His CPA PC Says…What Does Tax Law Say About Having Adequate Tax Documentation?
Tuesday, August 17th, 2010His CPA PC Says…What Does Tax Law Say About Having Adequate Tax Documentation?
The IRS tax law, surrounding the area of documenting most general business expenses, is generally summarized into three general areas. Failure to satisfy all of these areas may result in an otherwise potentially deductible receipt being voided. Tax law does not summarize the deductible tax items in this fashion. However, following these general guidelines will greatly assist in determining both the validity of a deduction as well as the maintenance of substantive collaborating documentation. The general guidelines are:
Business Intent
It should be clear from an unbiased observer that a deduction was incurred for the furtherance of the business. This includes advertising, administrative duties, overhead and expenses incurred to produce or provide the product or service to be delivered. Often direct expenses incurred in those efforts will be most obvious, as the absence of this occurrence will result in a product not being delivered.
For many issues it is necessary to look at the intent or the reason why an expense was incurred. For example, the sponsoring of a golf tournament most frequently is done by business to further its advertising efforts. By raising awareness of its participants and attendees, business’s often underwrite and support such events to raise name recognition, gain market share and to increase brand loyalty.
What is Valid Tax Documentation?
IRS tax law has often been misinterpreted as to what is required to adequately substantiate business expenditures. Frequently a credit card receipt will suffice but that is only for those times and circumstances where it is most obvious as to what expenditure was incurred. For example, a credit card receipt for a meal at a restaurant where a dinner was purchased, which documents the individual/business’s presence, and the nature of the business discussion should suffice as adequate documentation to substantiate a deduction. However the best documentation will be to ensure that you attach a copy of the itemized invoice. The individual/business entertained would typically be an employee or independent contractor of the business, a past, present or future client the customer hopes, is, or plans to serve, someone who the business networks/prospects with in order to produce new business or a trade or services supplier (such as someone from whom your business purchases either product, supplies, or services.)
In the event that expenditures are larger or would not be clear by the payee, care should be taken to obtain a copy of the actual receipt, agreement, memorandum, or a copy of the contract for which expenditures are incurred. Receipt/document/contracts should be clear as to the item being purchased for the business as being either an integral critical expense or those whose ancillary intended purposes (such as advertising) are clear. Absent the clear evidence of either of two components it would be wise to add documentation to the receipt accordingly.
Scope of Valid Business Expense Documentation Receipts
Tax law does not require any receipts below a certain level. For all expenditures above this threshold, a receipt is required. To help out in coding of the credit card statements please be sure to attach both the credit card receipt as well as the actual receipt from the selling establishment. Tax law requires you to have the actual receipts and is not required to accept the credit card receipt as proof of a valid business expenditure. Tax law requires detailed invoices/receipts for all items over $75.
The larger a receipt is, the more emphasis one would want to place on an expense to be sure that adequate documentation is received/available. Typically, most business receipts provide sufficient documentation, as usually items/services are typically well detailed to assure good communication, a clear understanding, and therefore, prompt payment.
Where the vendor or supplier does not supply appropriate documentation, and the expenditure is larger in nature, it would be prudent to prepare the documentation yourself and have the vendor or supplier sign and date it indicating their approval and agreement. Absent this option being readily available, one would want to forward written documentation by regular mail or electronically by e-mail, a confirmation of the details of the transaction. Written confirmation of this type is one of the most frequent mistakes business owners make. Often, this simple step alone will be the key determining issue if a dispute or litigation occurs. I have personally witnessed this issue alone being the key decision making point on which a judge or jury will rule.
Luke 12:31 But seek his kingdom, and these things will be given to you as well.
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