Publication 911 |
2000 Tax Year |
Recordkeeping
You must keep records to correctly figure your taxes. Your records
must be permanent, accurate, complete, and clearly establish your
income, deductions, and credits. The law does not require you to keep
records in any particular way. But if you have more than one business,
you should keep a complete and separate set of books and records for
each business.
Publication 583
provides information about setting up a
recordkeeping system, the types of books and records included in a
typical system for a small business, and sample records.
Publication 463
provides information on the records to keep if you
use your car in your business.
The following are suggestions for keeping adequate business
records.
- Keep a business bank account. Deposit all
business receipts in a separate bank account. Make all payments by
check, if possible. Then both business income and business expenses
will be well documented.
- Make a record. Record all your business
transactions in separate account books, and keep a monthly summary of
your business income and expenses.
- Support your entries. File canceled checks, paid
bills, duplicate deposit slips, and other items that support entries
in your books in an orderly manner and store them in a safe place. For
instance, organize them by year and type of expense.
If you cannot provide a canceled check to prove payment of an
expense item, you may be able to prove it with certain financial
account statements. These statements must show either a check
clearing, a credit card charge, or an electronic funds transfer. If
the account statement shows a check clearing, it must indicate the
check number, amount, payee's name, and the date the check amount was
posted to the account. If the account statement shows a credit card
charge, it must indicate the amount charged, payee's name, and the
date charged. If the account statement shows an electronic funds
transfer, it must indicate the amount transferred, the payee's name,
and the date of transfer.
- Keep your records. You must keep your business
books and records available at all times for inspection by the IRS.
You must keep the records as long as they may be needed in the
administration of any Internal Revenue law. You should also keep
copies of your tax returns to help prepare future returns or file
claims for refunds.
Proof of payment alone does not establish that you are entitled to
a tax deduction. You should also keep other documents as discussed in
Proving Your Deductions, next.
Proving Your Deductions
The IRS may ask you to prove your deductions for business expenses.
Travel Expenses
For travel expenses, you must be able to prove the following items.
- Each separate amount you spent for travel away from home,
such as the cost of your transportation or lodging. A receipt, bill,
or other documentary evidence generally is required for all lodging
expenses. You can total the daily cost of your breakfast, lunch,
dinner, and other incidental travel costs if they are listed in
reasonable categories, such as meals, gas and oil, and taxi
fares.
- The dates you left and returned home for each trip, and the
number of days spent on business while traveling away from
home.
- The destination or area of your travel, described by the
name of the city or town.
- The business reasons for your travel or the business benefit
you gained or expected to gain from it.
Entertainment Expenses
For entertainment expenses, including entertainment-related meals,
you must be able to prove the following.
- The amount of each separate entertainment expense. You can
total incidental expenses, such as taxi fares and telephone calls, on
a daily basis.
- The date the entertainment took place.
- The name and address or location of the place you went.
Include the type of entertainment, such as dinner or the theater, if
the information is not clear from the name or designation of the
place.
- The occupation or other information about the people for
whom you are claiming a meal or entertainment expense. Include their
names, titles, or other information sufficient to establish their
business relationship to you.
- The business reason for the entertainment or the business
benefit you gained or expected to gain from it and the nature of any
business discussion or activity that took place.
- The presence of you or your employee at a business meal
given for a client.
Business discussion.
If the entertainment took place before or after a substantial and
bona fide business discussion, in addition to the information in (1),
(2), (3), (4), and (6) above, you must be able to prove the following.
- The date, place, and duration of the business
discussion.
- The nature of the business discussion.
- The business reason for the meal or entertainment or the
business benefit you gained or expected to gain from
entertaining.
- The identification of the people who participated in both
the business discussion and the entertainment activity.
Business relationship.
If you entertain a readily identifiable group of people, you do not
have to record the name of each person. It is enough to designate the
group. For example, if you entertain all the members of a garden club,
an entry such as "members of the Hillcrest Garden Club" is
enough.
Gift Expenses
For gift expenses, you must be able to prove the following.
- The cost of the gift.
- The date you gave the gift.
- A description of the gift.
- Your reason for giving the gift or any business benefit you
gained (or expected to gain) from giving it.
- The occupation or other information about the person
receiving the gift, including name, title, or other information
establishing a business relationship to you.
The name of the recipient of a business gift does not always
have to be recorded. 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 a number of customers, it is usually
enough to record a general description of the recipients.
Records
You should keep the proof you need for your travel, meal,
entertainment, and gift expenses in an account book, diary, statement
of expense, or similar record. You should also keep adequate
documentary evidence that will support each element of an expense.
You do not have to record information in your account book that
duplicates information shown on a receipt if your records and receipts
complement each other in an orderly manner.
Keep your records up to date. Record your expenses in your account
book at or near the time of the expense. Entries made later, when you
may not remember them accurately, do not have as much value as entries
made at or near the time of the expense.
Separating expenses.
Usually, each separate payment you make must be recorded as a
separate expense. For example, if you entertain someone at dinner and
then go to the theater, the dinner expense and the cost of the theater
tickets are separate expenses. You must record them separately in your
records.
Expenses of a similar nature occurring during the course of a
single event will be considered a single expense. For example, if
during entertainment at a cocktail lounge you pay separately for each
serving of refreshments, treat the total expense for the refreshments
as a single expense.
Some items can be totaled in categories. You can make one daily
entry for such categories as taxi fares, telephone calls away from
home, gas and oil, and other incidental travel costs. Meals should be
a separate category. Include tips with the costs of the services you
received.
Documentary evidence.
A receipt or bill is often the best evidence to prove the amount of
an expense. Documentary evidence is needed for all your lodging
expenses unless, under an accountable plan, your employer pays you a
per diem reimbursement of no more than the government rate in effect
at that time and in that area. It is also generally needed for any
other expense of $75 or more.
Documentary evidence will ordinarily 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 the name and location of the hotel, the
dates you stayed there, and separate amounts for charges such as
lodging, meals, and telephone. A restaurant receipt is enough to prove
an expense for a business meal if it has the name and location of the
restaurant, the number of people served, and the date and amount of
the expense. If a charge is made for items other than meals and
beverages, the receipt must show that this is the case.
Canceled check.
A canceled check, together with a bill from the payee, usually
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.
Incomplete records.
If you do not have adequate records to prove an element of an
expense, you must prove the element by providing both of the
following.
- Your own statement, whether written or oral, containing
specific information about the element.
- Other supporting evidence that is sufficient to establish
the element.
Additional proof.
You may be required to provide additional information to the IRS to
clarify or establish the accuracy or reliability of information
contained in your records, statements, testimony, or documentary
evidence.
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