Help! It’s almost tax filing time, and your records are, well, incomplete.
What if you forgot to save receipts, log business mileage, and keep other records of your business related expenses? Is it too late to reconstitute a record of your eligible tax deductions?
Don’t worry, you’re not totally out of luck. Some records can be recaptured and adequate recordkeeping can be salvaged from a variety of sources to support your business expense deductions. You can’t use estimates or approximations to file for a business expense deduction, but putting in a little elbow grease can help make sure you don’t pay taxes on all the sales you generated, getting credit for at least some of your deductions. A variety of methods can be used to support your business expenses and help you claim valid deductions. Even if you can’t claim as many deductions as you might have if you had perfect records, putting in a little work before you file can still help you improve your situation.
Electronic financial records
First, did you charge business expenses on a debit or credit card, or make direct transfers from your bank account? All of these charges can be substantiated through your transaction history, and even if you’ve lost the receipt, a credit card or debit card charge is sufficient evidence for the IRS that you’ve made a payment. Transaction histories keep your date, amount of the charge, vendor, and often additional data about a location and expense category. BossTax’s free account connection lets you plug in your credit and debit card accounts and searches your transactions for possible business expenses to deduct. Connecting your accounts can save you hours of combing through statements to find possible deductions.
Ideally, you’re charging your business expenses on a separate card from your personal expenses – that will make it much easier to keep track. Jumbling it together? Apply here for a separate bank and card account to keep your business expenses separated and make next tax season easier. You can manage a separate business banking account easily from your phone to keep your expenses more organized.
You can also check your email and online statements for common business deductions to see if a record has been saved. For example, if you buy liability insurance for your business, you probably have an online portal where you can see your paid invoice statement.
Proving business purpose
These records form a good starting point, but simply proving you spent an amount isn’t sufficient to claim it as a business expense deduction. You must also generally prove the business purpose of the expense. Proving the business purpose of the expense is typically done by maintaining a written record of the business purpose at the time you incurred the expense, or gathering other direct evidence. For example, if you provided a gift to a customer, then an acknowledgment from the customer is direct evidence of the gift that supports the business purpose of your payment record and allows you to deduct it (up to the $25 gift limit per gift). If you sent a customer a gift, and they emailed you a note of thanks, that’s sufficient evidence to support your business expense as a deduction.
The degree of proof required depends on the circumstances in each case. According to the IRS, “If the business purpose of an expense is clear from surrounding circumstances, then you don’t need to give a written explanation.” For example, if you drive a regular sales route to call on customers, clients, consultants, etc., you don’t have to give a written explanation of every trip – you can record the length of the route once, then record the date of each trip and the total miles you drive at the end of the year.
If you charged business expenses where the purpose is clear from the transaction record, or where additional evidence helps to make it clear – for example, past business records of regular activities, calendar evidence, related records – then you don’t need to give a written explanation of each and every expense, the payment record is likely sufficient. If the nature of your business makes the purpose of the business expense clear, then you also don’t need to provide a written record. For example, if you are in direct sales and take delivery of goods ordered at a hostess party, then deliver the goods purchased to customers, invoices that establish the delivery of the goods are sufficient to establish business purpose to your vehicle use and mileage incurred.
Percentage basis for regular business activities
Did you keep partial records for a regular business? You may be able to use the records you did keep as a sufficient basis for applying a percentage method to the rest of your costs.
For example, let’s say you use a car for both business and personal purposes. If you kept a good record of your car activities for the first week of each month, showing that 25% of your mileage was for business purposes and 75% of your mileage was for personal purposes, you may be able to apply those percentages to the remaining three weeks of each month. In this example you would have to have other evidence to establish that your use of the car in the first week is typical of the remaining weeks. For example, sales receipts for your business that show that you carried on the same level of activity in your business, or a record of deliveries or events from a calendar or date book, could help establish that you conducted business at the same rate of activity in the remaining three weeks. Together, these records could support your deduction of 25% of your vehicle costs for all weeks even though you only kept specific records for the first week of each month.
Need help?
Feeling nervous? No one wants to get audited and it’s anxiety-inducing to not know if you’re doing the right thing. Get advice from a BossTax Pro in the mobile app – download now and get help from a professional.
Get better set up for taxes with our automated tracking module and our quarterly filing. Even if you don’t log your expenses every day, catching up quarterly will be easier than waiting until April 15! Download the app and track for free.
