Many businesses incur travel, meals and entertainment expenses as an ordinary course of business. However, these same businesses risk disallowance of these expenses as tax deductions due to poor recordkeeping. The IRS requires documentation in order to substantiate that the expense has a legitimate business purpose. Absent the substantiation, the IRS may completely disallow the expense. Here is a brief overview of the substantiation rules relating to business travel, meals and entertainment expenses.
The IRS requires that each expense involving travel, meals and entertainment be accompanied by the following documentation in order to meet the substantiation requirements.
- The amount of expense,
- The time and place of the expense,
- The business purpose of the expense, and
- The business relationship to the taxpayer of the individuals being entertained.
In addition to the requirements shown above, a business is also required to keep documentary evidence, such as a receipt, for any travel, meal or entertainment expense that is $75 or greater.
- Ex: A hotel receipt containing the name, location, dates of travel, purpose of the travel and breakdowns of amounts incurred for lodging, meals, and telephone should satisfy the substantiation requirements.
- Ex: For meals, a receipt from a restaurant containing the name and location of the restaurant, the date, amount, number of people, business purpose of the meal and the business relationship of the individuals served should satisfy the substantiation requirements.
Please be aware that the IRS and state revenue agents are being very aggressive during tax return audits and are strictly enforcing these substantiation requirements. Consider keeping a log or account book to substantiate these expenses. Be sure to update the log or account book on a timely basis to ensure adequate records are kept.
If you have additional questions about the substantiation requirements, please contact our office at 952.979.3100. We would be happy to discuss these with your further.