Substantiation

I think everyone has heard that it is important to save receipts for tax deductions – and this is something that has even come up many times here in our blogs. Often, though, a second part of this is left out, and that is that you must also be able to connect those receipts to your trade or business. Think of it as it’s one thing to have a have the receipts from when you took your family to Disneyworld, it’s another thing to be able to convince someone that it was a legitimate business expense.

Now of course, there are plenty of situations where serious explanations aren’t necessary.  If you have a receipt from Staples that says you bought a pack of pens and a ream of paper, the business use for these is easily seen.  You don’t need to keep track of each date that a pen ran out of ink and got tossed in the trash.  As long as you aren’t going through hundreds and hundreds of them, this is reasonable.

There are plenty of transactions, however, whose immediate business application is not obvious. For instance, many of us use a computer in our day-to-day work, and this is also reasonable. You will want to be able to connect a receipt for a computer, though, to the exact computer it is (just keep track of a serial number, don’t keep the receipt taped to the tower or anything). This way you can show how the device is used for business and that the receipt isn’t for a laptop you bought your kid for school – a much less reasonable business use.

This idea of proving what receipts are for may most come into play with dining. For again, of course, there are legitimate meals where business is discussed with coworkers, clients, vendors, etc. These happen for many reasons that are reasonable and qualify as deductions.  But most of the meals we eat in life – even those in restaurants – happen outside any sort of business environment and those ones clearly aren’t legitimate deductions, even if you are eating during the workday.  To ensure you can count those that are, though, see that the receipts for them include notes as to who attended the meal and what was discussed.

An important thing to note here is that we are talking about legitimate deductions. If we are thinking about an audit situation, yes, the auditors will question some deductions. Keeping that line of information through the receipts and EXACTLY what they are for, protects these real potential deductions from being tossed. This is not skirting the system, this is helping you use the system to your best advantage.
Warmly,

Josh Bousquet
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