Taking certain deductions is your right as a taxpayer… as long as you have the records to substantiate them. Here’s a helpful guide to make sure all your tax deductions are easily and properly documented for your maximum benefit (and to pass IRS guidelines).
The simple deductions
Some tax deductions are simple to report because they’re already documented with “authorities” and you get an official statement. These types of deductions include mortgage interest, real estate taxes, taxes paid through your paycheck and other items reported by your employer, government entities or other organizations.
At the end of each year, you’ll receive summary statements that include exactly what you can list as deductions. Simple enough. All we ask is that you send us those statements.
The more complicated deductions
Many kinds of tax deductions — such as employee business expenses, home office deductions, business meals, entertainment, charitable contributions and mileage — need detailed records and receipts that you track yourself.
Most legitimate business expenses will qualify as deductible if they comply with the following guidelines.
Ordinary and necessary business expenses: All business expenses must meet the general deductibility requirement of being “ordinary and necessary” in carrying on the business. These terms have been defined to mean customary or usual, and appropriate or helpful. Office supplies, conference fees, phone bills, stationery printing, etc. are ordinary and necessary expenses. If it’s reasonable in your business to entertain clients, those related costs should also qualify.
“Directly related” or “associated with”: Business meals, travel or entertainment must be either “directly related to” or “associated with” the business. “Directly related” means a specific, concrete business benefit is expected to be derived, not just general client goodwill, the principal purpose for the event must be business, and you must have engaged actively during the event, via a meeting, discussion, etc. Or, the expense may qualify as “associated with” the active conduct of business if the meal or entertainment event immediately precedes or follows a substantial and bona fide business discussion. “Goodwill” entertainment at shows, sporting events, nightclubs, etc. can qualify.
Substantiation: To qualify for a deduction, you must have proof of the expense. A receipt is the most important record, but you’ll also need to document the business purpose and the business relationship of the individuals involved. For expenses of $75 or more, documentary proof (receipt, etc.) is required, but it makes sense to keep organized receipts for EVERY business related expense regardless of the amount.
Charitable contributions: While all contributions must be substantiated (a cancelled check for example), cash contributions of $250 or more require a written receipt from the charity. If you donate property valued at more than $500, additional requirements apply. In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property with a value of more than $5,000, and to attach an appraisal summary to the tax return.
You have two options for deducting automobile expenses. For both, you’ll need to keep an annual log tracking business miles separately from the personal use of your car.
- Your deduction can be computed using a standard mileage rate (you can check with us to get the current mileage rate or visit www.irs.gov ), plus tolls and parking.
- Or, you can track actual expenses (including depreciation, subject to limitations) for the portion of car use allocable to the business. For this method, you need to keep track of all costs for gas, repairs and maintenance, insurance, interest on a car loan, and any other car-related cost.
If your deductible trip is by taxi or public transportation, save a receipt if possible or make a notation of the expense in a logbook, and record the date, amount spent, destination, and business purpose.
More Tax-Deduction Tips:
Organize your receipts all year.
There’s nothing worse than gathering a year’s worth of loose receipts in early April and trying to sort through them for the tax deadline. Not only is it a nightmare to sift through receipts, it’s more likely that you’ll miss a deduction – and pay more in taxes. Sometimes during an audit, we discover that our clients forgot items they should have deducted.
How can you avoid missing legitimate deductions?
There’s no way around it. If you want to deduct every single business expense you’re qualified to deduct, you’ll need to set up careful and detailed record-keeping procedures to keep track of expenses and justify their business connection. You could use a paper spreadsheet itemizing the receipts throughout the year, but it’s much easier to use business software for these purposes. Make all your purchases using bank accounts and a credit card tied to QuickBooks or Quicken software, so you can enter your expenses all year and then have a complete annual list with a mouse click.
These software programs make it super-easy to set up expense categories, such as office supplies, tolls, parking, meals, postage, entertainment, printing, professional services, bank charges and so on. Then at the end of the year, you can provide us with an itemized list, by category. This helps us ensure that we capture every single deduction you’re allowed to take.
If you’d like help setting up a new QuickBooks account or managing it more effectively, give us a call at 207-774-0882.
Our financial articles are presented by Honeck O’Toole, Maine-based certified public accountants. If you ever have questions about your finances, please email us or call 207-774-0882.