Thus, you must be able to show the IRS that the expense relates to your business.
Case in point: Stephen Wallach, an airline pilot who also worked as a real estate broker in California who dealt primarily in commercial properties. Unfortunately, Wallach’s real estate business didn’t do very well, reporting a $23,124 loss in 2007. One reason his brokerage business lost so much money that year was that he claimed business expenses of more than $14,000 for travel, meals and entertainment. The IRS disallowed all of these expenses. Wallach appealed to the U.S. Tax Court and lost.
To substantiate a deduction for travel, meals or entertainment, a taxpayer must maintain adequate records or present corroborative evidence to show:
Wallach provided the Tax Court with bank records and photocopies of receipts for meals, hotels, rental vehicles and airline tickets to substantiate some of his expenses. However, he was never able to establish a believable business purpose for them. For example, he claimed deductions for hotel, rental car and meal expenses for an 11-day trip to Hawaii. He said the trip was to scout potential properties for a client.
However, Wallach’s records showed that he paid for multiple hotel rooms for the same nights and that there were multiple occupants in the rooms. Needless to say, it appeared that Wallach went to Hawaii for a vacation, not to scout for property. The Tax Court disallowed all his Hawaii expenses. (Wallach v. Comm’r, T.C. Summ. Op. 2012-94.)
Travel, entertainment and meal deductions are always a hot button for the IRS. The IRS is particularly suspicious of trips taken to “scout property.” People often try to turn vacations into “business trips” by claiming they took the trip to look for property. Oddly, these scouting trips are always taken in nice resorts.
Whenever you incur an expense for business-related entertainment, meals, gifts or travel, you must document the following five facts:
The IRS does not require that you keep receipts, canceled checks, credit card slips, or any other supporting documents for entertainment, meal, gift or travel expenses that cost less than $75. However, you must still document the five facts listed above. This exception does not apply to lodging — that is, hotel or similar costs — when you travel for business. You do need receipts for these expenses, even if they are less than $75.
All this record keeping is not as hard as it sounds. You can record the five facts you have to document in a variety of ways. The information doesn’t have to be all in one place. Information that is shown on a receipt, canceled check, or other item need not be duplicated in a log, appointment book, calendar or account book. Thus, for example, you can record the five facts with:
No matter how you document your expenses, you are supposed to do it in a timely manner. You don’t need to record the details of every expense on the day you incur it. It is sufficient to record them on a weekly basis. However, if you’re prone to forget details, it’s best to get everything you need in writing within a day or two.