Given the considerable amount of travel that you do in your consulting business and the sizeable expenses incurred for meals and entertainment, there are several potential areas of concern that the IRS may focus if you are ever audited. Should an audit occur, it is important that we are properly prepared so we can reduce the time and money spent dealing with such an audit. Additionally, proper preparation will reduce any exposure to additional tax, penalty, and interest exposure.
The areas the IRS is likely to focus on with respect to your business are:
(1) whether there is a legitimate business purpose for the expense;
(2) whether the applicable percentage limitation has been properly applied to the expense
(3) whether you have proper documentation of any reimbursement by a client for such expenses;
(4) proper documentation of meal and entertainment expenses while you are not traveling.
To deduct meal and entertainment expenses, you must establish that the expense was one that was ordinary and necessary in carrying on your trade or business.
Reimbursed expenses, such as travel and meals, are expenses which you will recoup directly from your client. IRS agents look for one or more of the following when reviewing a taxpayer’s accounting system:
(1) Whether the taxpayer reflects the reimbursed funds as income and then takes a corresponding deduction.
(2) Whether the taxpayer nets the income and the associated expense through one account.
(3) Whether the taxpayer fails to record the income yet deducts the related expense.
(4) Whether reimbursements provided under non-accountable plans are taxable wages subject to employment taxes. Reimbursements provided under accountable plans that are in excess of substantiated expenses are taxable wages subject to employment taxes if excess is not returned within a reasonable period of time.
If any of these situations exist, the IRS agent will look at the tax effect of reimbursed expenses given your method of accounting.
Please call me at your earliest convenience so we can discuss your accounting and substantiation for such expenses.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.