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Travel and Entertainment Expense Records

There is one area that the IRS is very strict with: travel and entertainment. It is very common for taxpayers to attempt to write off personal expenses as business expenses in this category. Even though Congress made substantiation and recordkeeping requirements for travel and entertainment in 1962, it is still a problem area for most taxpayers.

Whether you are self-employed, or work for someone else, you may have business expenses related to travel away from home, and entertainment. If so, you need to read this section. Tax examiners love to challenge travel and entertainment expenses because they are "easy pickings," and often result in additional taxes. When you read the rules, you'll understand why.

In 1962 Congress adopted special rules under Code Section 274(d) requiring taxpayers to substantiate their deductions for overnight traveling expenses, entertainment, and gifts, by providing either adequate records or by sufficient evidence, as corroboration of the taxpayer's own statement. Congress established five elements of information that were required to support the deduction.

In 1984 Congress made changes in this area that caused a groundswell of opposition. They eliminated the sufficient evidence test, required that adequate records be "contemporaneous," and expanded the rules to cover local travel of passenger automobiles, other transportation vehicles, computers, property related to entertainment, amusement, or recreation, and any other type of property the IRS wanted to apply the rules to (all these were know as Section 280F property).

Congress reacted to the subsequent flood of complaints by repealing the "contemporaneous" requirement and restoring the sufficient evidence test. The requirement to include Section 280F property in the Section 274(d) substantiation requirements was postponed until 1986. In addition, Congress specifically prohibited the IRS from requiring you to keep a daily contemporaneous log of your automobile use for local travel. An exception from the substantiation requirement of Section 274(d) was also made for minimal personal use of business vehicles.

Code Section 274(d) now requires you to substantiate your deductions or tax credits in connection with the following business-related expenditures:

• Local travel, computer usage and listed property under Section 280F;
• Traveling expenses, including meals and lodging, while away from home;
• Cost of business meals of $25 or more, entertainment, amusement,or recreation activities or property, or the use of facilities; and Gifts.

Deductions for the above expenses will not be allowed unless you can provide either adequate records or sufficient evidence to corroborate your own statement with the following five elements:

1. The amount of the expense.
2. The time and place of the travel, business meal, entertainment, or amusement, or use of such facility.
3. The business purpose of the expense.
4. The business relationship to you of the persons you entertained, used the facility, or received the gift.
5. The date and description of the gift.

It's important to note that these elements do not stand alone. You must first establish that the expense qualifies as a deduction even before the substantiation requirements of Section 274(d) become applicable. Deductions are not allowed for approximations, or estimates; or for expenses for lavish or extravagant entertainment.

Next Section: What are Adequate Records or Sufficient Evidence?

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© 1986, 1998 to 2002, Jack Warren Wade, Jr.