2011 Virginia Legislators' Tax Guide: Recordkeeping

See IRS Publication 463—Travel, Entertainment, Gift and Car Expenses, Section 5 for further information.

What kind of information do I need to substantiate my deduction for automobile, travel, entertainment and other business expenses? | Top

As in prior years, strict substantiation rules for travel and entertainment expenses, including meals and lodging away from home and business gifts are required to prove your claim for these expenses. If adequate records are not kept, no deduction will be allowed. This is because written evidence is more reliable than oral evidence alone. However, if you prepare a record in a computer memory device with the aid of a software program, it is considered an adequate record. It is also expected that taxpayers will be required to directly indicate on their income tax returns whether adequate records, or sufficient written evidence justifying the deduction, have been kept.

No deductions will be allowed for any automobile expenses or travel expenses (including meals and lodging while away from home), for any items concerning a type of activity generally considered entertainment, amusement or recreation (or a facility used in connection with such activity), or any expenses for gifts, unless you substantiate the following elements:

  1. The amount of expense or other item;
  2. The time and place of the travel, entertainment, amusement, recreation or use of the facility, or the date and description of the gift;
  3. The business purpose of the expense or other item; and
  4. The business relationship to the taxpayer of the persons entertained, using the facility or receiving the gift.

No deduction will be allowed for approximations or estimates, or for expenses that are lavish or extravagant.

What type of proof represents adequate records? | Top

The taxpayer should keep proof needed in an account book, diary, statement of expense or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.

Documentary evidence — Documentary evidence consists of such items as receipts, canceled checks, or bills, to support your expenses.

Adequate evidence — The support used must show the amount, date, place and essential character of the expense.

Duplicate information — The taxpayer does not have to duplicate information shown on a receipt as long as your records complement each other in an orderly manner.

Timely kept records — The taxpayer should record the elements of expense or of business use at or near the time of the expense. A timely kept record has more value than a statement prepared later when generally there is a lack of accurate recall. It is not necessary to write down every element of expense on the day of the expense. If you maintain a log on a weekly basis that accounts for the use during the week, the log is considered a timely kept record.

Proving business purpose — The taxpayer must generally provide a written statement of the business purpose of an expense.

Confidential information — Confidential information relating to an expense is not necessary to provide as an element of the deduction. However, you must maintain this information and have it available to fully prove the element of expense.

Examples of documentation and adequate evidence necessary for claiming expenses incurred are:

Automobile expenses — In order to claim actual expenses associated with the business use of your automobile, adequate records must be maintained and you must prove the following elements:

  1. Total expenditures related to operation of the automobile, i.e., depreciation, insurance, fuel, repairs, etc. Total expenses are accumulated for year-end allocation between personal and business use;
  2. The date of business use and the destination;
  3. The business purpose of the trip; and
  4. The number of business miles driven and the total mileage driven for the year. 

At the end of the year total automobile expenses are allocated between business and personal use based on the number of business and personal miles driven. If you choose to use the standard mileage you will only be required to record the date of the business use, the destination, the business purpose of the trip and the number of business miles. (See also the detailed explanation under the section on automobile expenses.)

Travel — You must prove the following elements:

  1. The amount of each separate expenditure for travel away from home, such as the cost of your transportation or lodging, but the daily cost of your breakfast, lunch, dinner and other incidental elements of such travel may be totaled if they are set forth in reasonable categories such as meals, gasoline and oil and taxi fees;
  2. The dates of your departure and return home for each trip, and the number of days spent on business away from home;
  3. The destination or the locality of your travel, described by name of city, town or similar designation; and
  4. The business reason for your travel or the business benefit derived or expected to be gained from your travel.

Entertainment — You must prove the following elements:

  1. The amount of each separate expenditure for entertaining, except for incidental items such as taxi fares and phone calls which may be totaled on a daily basis;
  2. The date the entertainment took place;
  3. The name, address or location and type of entertainment, such as dinner or theater, if the information is not apparent from the name or destination of the place;
  4. The reason for the entertainment or the business benefit derived or expected to be gained from entertaining and, except for certain business meals, the nature of any business discussion or activity that took place; and
  5. The occupation or other information about the person(s) entertained, including name, title or other designation sufficient to establish the business relationship to you.

Entertaining before or after business discussion — To deduct your expenses for entertaining directly preceding or following a substantial and bona fide business discussion on the grounds that the entertainment was associated with the active conduct of your trade or business, in place of element 4 above, you must prove the date, duration and location of the business discussion, the nature of the discussion and the business reason for the entertainment or any business benefit derived or expected to be gained from entertaining. Also, you must identify the person(s) entertained who participated in the business discussion.

Business gifts — You must prove the following elements:

  1. The cost (deduction is limited to $25 per recipient per year);
  2. The date of the gift;
  3. The description of the gift;
  4. The reason for giving the gift or any business benefit derived or expected to be gained from giving it; and
  5. The occupation or other information about the person receiving the gift, including name, title or other designation sufficient to establish the business relationship to you.

Substantiation of automobile expenses, travel, entertainment and business gift expenditures should be kept in a log, account book, diary, statement of expenses or similar record, supported by adequate documentary evidence that is sufficient to establish the elements for the expenditures. For example, entries on a desk calendar, not supported by evidence, are not proper substantiation.You are not required to record information in your account book or other record that would duplicate information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Neither are you required to record amounts your employer pays directly for any ticket or other travel item. However, if you charge these items to your employer (through a credit card or otherwise) you must make a record of the expenditures.

Your records must be timely. You should record the elements of an expenditure in your account book or other record at or near the time of the expenditure to ensure your allowance of the maximum deduction for these expenses. Record entries made later, when there is a lack of accurate recall, will not comply with these rules.

Season or series tickets — Often season or series tickets are purchased for business use and to support various events. The taxpayer must treat each ticket in the series as a separate item. The taxpayer individual ticket cost is calculated by dividing the number of games or performances by the total cost (not more than face value) of the series of tickets. An adequate record must be kept to show the use of each ticket and whether the ticket is a gift or entertainment. The name of the recipient and the purpose of providing the ticket must also be included.

Skyboxes and other private luxury boxes — Rental of these boxes for more than one event at the same sports arena is generally limited to the price of a non-luxury box seat ticket.

 

When reporting my various expenses for tax purposes, do I have to list each item by a specific category? | Top

The categories of expenses for automobile, travel, meals, entertainment and gifts and their elements must be listed separately. Each payment is considered a separate expenditure and must be reported as follows:

Breakdown of expenses — All elements of automobile expense, travel, entertainment and gift expenditures must be proved. If you can prove the elements of time, cost, place and business relationship of the expenditure, but fail to prove its business purpose, generally no deduction will be allowed.

A written statement of the business purpose of an expenditure generally is required, but the degree of substantiation of the business purpose will vary according to the facts and circumstances in each case. If the business purpose of an expenditure is clear from the surrounding facts and circumstances, a written explanation is not required.

Each separate payment usually is considered a separate expenditure. Thus, if you entertain a constituent at dinner and then take him to the theater, the dinner expense and the cost of the theater tickets are separate expenditures and must be recorded separately in your records.

Some items may be totaled in reasonable categories. You may make one daily entry for such categories as taxi fares, telephone calls, meals while traveling away from home, gas and oil and other incidental costs of travel. Tips may be grouped with the costs of the services rendered to you. You are not required to total the tips but may record them separately if you desire.

Other items should be totaled. Concurrent or repetitious expenses of a similar nature occurring during the course of a single event will be considered a single expenditure. Therefore, if you pay separately for each serving of refreshments, such as at a cocktail lounge, the total paid for the refreshments will be treated as a single expenditure.

Documentary evidence is required to support all expenditures for lodging while traveling away from home and for any other expenditure of $75 or more, except that if evidence is not readily available for transportation charges it will not be required. Though documentation for expenses under $75 is not required, they must be established by an account book, diary, statement of expense or similar record. Documentary evidence is a receipt, paid bill, or similar evidence sufficient to support an expenditure.

Documentary evidence ordinarily will be considered adequate to support an expenditure if it discloses the amount, date, place and essential character of the expenditure. For example, a hotel receipt is sufficient to support expenditures for business travel if it contains the name and location of the hotel, the dates you stayed there and separate amounts for charges such as lodging, meals and telephone.

Similarly, a restaurant receipt is adequate to support an expenditure for a business meal if it contains the name and location of the restaurant, the date and amount of the expenditure, and, if a charge is made for an item other than meals and beverages, an indication that such is the case.

Some documents are not adequate evidence. A cancelled check, together with a bill from the payee, ordinarily will establish the element of cost. However, a cancelled check will not by itself support a business expenditure without other evidence to show that the check was for a business purpose.

Confidential information relating to an element of an otherwise deductible expenditure, such as the place, business purpose or business relationship, need not be set forth in your account book, diary or other record if the information is recorded elsewhere at or near the time of the expenditure and is available to fully substantiate that element of the expenditure.

If you entertain a large number of people, you do not have to record each name where a readily identifiable class of individuals is involved. It will be sufficient if you designate the class. However, if the identity of a class is not sufficient to identify the persons entertained, then an individual designation of each person will be required.

The name of the recipient of a business gift does not always have to be recorded. A more general designation will be sufficient if it is evident that you are not attempting to avoid the $25 annual limitation on the amount that can be deducted for gifts to any one individual. For example, if you purchase a large number of inexpensive tickets to local high school basketball games and distribute one or two tickets to each of a large number of constituents, it will usually be sufficient to record a general description of the recipients of the tickets.

There are special rules for cases when, because of the inherent nature of the situation in which an expenditure is made, you are unable to obtain a receipt or when you cannot produce a receipt for reasons beyond your control, such as a loss of the receipt by fire, flood or other casualty. 

What happens if I do not or were not able to obtain a complete record to prove an element of expense or my records are destroyed? | Top

The taxpayer may lose or not receive a receipt for substantiation purposes, have incomplete records or the records are destroyed. In these cases, the taxpayer must use other evidence to prove the element of expense.

The expense can be proved by:

  • Providing a written or oral statement containing specific information about the element, and other supporting evidence that is sufficient to establish the element; or
  • Direct evidence as to description of a gift, or the cost, time, place, or date of an expense can be written or the oral testimony of your guests or other witnesses which can corroborate the information about the element of the expense.  

How long do I have to keep records and receipts for expenses deducted on my tax return? | Top

The taxpayer must retain his or her records and related documentary evidence in support of travel, entertainment, gift and automobile deductions during the period that his or her tax return is subject to audit. Normally, this period is three years from the date of filing the tax return on which the deduction is claimed. However, the period of limitations is longer if the taxpayer consents to an extension or if there has been a substantial omission fromgross income. Moreover, there is no statute of limitations in cases of fraud. Amending a prior year tax return restarts the statute of limitations.

If I elect to claim the per diem amount as discussed under the section on living expenses, do I still need to maintain all these records? | Top

You are relieved from recordkeeping for many of the details for your own meals and lodging under this option. However, you must still be able to substantiate the time, place and business purpose, unless the IRS § 162(h) election is used.