The Proof You Need for Tax Deductions

Guilty until proven innocent, that’s how the IRS operates. So, even though you may be innocent when it comes to tax deductions, you’ll have to prove it. Unfortunately, it’s not as simple as just handing over that shoe box of receipts you've been collecting in your basement. “What about an official statement from my credit card company?” you may be thinking. Well, sadly, even that’s not enough information for the IRS.

Perhaps you’re very organized and you have kept all receipts from every business transaction, sorted them, and have maintained that system in a well-labeled filing cabinet for years. Will that be enough information? Again, no, receipts alone are not good enough.

Proving Your Case for Innocence

When it comes to tax deductions for business expenses, you need to establish an amount and provide complete information concerning the business purpose. That means taking note of the who, what, when, where, and why for the transaction – otherwise known as the “5 Ws.” A receipt and credit card statement are both sufficient to establish the amount, but it’s up to you to provide information about the business purpose.

Entertainment business transactions are even stricter. According to the business research firm Thomson Reuters, five things are necessary for an entertainment deduction to be allowed:

  1. The amount of each separate expenditure;
  2. The date of the entertainment;
  3. The name and address or location of the entertainment;
  4. The business reason for the entertainment or nature of the business derived or expected to be derived and the nature of the business discussion or activity;
  5. The occupation or other information relating to the person or persons entertained, including the name, title, or other designation, sufficient to establish the business relationship to the taxpayer.

As you can see, the IRS is basically looking for information about what’s going on. Also, note that a credit card statement or receipt is enough to cover the first three criteria; however the burden is on you to have proper documentation supporting the final two.

The big thing here is to keep adequate records covering the 5 Ws for each transaction, particularly entertainment expenses. A good idea is to write it on the receipt or statement so all the information is in one place.

It may take a little extra time but the peace of mind will be worth it. If the IRS ever comes calling to question your deductions, you can sit back, grab a beer, golf club, or TV remote, and relax because you have the proof to back up your deductions. If you’re sticking to the minimalist shoe box method, get ready to grab your wallet instead.


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