Thursday, December 20, 2012

"Do I really need to keep those receipts and logs?"

This is one of the most common questions I receive when conducting an interview with a client in connection with the preparation of their tax returns.  At first, the answer seems quite obvious, "of course you need to keep the receipts."  However, this answer should really be expanded to say "Yes, you need to keep the receipts and mileage logs if you want to deduct the expenses on your return."  In other words, if you decide to forgo the deduction, then the IRS really does not care if you keep the receipts or logs. 

Let's take a closer look at this question.  In most cases, the client is referring to receipts for charitable donations and log books for the business use of a personal automobile.  The requirements for documenting these deductions are summarized below.  As with all tax issues, you should contact your tax advisor to determine the impact this may have on your income tax returns.

For charitable donations, the first thing that must be determined is the form of the donation.  A distinction is made between cash donations (which includes donations made using cash, a check or a debit or credit card) and non-cash donations.  For cash donations of less than $250, the taxpayer must maintain a bank record, which may be a cancelled check, bank statement or credit card statement, showing the donation or a receipt, letter or other form of communication from the donee, including the donee's name, address, date of contribution and amount of the contribution.  For donations in excess of $250, the taxpayer must have a contemproaneous written acknowledgement from the donee organization.  The receipt must include the amount contributed, a good faith estimate of the value of anything given to the donor in exchange for the donation (such as a meal) and, if the donee provided any intangible religeous benefits, a statement to that effect.  It should be noted that the purchase of raffle tickets or purchase price for items purchased at a charitable auction are not deductible as charitable donations.  The exception would be the amount paid for the auction item that is in excess of the item's fair market value. 

Non-cash charitable donations have their own set of documentation requirements.  These requirements are somewhat complicated, and you should discuss any non-cash donations with your tax preparer.  The thing to remember is that every non-cash donation must be supported by some form of acknowledgement from the donee.  Even for donations which are less than $250, the taxpayer must have a written receipt from the donee or, if it is not practical to get a receipt, a detailed list of the items donated, the date donated and the fair market value at the date of donation.  The requirements become much more strict for larger donations of non-cash items.

What about mileage logs?  As with all deductions, it is the responsibility of the taxpayer to substantiate the amount claimed as a deduction on the tax return.  With respect to the business use of an automobile, the best evidence is a contemporaneous mileage log.  The log should show the actual  miles driven and the business purpose of the trip.  In an audit situation, the IRS will also ask for some form of verification of the total miles driven during the year.  This can be accomplished by showing a vehicle service receipt near the beginning and end of the year.  The best way of substantiating the business mileage would be to maintain a log throughout the entire year.  However, as long as a log is maintained in such a manner as to represent a representative sample of the business miles driven, the total business miles driven can be calculated using the percentage from the sample period.  While it may be possible to support the deduction in other ways, keeping an accurate, timely log will make the substantiation much easier. 

While this is an overview of the substantiation requirements for these two items, it can safely be said the taking a few extra minutes to document and save the support for these items can reap huge benefits if the IRS questions the deductions.

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