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How to prove business expenses

February 11, 2016 | By More

receiptsAll businesses must keep records in order to prove business expenses. Good records can help a business prepare its business tax returns as well as support items reported on the returns. All taxpayers must also keep business records for the IRS.

To claim any deduction, a business owner (or taxpayer) must prove what the expenses were for and that the expense was paid. Documents need to support the expenses can include paid bills, receipts, statements, invoices, deposit slips, and canceled checks. Documents should show the amount paid and the reason for the expense. Individuals and businesses must keep their records as long as needed (until the time frame for auditing the return expires).

There are specific record keeping requirements and documentation rules for certain expenses such as:

  • meals and entertainment
  • cars and other modes of transportation
  • business gifts
  • travel expenses (i.e., meals and lodging)

All receipts must be retained for any of the above expenses. All amounts must be substantiated to the employers as to the amount, time and place, and business purpose. For entertainment and gift expenses, business relationship of the person(s) being entertained or receiving a gift must be provided. For vehicle expenses, a mileage log must be kept. Be sure to view the list of common business deductions.

If a business gives reimbursements and allowances to its employees for business-related travel and entertainment expenses, it must usually treat these amounts as income to the employees. However, these expenses are not considered income if:

  • the expenses are not deducted by the employee
  • the employee accounts for the expenses
  • the total of the reimbursements and allowances equals the total amount of the expenses

Accounting for expenses is supplying employers with evidence to verify each expense’s amount, business purpose, time, and place. This also works if an employee has a fixed allowance and substantiates each expense. A fixed allowance can include the standard mileage rate for vehicles and the federal travel per diem rate.

A reimbursement arrangement is considered accountable if it meets the following:

  • it provides advances, allowances, or reimbursements for employee business expenses
  • all business expenses must be verified to the employer within a certain period of time
  • employees must return any leftover reimbursement within a reasonable period of time

If the plan is accountable, the reimbursements are then excluded from the employee’s wages and are not subject to employment taxes. Excess reimbursements that are not returned within a reasonable time frame are treated as paid under a nonaccountable plan, which means they are considered employee income and must be included in wages with appropriate tax withholdings.

Employers can have an accountable plan for some items, and a nonaccountable plan for others.

Contributed by Walthall – CPAs
Walthall CPAs is located in Cleveland, Ohio. For more information or to contact Walthall, visit http://www.walthall.com

Article information should not be used exclusively to make legal, financial or tax decisions. Because laws and rules can change frequently, topics may not always be updated to reflect these changes or may not apply to your unique situation. It’s prudent to seek out the advice of a professional for your specific needs.

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Category: Business Bookkeeping, General Business

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