Courtesy of the Adaptax newsletter (from my tax preparer), here are five tips on recordkeeping that will help you avoid errors with the IRS:
1. Receipts – Even though the IRS does not require receipts for meal and entertainment expenses of less than $75, it would be wise to hang onto them. There is no better documentation than a credit card receipt since it has all the expense information required. All you need to do is write on the slip the purpose of the event, the individual you were with, and your business relationship with that person.
2. Auto Deductions – Since there are so many ways to compute deductions for the business use of a car, it is very easy to overlook the most beneficial options. However, regardless of the method used, make sure you keep track of the total and business use miles for the year since it is required for all options.
3. Reimbursable Expenses – Keep track of reimbursable expenses. Many business owners have a tendency to pay business expenses with out-of-pocket cash or with a personal credit card. Avoid non-reimbursed business expenses by tracking those costs and substantiating the expenses.
4. Gifts – Do not overspend on gifts to clients and business associates. The IRS will allow a deduction of only up to $25 worth of gifts to any individual per year. Being too generous will cost you. With only that first $25 per recipient considered a deductible business expense, the rest will be nondeductible.
5. Business Equipment – Since equipment is considered a capital expenditure, it has to be depreciated. That is why lumping equipment together with supplies is not a good idea. This is true even when you elect to expense equipment purchases under Sec. 179. If the purchases are not reported properly, the IRS could rule that the expense was improperly characterized. If that is the case, you would not be entitled to the deduction claimed on your return. There could be other repercussions, leaving you with no current deduction at all.