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How to make sure that you keep your Travel, Meals and Entertainment deductions if Audited


One of the favorite targets of the IRS when auditing an income tax return is Travel, Meals and Entertainment (T,M&E). Please bear in mind that credit card and banking statements are never enough by themselves when audited by state or federal authorities. That is because, increasingly, a purchase 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.
Even if they did, it is mandatory in most audits to have them, but still not adequate in and of themselves. The IRS can disallow all of these types of deductions if you are off by $50.00.

So here is the core of the records system that will save the day: 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 made available in paper form to meet IRS rules and laws. DO NOT BUY INTO THAT PAPERLESS NONSENSE WHEN DEALING WITH ANY TAX AGENCY!!! IT JUST "AIN'T" SO!. If you store tax records electronically, take multiple backups. Increasingly, Companies are not keeping records for more than one year and/or are charging a lot to provide them to us. Many simply are not keeping them after a short while.

Travel (overnight):
When flying, keep your boarding passes, cab receipts, auto rental records, gas receipts and hotel and 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.

Travel(not overnight):
Note your business calendar accordingly. If you go more than FIFTY miles from your tax home front door, then the mid-day meal and, if still on site into the evening, dinner counts, get receipts. Breakfast on the road does not count for a day trip.

Entertainment (not in home):
Now,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) along with the name and address of the restaurant. Don't lose it. No name or address receipts are worthless for this purpose. take the time to write it out.

Now, you have provided the five elements needed for your friendly IRS folks: Who, What (amount paid and purpose), Where, When and Why.

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 love doing it. Use a fresh page for each event. Plan your meal and go buy the stuff, keeping all of the receipts for the event in a dedicated envelope. Label it 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. This writer puts "B" next to those names who are there for a business reason (such as good will, net working, referral thank yous, project planning, etc.) and a "P" next to those who are present only for personal reasons Your spouse is always business at a party, but not so for most business trips.

Add up the total number of those who are present including yourself. Count the number of those there for business reasons and, again, count yourself too. Divide the smaller number (business only) by the larger number. 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. Do not lose the guest book. It is evidence, (Not all will fill in their names and addresses, so offer an incentive for those who do, and fill in the names of the recalcitrant ones later. It is legal.

Keep your bank and credit card statements with other paper proofs in paper form for four years (three for the feds and four for most states).

You can go back to prior years or the start of this year, and put your T,M&E into proper form retroactively. Certain court cases allow this.

Lastly, if you do catch a federal or state tax audit, do not represent yourself. Call an EA like this writer. We are worth our weight in gold at such times.

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