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How to keep complete business expense records.


Dear Clients,

I have given a fair amount of thought to the tax record keeping system that might best work for people in business for themselves or those who are working for others. Please bear in mind that our credit and banking statements are never enough by themselves when audited by state or federal authorities. That is because, increasingly, a purchase online will be listed on the statement as "a computer store"or "a restaurant". They do not show other info needed from actual invoices and receipts. While this article focuses on T,M&E, the logic holds for any business expenses.

This is the core of the system: When setting up an appointment in your business diary and it involves travel, meals and/or entertainment for business or networking reasons (T,M&E), note the business purpose for that event and the names of the people involved. Note where you are meeting and, if any, the restaurant you are meeting in. Records must be in paper form to meet IRS rules and state laws. If you store electronically, take multiple backups. Increasingly, phone, internet service and even utility companies are not keeping records for more than one year or two and/or are charging a lot to provide them to us. If you are audited, usually several years have gone by. The records you need are long gone. The canceled check copies are hard and often pricey to obtain.

Travel (overnight):
When flying, keep your boarding passes, cab receipts, auto rental records, gas receipts and hotel as well as all personal meal receipts. Put them all in one large envelope labeled by date and destination. Store in a safe place. Do this for each trip. (I use the time on board the plane to sort and total up these receipts when possible). Make it clear when checking in that you want these records in paper form when you depart.

Travel(not overnight):
Note your business calendar accordingly. If you go more than FIFTY (50) miles from your front door or, if working for another, your place of business, then the mid-day meal and, if still on site, dinner is deductible. Get receipts that show where, when and what. You must supply the why and who, if applicable. I refer to this as the five "W's". Don't forget the cash tips- they add up.

Entertainment (not in home):
If you have covered the "who and why" in your business calendar, then just get a receipt that shows the date, the amount paid AND Tipped) and the name and address of the restaurant. Don't lose it.

Now, you have provided the five elements needed for your IRS and state tax folks: Who, What (amount paid and what it is for), Where, When and Why. The tax auditors will not smile.

Entertainment in your home:
Buy a guest book with a name, address and date column (tax deductible). Have each guest at your home party fill in their info when they arrive. People will love doing it. You add the business purpose for their presence later on, but never later than the first day afterward (I set mine up before the event). Use a fresh page for each event. Plan your meal and go buy the stuff, keeping all of the receipts for that event. Label them by a name or acronym for that party. In your business calendar, attach a list of those whom you invited and their business connection in your life. I put "B" next to those who are there with a business reason (such as good will, referral "thank you", project planning, etc.) and a "P" next to those who are present only for personal reasons. Then you count all the heads plus yourself. Count the heads of those there for business plus yourself. divide the smaller by the larger. Multiply the total party cost by that percentage and you will have the business cost of your home party. Put all but the guest book in an envelope and label it as you see fit.

Folks, keep your bank and credit card statements in paper form for six years if you are self-employed. Finally, you can go back to prior years or the start of this year, and put your T,M&E into proper form retroactively). Court cases allow this.

Business expenses and records may be created retroactively off of best efforts under a long standing Supreme Court tested case referred to as the "Cohan Rule". So, get busy on 2013, if needed. But call us first so we can guide you a wee bit through this one.

Ron Fetzer, EA


The rules (federal level) have been clarified and issued by the IRS for two types of expenses common to restaurants, farms and rental properties. These changes, and more than a few like them, cause us to urge you to get in touch with this office soon so we can begin to address your Taxing Matters. Thanks in advance for reading this.

2014 Mileage Rates:
Business: 56 cents/mile
Medical: 22 cents/mile
Charitable: 14 cents/mile

Rental Properties:
The manner in which we account for your rental property repairs and maintenance has changed. We must ask the right questions so that we avoid treating what seems to be a repair or maintenance expense that is now, in the tax code, an improvement and deducted over a longer period of time.

The second change is effective since 2013 and involves some of the Obamacare tax law changes. Rental property owners are exposed because they have to add their GROSS rents received to some of their other income as part of the new class of taxable income known as "Net Taxable Investment Income, or NTII". This too will be addressed as we meet or converse with you.

The IRS rules have changed for the business owners/operators who have leased their business locations. The law had been modified for some years to encourage leasehold improvements by permitting 100% of such expenses to be deducted in the year incurred. As of tax year 2013 this is no longer so. Such expenses need to be deducted over a number of years. Congress can change this, but, so far, the more beneficial law has not been renewed.

Again, the repairs and maintenance tax treatment has changed the game for all business owners who have equipment to repair.

Bear with us as we do what we are supposed to do: be thorough.

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