If the IRS or a state tax agency examines your tax return, you may be asked to document the items reported on your return. If you can not produce the requested documents you may have to pay additional tax, penalties and interest. Typically, expense documents are the most common documents requested. Deductible expenses require a document (receipt) showing a description of the expense, amount, payee’s name, check number, and the date paid. Charitable contributions need a document showing the name of the organization, the amount, and the date of the contribution. Contributions of $75 or more for which you receive some goods or services, require a receipt describing the value of the goods or services received. Contributions of personal property require a written receipt from the organization showing a reasonable description of the property; and you are responsible for identifying the fair market value of the property contributed. Deductible child care expenses need to be supported with the name, address, and taxpayer identification number (Social Security Number or federal tax number) for all persons and organizations that provide care for your dependent(s). Employee and business expenses are deductible when they are ordinary and necessary, while not being extravagant. The most often audited business expenses are vehicle expenses, meals, entertainment, cell phone, travel, and office-in-home expenses. Good records for these expenses include:
- A mileage log with dates, destinations, business purposes, and miles driven. See the example below.
- Receipts including the business purpose for meals and entertainment.
- Phone records indicating who was called and the business purpose, or verification that the phone is used exclusively for business.
- A business travel log indicating nights away from home, the business purpose, and location.
- Square-footage of an office-in-home used exclusively for business.
A good recordkeeping system can be in many different forms. It is important to establish a system that is efficient and easy for you to use. Most importantly, it needs to be complete. For more reading see IRS Publication 552 Recordkeeping for Individuals. Here are some examples for recordkeeping: Mileage Log A good mileage log needs to be something convenient for you to use. Many people use a small notebook kept in the vehicle to record the trips along with an envelope for all related expense receipts. A log is necessary for business owners and employees driving for work related trips. Here is an example of what needs to be in your mileage log:
|1/5||Office Store||Office Supplies||6|
|1/5||Thompson’s Res.- Kuna||Site Survey||44|
|3/8||Blueprints R Us||Pick-up Documents-Markos||15|
|4/14||Wilson, Harris & Co||Payroll Reports||12|
|12/31||Year-End Total Business Miles||77|
Equipment Used for Business & Personal Use The tax laws say when an asset is used for business and personal use the cost of the asset has to be allocated between business and personal use. Therefore it is necessary to document your claim of how much the asset is used for business. For example if your computer cost $1,000 and you use it one-third of the time for business, you would be able to deduct $333.33 for the computer. But you need some time of record documenting your business use. Example Computer Use Log
|12/31||Total Time||67 min|
Cell Phones For audit purposes, an auditor most often asks for monthly phone bills and then asks the taxpayer to substantiate each call as business or personal. Other than the obvious tedious task of doing that every month, it can be preferable to establish that a (cell) phone is required for business purposes and the minimum monthly fee is deductible regardless of business/personal ratio. Any additional charges would have to be substantiated to claim them as business expenses. Example Cell Phone Log
|Monthly Total Time||37 min|
Year-end Summary of Personal Expenses To summarize personal deductible expenses, simply list your expenses like this:
|Medical Expenses||$ 2,560|
|Job Related Expenses||$ 225|
|Education Expenses||$ 3,000|
|Cash Donations||$ 520|
Year-end Summary of Business Expenses You can help your accountant to quickly complete your tax return by totaling your receipts and records into a summary page. Example Business Income & Expenses Summary for a Year
|Cell Phone Service||1,200|
|Total Business Miles||77|
|Total Vehicle Miles||3,040|
|Total Nights Away from Home||23|
|Computer & Printer||1,000||33%|
|Cell Phone/ PDA||325||32%|