Defending your deductions

If a canceled check were all you needed to satisfy an IRS agent that you are entitled to a business deduction, audits would hold few terrors.  Unfortunately, it's not enough to just spend money to get a deduction.  You need to show that it is a business deduction.  Paperwork matters.

If you are in a regular profit-seeking business with a decent accounting system, most of this takes care of itself.  Your accounting records will generate the purchase orders, invoices and payroll records for most of your day-to-day deductions. (And if you don't have a good accounting system, you should get one, and tax is the least of the reasons you need to).  But some deductions require support beyond what you might normally get from your bookkeeping records. 

If you want to deduct travel or meals and entertainment expenses, the tax law requires you to keep records that show:

• the amount of the expense;
• the time and place of the travel or entertainment;
• the business purpose;
• for business entertainment, the business relationship with the person being entertained.

If you want to deduct a charitable contribution, you at least need a canceled check or credit card statement for a gift up to $200.  For larger gifts, a written receipt from the recipient listing the amount of the gift and the value, if any, received for the donation is required.  Special rules apply when you make gifts of property; if you donate property worth over $5,000, other than publicly-traded securities, you need to get a qualified appraisal.

The IRS has more on documenting travel, meal and entertainment expenses.  To learn more about documenting your contributions, visit the Tax Girl.