The MSSP focuses on developing high trained IRS examiners for a particular market segment. A market segment can be an industry like retail stores, a profession like business consultants or an issue like Shareholder loans. An integral part of the approach used by the IRS is the development and publication of Audit Techniques Guides. These ATG’s contain IRS examination questions, common and unique industry issues, business practices, industry terminology and other information to assist IRS examiners in performing examinations. These are the same Audit Guides that IRS examiners use to conduct examinations of tax returns. This MSSP program is revolutionizing the way the IRS conducts its business.

My belief is that it is prudent to be aware of these issues, to deal with them and provide backup documentation as a standard operating procedure of any business.  My program includes this approach.

The “killer AMT” Tax

Although not considered as MSSP issue, the IRS is also concerned with the most abused deductions. Most small business owners understand that they can expense automobile usage; meals and entertainment; and travel. Some understand that those expenses have to be incurred  in the ordinary, necessary, and reasonable activities of their business. Few understand that when faced with an I.R.S. audit, the auditor can disallow most if not all of the expenses unless the proper substantiation of each expense can be established by the taxpayer. 

These categories of expenses are what I call the “killer AMT” tax. It’s simple to document, but requires knowledge of the rules and regulations and acting on that knowledge to present documentation in an IRS approved format. And half of it can be done in your present software.

Automobile Expenses

The IRS requires that the following four items be submitted with your tax return:

·        Total mileage

·        Total business miles

·        Total commuting miles

·        Other personal miles

Your records must also be adequate to support business use and be made at or near the time of business use. The I.R.S. will accept:

·        Daily log

·        The 90-day log

·        The “first-week” rule log

Meals & Entertainment

Legal requirements:

1. Business meal must be arranged for a business purpose;
2. Must discuss business before, during, or after;
3. Meal must take place in surroundings conducive to a business discussion.
4. You must adequately substantiate meals and entertainment even if a receipt is not required. [i.e., over $ 75.00]

Five questions to substantiate expense:

1. Who was entertained?
2. Where did it take place?
3. When did the entertainment take place? [date]
4. Why did it take place?
5. How much did the entertainment cost?

The key IRS requirement for you to deduct your M&E  is that the entertainment must either precede or follow a substantial and bona fide business discussion during the same day as the entertainment.

What if your spouse is involved in the M&E? You cannot take the deduction as per a “closely connected” spouse rule.  Unless you are entertaining another couple! Or couple and kids!

Deduct your entertainment at home. Normally you would not need a receipt as the “cost” of the meal would be less than $ 75.

Give small parties at home. Keep the list small (less the 12 people) so it can reasonably be assumed that you talked with each and every one of them. Large groups are okay, but it places more burden of proof on you.

Give seminars a home.  Normally this would be a 50% deduction, but food served at a seminar is 100% deductible.

Give parties for employees.  100% deductible but can’t be discriminatory.

Travel (“Strange Bed Rule”)

According to the IRS you are on business travel when you are traveling from home, overnight, or for a period of time sufficient to require sleep (in a strange bed)

Transportation expenses are those costs that you incur in getting to and from your destination. On-the-road expenses include all costs necessary to sustain life while on the trip such as lodging, meals, laundry, dry-cleaning and similar expenses.

How to avoid the killer AMT tax:

I assume you already keep a diary/appointment book to keep track of when you have scheduled meetings with clients/customers (and quite possibly what the business topic will be). Some do it manually and others use ACT!/Outlook or other software for this purpose.  This type of record keeping fulfills half the I.R.S. requirements. 

The other half can be maintained using your financial software program.. You are already entering the credit card bills and the cash paid for meals etc., but it probably won’t satisfy the I.R.S. (or at very least will be cumbersome).  I can show you how to implement this half and fulfill the I.R.S. requirements – and maintain the paper records some auditors are still in love with.

Avoid the “Sutter Rule”: allows the IRS to disallow a portion of you business meals when such meals absorb substantial amounts of your typical living expenses. This is also known as the “P.I.G.” rule.

Key is to enter all appointments in your appointment book, tax organizer, or diary – that proves consistent business use.