The Paper Trail: Tax Deductions for Business Expenses
Don’t risk your deduction by falling into these common traps
Chances are you have at least one folder or cabinet filled with receipts saved from dental supply purchases, meals, travel, promotional and other items you plan to expense through the practice. Or perhaps you’re a bit more on the modern side—keeping electronic copies in a receipt organizer app on your phone. Worse, maybe you roll the dice and assume since most of your expenses are small, you won’t get audited.
Regardless of which camp you fall into, a couple central questions persist: What type of documentation do I need? How long does a business need to hang on to its tax documents?
“The IRS is very clear that in order for a taxpayer to take deductions for business expenses, they must keep an accurate and contemporaneous documentation,” CWA Director of Tax Kristina Yarbrough states.
To an extent, the IRS allows some flexibility in how businesses manage their documents, including the use of paper versus electronic systems. However, depending on the type of expense, the scrutiny—and risk of audit, can vary greatly.
What you need to keep for your monthly trip to the dental supply store is pretty basic, but when you are looking to expense a meal, which is now only deductible up to 50%, more that just a receipt is needed.
Guidelines for Common Deductions:
1. Meals: To claim a business meal, a credit card statement or receipt is not enough, auditors have to know who was with you and what was the purpose of the meeting. It’s up to you to produce this full documentation in the case of audit. If you don’t—it’s assumed this was a personal expense, and you run the risk of losing the deduction.
2. Mileage: You will not have receipts in this case, but are expected to keep logs of where you drove for business purposes. Miles expensed to and from the practice is considered “commuting” and is not a deductible expense for a business owner. Trips to the post office? That is a business deduction and miles should be logged.
3. Promotional/Advertising: If you are a specialist who gets most of your business through referrals from other practices, per the tax code “goodwill gestures” like sending over lunch etc., can be an audit risk. As of Jan. 1, 2018, the only way to receive the 50% deduction as a business meal expense, a team member of the gifting practice must be present at the meal.
Another common pitfall in this category is sponsorships. If the practice is sponsoring a local event or fundraiser in exchange for advertising, keep the flyer or pictures of the banner in which the practices name or logo was displayed in addition to the receipt or transaction .
4. Gifts: The IRS will allow the deduction of gifts up to $25 per person, per calendar year. A receipt showing the cost of the gift, and reason for the gift must be logged and produced in the case of an audit. In some special circumstances the gift amount could be increased up to $100.
5. Supplies: Watch out for last-minute supply purchases. If you run out of cotton swabs or alcohol and run to a local drug store—how is an auditor to know that it was a practice versus a personal expense? In order to prove it’s a business expense you must keep the receipt and ensure business and personal transactions at these types of retailers are separate.
6. Continuing Education: Conference fees and travel are deductible up to 100%, however record keeping for this category can be extensive. In addition to keeping receipts from your travel (ground, air, lodging), you also need to keep a copy of the event flyer, email or whatever else can show the topic, location and agenda from the meeting. Hotel stay or meals for extra days padded onto the beginning or end of the trip are not deductible and can be an audit risk.
Is there any business purchase that doesn’t need to be kept? Technically per the IRS, everything should be recorded and filed, regardless of how small the amount. Kristina says she has seen audits where a $10 receipt was missing, and therefore disallowed.
“The IRS actually does not give guidance on the length of time to keep records,” says Kristina, “but I usually recommend a minimum of seven years.”
Returns are subject to being audited by the IRS for three years, however states are different. Some states follow IRS rules, but others have limits of five to seven years. Additionally, should the IRS find that you were fraudulent on a return, they can technically go back as far as they would like.
Because the burden of proof is on the owner to back up every item on your tax return with documentation, the best approach to recordkeeping for businesses is to try to keep as many records as you can.
Some situations and expenses can be unique. Consult a CPA for guidance. Questions on your unique situation or looking for more specific advice on tax strategies to maximize deductions? Contact a member of our team.