Exception. Documentary evidence is not needed if any of the following conditions apply.

• You have meals or lodging expenses while traveling away from home for which
  you account to your employer under an accountable plan, and you use a
  per diem allowance method that includes meals and/or lodging.
  (Accountable plans and per diem allowances are discussed in chapter 6.)
  
  



• Your expense, other than lodging, is less than $75.
  
  



• You have a transportation expense for which a receipt is not readily available.
  
  

For most people the $75 rule is really useful. However, even if you are not required to provide documentary evidence you still have to prove the expense by providing information about the amount, time, place and business purpose of the expense. IRS provides a table available here that to be honest is more confusing than helpful.

For expenses under $75 a businesses general ledger or an individual's financial records (Quicken, MS Money, or paper ledgers) will generally suffice as long as they provide amount, time, place and purpose descriptions. If the expense is over $75 you need documentation. IRS also has something to say about what constitutes adequate documentation. For example a charge card receipt is not adequate for a restaurant bill because it does not show the number of people served. You can read some other examples contained in the publication.

The best solution is to setup a record keeping system that automatically tracks everything IRS needs. Here's the suggestion we give to clients.

1. Get a seperate debit or charge card for business expenses and use it religiously.



2. Keep all receipts and record a quick note on the face of the receipt that includes who was with you and what was discussed (John Smith and Joey, 2006 tax planning).



3. When you get back to the office put all receipts in an envelope.



4. Once per month reconcile your credit card bill to your financial records, refer to the month's receipts as needed to record your expenses, then seal the receipts in the envelope and staple it to the month's credit card statement. The whole package goes into the credit card vendor file and will be archived at the end of the year with the rest of your financial records.



5. Try to minimize the expenses you pay with petty cash.



6. DON'T WAIT UNTIL YEAR END. We've compared clients who reconcile expenses once per year with those who reconcile monthly and on average clients who reconcile monthly are able to claim TWICE the amount of business deductions as those who procrastinate.

If you need help setting up a system now is the time ask for it. Give us a call if you don't know where to start.