How to Validate Certain Business Expenses

Posted by Christina Bell, CPA

Delaware Single Audit - Nonprofit CPANonprofits, just as for-profit organizations, incur expenses for travel, meals and entertainment, gifts, and transportation. And just as in an Internal Revenue Service (IRS) audit of a for-profit organization, nonprofits are required to provide evidence supporting the fairness and reasonableness of these types of business expenses. Many times organizations are under the impression that a receipt alone will provide sufficient evidence to support the fairness and reasonableness of these types of expenses; however, receipts do not always encompass all information the IRS requires. Below is a summary of what information should be kept to support these types of business expenses. The summary is an excerpt from IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses and reflects the importance of keeping more than just a receipt to validate a business expense.

  • Travel – Records should be maintained that support the cost of each separate expense for travel, lodging, and meals. The dates persons left and returned from each trip should be documented along with the number of days spent on business. The name of the city or town traveled to should also be documented. Lastly, the business purpose of the expense, or the business benefit gained or expected to be gained, should be documented.
  • Entertainment and Meals (when not traveling) – The cost of each separate expense should be maintained. The name and address of the location should be documented along with the type of entertainment, if not apparent by the name of the location. The business purpose of the expense or the business benefit gained or expected to be gained should also be documented. In addition, for entertainment, the following should be documented:
  • The nature and duration of the business discussion.
  • When the business discussion occurred. For example, did it occur before, during, or after the provided entertainment.
  • The identity of the persons who took part in the both the business discussion and the entertainment activity. The identity of the recipients should include enough information to show their business relationship with the organization.
  • Gifts – The cost of the gift along with the date and description of the gift should be maintained. In addition, the business purpose of the gift should be documented.
  • Transportation – The cost of each separate expense should be maintained. The date of the expense should also be documented. Lastly, the mileage for each business use should be maintained along with the name of the business destination and its business purpose.

It may be helpful for organizations to review their current cash disbursement policies to ensure adequate information is being maintained to support the fairness and reasonableness of business expenses in accordance with IRS guidelines.

Photo by David Becker (License)

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