TAX CHANGE REDUCES BOOKKEEPING REQUIREMENTS BUT DOES BUSINESS CARE?

By Sheila D. Foster, PhD, CPA, and Cynthia E. Bolt, CPA, The Citadel

Some changes in the tax code are actually made in an attempt to ease the bookkeeping requirements on taxpayers. One such change is contained in IR-95-56 which became effective on October 1, 1995. The change modifies the requirements for expenditure substantiation under IRC section 162 (Trade or Business Expenses), section 212 (Expenses for Production of Income), and section 274 (Disallowance of Certain Entertainment, etc., Expenses).

To be deductible under IRC section 162, ordinary and reasonable "traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) [should be incurred] while away from home in the pursuit of a trade or business..." [162(2)]. Under IRC section 212, the same deduction of ordinary and reasonable travel expenses is allowed "for the production or collection of income...[or] for the management, conservation, or maintenance of property held for the production of income..."[212 (1 and 2)]. IRC section 274 requires substantiation "by adequate records or by sufficient evidence corroborating the taxpayer's own statement" of the amount, the time and place, and the business purpose of travel expenses [274 (d)(4)].

The restrictiveness of the substantiation requirement was lessened by Temp. Regulation section 1.274-5(c)(2)(iii) which eliminated the requirement of documentary evidence for travel expenditures, other than lodging, of $25 or more by stating that to be deductible, "[d]ocumentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure shall be required for any expenditure for lodging while traveling away from home, and any other expenditure of $25 or more...[Reg. section 1.274-5(c)(iii)(a and b)]." The "essential character of the expenditure" must be proven; not merely by a canceled check, but also with detailed information about the nature of the expenditure along with a receipt. While facts and circumstances govern each situation uniquely, without such substantiations, no deduction is allowed.

Although the same regulation gave the commissioner the opportunity to
ease the code restrictions on travel expenditures,
the requirement for documentation of lodging expenses, regardless of amount, remains in place, and the $25 limit for other expenses remained unchanged from 1962 until 1995.

After almost 35 years, this limit was increased to $75 by Internal Revenue News Release 95-96. IRS Commissioner Margaret Milner Richardson indicated that the change was to assist in making the government "work better and cost less...[and] to make recordkeeping a lot less difficult for businesses and employees."

Informal surveys have indicated that corporate America has not responded to IR-95-96 as the commissioner had anticipated. One poll taken by Kiplinger's Personal Finance Magazine (January, 1996) found only one company, AT&T, even considering easing the requirement for documentation of travel expenses. Many companies polled indicated that they already had in place thresholds for documentation that were more restrictive than the $25 limit. Likewise, a survey by Coopers & Lybrand of 76 companies found only four that had eased their requirements following the release of IR-95-96. Clearly, among larger companies, there is little interest in changing existing company requirements for employee documentation of travel expenses in order to reduce recordkeeping. The potential savings in accounting costs seems to be outweighed by concern for keeping close control over employee expenses by requiring receipts.

Even though code restrictions have been eased, it appears that most companies continue to mandate and most tax professionals continue to advise their business and individual clients to maintain adequate documentation of all their expenditures, regardless of the amount and nature of the expense. Although paper and bookkeeping reduction may be a desirable goal for those minor expenditures that are difficult to keep track of, nonetheless, adequate maintenance of a paper trail for audit, accounting, and tax purposes seems to be a preferable goal for proving the existence of a taxpayer's deduction --notwithstanding the IRS's revised requirements. *