If you’ve ever browsed through the IRS tax code, you’ve likely stumbled upon some unfamiliar vocabulary. One such term that tends to leave taxpayers scratching their heads is “contemporaneous.”
This word plays a crucial role in how you manage and maintain records for your business. So, what exactly does contemporaneous mean, and why should business owners care? Let’s dive in.
What Are Contemporaneous Records?
According to the IRS, the term “contemporaneous” refers to records that are created at or near the same time as the event or transaction in question.
This means that the documents supporting your claims on a tax return must be produced at the time of the event— not weeks, months, or even years later.
In simple terms, if you forgot to get a receipt for a business expense, you can’t just try to obtain one retroactively. Unfortunately, the IRS and tax courts have consistently denied deductions where contemporaneous documentation was lacking.
So, for business owners, this concept is one that must be taken seriously to avoid losing valuable deductions.
What Requires Contemporaneous Documentation?
Think about how many transactions take place in your business daily. From expenses related to client meetings, office supplies, travel, and charitable donations, it can be easy to forget about maintaining proper records.
However, the absence of contemporaneous records could lead to denied deductions and increased scrutiny from the IRS. Tax audits become a lot more stressful when you don’t have the right paperwork to back up your claims.
Here are some key areas where the need for contemporaneous documentation is particularly critical:
- Charitable contributions
- Business expenses and capital purchases
- Mileage logs for business travel
- Tip income records
- Business travel expenses
The IRS’s rules on contemporaneous documentation exist to prevent taxpayers from inflating their deductions or creating fraudulent records long after the transaction occurred.
The idea is to maintain accuracy and fairness in the tax process.
Real-World Example: Charitable Donations
One of the most common situations where contemporaneous documentation becomes a hot topic is in charitable donations, particularly when vehicles, boats, or planes are donated.
The IRS has strict rules around these types of contributions because they often involve high-value assets that fluctuate in market value.
Let’s say you donate a vehicle to a qualified charity. You must obtain a timely written acknowledgment from the charitable organization, usually in the form of a Form 1098-C, to substantiate your donation.
If you don’t get this form when you donate the vehicle, or if the charity fails to use the vehicle in a way that allows you to claim its full market value, your deduction could be denied— even if the donation was genuine.
For any donation of $250 or more, it’s essential to get a receipt or acknowledgment at the time of the contribution.
Waiting until tax season to scramble for paperwork can lead to unnecessary headaches and potentially lost deductions.
Key Takeaways For Business Owners
Now that you understand what contemporaneous means and why it’s important, what steps can you take to ensure you’re compliant with IRS guidelines?
Here are some practical tips for managing contemporaneous records in your business:
1. Always Request Receipts
Whether it’s a donation, a business lunch, or a capital purchase, make it a habit to request receipts immediately.
Don’t assume you’ll be able to get a receipt later if you forget. In fact, the IRS is unlikely to accept receipts that weren’t issued at the time of the transaction.
2. Stay On Top Of Donations
When donating high-value items like vehicles or equipment, always request the appropriate IRS form, such as the 1098-C, and make sure all details are filled out accurately.
The form must show that the charity is either using the asset or meets the criteria for you to claim the fair market value of the donation.
3. Log Everything
Certain deductions, like mileage, require detailed logs that are kept at the time of the event. For instance, a mileage log should include dates, destinations, purpose of the trip, and total miles driven.
Maintaining accurate records as you go, rather than trying to recreate them at tax time, will save you significant hassle.
4. Wait To File If Missing Documentation
The IRS requires that the necessary documentation be obtained either before filing your tax return or by the due date (including extensions).
So, if you are missing any required receipts or acknowledgments for charitable donations or other deductions, consider holding off on filing your tax return until all paperwork is in hand.
5. Think In Terms Of The Tax Year
The timing of your receipts is just as important as having them. While contemporaneous isn’t always clearly defined in IRS literature, as long as you receive the receipt or acknowledgement within the same tax year as the transaction, you are usually in good shape.
But don’t risk it— keeping a proactive approach to documentation will allow for smooth sailing through any potential audits.
When In Doubt, Seek Help From A Professional
Keeping track of all these records can feel overwhelming, especially when juggling the day-to-day operations of running a business. That’s where working with a qualified bookkeeper or tax professional can make all the difference.
A professional can guide you through the complexities of the tax law and keeping up with these records, helping make sure you’re taking full advantage of all available deductions while staying compliant with IRS rules.
At Minton CPA & Associates, we specialize in bookkeeping, tax preparation and planning. Our experts understand the importance of contemporaneous records and can help you establish practices that keep your business protected during tax season and beyond.
For help navigating the complexities of tax preparation and maximizing your deductions, give us a call at 757-546-2870. Let us take the stress out of tax time so you can focus on what matters most— growing your business.
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