Good recordkeeping may not be in the list of business secrets of successful entrepreneurs. But for the company’s accountant or bookkeeper, it is very important. It can significantly reduce the amount of profit that a business will pay tax on. Keeping accurate and organized records makes it easier for companies to track their cash flow, save time and trouble in filing their tax returns, and perhaps more importantly, ensure that they are tax-efficient.
Good recordkeeping is particularly vital for business owners and contractors who go on a business trip. The Internal Revenue Service (IRS) allows business owners to claim tax deductions for travel-related expenses such as:
- 50 percent of the costs of meals
- Baggage charges
- Air, rail, and bus fare
- Cleaning and laundry
- Taxi fare and car rental
- Computer rental
- Public stenographer fees
- Telephone or fax expenses
- Tips on qualified expenses
If you are a business owner, you should understand how good record keeping is vital. Keeping accurate records will back up your tax deduction claims. And it can spell the difference between winning an audit and the IRS possibly digging up your other tax returns.
The following are some of the recordkeeping rules you should keep in mind when you are to claim on a business trip:
- You can’t claim tax exemptions for estimated or approximated expenses.
The IRS doesn’t allow businesses to deduct amounts based on approximate or estimate. You cannot guess the amount you spent on your gas or toll fees, neither for the cost of your meals during the business trip.
It is thus recommended for entrepreneurs or their bookkeepers to keep adequate records proving their business trip-related expenses.
You should be accurate on the amount to be written off. The IRS recommends keeping documentary evidence to prove your expenses, such as receipts, bills, and checks.
However, documentary evidence isn’t required when the travel-related expense is lower than $75. You don’t also have to present a receipt for meals and lodging expenses if you are to claim per diem, or you took public transportation for which a receipt isn’t readily available.
You should keep timely records.
The IRS also recommends keeping records of business travel during or near the time of the trip. It should also be supported with sufficient documentary evidence. This can make the record more believable than a statement prepared at a later date.
Let’s cite an example. A business owner wrote off more than $20,000 in his tax return, citing that the amount represented the gas expenses he had when he went out of town on several occasions in 2013 to meet several prospective clients.
Two years after the trip, the IRS decided that it had enough grounds to audit his tax returns. To substantiate his claim, he presented a 2013 calendar as well as printouts of driving directions generated by an online web mapping service. The directions also specified the distance supposedly traveled by the business owner from his place to the offices of his clients.
Despite those documents presented, the IRS will still disallow the claims of the business owner. For one, the documents presented were prepared two years after the business trip. Therefore, there is a lack of truthful recall on the part of the entrepreneur to justify the said claim even though an online mapping service was used.
This illustrates the importance of keeping timely records of your business trip. While you don’t have to record information as soon as you get home, you don’t have to wait for months to do so, either.
- You must state the business purpose of an expense.
The IRS encourages business owners and employees who are claiming a business travel exemption to provide a written statement indicating the purpose of an expense. You can indicate that a conference you attended is for networking and meeting potential clients. You can back up your claim by showing the conference program or invitation from the organizer.
However, this may not be needed if the purpose of an expense is obvious given the surrounding circumstances.
The easiest example of this would be a sales representative. Given the job description of the worker, it is understood that he or she is constantly traveling. Thus there is no need to submit a written statement detailing the business purpose of each and every trip. The sales representative would only have to record the date of each trip, total miles covered, and back up his or her claims with documentary evidence like receipt or record of delivery.
You can also withhold confidential information in stating the purpose of a business travel expense. You don’t have to be explicit in stating the purpose of a business meeting like mentioning the number of deals you booked over dinner.
- You can’t use credit card statements to claim an expense.
One of the more common mistakes that business owners make when writing off a business trip expense is using their credit card statements. The IRS, though, won’t accept this as documentary evidence.
A credit card statement can be likened to a canceled check. It only shows the costs but not any further evidence to prove that the expenses were for a legitimate and necessary business purpose.
You should present a receipt alongside the credit card statement to substantiate the travel expenditure.
- You should provide direct and supporting evidence in case you have incomplete records of an expense.
If you cannot provide complete records to support a tax deduction, you can still write off an expense by furnishing direct evidence in the form of a written or oral statement and supporting evidence. The written or oral statement details the cost, time, place, and date of a business trip expense like meals or transportation. It may be a written statement from you, your associates, and guests. Documentary evidence, on the other hand, maybe receipts or paid bills.
In the absence of documentary evidence, you can present adequate evidence to prove the character of the expense. In the case of lodging expense, a hotel receipt can be presented to and admitted by the IRS if it provides essential information such as the name and location of the hotel, the dates of the stay, and separate amounts for lodging, meals, and communication expenses.
Another example of adequate evidence would be a restaurant receipt. It can be presented to the IRS for meal expenses as long as it indicates the name and location of the restaurant, the number of people who were served, and the date and amount of the expense.
6. You should record expenses separately.
The IRS says that each payment is considered a separate expense.
Let’s say that you took a taxi to go to a restaurant where you met a client. The dinner expense and the taxi fare are two separate expenses. You should, thus, record them separately in your records.
It is also common for businessmen to treat their clients to sports events. If you bought a season or series tickets and then used these for business purposes, then each ticket in the series should be treated as a separate item.
You can divide the total cost of the season tickets by the number of games in the series to get the cost of each ticket.
7. You can combine items if the expenses are of a similar nature.
You can combine expenses of a similar nature, and record them as a single expense. These expenses should have happened during a single event.
For instance, you don’t have to record each and every drink during a cocktail party as separate expenses. You can record the total expenses for the refreshments as a single expense.
8. You can record all vehicle/transport expenses and then divide them into business and personal expenses at the end of the fiscal year.
You can claim gas expenses if you used your car during a business trip. It is also possible to record all your expenses during the year, and then divide them into business trips and personal expenses at the end of the year. However, you should keep an accurate mileage log if you are to claim a tax deduction for your business trip-related expenses.
The mileage log should indicate the starting mileage on the odometer at the beginning of the year, as well as its ending mileage at the end of the year. Every time you use your vehicle for a business trip, you should record details such as the date of your travel, your starting point, and your destination. You must also write the purpose of your trip, the starting and ending mileage of the vehicle, and other trip-related expenses such as tolls and parking fees. It is important to keep your mileage log updated regularly so that your records will be precise.
9. You can claim deductions using your actual expenses, or by using the standard mileage rate.
There are two ways of claiming transportation-related expenses during a business trip. You can deduct your actual expenses, or use the standard mileage rate set by the IRS.
The latter is easier to follow, which makes it a more popular option among employees and entrepreneurs. For 2017, the mileage rage is 53.5 cents for every mile. You simply have to multiply the miles that your vehicle has accumulated for business-related expenses.
For example, your car drove 20,000 miles for business trips in 2017. You will then multiply 20,000 by 53.5, giving you a total of $10,700. This is the amount that you can write off in your next tax return.
You may opt to deduct your actual expenses instead of using the standard mileage set by the IRS. However, you should have a thorough record of your gas, parking, and toll expenses. You can also deduct other expenses like repair and maintenance, tires, car washing, car repair, and gas and oil replacement. While this method requires a lot of record-keeping, it can save you a lot of money because it usually results in a larger tax deduction.
- Keep records and receipts as long as you can.
You may wonder how long should you keep those receipts related to a business trip that you had two years ago. The IRS recommends keeping records as long as you can, as there will always be a possibility that your tax return is audited up to three years from the date that you filed it.
While entrepreneurs are entitled to many tax deductions when they go on a business trip, they won’t be able to write off expenses if these are not properly recorded. The last thing you want to have is the IRS auditing your tax returns for making unsubstantiated claims. Here are some tips to keep in mind so that you will have an easier time recording your expenses while on a business trip:
- Scribble down notes on receipts. This is particularly helpful if you are to claim meal expenses. You should list down the names of those who you dined with, and the business purpose of the meeting.
- Scan receipts. If you’re the type of person who keeps on losing receipts, you can simply scan or take photos of this essential documentary evidence.
- Keep track of your expenses in a daily business journal. You can download a good daily business journal that you can use to record all your expenses during a business trip.
- Use debit and credit cards as much as possible. Using cash can be disadvantageous for anyone on a business trip. It is easy to spend but hard to keep track of. Instead of using cash, simply your debit and credit cards, then reconcile them with your receipts.
- Use an app. There are many apps that you can use to track your business travel expenses. These apps can make it a lot easier for you to document your expenses and make an accurate tax claim.