Reg 1.274-5(c)(2)(iii) clarification

[DaveinTexas]

Does this reg mean that if my client entertains his client and spends less than $75 or let's say $25, my client does not need any substantiation for this expenditure?

I would think that in order to prove the entertainment expense, the IRS would require my client to have a receipt stating the amount, date and location at the very least.

Please help me understand this reg. TIA

[Jiggers]

Substantiation

Does this reg mean that if my client entertains his client and spends less than $75 or let's say $25, my client does not need any substantiation for this expenditure?

I would think that in order to prove the entertainment expense, the IRS would require my client to have a receipt stating the amount, date and location at the very least.

Please help me understand this reg. TIA

You still have to have something that shows the expense and who, what, where, why, and when.

If I get no receipt, I write my own receipt with all of the above:
"$65.00 Lunch. Joe Blow, VP of Finance of Corporation, Inc. at Any Resturant, 12:30 PM, 5/14/2007. Reviewed April business results in anticipation of FYE 5/31/07 and related tax return."

That is all you need.

[DaveinTexas]

That's what I figured

Thanks for the info.

[jainen]

excuse for sloppy records

>>I would think that in order to prove the entertainment expense, the IRS would require my client to have a receipt stating the amount, date and location at the very least.<<

Dave, not everyone has access to complete text of the regs, and anyway it takes time to look up. I have taken the liberty of quoting the part you are asking about.

"1.274-5(c)(2)(iii)(A) Except as provided in paragraph (c)(2)(iii)(B), documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure, is required for—
(1) Any expenditure for lodging while traveling away from home, and
(2) Any other expenditure of $75 or more except, for transportation charges, documentary evidence will not be required if not readily available."

The background information makes it clear that this is not "a significant regulatory action," that is, it does not change what is allowed as a deduction. Nor does it change the requirement that ALL expenses be substantiated. It only simplifies record-keeping by allowing for per diem and other standard rates along with an increased threshold for "documentary evidence."

Don't confuse that last term with what you are asking about, "my client does not need any substantiation." §1.274-5T leaves no wiggle room -- a receipt is only part of what may be required.

"a taxpayer shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record... and documentary evidence ... which, in combination, are sufficient to establish each element of an expenditure."

Therefore, unless the client maintains a truly excellent logbook of some kind, a properly annotated receipt is still the simplest way to support the deduction regardless of the amount. §1.274-5 demands documentation, so don't think you can use it as an excuse for sloppy records.

[DaveinTexas]

Oh, I would never think that way.

You know, this question stems from not only what I've heard from some old hats but from a few of my clients.

It must be one of those urban tax myths: "Oh, as long as the expense is $25 or less, you don't need a receipt for entertaining a client."

It ranks right up there with, "....but I got paid in cash, so I don't have to report that."

Thank you Jainen for the detailed response, and I'm sorry I should have quoted the reg. I thought everyone had that one memorized---gotcha!