written by Connor O’Mealy
Keeping good records will help a business when preparing their business tax return, and will help support items reported on a tax return. It is a requirement from the IRS to keep your records available if they were to ever need any form of verification.
In order to claim any deductions, business owners and taxpayers must be able to prove two things: what their expenses were for and that the expense was in fact paid or incurred. Supporting documents may include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. The documents need to show the amount paid and the reason for the expense. Businesses must keep their records as long as needed to qualify under the Tax Code. Typically, this means until the period of limitations for auditing the return expires.
There are special recordkeeping requirements and strict documentation rules for certain expenses. These expenses include:
- Expenses for travel away from home
- Meals and entertainment expenses
- Business gifts
- Transportation expenses
For these expenses, taxpayers must keep receipts and must also verify each individual expense as to (1) the amount, (2) time and place, and (3) business purpose. For entertainment and gift expenses, taxpayers must also provide the business relationship of the person(s) being entertained or receiving a gift. For vehicle expenses, taxpayers must keep a mileage log.
Businesses that give reimbursements and or allowances to their employees for employment-related travel and entertainment expenses typically must treat these amounts as income to the employees. However, there is no income inclusion if: (1) the employee is required to account for the expenses to the employer; (2) the employee does not deduct the expenses; and (3) the total expenses equal the total reimbursements and allowances.
Accounting for expenses means giving the employer documented evidence and an account book or statement to verify each expense’s place, time, amount and purpose. An employee is treated as having accounted for expenses if the employer provided a fixed allowance and if the employee verifies the place, time and business purpose of each expense. A fixed allowance includes the federal per diem rate for travel away from home and the standard mileage rate for cars.
A reimbursement arrangement is considered an accountable plan if it meets all of the following requirements:
- The employee must return any excess reimbursement within a reasonable period of time.
- It provides advances, allowances or reimbursements for business expenses paid or incurred by an employee.
- Each business expense must be substantiated to the employer within a reasonable period of time.
If the arrangement is an accountable plan, the reimbursements are excluded from the employee’s wages and exempt from employment taxes.
If you have any questions about business expenses, please contact our office 417-881-0145.