I get asked, “why do I need to always document my deductions?” The short answer is that you need the correct documentation in order to sustain your deductions against a competent auditor and thus, never have to be afraid of a tax audit.
The long answer is that deductions are similar to having an alibi in a criminal investigation. If you are being investigated for a crime, the first thing the police want to know is if you have an alibi. An alibi will show that you didn’t commit the crime and weren’t on the scene. Documentation is, in effect, your alibi. Moreover, the more specific the alibi the better. Let’s face it, saying “I was at the movies” vs saying “I was at the 7 PM showing of Captain Marvel at the Rio” are different. The second version is much more specific and thus a much better alibi.
So what kinds of documentation do you need?
First, you need all receipts for any deductions taken. While it is true that you don’t need receipts for travel and meals under $75, I recommend that you get them anyway. Tax auditors love seeing receipts.
You also must have a mileage tracker showing the date of each trip, the mileage, the beginning and ending odometer reading for the year and , very importantly, must have an explanation for each trip. Not all mileage trackers are compliant especially if they don’t require an explanation for each trip. This is one thing that Taxbot does very well.
Finally, you need certain things documented in your tracker. For example, for meals, you need to document:
- Who was entertained or present at the meal and business discussion.
- What type of meal such as breakfast, lunch, dinner or even a business gift.
- When was the date of the meal
- Where did the meal take place
- What was the specific alibi that took place at the meal. Thus, what was discussed.
- How much was spent, including the tip and any required parking.
Finally, before you complain about the time and work correct documentation might entail, I can assure you that on a per hour basis, few things are as monetarily rewarding as documentation. It probably results in thousands of dollars for hour if you tracked it. Moreover, with a good tracker like Taxbot, the time required for documentation and receipt management is significantly reduced and makes it MUCH, MUCH easier.
You can find out more information on this by either subscribing to Taxbot University, where we have a video on the top 5 deductions for small businesses and/or get my latest book “Lower Your Taxes: Big Time” 2019-2020 edition.
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