Maximizing Your Medical Expense Deduction

First things first, the vast majority of people won’t qualify for a medical expense deduction.  You’ve got three big things in the way.  The first is that your medical expenses have to be over 7.5% of your Adjusted Gross Income before you can start to claim them.  That means if you make $50,000 a year, your medical expenses have to be over $3,750 before any of it can be deducted.  (50,000 x .075 = 3,750.)  Second, even if your medical expenses are high enough to be deductible, you’ve got to have enough other deductible expenses to exceed the standard deduction to make claiming your medical expenses worthwhile.  And third, for most people, their biggest medical expense is their health insurance—which, if you get it through work, it’s already been exempted from your income tax so you can’t use it on your Schedule A.

 

But even though you might not meet the criteria I mentioned above, you might still qualify for some type of medical expense deduction, so please bear with me a little longer.

 

Do you live in a state that has a medical deduction?  Here in Missouri, there’s a deduction for health insurance.  Many people don’t even know about the deduction so they don’t bother with it.  Here’s the thing—if you list your health insurance, your prescriptions, and other medical expenses in the right boxes when you fill out your federal tax return—if you have a state deduction, it will flow through to your state tax return.

 

Why is it important to separate out your expenses and list them in the right boxes?  Recently, I was reviewing a tax return prepared somewhere else.  The taxpayer had several thousand dollars worth of medical expenses, including paying for his own health insurance.  The preparer had totaled up all the expenses and put them all on the “other medical expenses” box.  Now doing this made no difference on the taxpayer’s federal tax return.  But when I separated out the man’s health insurance premiums, it saved him over $200 on his state tax return.

 

This was a Missouri tax return.  Not all states have medical deductions.  But if you don’t take shortcuts when you’re putting the numbers into your federal return, the numbers will flow to the proper spots on the state return.

 

Are you self employed?  If yes, and you pay for your own health insurance, then you don’t have to claim it on the Schedule A—you can claim it on the front of your 1040 form on line 29.  While this isn’t as good as being able to claim it as a business expense where you get to deduct it from self employment tax, placing a deduction on the front of the 1040 is still better than putting it on the Schedule A.  The best part, you don’t even have to file a Schedule A in order to claim it.

 

But suppose you do have enough medical expenses to claim on your schedule A.  You still want to put your self employed health insurance on line 29 first instead of on the Schedule for the best deduction.  Let me explain with an example.  This is going to have a lot of math but the math is just to prove my point.  When you’re preparing your own tax return, all you have to remember is to put your deductions on the right line in the tax software–your software program will do the math for you.

 

A taxpayer had medical expenses of about $10,000 of which $4,000 were for his self employed medical insurance.  Let’s assume he had an AGI (adjusted gross income) of $50,000.  If you lump all the medical expenses together, you take 50,000 and mulitply that by 7.5%–that becomes the floor amount;  $3,750.  All of the expenses over the $3,750 are deductible.  $10,000 minuse the $3,750 equals $6,250.  So if you’re in the 25% tax bracket, you’ve saved $1,563–sweet right?

 

But, if you took the $4,000 as your self employed medical insurance deduction first, that $4,000 would come off of your AGI.  So your AGI would be $46,000.  To compute the rest of your medical expense deduction you’d take 46,000 x .075 = $3450–that’s the new floor for claiming your medical expenses.  But now, since you’ve used the 4000 someplace else, you have to take that out of the calculation so now your medical expenses on Schedule A are only 6000.  With me so far?  You take that 6,000 and subtract the 3,450 floor and you still have $2,550 in medical expenses on your Schedule A.  So now, instead of writing off $6,250 you’re writing off $6,550 (the 2,550 plus the 4,000).  Now your tax savings are $1,638–that’s $75 more than before.   All you’ve done here is just move the number to the correct line.

Roberg Tax Solutions Mileage Log

Roberg Tax Solutions Mileage Log

Time to Get Your Mileage Log Ready

 

http://robergtaxsolutions.com/2012/11/roberg-tax-solutions-mileage-log

 

Do you claim auto expenses for your business on your taxes?  If the answer is no, you should probably skip this blog post.  If the answer is yes, this is exactly the post you want to be reading.

 

I do a lot of audit work.  Lots of audit work.  Every audit that I’ve ever worked on where the taxpayer claimed mileage the IRS asked to look at the mileage log.  Every single one!  Small business owners are more likely to get audited than wage earners and most small business owners claim mileage.  So—if you’re a small business owner, you need a mileage log.

 

So here is your new mileage log.  All you have to do is fill it in with the miles and the appointments.  It’s all set up and formatted as an Excel spreadsheet.  There’s even room for other auto expenses in case you’re using your actual costs instead of mileage.

 

 

Did you know that you have to keep track of your miles even if you are claiming your actual expenses?  It’s true.  Often, people come to me with their auto receipts and I can’t do anything for them without their mileage.  Whether you claim mileage or actual expenses, you must have a mileage log.

 

In order to do your mileage log correctly, you’ll need your odometer reading from the beginning of the year and from the end of the year.  I like to take my readings on New Year’s Day during the Rose Bowl Parade.  I started 2012 out with 81 miles on my car (I got a new car at the end of 2011.)  Now I’m up to 8903.  I should reach 9700 by the end of the year.    Of those miles, about 5,000 of them are for business.

 

If I’m claiming straight mileage, I would take the 5000 miles times the 55.5 cents per mile that I’m allowed to claim for a deduction of $2,775.

 

If I’m claiming actual expenses, then I’d take the 5,000 business miles I drove and divide that by the  9610 actual miles I drove during the year  to get the percentage of my expenses that I could deduct.  5,000 divided by 9610 = 51.98%.  So I’d total up all my gas and maintenance expenses and figure the depreciation and multiply that all by 51.98% to get the right dollar amount.

 

So you see, you can’t claim your actual expenses without having the mileage to figure the percentage.

 

This mileage log was prepared by Michael Siebert in my office.  We looked at a bunch of other logs; some were too complicated and some didn’t have everything you needed.  This one’s right about in the middle and it covers what the IRS really wants to know.  There’s a separate page for every month, but all you really need to turn in to your tax preparer is the summary page.

 

Feel free to use it.  Copy it.  Give it to friends.  It’s okay.   We left the year off so that you can use it for multiple years if necessary.  We’d like you to use it when you have us do your taxes, but if you use someone else’s, that’s okay.  You can always use our mileage log.  The point is that it is very important to have a mileage log for your taxes that we don’t care who uses it.  It’s free.  We’re not even asking you to sign up for anything.

 

If you’re claiming auto expenses on your tax return this year, you need to use a mileage log.  If you don’t already have one, here’s one for you.

 

http://robergtaxsolutions.com/2012/11/roberg-tax-solutions-mileage-log

 

Can I Claim My RV as a Business Expense?

I had a client that owned his own business and he wanted to buy an RV so he could go on vacation with his family.  He wanted to know if he could write off the cost of the RV as a business expense if he put a sign about his business on the RV while he traveled around the country.  The answer to that is a flat out no.  The IRS is all over that idea and they don’t like it.

 

But, it may be possible to write of an RV as a business expense if you really do use the RV for business.  For example, let’s say you have clients in another city that you regularly visit.  When you are visiting those clients, you normally need to spend time in a hotel.  So, maybe the RV might be a good choice for you.  You could travel to the location in the RV and sleep in the RV instead of a hotel.

 

So I said you might be able to claim it—this isn’t a rock solid deduction.  You’ve got to be able to prove it’s truly a business expense.  There are a couple of things you must absolutely do.

 

1. You must have a log of all of your miles you drive in the RV.  Not one of those, oh I drove some business miles and write it down later—a very serious, a very real mileage log.  Over 50% of the miles you drive must be used for business to try to take the RV as a deduction.
2. You must also keep a log of all the nights that you sleep in the RV.  Same rule—over 50% of your nights sleeping in the RV must be for business.
3. You must also keep your business trips shorter than 30 days so that the RV counts as transient lodging.   That means I can’t buy an RV and drive down to Florida for the entire tax season and spend my summers in Missouri.  (Well I could, but I wouldn’t be able to write off the RV as a business expense.)

 

And the main point you must absolutely keep in mind—do not use the RV for entertainment.  No business parties on the RV.  The IRS is pretty strict about that.  Entertainment facilities are not tax deductible (things like swimming pools, hunting lodges, and bowling alleys.)  Make sure that your RV is for lodging or travel—not for entertainment.

 

So although my client with the sign idea couldn’t claim the RV as a business expense just for putting a sign on it, if he chose to drive the RV on his business trips and stayed in the RV overnight instead of a hotel—he might be able to claim part of the RV expenses for his business, as long as his business use was more than his personal use.

 

Remember, trying to claim an RV as a business deduction is kind of “out there” and highly likely to be audited by the IRS.  You’re going to want to have really good documentation and a good accountant to back you up on this one.

Claiming Meals as a Business Expense

I was working on a client’s tax return and he had a whole lot receipts for business meals.  A whole lot.  I do a lot of tax returns and I’m pretty familiar with claiming meal expenses.  This guy wasn’t in one of the jobs that I normally associate with lots of meal expenses – so I had to ask him about it.

 

He told me, “Well yeah, I own my own company and my wife helps me and so we go out to dinner together all the time and we talk about work so I write it off as a business expense.”

 

Here’s the problem – that’s not going to fly with the IRS.  If you are just going out to dinner with your spouse, even if you do nothing but talk about business – well then, it’s not a deductible business expense.

 

I deal with this issue all the time.  Heck, my own husband will say, “Hey we talked about business, you can deduct our dinner!”  And yes, my husband often gives me excellent business advice during dinner (he’ll read this blog post so I have to say that) but I still can’t deduct having dinner with him for business purposes.  (As smart as he is at business, he stinks at taxes.)

 

Here’s the IRS rule:  “Generally you cannot deduct the cost of entertainment for your spouse or for the spouse of a customer.  However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose for providing the entertainment.”

 

So, I can bring my husband, Mark, along if I’m entertaining a client who needed to bring her husband along as well.  For example, someone is in from out of town and wouldn‘t want to leave her husband all alone in the hotel.  But if I’m just having dinner with my husband alone – no deduction.

 

There are lots of other rules about claiming meals as well.  You’re supposed to record the expense “contemporaneously”.  That’s a fancy way of saying you should write down on the receipt who and why.  For example, Helene is one of my advertising people.  We both like the grand slam breakfast so I’ll meet her at Denny’s.  On the receipt I would write, “Helene, advertising.”  Quite frankly, Helene is the only person I meet at Denny’s so if I’ve got a Denny’s receipt, I know who I was meeting and what we were talking about.  But a Bread Company receipt?  Well I probably meet someone there once a week.  If I don’t write that down that might not survive an audit.  It’s just a good business practice to write who and what on the receipt every time.

 

Here’s a silly little tip that makes the IRS happy:  when you’re paying for a business meal with your credit card, write the name and reason for the meeting on the slip that you sign and give to your waitress.   That way, your “contemporaneous reporting requirement” is proved on your receipt carbon.  Your waitress might think you’re a little weird but chances are she won’t even notice.

 

If you want more information about entertainment meal expenses, you can check out the IRS publication 463:  http://www.irs.gov/pub/irs-pdf/p463.pdf

 

And now, I’m headed off to a non-deductible dinner with my husband!

Personal Bad Debt

In my last post I wrote about how to write off a business bad debt on your tax return.  Today, I’m going to explain writing off a personal bad debt.  For example, say you loaned your brother-in-law $5,000 to buy a house and he never paid you back.  That’s considered to be a “non-business bad debt.”

 

The key to claiming a personal bad debt is being able to prove that you tried to get your money.  For example, I paid a boatload of money to send my son to college.  He’s not paying me back.  To be honest, I don’t expect him to – that college money was never meant to be a loan so I can’t claim a deduction for money that I was never supposed to get back in the first place.

 

If you’re claiming a personal debt, you’ll need to show that the money really was a loan, that you were supposed to receive payment, and that the payment was not and will not be received.

Evidence such as a signed loan agreement and copies of collection letters are going to be necessary.  You don’t have to take the person to court – especially if you know that even if you win the court case you won’t get your money – but you do have to show that you tried to get paid.   So, using the brother-in-law example, first you’d want a signed agreement showing that he intends to pay back the $5,000.  Your agreement should show how he’s paying it back, and when.  When he doesn’t pay you, you’ll want to send him a signed letter stating that you expect him to pay you.  You will want to send that correspondence via certified mail, return receipt requested.  This gives you evidence of trying to extract a payment from him.

 

Remember: Without some sort of evidence that the money really was a loan, and that you tried to get paid – you can’t claim the bad debt.

As far as the actual reporting goes, it gets reported as short-term capital losses on Form 8949 part 1 line 1.  (Back in the old days that would be schedule D.  It will still show up on your Schedule D when you’re done, but you’ll be inputting the information onto Form 8949.)

 

You’d write your brother-in-law’s name in column a.  You’d put $5,000 in column f (that’s your basis), and you’d enter zero in column e (because it’s worthless now since he ain’t payin’ ya.)  Make sure you check the box “C” because you’re not getting a 1099B form for this debt.

 

When you write off a personal bad debt like that, you’ll need to attach a statement to your tax return that has the following: a description of the debt, including the amount and when it became due, the name of the debtor and any business or family relationship that you have with him, the efforts that you made to collect the debt, and why you decided the debt was worthless. (For example – maybe your brother-in-law declared bankruptcy or may you know that legal action to collect the debt would probably not result in payment.)

 

Because it’s being claimed as a capital loss – you’re going to be limited to the same rules as other capital losses as far as the amount of the debt that can be used to offset your other income.  So if the loan is the only thing that’s going to wind up on your Schedule D – then you’ll only be able to claim $3000 of the loss.  The rest will carry over to the next year.

 

If you only take away one point of this blog post it should be that you must try to collect the payment before you try to claim the bad debt as a tax deduction.  If you don’t try to collect, then the IRS can treat the debt as a gift and you lose out.

Sole Proprietor: You Gotta Have a Home Office

Right now, I’m sitting in my comfy chair in the corner by the window of my home office and drinking a freshly brewed cup of coffee from my favorite mug.  The dog has done her security patrol of the perimeter, deemed me to be safe from the local deer and bunny rabbits, and has settled in for her morning nap. I’m having one of those, “This is why I’m doing this,” kind of moments and it’s nice.

As a tax person who specializes in small businesses, I get asked a lot of questions about different business practices–Should I set up an LLC?  I always answer, “That depends.”  Should I lease a car or buy it?  That depends.  Should I set up as a sub-chapter S corporation?  That depends.  You get the picture.  But when people ask me about a home office I always say, “Yes!  Every small business owner who files a schedule C should have a home office.”  My answer has nothing to do with the comfy chair and coffee either.  As usual with me–it’s all about the money.

 

A home office is good for your tax return.  First, you get to use a portion of your living expenses (that you would already be paying anyway) to offset your self employment income.  Remember–your self employment income is taxed at 13.2% more than your regular income tax so even something like your mortgage interest-which is already deductible, is a better deduction when it goes against your self employment income.  Kaching!

a home office is foThe other reason you want r your mileage.  Yes, you read that right–you want the home office deduction to claim mileage.  Here’s the deal–let’s say you’re a contractor, you drive to jobs all over town.  You probably put close to 20,000 miles on your truck a year for business.   You claim that on your tax return and get audited.  (Side note:  claiming exactly 20,000 business miles on your tax return will get you audited it’s a red flag.)  Anyway, you go through the audit process and the IRS disallows all 20,000 miles because you’re commuting to those job sites from your home and commuting miles are not tax deductible.  That’s over $3800 worth of tax money that you just lost right there.  Add the fines and penalties and you’re well over 5 grand in tax debt.

But if you had a home office–all of that mileage becomes deductible because ou’re traveling from your office to a job site.

But what if I don’t really have a home office? Seriously, you need to set something up.  It doesn’t have to be a whole room–it can be a corner of a room (like my comfy chair spot although most people have a desk or table.)  You can’t just say you have a home office on your tax return and not really have one.  (You’ve heard of fraud, right?)  Be be realistic.  If you have a small business–you’ve got something–files, or a computer, or make up, or something–and it needs to be put someplace.  You need a spot to make phone calls from, pay the business bills, do your adminsitrative work–that’s your home office.

Aren’t I more likely to get audited if I claim a home office? To be honest, I keep hearing that, but my experience says no.  The only time I’ve seen home office expenses audited was when they really were wrong and it was part of a broader audit.  (Oh yeah, and when I redid those numbers correctly the taxpayer got a bigger home office deduction.)  Be honest about it and you’ve got nothing to worry about.

But what if I have a real office in a business building that I go to every day? Can I still have a home office?  Yes you can.  You make your home office your administrative office.  Like I said, pay bills, balance the business check book.  I never meet clients in my home office, they always come to my “business office” location.  My business office doesn’t prevent me from having an “administrative” office at home.

If you’d like more information about claiming a home office, try this link:  http://robergtaxsolutions.com/2010/09/can-you-claim-a-home-office-deduction/ It has more information about the rules and what the IRS is looking for.  But seriously, if you’re a sole proprietor, you need a home office.

 

 

 

Can I Deduct My Work Clothes as a Business Expense?

Now, if you’re a regular reader of my blog then you already know I’m going to say, “It depends.” But for about 90% of the people asking that question, the answer’s going to be, “No.” If you have to wear a suit and tie to work, or ladies, if you have to wear hose with your dress – that doesn’t count as a deductible work clothing expense. A lot of offices have dress codes, but adhering to a dress code does not qualify those clothes for a business deduction.

Okay then, so what does? A uniform, like for a police officer or a mail carrier. Clothing that’s not a necessarily a uniform but is required for the job – for example, a chef jacket or doctor’s scrubs. Or logo clothing that could also be considered a work uniform – like the shirt’s they wear at McDonald’s or the cleaning company that takes care of my office building.

What about Macy’s, where all the employees have to wear black? That’s a good example because wearing black at Macy’s is a requirement and I’ve heard Macy’s workers refer to that as their “uniform,” but unfortunately, that doesn’t meet the IRS test of a uniform. Although everyone has to wear black, there is no “standard” Macy’s uniform and the clothing has no Macy’s logo, so in a situation like that, there would be no tax deduction.

So let’s go back to the McDonald’s example again. Let’s say you have to wear the uniform shirt, but you can wear any pants you want to as long as they’re black, can you deduct the pants? No, because you can wear any pants as long as they’re black. If McDonald’s has special pants with a Mickey D’s logo on it, or something special to go with their uniform shirts, then that would be a deductible expense, but plain black pants are not.

Any kind of safety clothing would count as deductible: safety goggles, reflective vests, work gloves, and steel toe boots all come to mind there. If you’re in a job that requires protective gear, I count the gear as a deductible business expense.

If you’re self-employed, these expenses go right onto your Schedule C and it’s a direct offset against your income. If you’re working for someone else, then your clothing expenses would go on your form 2106 – Employee Business Expenses. They’re subject to the 2% limitation rule (meaning you have to spend more than 2% of your total income on work stuff before you qualify for a deduction).

Remember, if your clothing does qualify as deductible, then cleaning it is also deductible. I actually sat and worked this out with some med students that I was doing taxes for: scrubs only – one load a week. Scrubs and lab coats: two loads. For one load a week, take a $250 deduction; two loads, double it. If you have to dry clean your uniforms, save those receipts because that really adds up. Since most people do their laundry at home (and the laundromat doesn’t give out receipts), you do not need receipts for doing your laundry. Of course, cleaning of a regular business suit or laundering of regular business shirts does not count as a deductible expense.

Charitable Donations: How Much Should You Tithe? Why Do It?

This is one of the most difficult questions I get asked every year. I think most people have heard the 10% rule (donate 10% of your income to your church), but what they’re asking me is, “10% of gross, 10% of net after taxes, or 10% of net after my deductions?” And here’s my classic cop-out answer: “You should ask your religious leader.” I always thought that was safe, and different churches have different opinions. (Although I’ve never heard any religious organization say 10% after deductions – just to be clear.) I always thought that referring it back to the church was a good answer until one of my clients came back at me with, “I talked to my minister first and he told me to ask you.”

For a moment I was terrified. If I got this answer wrong, it’s not like a tax return mistake, it’s messing with God. Screw it up and you go to hell, go directly to hell, do not pass go, do not collect $200. And the reason it was so scary was because for this particular person, I felt that she could not even afford 10% of her net income to go to charity, much less 10% of her gross. (Hindsight being 20/20, I think her minister was pretty much thinking the same thing and didn’t want to make a rule that would harm his congregant.) If we used the 10% after deductions rule then nothing would be going to charity and that wasn’t an acceptable answer for my client. So we sat down and worked out a budget for her church donations. I figured that God wanted her to have a roof over her head and food on the table and we went from there. Her tithe didn’t work out to 10% of her income, but she was happy, I was happy, her minister was happy, and I didn’t get struck by lightning—a good sign.

So, how much should you tithe? If your church doesn’t have definitive rules on tithing, I think 10% of your take home pay is the best answer: ten percent into savings, ten percent into charity and the rest to handle your day to day living expenses. Now, if putting 10% into charity means you can’t put food on the table and maintain a roof over your head then we need to get you to a better financial place first. Donate what you can.

What if I don’t go to church? Even if you’re not donating to a religious institution, the idea of 10% going to charity is still a healthy one. There are thousands of worthwhile charitable organizations that need help. And, for many of us, we have friends or family members that need our charity just as much as the United Way or the ASPCA does. Remember, true charity isn’t always a “tax deductible” event.

If I tithe, what’s in it for me? For some people, charitable donations are tax deductible. That’s the obvious answer from a tax blog, right? But more importantly, I find that persons who regularly make charitable donations tend to weather the difficult economic times better. You could argue that’s because persons of faith have their faith to help them through hard times, and there’s certainly a lot of truth to that. But I also find that even people not associated with religious institutions who donate generously seem to fare better in difficult financial times than people who don’t contribute.

I heard someone suggest that it’s the discipline required to donate part of your income to charity that gives people the discipline to handle financial setbacks. I can’t say for sure. I do know that I prepare a lot of tax returns. I prepare a lot of tax returns for people going through bankruptcy and/or foreclosure. What I don’t see on those tax returns is charitable giving. Now you might say, “But, they’re going through bankruptcy, they have no money!” True, but the charitable giving isn’t there in the years before the bankruptcy either.

It’s only anecdotal evidence; I really don’t have hard numbers. I’ve talked with other tax people who’ve noticed the same thing. Perhaps the old adage is true, when you donate to charity, the person you’re helping the most may just be yourself.

Audit Proofing Your Employee Business Expenses

I recently attended the national conference of the National Association of Tax Preparers. It was easy to get to as it was in St. Louis this year. As much as I enjoyed taking the classes and meeting new people, sometimes the best information you get at these things is not in the actual classes, but in the scuttlebutt that you hear about what’s going on across the country. One of the issues that people were talking about was that the IRS has really stepped up the audits on Employee Business Expenses (Form 2106).

Just because certain types of forms might be susceptible to an audit doesn’t mean you shouldn’t claim legitimate deductible expenses on your tax return. If you are entitled to a deduction, you should take it. (Let me tell you, Warren Buffet’s not skipping out on his legal deductions). Just make sure you can back up your claims.

If you plan on claiming Employee Business Expenses on your tax return this year, the one thing you’re going to want is a copy of your company’s policy on employee reimbursements. If you get audited for your Employee Business Expenses, the first thing the IRS will ask you for is your official company policy on official company letterhead. If your company has a full reimbursement policy—you will automatically lose the audit. You may not claim a deduction for expenses that could have been reimbursed by your company.

Major companies like GM or Citibank will definitely have a policy. Smaller companies often don’t. To be honest, on more than one occasion I’ve written the reimbursement policy for a small company so they could submit something to the IRS when an employee was being audited. (Now that I think about it, I guess I should write one for my own company).

If you are claiming business mileage, you want to have a mileage log. This is the big IRS “gotcha” because so many people just guess a number and it’s wrong. For some reason, people seem to think that they drive 20,000 miles a year for business. Some people actually do. Some drive even more. But if you say that you drive 20,000 miles for business, you had better be able to back it up with a mileage log. For one thing, “20,000” is like a guaranteed audit flag. If you keep a mileage log, all you have to do is just whip it out and show the IRS agent and you’re done, end of story.

People who claim 20,000 miles and don’t keep mileage logs have a tougher sell. You’ll need outside proof, like your oil change statements to show your overall mileage, plus some type of record to show where you’ve been. Like hotel receipts to prove you drove to various places on business. I charge $100 an hour to recreate those statements for you and it takes time to recreate 20,000 miles. You’ll save yourself a boatload of money and a big headache if you just keep the log.

Don’t make up mileage numbers. I’m serious about the 20,000 being an audit red flag. One audit I worked on the gentleman asked me why I thought he got pulled for an audit. It was obviously his miles. Everything about his tax return had looked pretty normal, except for his 20,000 business miles. Hint: round numbers in multiple thousands look suspicious. He had no mileage log so I had him get me his odometer readings from his oil change company. Well it turns out, not only did he not have 20,000 miles of business driving, he drove less than 5,000 miles during any given year for the past three years!

I’m good at what I do, but this guy wound up paying the IRS some money. I asked him, why did he claim so much in mileage when he only drove 5,000 miles altogether. He said that was what the other guys in his office claimed. Don’t do that! Use your own numbers.

The other thing that gets a lot of IRS attention is the meals and entertainment expense. This trick is so easy it’s ridiculous. Let’s say you take John Smith to lunch to talk about him buying your product. The waitress brings you the check and you get out your credit card. She brings the receipt back for you to sign and add the tip. You also write on the top copy: John Smith sales widgets. Or you may write Jane Doe, advertising; or Fred Bird IT consulting; or whatever. The bottom line is that this note tells you who you were with and what the meeting was about. The receipt itself gives the date, time and place. The waitress may wonder why you wrote about Jon Doe and the widgets on the receipt, but that’s fine, (she’s seen it before.) But by writing on the top copy of the sales receipt, you made the yellow copy a time recording stamp. As the yellow copy of your sales receipt ages it changes color. This shows that you wrote your note a long time ago – remember that an audit will be two or three years after the fact. This proves to the IRS that you were – time for the big word here—contemporaneously recording your business expenses. It gives you street cred with the IRS agent. You took care of business, back when you were supposed to instead of trying to make up stuff after it’s too late.

Bottom line, if you want to audit proof your employee business expenses, you want a copy of your company’s expense reimbursement plan, a solid mileage log, and notations made on the top copy of your meal receipts.

• Yahoo Answers from Roberg Tax Solutions

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