By: Kerri Tassin

I teach tax accounting classes at Missouri State University, and each semester in class we discuss business related expenses for purposes of possible deductions from federal gross income. When we start to explore certain deductions and transactions, I pause to have a real heart to heart with my students. This is the time I advise them to have a serious chat with their future clients about recordkeeping. So many taxpayers wish to take advantage of legitimate tax deductions, but fail to keep adequate documentation to calculate the proper amount or provide substantiation as required by law. In this Bears Business Brief, we’ll take a look at some important records taxpayers need to hold onto, and why we need to keep those records.

Internal Revenue Code §162 allows taxpayers to deduct ordinary and necessary expenses that taxpayers pay or incur in the process of conducting a trade or business. IRC §6001 requires that taxpayers keep records that can verify the correct amount of items of income, deductions and credits claimed on a tax return. In addition, heightened standards of substantiation apply to certain types of expenses taxpayers may commonly incur in the conduct of a business.

According to Internal Revenue Code §274(d), in order to deduct certain business related expenses including travel, meals and entertainment, business gifts, and expenses incurred related to the use of listed property, taxpayers must be able to provide substantiation for those expenses. According to the code section, taxpayers must substantiate these particular expenses with either adequate records or evidence that corroborates the taxpayer’s statement regarding the expenses.

Taxpayers must be able to prove the amount of the expense, time and place of the travel or entertainment, date and description of a business gift, business purpose of the expense, and business relationship with persons entertained or with those who received gifts. Proper documentation and recordkeeping make this process of substantiation possible. Records may include receipts, credit card statements, cancelled checks, and entries in journals or account books, depending upon the type of expense. In addition, taxpayers need to document expenses as near the time of the actual event as possible, while memories are still fresh.

In particular, transportation expenses can amount to a significant deduction for business owners. Business owners who use a passenger vehicle for business purposes may generally choose between deducting actual vehicle expenses or a standard mileage amount, subject to certain limitations. Taxpayers who choose to deduct actual vehicle expenses need to keep track of receipts and records for expenses such as fuel, repairs, insurance, and depreciation just to name a few. Taxpayers who use either method for deducting transportation expenses also need to keep a mileage log with detailed information regarding the date of travel, business purpose, destination, and miles traveled, especially when the vehicle is used for both business and personal purposes.

Failure to keep adequate records, especially for certain types of business-related expenses, can result in the disallowance of valuable deductions. Proper recordkeeping will help taxpayers accurately calculate, report, and hold onto those deductions. Now might be a good time to contact your tax advisor and ask for assistance putting together a good recordkeeping system for your business.

The material in this article is for informational purposes only and does not constitute written tax or legal advice. Please consult with your own tax advisor regarding your personal tax situation.

References

Internal Revenue Code Section 162

Internal Revenue Code Section 274(d)

Internal Revenue Code Section 6001

Internal Revenue Service Publication No. 463 (2014)

Assistant Professor Kerri L. Tassin, CPA, JD teaches tax accounting classes in the School of Accountancy at Missouri State University.  She also serves as director of the MSU Public Service Tax Clinics.