Travel and Entertainment Deductions in Small Businesses

A first step in avoiding costly hassles with the IRS is identifying potential problem areas. As a recent government report confirmed, one frequent source of audit conflict between the IRS and small businesses is the documentation of travel and entertainment expenses.

The IRS often has the edge in these fights and wins because the tax law spells out detailed rules about how these expenses must be verified and documented. Most companies try to comply but often fall short, and end up drowning in paperwork.

Fortunately, that is one problem for which some relief is available. Put simply, employees don't technically need receipts for non-lodging expenses of under $75 that are reimbursed by their employers. Although this is a big break, it doesn't mean that all recordkeeping can be ignored. Receipts are still needed for all lodging expenses (even if the cost is under $75), unless the company pays traveling employees only the IRS-approved per-diem rate. And those incurring the expense will still have to record the time, place, business reason, and amount of each travel and entertainment expenditure (unless a per-diem is used, in which case amounts don't have to be recorded at all).

With this in mind, you may want to consider reviewing your travel and entertainment recordkeeping and substantiation procedures as you adjust your recordkeeping practices to take into account this IRS $75 rule.

Setting up separate procedures for your own internal tracking of expenses probably makes sense, too. For example, you may want to require employees to show you receipts for expenses costing less than $75 before okaying them, even though you no longer need to keep them for audit purposes.

Best thing to do is keep excellent records for your business expenses and call our office at (214) 827-9118 if you have any questions or would like us to review and update your travel and entertainment recordkeeping procedures.

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