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Recordkeeping

What kind of information do I need to substantiate my deduction for travel, entertainment and other business expenses?

Records should be kept in an account book, diary, statement of expense, or similar record with adequate documentary evidence to support each expense item. Although a contemporaneous log is not required, making entries in a log at the time the expense is incurred has a higher degree of credibility than a statement prepared later. Please contact The Ohio Society if you would like a “2008 Business Expense Log.”

The necessary elements for recording travel expenses are:

Amount. Amount of each separate expenditure incurred while traveling away from home, such as cost of transportation or lodging. (The cost of travel by automobile may be substantiated through using a standard mileage allowance not in excess of 48.5 cents per mile from January 1, 2007, through December 31, 2007). The standard mileage allowance will increase to 50.5 cents per mile on January 1, 2008.
Date. Dates of departure and return for each trip away from home, and number of days away from home spent on business.
Place. Destination or locality of travel, identified by the name of the city or town or other similar designation.
Business purpose. Business reason for travel and/or the nature of the business benefit derived or expected to be derived as a result of travel.

Entertainment expenses should be recorded as follows:

Amount. Amount of each separate expenditure for entertainment, except that such incidental items as taxi fares or telephone calls may be aggregated on a daily basis.
Date. Date of the entertainment.
Place. Name, address or location, and identification of the type of entertainment, such as dinner or theater, if such information is not otherwise apparent.
Business purpose. Business reason for the entertainment or the nature of the business benefit derived or expected to be derived as a result of the entertainment. Also, document the nature of any business discussion or activity.
Business relationship. Occupation or other information relating to the person or persons entertained, including name, title or other designation, sufficient to establish the business relationship to you. (If you entertain a relatively large group of people, you need not record the names of each individual present if a class designation would suffice to indicate the business relationship. However, members of the group must be readily identifiable. If the group is not so large and heterogeneous that members could not be easily identified, you are required to list each person entertained.)

If the entertainment is “associated with” rather than “directly related to” the active conduct of your trade or business (as explained in the Business Meals and Entertainment Expenses section), you must also record:

a. The date and duration of the business discussion which preceded or followed the entertainment.
b. The place where the business discussion was held.
c. The nature of the discussion, its purpose and the benefit derived or expected from the discussion.
d. The identity of the persons entertained who participated in the business discussion.

Entertainment facilities:
Entertainment facilities include any property you own, rent or use for entertainment. In general, no deduction is allowed for any expense paid or incurred with respect to such facilities. This disallowance generally does not apply to civic, professional or business organizations.

If the facilities are used for entertainment, then no business deductions are allowed. However, you may be able to deduct the cost of entertainment activities that take place at the facility. For example, if you own a swimming pool, you may not deduct the cost of maintaining the pool. However, you may deduct the cost of meals and beverages served to business associates at the pool provided these expenditures relate to qualifying business activities (and subject to limitations discussed in the Business Meals and Entertainment Expense section of this guide).

The IRS Code has barred deductions for amounts paid or incurred after 1993 for membership in any club organized for business, pleasure, recreation or other social purpose.

The IRS has defined the term “club” for purposes of this rule. Clubs organized for business, pleasure, recreation or other social purposes include any membership organization if a principal purpose of the organization is to conduct entertainment activities for the members of the organization or their guests with access to entertainment facilities. Clubs organized for business, pleasure, etc. include, but are not limited to, country clubs, golf and athletic clubs, airline clubs, hotel clubs and clubs operated to provide meals under circumstances generally considered to be conducive to business discussion.

The following organizations would not be treated as “clubs” under this rule, in the absence of showing that a principal purpose of the organization is to conduct entertainment activities for members or their guests: professional organizations (such as bar associations and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, real estate boards, and civic or public service organizations (such as Kiwanis, Lions, Rotary and Civitan).

While a deduction for amounts paid for membership in a club is not allowed, specific business expenses at a club are deductible to the extent they otherwise satisfy the rules for deductibility. For example, 50% of allowable meals and entertainment expenses are deductible. Thus, while membership dues for a business lunch club are not deductible, 50% of qualifying meal expenses may be deducted.

Records must be kept documenting all of the elements of each expenditure for each business use. In addition, the records must include appropriate entries describing the use, cost, date, number of persons entertained, nature of entertainment and business relationship, as discussed earlier.

The rules relating to the deduction of entertainment facility expenses are very complex. The documentation requirements are rigid and must be strictly adhered to. Therefore, it's advisable to consult your CPA for a more detailed explanation of these very complex provisions.

Gifts:
If you wish to deduct business gifts, you must substantiate:

The cost of the gift, including a description. The maximum deduction for business gifts to any one individual is $25 per year.
The date the gift was made.
The business reason for or the benefit derived or expected as a result of the gift.
The relationship of the recipient to you, including name, title or other designation sufficient to establish such relationship. It is not necessary to record the recipient’s name in certain situations if the business relationship of the gift is clear and if it is apparent that you are not attempting to avoid the $25 limitation. Thus, if you purchase a large number of inexpensive tickets to a local high school basketball game and distribute one or two of them to each of a large number of constituents, you need not record the names of the recipients. However, you must still substantiate the cost, date, description and business purpose of the gift.

Adequate records and other evidence:
You must record the above elements for each separate expenditure. Generally, a single payment for goods, services or facilities will be considered a separate expenditure. Thus, when you entertain a guest at dinner and the theater, the payment for the meal and the tickets constitute separate expenditures, each of which must be individually recorded. If you hold season or series tickets to an event, you must treat each ticket in a series as a separate item and record the use of each for entertainment or gift purposes.

However, concurrent or repetitious payments made during the course of a single event which are of a similar nature may be treated as a single expenditure. For example, rounds of drinks paid for separately during an evening’s entertainment at one place may be treated as a whole.

In some instances, certain kinds of expenses can be aggregated on a daily basis. Thus, the regulations permit you to treat as one expenditure the total meal expenses (breakfast, lunch and dinner) incurred in one day. Tips may be aggregated with the expense of the services to which they relate. Other expenses that may be grouped include gasoline and oil, taxi and telephone calls.

Adequate records consist of:
Diaries or account books. The elements of an expenditure should be recorded “at or near the time” when the expense was incurred. Such timely recording is believed to have a “high degree of credibility not present with respect to a statement prepared subsequent thereto.” Thus, although no special form of records must be maintained, the IRS prefers that you keep a diary or account book in which entries can be made on a daily basis. The amount of detail in a diary or account book will vary with the facts and circumstances of each expenditure. Where documentary evidence is required, it is not necessary to make a diary entry which duplicates information contained in the receipt if the receipt and diary complement each other in an orderly fashion. Again, when the business purpose of an expenditure is evident from surrounding facts and circumstances, a written statement of such business purpose is not required.

Documentary evidence:
A diary or account book is not sufficient substantiation in all circumstances. You must also be prepared to produce documentary evidence (i.e., receipts, paid bills, etc.) in order to deduct lodging expenses incurred while traveling away from home and expenses in excess of $75.

Usually a receipt will suffice if it contains enough information to establish the amount, date, place and character of an expense. Thus, a hotel receipt must include the name, location, date and the separate charges for lodging, meals, telephone, etc., if it is to serve as adequate substantiation of a business travel expense. Similarly, a restaurant receipt must indicate the name and location of the restaurant, the date, and the charge for food, beverages and other items.

A canceled check will not ordinarily constitute adequate documentary evidence since it does not show in detail the specific items composing the total expenditure. For example, if you make a long-distance telephone call to your home (a personal expense), a hotel receipt would usually indicate this fact while a canceled check would not. However, a canceled check, in connection with the payee’s bill, will typically be sufficient to substantiate the business nature of an expenditure. Providing the necessary detail is important because it is the basis upon which an allocation between personal and business expenses can be made. Moreover, when expenses are incurred with respect to certain persons who are generally not deductible (e.g., spouses), it is essential that evidence of the cost incurred related to them be available. Otherwise, they will be deemed to bear proportionate share of the total charge.

Retention of records:
You must retain your records and related documentary evidence in support of travel, entertainment and gift deductions during the period that your tax return is subject to audit. Normally, this period is three years from the date of filing the tax return on which the deduction is claimed. If there has been a substantial (25% or more) understatement of gross income, the statute of limitations is six years. Also, there is no statute of limitations in cases of fraud, or if no return was filed.