The U.S. taxing system is unique in many ways. However, these differences are not always more aggressive or unfriendly to taxpayers. One area we have seen with our clients where the U.S. is much better for taxpayers than Mexico is in the area of expense documentation. Despite the direct comparison to Mexico in this discussion, it is also a good opportunity to review what it takes to get a deduction in the U.S.
In Mexico, for business deductions to be allowed they must meet the requirements of a “factura.” A factura is a term of art, but from our limited experience, it equals a U.S. receipt but with much more detailed information required. For our Mexican clients we have to put exhaustive information on our invoices to meet this standard. Furthermore, the entire system is now becoming electronic adding even more barriers to getting a basic deduction.
Luckily in the U.S. we do not have these requirements. The standard for a business deduction is that it must be an ordinary and necessary expense. From audit experience, you also must prove the expense was actually paid or incurred. There are a few deductions where the law is clear what documentation is required, however, for most deductions as long as you can prove it was paid and that is was ordinary and necessary the expense will be allowed. This means that things such as bank statements, cursory receipts, emails, cancelled checks, or possibly even common sense can be used to justify an expense. Of course, it is always better to have the proper documentation of a valid receipt and a clear reason the expense was warranted. Nevertheless, if a proper expense was actually paid you should not let the lack of a receipt stop you from challenging the validity of that deduction in an audit.
These rules are very important to remember for both international and domestic taxpayers. For domestic taxpayers, review your options for proving an expense. If you can’t have a traditional method that doesn’t mean you should give up the deduction. For international taxpayers, don’t rely on your home country rules, the IRS follows its own laws, therefore, you might be passing up on deductions you could take against U.S. tax just because they do not meet rules which don’t even apply.