Q-1:

Subject: Substantiation of Expenditures

 

Tax Guru,

 

I appreciate your musings and advice on the U.S. Tax regime and have a question for you that I've been unable to see a post for on your blog.

 

Is there a de minimis amount for which a receipt is not required to substantiate a deduction for income tax purposes.  My former employer required us to provide a receipt only for expenses of $25 or more.  Has the IRS adopted an similar policy?

A-1:

For several years, IRS had a $25 threshold for when an actual receipt was required to document a particular travel or entertainment expense.  A number of years ago, this was raised to the current $75 threshold.

While IRS can't demand an actual  receipt for individual travel & entertainment expenditures of less than $75, you do still need to keep records showing the time, place, business purposes and amount of each separate expense.  Documentary evidence is still required to substantiate expenses for lodging.  See IRS Publication 463  for more details.

An even easier way to account for out of town expenses is to use the IRS's per diem rates, as published in IRS Publication 1542.

Your own personal professional tax advisor should be able to provide more specific assistance for your particular situation.

Good luck.

Kerry Kerstetter

Q-2:

Thanks for the input Kerry. Turbo Tax, my tax advisor, has been silent on the matter.  I've been keeping receipts for everything $25 and over.  But have been throwing away all receipts under $25 not just travel and entertainment.   Should I be keeping receipts for items under $25 that are not travel and entertianment?

A-2:

Now I can't tell if you're legit or pulling my leg here.  No computer program can seriously be considered as a professional tax advisor.  That goes for all software, from the $5,000 plus Lacerte programs I use to the $30 TurboTax you are using. The role of an advisor can only be handled by an experienced human.

The rules for record keeping need to be tempered with real life.  While technically, you are supposed to have receipts or other suitable documentation for every penny you deduct (other than the special $75 rule I mentioned previously), the real life need for such detailed records may never materialize.  If you are audited by IRS for those deductions, the auditors have the discretion to either demand to see detailed documentation for every single penny or just those expenditures over a certain dollar figure.  It usually depends on the number of individual transactions and the total dollar amount being deducted.  For example, I am currently handling an IRS audit where the auditor agreed to only look at documentation for individual expenditures over $100 after I gave him a several page QuickBooks listing of all of the items included in the expense accounts he was interested in examining. 

So, your self defined $25 threshold for keeping receipts may work out to be fine, as long as you don't encounter one of the IRS auditors who doesn't believe in the concept of materiality and demands documentation for every penny. 

Again, if there are large amounts of money involved, I would advise working with an experienced human tax professional for setting up your record keeping systems, preparing your tax returns and representing you with IRS if you are one of the lucky ones to be selected for their examination.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Very helpful.  Thanks for the real life advice. 

 

I'm pulling your leg.  I've done a bit of research on my own and don't rely on TT as an authoritative source for tax law.  My consulting work isn't sufficiently complex enough or large enough, at least yet, to require a tax advisor, at least I think don't think so.   Maybe one more

year of Turbo Tax and then I might need to seek more professional help with my taxes.

 

Thanks again for taking the time to personally respond.

 

Happy holidays.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/19/2006 03:41:00 PM Send this post: