem Rates for Deductions

The regular Federal per diem rate is the highest amount the Federal government will pay to its employees for lodging, meals, and incidental expenses61 while in travel status away from home in a particular area. The rates are different for different locations. The use of the standard Federal per diem rates for meals and incidental expenses constitutes an adequate accounting of the expenses incurred. Employees and self-employed persons can use these standard allowances instead of deducting the actual cost of daily meals and incidental expenses, even if not reimbursed by the employer. However, lodging costs must actually represent the amount paid by the taxpayer.

 

IRS deemed substantiated method

Only the amount of the expense is considered substantiated under the deemed substantiated method. The other substantiation requirements must be provided: place, date, business purpose of the expense, and the business relationship of the parties involved. This will require the type of documentation that is suggested above.