Publication 463 |
2000 Tax Year |
How To Prove Expenses
Table 4 is a summary of records you need to prove each
expense discussed in this publication. You must be able to prove the
elements listed across the top portion of the chart. You prove them by
having the information and receipts (where needed) for the expenses
listed in the first column.
You cannot deduct amounts that you approximate or estimate.
Table 4. How To Prove Certain Business Expenses
You should keep adequate records to prove your expenses or have
sufficient evidence that will support your own statement. You must
generally prepare a written record for it to be considered adequate.
This is because written evidence is more reliable than oral evidence
alone. However, if you prepare a record in a computer memory device
with the aid of a logging program, it is considered an adequate
record.
Adequate Records
You should keep the proof you need in an account book, diary,
statement of expense, or similar record. You should also keep
documentary evidence that, together with your record, will support
each element of an expense.
Documentary evidence.
You generally must have documentary evidence, such as receipts,
canceled checks, or bills, to support your expenses.
Exception.
Documentary evidence is not needed if any of the following
conditions apply.
- You have meals or lodging expenses while traveling away from
home for which you account to your employer under an accountable plan,
and you use a per diem allowance method that includes meals and/or
lodging. (Accountable plans and per diem allowances are discussed in
chapter 6.)
- Your expense, other than lodging, is less than $75.
- You have a transportation expense for which a receipt is not
readily available.
Adequate evidence.
Documentary evidence ordinarily will be considered adequate if it
shows the amount, date, place, and essential character of the expense.
For example, a hotel receipt is enough to support expenses for
business travel if it has all of the following information.
- The name and location of the hotel.
- The dates you stayed there.
- Separate amounts for charges such as lodging, meals, and
telephone calls.
A restaurant receipt is enough to prove an expense for a business
meal if it has all of the following information.
- The name and location of the restaurant.
- The number of people served.
- The date and amount of the expense.
If a charge is made for items other than food and beverages,
the receipt must show that this is the case.
Canceled check.
A canceled check, together with a bill from the payee, ordinarily
establishes the cost. However, a canceled check by itself does not
prove a business expense without other evidence to show that it was
for a business purpose.
Duplicate information.
You do not have to record information in your account book or other
record that duplicates information shown on a receipt as long as your
records and receipts complement each other in an orderly manner.
You do not have to record amounts your employer pays directly for
any ticket or other travel item. However, if you charge these items to
your employer, through a credit card or otherwise, you must keep a
record of the amounts you spend.
Timely-kept records.
You should record the elements of an expense or of a business use
at or near the time of the expense or use and support it with
sufficient documentary evidence. A timely-kept record has more value
than a statement prepared later when generally there is a lack of
accurate recall.
You do not need to write down the elements of every expense on the
day of the expense. If you maintain a log on a weekly basis that
accounts for use during the week, the log is considered a timely-kept
record.
If you give your employer, client, or customer an expense account
statement, it can also be considered a timely-kept record. This is
true if you copy it from your account book, diary, statement of
expense, or similar record.
Proving business purpose.
You must generally provide a written statement of the business
purpose of an expense. However, the degree of proof varies according
to the circumstances in each case. If the business purpose of an
expense is clear from the surrounding circumstances, then you do not
need to give a written explanation.
Example.
If you are a sales representative who calls on customers on an
established sales route, you do not have to give a written explanation
of the business purpose for traveling that route. You can satisfy the
requirements by recording the length of the delivery route once, the
date of each trip at or near the time of the trips, and the total
miles you drove the car during the tax year. You could also establish
the date of each trip with a receipt, record of delivery, or other
documentary evidence.
Confidential information.
You do not need to put confidential information relating to an
element of a deductible expense (such as the place, business purpose,
or business relationship) in your account book, diary, or other
record. However, you do have to record the information elsewhere at or
near the time of the expense and have it available to fully prove that
element of the expense.
Incomplete Records
If you do not have complete records to prove an element of an
expense, then you must prove the element by:
- Your own written or oral statement containing specific
information about the element, and
- Other supporting evidence that is sufficient to establish
the element.
If the element is the description of a gift, or the cost, time,
place, or date of an expense, the supporting evidence must be either
direct evidence or documentary evidence. Direct evidence can be
written statements, or the oral testimony of your guests or other
witnesses setting forth detailed information about the element.
Documentary evidence can be receipts, paid bills, or similar evidence.
If the element is either the business relationship of your guests
or the business purpose of the amount spent, the supporting evidence
can be circumstantial, rather than direct. For example, the nature of
your work, such as making deliveries, provides circumstantial evidence
of the use of your car for business purposes. Invoices of deliveries
establish when you used the car for business.
Sampling.
You can keep an adequate record for parts of a tax year and use
that record to prove the amount of business or investment use for the
entire year. You must demonstrate by other evidence that the periods
for which an adequate record is kept are representative of the use
throughout the tax year.
Example.
You use your car for local business transportation to visit the
offices of clients, meet with suppliers and other subcontractors, and
pick up and deliver items to clients. There is no other business use
of the car, but you and your family use the car for personal purposes.
You keep adequate records during the first week of each month that
show that 75% of the use of the car is for business. Invoices and
bills show that your business use continues at the same rate during
the later weeks of each month. Your weekly records are representative
of the use of the car each month and are sufficient evidence to
support the percentage of business use for the year.
Exceptional circumstances.
You can satisfy the substantiation requirements with other evidence
if, because of the nature of the situation in which an expense is
made, you cannot get a receipt. This applies if all the
following are true.
- You were unable to obtain evidence for an element of the
expense or use that completely satisfies the requirements explained
earlier under Adequate Records.
- You are unable to obtain evidence for an element that
completely satisfies the two rules listed earlier under
Incomplete Records.
- You have presented other evidence for the element that is
the best proof possible under the circumstances.
Destroyed records.
If you cannot produce a receipt because of reasons beyond your
control, you can prove a deduction by reconstructing your records or
expenses. Reasons beyond your control include fire, flood, and other
casualty.
Additional Rules
This section explains when expenses must be kept separate and when
expenses can be combined.
Separating expenses.
Each separate payment is generally considered a separate expense.
For example, if you entertain a customer or client at dinner and then
go to the theater, the dinner expense and the cost of the theater
tickets are two separate expenses. You must record them separately in
your records.
Season or series tickets.
If you buy season or series tickets for business use, you must
treat each ticket in the series as a separate item. To determine the
cost of individual tickets, divide the total cost (but not more than
face value) by the number of games or performances in the series. You
must keep records to show whether you use each ticket as a gift or
entertainment. Also, you must be able to prove the cost of nonluxury
box seat tickets if you rent a skybox or other private luxury box for
more than one event. See Entertainment tickets in chapter 2.
Combining items.
You can make one daily entry in your record for reasonable
categories of expenses. Examples are taxi fares, telephone calls, or
other incidental travel costs. Meals should be in a separate category.
You can include tips for meal-related services with the costs of the
meals.
Expenses of a similar nature occurring during the course of a
single event are considered a single expense. For example, if during
entertainment at a cocktail lounge, you pay separately for each
serving of refreshments, the total expense for the refreshments is
treated as a single expense.
Car expenses.
You can account for several uses of your car that can be considered
part of a single use, such as a round trip or uninterrupted business
use, with a single record. Minimal personal use, such as a stop for
lunch on the way between two business stops, is not an interruption of
business use.
Example.
You make deliveries at several different locations on a route that
begins and ends at your employer's business premises and that includes
a stop at the business premises between two deliveries. You can
account for these using a single record of miles driven.
Gift expenses.
You do not always have to record the name of each recipient of a
business gift. A general listing will be enough if it is evident that
you are not trying to avoid the $25 annual limit on the amount you can
deduct for gifts to any one person. For example, if you buy a large
number of tickets to local high school basketball games and give one
or two tickets to each of many customers, it is usually enough to
record a general description of the recipients.
Allocating total cost.
If you can prove the total cost of travel or entertainment but you
cannot prove how much it cost for each person who participated in the
event, you may have to allocate the total cost among you and your
guests on a pro rata basis. To do so, you must establish the number of
persons who participated in the event.
An allocation would be needed, for example, if you did not have a
business relationship with all of your guests. See Allocating
between business and nonbusiness in chapter 2.
If your return is examined.
If your return is examined, you may have to provide additional
information to the IRS. This information could be needed to clarify or
to establish the accuracy or reliability of information contained in
your records, statements, testimony, or documentary evidence before a
deduction is allowed.
How Long To Keep
Records and Receipts
You must keep records as long as they may be needed for the
administration of any provision of the Internal Revenue Code.
Generally, this means you must keep records that support your
deduction (or an item of income) for 3 years from the date you file
the income tax return on which the deduction is claimed. A return
filed early is considered filed on the due date. For a more complete
explanation of how long to keep records, get Publication 583,
Starting a Business and Keeping Records.
You must keep records of the business use of your car for each year
of the recovery period. See More-than-50%-use test in
chapter 4
under Depreciation Deduction.
Reimbursed for expenses.
Employees who give their records and documentation to their
employers and are reimbursed for their expenses generally do not have
to keep copies of this information. However, you may have to prove
your expenses if any of the following conditions apply.
- You claim deductions for expenses that are more than
reimbursements.
- Your expenses are reimbursed under a nonaccountable
plan.
- Your employer does not use adequate accounting procedures to
verify expense accounts.
- You are related to your employer as defined under
Standard Meal Allowance in chapter 1.
Reimbursements, adequate accounting, and nonaccountable plans
are discussed in chapter 6.
Examples of Records
Examples of records that show the information you need to keep for
different types of expenses are included in this publication as
Table 6 and Table 7. They are part of the
illustrated examples shown at the end of chapter 6.
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