ACCOUNTING BLOG

Deduction Substantiation

Business Management, Taxes
by Leah Rourke

Let’s hope your tax return is never chosen for a random audit…but if it is, the IRS will require substantiation of the deductions on your return. From the IRS perspective, there’s no “standard amount” or “use what I took last year” approach for items like mileage, meals and entertainment, and charitable donations. All of these deductions require some form of documentation.

Let’s focus on meals and entertainment.

While traveling away from home on a business trip, taxpayers have two methods available for documenting and deducting these expenses. The actual method – which is just as it sounds, keeping and deducting actual receipts for these expenses – and the per diem rate method.

The per diem rate method has two major components: 1) using the proper rates for your travel area as published by the IRS and 2) documenting the time, place and purpose of the business travel. When using the per diem method, actual receipts do not need to be retained to support the deduction on your tax return.

Your employer has three options for reimbursing you for meals and entertainment expenses while traveling on the job: 1) no reimbursement or 2) per diem reimbursement or 3) actual reimbursement. Your employer will inform you if you are working under an actual or per diem basis. In any case, if your employer does not reimburse you the full amount under their chosen policy of either the federal per diem rates or the actual amount, you may be allowed to deduct the unreimbursed difference on your individual tax return. This amount is an itemized deduction subject to 2% of your adjusted gross income before any amount is deductible.

The per diem method can be used while traveling away from your business home. We recommend keeping actual receipts and documentation for meals and entertainment expenditures during your daily business activity. In order to be a valid defense in an audit, documentation should include the place, the time, the people, and the reason for meeting.