20.28 Proving Travel and Entertainment Expenses

To satisfy the IRS requirements and to substantiate your expense deductions in the event of an audit, you need two types of records:

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Credit Cards
Credit card charge statements for traveling and entertainment expenses meet the IRS tests, provided the business purpose of the expense is also shown. Credit card statements provide space for inserting the names of people entertained, their business relationship, the business purpose of the expense, and the portion of the expense to be allocated to business and personal purposes. These statements generally meet the IRS requirements of accounting to your employer for reimbursed expenses (20.32), provided a responsible company official reviews them. However, you need a receipt for lodging; the IRS will not accept a credit card statement as substantiation of a lodging expense.
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1. A computer log, diary, account book, or similar record to list the time, place, and business purpose of your travel and entertainment expenses; and
2. Receipts, itemized paid bills, or similar statements for lodging regardless of the amount, and for other expenses of $75 or more. But note these exceptions:
  • A receipt for transportation expenses of $75 or more is required only when it is readily obtainable. For example, for air travel a receipt or a boarding pass is usually provided.
  • A cancelled check by itself is not an acceptable voucher. If you cannot produce a bill or voucher, you may have to present other evidence such as a statement in writing from witnesses to prove business purpose of the expense.

A receipted bill or voucher must show (1) the amount of the expense; (2) the date the expense was incurred; (3) where the expense was incurred; and (4) the nature of the expense.

A hotel bill must show the name, location, date, and separate amounts for charges such as lodgings, meals, and telephone calls. A receipt for lodging is not needed if its cost is covered by a per diem allowance (20.33). The IRS will not allow a credit card statement to substitute for a lodging receipt. The IRS wants detailed receipts to catch personal items such as personal phone calls or the purchase of gifts.

A restaurant bill must show the restaurant’s name and location, the date and amount of the expense, and, when a charge is made for items other than meals or beverages, a description of the charge.

Account book or computer entries.

Your records do not have to duplicate data recorded on a receipt, provided that a notation in your record is connected to the receipt. You are also not required to record amounts your company pays directly for any ticket or fare. Credit card charges should be recorded.

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Sampling Can Support Deduction
If an adequate record of expenses is kept for part of a tax year, and that period is representative of the whole year, the IRS will accept those records as proof of expenses for the entire year. For example, if you keep records for the first week of each month that show that 75% of the use of your car is for business purposes, and your invoices and bills show the same business pattern for the rest of each month, the IRS will treat your partial record as proof of 75% business use for the whole year.
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Your records for entertainment costs must also show (1) the names of those you entertained; (2) the business purpose served by the entertainment; (3) the business relationship between you and your guests; and (4) the place of entertainment. Inattention to these details of substantiation can cost you the deduction. For example, an executive’s company treasurer verified that the executive was required to incur entertainment expenses beyond reimbursed amounts. He also kept a cash diary in which he made contemporaneous notes of the amounts he spent. But he failed to note place, purpose, and business relationship. Consequently, there was no record that tied the expenses to his employment and the deduction was disallowed.

Excuses for Inadequate Records

Substantial compliance.

If you have made a “good faith” effort to comply with the IRS rules, you will not be penalized if your records do not satisfy every requirement. For example, you would not automatically be denied a deduction merely because you did not keep a receipt.

Accidental destruction of records.

If receipts or records are lost through circumstances beyond your control, you may substantiate deductions by reasonable reconstruction of your expenditures.

Exceptional circumstances.

If, by reason of the “inherent nature of the situation,” you are unable to keep adequate records, you may substantially comply by presenting the next best evidence. A supporting memorandum from your files and a statement from the persons entertained may be an adequate substitute. IRS regulations do not explain the meaning of “inherent nature of the situation.”

EXAMPLES
1. Bryan’s 1966 records were lost by a moving company. He claimed a T&E deduction of $15,301.87. The IRS estimated his T&E and other business expenses as $8,669 on the basis of his 1971 expense records. The Tax Court affirmed the IRS’s approach. True, Bryan’s loss of records made his burden of proof difficult, but he had to provide a reasonable reconstruction of his records to support his claimed deduction. His testimony of what he incurred in 1966 was not sufficient. A more accurate method was the IRS’s use of his 1971 records and receipts.
2. Jackson claimed the IRS lost his records. He left his records with the IRS when he was audited, and the records were never returned. The Tax Court held that to be a good excuse for not producing his records and allowed a deduction on the basis of reconstructed records. Evidence that the IRS lost them: The IRS discovered Jackson’s worksheet a year after the audit interview.
3. Murray claimed he lost his records when he was evicted from his apartment for failure to pay rent for a month. The Tax Court accepted his excuse on proof that he had kept records before they were lost. The eviction was beyond his control. However, if the records had been lost during a voluntary move, the loss would not have been excused, as in Example 1.
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