Know What Kind of Documents are Needed When Claiming Business Travel Expenses

Know What Kind of Documents are Needed When Claiming Business Travel Expenses

It is clear that taxpayers can deduct regular travel expenses when the trip is entirely business related. Additionally, if the taxpayer is on a domestic business trip and made personal side trips or stayed longer than the business purpose required, then the expenses must be allocated between business and personal. The portion of the trip dedicated to business activities is deductible. Any portion related to personal activities is not deductible.

However, if a trip is primarily for personal activities, such as a vacation, then the only deductible business expenses are those incurred at the destination that is directly related to the trade or business and none of the expenses for traveling to the destination are deductible.

IRS parameters

In general, all trip expenses must be recorded on the travel expense statement including procurement card expenses. If a trip is paid for entirely by procurement card, a travel expense statement must be completed and approved. It is not necessary to enter this travel report in AIS; however, the statement and documentation must be retained in the department. As a best practice, the supplemental procurement card expenses form should be used to detail procurement card activity. If the supplemental form is not completed, all procurement card expenses should be clearly marked on the travel expense statement. Procurement card expenses should be deducted from the total expense using line #22. The original procurement card receipts should be kept in the department or school procurement card files.

Even if the expense is clearly deductible the deduction can be denied if not substantiated. Taxpayers must keep adequate records and documentary evidence. However, the taxpayer can use the per diem method of deducting expenses and still satisfy the substantiation requirements for the amount of the expense. The time, place, and business purpose must still be substantiated through adequate records and documentary evidence. The per diem method can be used by employers, employees and self-employed individuals. Self-employed individuals and employees can only use the per diem method for a meal and incidental expenses, not lodging. Additionally, a taxpayer, whether employer or employee or self-employed can alternate during the year between the per diem method and the actual expense method. The per diem rates for travel can be found at www.gsa.gov/perdiem.

Taxpayers in the transportation industry may use a special per diem rate. A taxpayer eligible for this rate is in the transportation industry if the work directly involves moving people or goods by airplane, barge, bus, ship, train or truck and often requires travel during a single trip to localities with differing rates in the per diem tables. These rates, if chosen, must be used for the entire year.

According to the streamlined guidelines set by the Internal Revenue Services (IRS), there are a couple of documentation that should always be kept, regardless of circumstances or situation, to make sure that you can have an easier time in proving that your trip was primarily for business purposes. While it is best to log in everything, these ones below are the most crucial documentations needed to stake your claim.

Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

  • Cash register tapes
  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC

Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Credit card receipts and statements
  • Invoices

Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tapes
  • Account statements
  • Credit card receipts and statements
  • Invoices
  • Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses. If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.  For additional information, Publication 463 of the IRS document provides more details with regard to Travel, Entertainment, Gift, and Car Expenses.

Assets are the property, such as machinery and furniture that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions are taken for depreciation
  • Deductions are taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

The following documents may show this information.

  • Purchase and sales invoices
  • Real estate closing statements
  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Meals

Amounts paid for food and reasonable restaurant gratuities while traveling away from home are another deduction. The IRS gives taxpayers two methods to calculate meal costs. It publishes daily per diem rates applicable to various geographic areas that you can use without regard to the amount actually spent. Alternatively, you can keep records of all meals and list the total costs paid. Regardless of the method chosen, the total allowable meal expense gets a further 50 percent deduction. Calculate this reduction before applying the 2 percent adjusted gross income limitation.

Instead of keeping records for meal costs, the taxpayer can claim an IRS meal allowance, which is referred to as the M&IE per diem rate (for meals and incidental expenses). The M&IE rate includes tips for service people such as porters, and hotel maids, but does not include the cost of laundry, cleaning, or pressing of clothing, which can be deducted separately with the proper documentation. Self-employed individuals can claim the M&IE allowance, but employees may only claim the allowance if they are not reimbursed under an accountable plan, if their employer is not related to them, and if they do not own more than 10% of the employer’s outstanding stock.

The standard meal allowance for travel within the Conterminous (or Continental) United States (CONUS), meaning locations within the continental United States, is $46 per day, although higher rates may apply to more expensive localities such as major metropolitan areas and resort areas. Outside of the Conterminous United States (OCONUS) rates apply for travel to Alaska, Hawaii, Puerto Rico, United States possessions, and foreign countries. Generally, only 75% of the allowance can be claimed for the 1st and last days of the trip. Workers in the transportation industry who are subject to the Department of Transportation hours of service limits, such as interstate truck drivers and pilots can deduct 80% of their meal costs. CONUS rates can be found by zip code or by city and state.

If meals are not claimed on a particular day but the taxpayer had other incidental costs, then instead of using actual costs, an allowance of $5 per day can be claimed for the incidental expenses, even if the actual expenses were less than that.

Important documentation features

Substantiate is a fancy way to say: the taxpayer has to prove it. Taxpayers must keep evidence of business travel expenses in order to deduct them. The information that must be noted:

  1. The date. The date the expense was incurred will usually be listed on a receipt or credit card slip; appointment books, day planners, and similar documents have the dates pre-printed on each page, so entries on the appropriate page automatically date the expense.
  1. The amount. How much you spent, including tax and tip for meals.
  1. The place. The nature and place of the entertainment or meal will usually be shown by a receipt, or you can record it in an appointment book.
  1. The business purpose. Show that the expense was incurred for your business — for example, to obtain future business, encourage existing business relationships, and so on. What you need to show depends on whether the business conversation occurred before, during, or after entertainment or a meal.
  1. The business relationship. If entertainment or meals are involved, show the business relationship of people at the event — for example, list their names and occupations and any other information needed to establish their business relation to you.

Cautions

Trying to write off your personal vacation as a business expense isn’t worth the risk. “You have to recognize that travel and entertainment is a highly suspect area,” Barbara Weltman, a tax and law expert and the author of JK Lasser’s Small Business Tax Guide, said. “It’s an area that the IRS is on the lookout for because of the potential of crossing the line a little bit and claiming business write-offs for what are really personal expenses. You can assume that if you get audited the IRS is going to look very closely at this area, so you want to make sure you do things right.”

When traveling or entertaining for business purposes, it’s important to document everything.  It’s not enough to just keep receipts, you also need to document who you spoke with, what you spoke about, and how it was related to your business. For travel, the IRS also requires you to keep a written or electronic log, made near the time that you make the expenditure, recording the time, place, amount and business purpose of each expense. This once took the form of expense reports. Increasingly, online programs and even apps, like Tax Tracker, are available for documenting business expenses.

Weltman also suggests creating a paper trail that can be traced if you are audited by the IRS. Take notes on meetings you attend while traveling, keep programs of conferences you attend, sign into conferences, and keep e-mails sent to those you met with during business meetings.

As with all deductible business expenses, you are also expected to keep receipts for travel and entertainment purchases. For meals, make sure that the receipt includes the exact cost of the meal as well as the name and location of the restaurant. Get in the habit of writing down who was present (names and business relationship) and what business was discussed.

For entertainment expenses, document: the amount of each separate expense; the date of the entertainment; the name, address, and type of entertainment; the business reason for the entertainment; and the name, title, and occupation of the people who you entertained.

Whenever business expenses are claimed it is a good idea to keep detailed records and receipts for everything. Business expenses can be charged to a practice credit card, receipts should be obtained from taxi drivers or other modes of transportation, and a detailed copy of the hotel bill should be kept. For the show, meeting or conference, a copy of all charges, as well as a copy of the convention schedule/agenda, can help prove it is relevant to your practice.

 

The safe way to go in all of this is to just diligently record all your business-related travel expenses in a log complete with dates, times, descriptions, locations and amounts. Include your travel expenses, lodging expenses and the costs of your meals. Also include taxis, fees, tips and any other incidental expenses.

No matter how you document your expenses, you are supposed to do it in a timely manner. You don’t need to record the details of every expense on the day you incur it. It is sufficient to record them on a weekly basis. However, if you’re prone to forget details, it’s best to get everything you need in writing within a day or two. Just make sure to keep all supporting paper documentation of the recorded expenses. This way, when you present.

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