When it comes to submitting documents to a tax agency – whether it be regarding sales and use tax issues – or other – it’s always best to avoid including anything but the basic facts. My primary business is helping to exempt clients from California sales taxes on “mobile transportation equipment” largely aircraft and vessels, so my examples will reference those environments. However, applying this same type of scrutiny to all tax documentation (regardless of industry or situation) can save you tax dollars.
As an example, let’s say you are documenting a business meeting with Mr. Bob Smith in Montana. From a taxation perspective, the prudent approach would be to say:
“Bob - This email is to confirm our meeting to discuss the Bridgewater Project near Billings. I will forward the complete proposal by the end of next week. “
However, as many of us tend to do business with friends (or develop friendships over time with business associates) this email could very easily morph into the following:
“Hey Bob! This email is to confirm our meeting to discuss the Bridgewater Project near Billings. We need to meet more often as the cigars and whisky that we enjoyed the first night with our guide Fritz made the stay in his hunting lodge extra enjoyable. My wife said that although she doesn’t like the smell of cigars, watching us three old codgers consume so much whiskey that we slept most of the following day was laughable. Your wife and son did make the comment that it will take you at least a week to come out of the fog. Once my head clears I look forward to searching through my files so I can find the project proposal and forwarding it by the end of next week. LOL”
Realistically, the second (more social/more conversational) version could cost you some of the deductible expenses on your aircraft, including a portion of the depreciation. While the IRS was touting that they were going to give the aviation industry some benefits in accelerated depreciation they were simultaneously working to take it away. The 2004 Jobs Creation Act requires that aircraft owners allocate their aircraft expenses on a seat by seat basis between 1) legitimate business use and 2) entertainment use (where entertainment includes entertainment, amusement and recreation). The aircraft owner is now forced to substantiate the business purpose for each person on the flight-- backed up with good documentation-- to support the actual business reason for each person travelling to that destination.
The additional details provided in the second example above would likely allow the IRS to disallow any deduction for that flight. Additionally, if you used these same details to support a business use exemption from a state’s sales/use tax you may lose that exemption altogether.
If you have questions about California aircraft or vessel taxation, feel free to contact me. (See below for details).