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Recordkeeping Requirements for Business Deductions

Two areas that the IRS typically has the edge on in an audit are the deductions for business mileage and business meals and entertainment since the substantiation requirements can be time consuming.  Following the rules below and staying current on your documentation will give you the best chance to be able to support all of your tax deductions in the event of an audit.

In general, if you use your vehicle in pursuit of a trade or business, you are allowed to deduct the ordinary and necessary expenses incurred while operating the vehicle.  However, any expenses associated with the personal use of the vehicle are not deductible.  In lieu of proving the actual costs of operating an automobile, individuals may compute the deductible costs for their business use using a standard mileage rate of 51 cents per mile for the first 6 months of 2011 and 55.5 cents per mile for the second half of 2011.  Whether you use the standard mileage rate or claim actual expenses including gas, maintenance, insurance and depreciation, you should keep a daily log showing the miles traveled, destination and business purpose.  Without a business mileage log, the Internal Revenue Code allows an auditor to disallow all automobile expenses even though it may be clear that you as the taxpayer use your vehicle for business purposes.  This is an audit adjustment that the Service is now pursuing regularly when mileage logs are not produced.

50% of meal and entertainment expenses that are bona-fide business deductions can be deductible for income taxes as well.  To follow the substantiation requirements for these deductions, you must keep a receipt or written record showing the time, place and cost of the event, who was entertained, and the business purpose of the meal or entertainment.