and “You’re a Grand Old Flag”) deducted $55,000 for travel and entertainment expenses-an enormous amount in 1921 and 1922-but couldn’t produce any receipts. The IRS disallowed all of his deductions and he fought back in court.
In 1930, a federal appeals judge ruled that Cohan was on the road constantly, so it was likely he did engage extensively in business travel and entertaining. Therefore, he was entitled to some deductions. The IRS was ordered to “make as close an approximation as it can” of the actual expenditures.
So that gives you some leeway in approximating expenditures. Overnight travel and business entertainment, for example, is subject to certain record keeping requirements. However, you don’t need receipts for expenditures under $75. Thus, if you take business trips and keep a log, you might be able to take reasonable deductions for airport cabs, tips to hotel personnel, etc., even if you don’t have receipts for every expense. If it’s not practical to keep track of such incidentals, you can make reasonable estimates.
In the same fashion, you may not be able to keep track of all the petty cash you spend on office supplies, business gifts, business-related periodicals and reference books, photocopies or other small business purchases. “It’s better to estimate such expenses now, when you’re filing your tax return, rather than just making up numbers and having to justify them during an audit,” says Larry Torella, tax partner, in the accounting firm Richard A. Eisner & Co. in New York. “The reality is that the IRS won’t disallow everything during an audit. If you have some records to support a deduction, take the deduction.”
But don’t be a pig about these deductions. If you spend $200 in cash per week ($10,400 per year), don’t “estimate” $9,500 worth of cash outlays for business purposes. But you might estimate that you spent $1,000 or $2,000 a year ($20-$40 per week) on incidental cash expenses that are ordinary and necessary for your business. Take your best guess and give yourself the benefit of the doubt, as long as you can support your claims.
Don’t forget to fund your future
Beyond scouring your records for extra deductions, there’s another step you can take to reduce your taxes: make deductible contributions to a retirement plan. “If you had a Keogh plan in place by the end of 1998, you can make contributions up until the due date of your plan, including extensions,” says Willock. The amount you can contribute (and deduct) will depend on the terms you established when you created the plan.
Suppose, as is likely, that you were too busy running your business last year to set up a Keogh. “In that event, you still can create a simplified employee pension plan (SEP) for 1998,” says Willock. As the name suggests, SEP plans require virtually no paperwork. Most banks, brokers and mutual fund companies will help you set up a SEP with a minimum of aggravation and make “look-back” (to 1998) contributions until the due date of your return, including filing