In the middle of tax season everyone is trying to meet deadlines and provide their accountants with the necessary information to file returns accurately. However, this task can be daunting for individuals that have not properly kept records for themselves or their business. Financial statements, receipts, invoices, and proof of transactions must be accurately kept over the life of the business. Unfortunately people do not know what needs to be documented, how to document expenses, or why proper documentation is important. Recording proper expenses such as traveling, vehicle, and meals and entertainment expenses can result in not being audited and lead to a beneficial tax return.
Keeping track of traveling expenses can be very beneficial to a business owner. The IRS, bookkeepers, and accountants need to see everything in writing before deductions can be taken and returns can be accurately filed. When taking a business trip be sure to document the purpose of the trip, who you are going to be meeting, and the exact duration of the trip. Documenting this information legitimizes the travel as a business expense and gives financial consultants the information they need to reduces the chance of an audit. However, the business owner must be savvy when distinguishing between business and personal travel. If you travel to a destination and engage in both personal and business activities, you can deduct your traveling expenses to and from the destination only if the trip is primarily related to your business. Trips that are primarily personal in nature will not be able to be claimed as traveling expenses. However if some business activities take place on a personal trip, you may be able to claim particular expenses you incur at the destination. Through proper documentation of time, primary purpose, and attendees the opportunity will be created for the IRS and accountants to deem the expense deductible.
Another expense that needs to be documented correctly when dealing with travel is vehicle expenses. A person looking to account for vehicle expenses must keep a mileage log to track the miles used for the business. The vehicle log must display the date, destination, purpose of the trip, and the number of miles driven for the business. Accountants will then be able to apply one of two methods. The standard mileage method allows a person to deduct 55 cents per mile. This method must be used the first year the car is available for use in the business and the method can be changed in following years. The actual mileage method will allow people to deduct the business portion of the vehicle expenses such as: tires, oil/gas, registration fees, licenses, insurance, maintenance, repairs, and depreciation. Once this method is used, the standard mileage method can no longer be applied in the following years. The car must be owned by the owner for this method to be put into use. Incorrectly using either of these methods or not actually having a mileage log may result in an audit by the IRS.
The next important item that is most commonly recorded incorrectly is meals and entertainment expenses. Business owners often find themselves in positions where they would like to entertain a customer or future client. Depending on the client or the venue these costs can become very substantial over time. Properly documenting meals and entertainment can lead to deducting 50% of the cost. Ordinary activities such as lunch, baseball games, or concerts fall into the realm of meals and entertainment if the activity is business related. If you are trying to make a sale to a client and you take him to a Yankees game to complete the sale then the deduction can be made. Once again a receipt must be kept and proper documentation must be prepared in regards of whom you met with, what was discussed, what was the purpose of the meeting, and what the business relationship was with you and all those in attendance. Properly recording such events allows a business owner to take part in exciting venues, entertain clients for future sales or business and claim deductions.
Keeping proper records allows business owners to present themselves confidently if an audit occurs. Records need to be kept for as long as 7 years if at some point you file a claim for a loss from worthless securities or bad debt deductions and as little as three years after you file a claim for credit or refund. Accurately recording expenses and transactions may be a hassle over time but if kept correctly they can result in more profitable business returns and a successful business.
