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Documenting Business Expenses Adequately

Are you adequately documenting your business expenses? There are several regular expenses that often don't get documented very well. These are vehicle miles, meals & entertainment and business travel. In this post we'll look at important factors when documenting business mileage. An overall consideration is that expenses must be ordinary and necessary to the operation of the business.

Auto Expenses

Total Miles
Mileage is the one deduction that many seem to have the most trouble with. You want to note your odometer reading at the end of each year so that you know how many total miles were put on the vehicle. This is an important starting point.

Business Mileage
Whether as an employee, contractor or business owner many of us incur business mileage. It's important to find a systematic way of recording these miles. Very often a vehicle is used both personally and for business. There may even be commuting miles to track.

All business expenses must be reasonable necessary and clearly serve a business purpose. When documenting mileage you want to keep this in mind.

Documents you should keep
How you document your miles is up to you. I use a day planner. This is a convenient way to note the business activity (client meeting, pickup supplies, sit visit, etc.), who was involved, where it occurred. When it is a regular client, it is sufficient to have my accounting records to support that location. If possible write odometer readings. Otherwise keep track of the total mileage. For those that get busy, you can go on the internet later and use any map program to find out the mileage between destinations.

Supporting Information
If you decide to use a day planner this will become part of your tax records that you will need to keep. You may still want to summarize this on a spreadsheet or in your day planner. By summarizing this data you can save yourself time and money later on your taxes. I generally summarize weekly and monthly while it is still fresh. Never know you might forget something during a hectic day. If all your days are hectic, you better get in the habit of summarizing at the end of each day.

Meals & Entertainment

There are several elements that must be established in order to have a legitimate meals and entertainment expense. These are the amount, time, place, business purpose and relationship of the parties involved.

A Business Log
The main way to establish that all of these business elements are met is by using some type of log or journal. Common journals might be a diary, day planner, an account book of some kind, or other similar activity log. I generally use a day planner for this purpose which also assists me in time management. You can use whatever form of journal makes sense in your business. The important point here is keeping track of all these expenses noting all of these elements (amount, time, place, business purpose, parties involved).

Supporting Evidence
You also will need to keep documentary evidence of these business meals and entertainment expenses. Adequate receipts include:
• Canceled checks
• Credit card slips
• Cash register receipts
• Credit card statements

There are some exceptions. One is, if the cost is less than $75 for meal or entertainment expense, then no receipt is required. Still a good idea, but not required.

Travel Expenses

Travel expenses can be deducted when they satisfy a legitimate business purpose and meet the ordinary and necessary test.

Legitimate Business Purposes
The type of business you are in makes a difference. Here is a short list of purposes that may be ordinary and necessary in your business.

1) Meeting with existing and potential customers, suppliers or other business contacts
2) Continuing education, association meetings, conferences, trade shows and other trade activities
3) Meeting to discuss potential investment deals
4) Speaking engagements
5) Attending shareholder meetings
6) Meeting the publisher of your book
7) Taking photos for your marketing pieces

Documenting your Travel
You will want to keep copies of receipts, but I generally will keep a file as well. In the file I keep copies of meeting outlines, agenda lists, notes, a log of hotel, rental car, meals and entertainment used during the trip.

I use this file also to help me decide if this trip might be worth doing again.

Supporting Evidence
You also will need to keep documentary evidence of these business meals and entertainment expenses. Adequate receipts include:
• Canceled checks
• Credit card slips
• Cash register receipts
• Credit card statements

More information on the IRS website

Comments

• 

  Marc Freislinger — over 1 year ago

  Charles, you mentioned that we should keep track of actual odometer readings. Is this required or just recommended?

• 

  Charles Perkins — over 1 year ago

  You need to be able to support business mileage during the year. At minimum it is advised to document mileage at the beginning an the end of the year. Actual mileage during the year can be supported in other ways.