Recent tax court cases have emphasized the need to substantiate the requirements set forth in the IRS Tax Code Sec 274(d). The tax court cases involved travel and vehicle expenses that the Tax Court found unsubstantiated for lack of records and corroborative evidence including travel dates, specific destinations, and business purposes for the travel.
Taxpayers bear a significant burden of proving all business deductions are valid. Adequate records include:
- The amount of the expense
- The time and place the expense was incurred
- The business purpose of the expense
- The business relationship related to the expense
We recommend taxpayers keep an account book, a diary, log with statement of each expense, trip sheet, and travel document evidence that establish the validity of each expense.
In order to substantiate vehicle expenses, it is recommended that the taxpayer keep records of the amount of the expense, the mileage for each business use, and the total mileage for all business use during the year, the date of each business use, and the business purpose for each use.
What causes the court to disallow business deductions?
- Lack of substantiation
- Concerns about the authenticity of receipts provided
- Failure to provide corresponding documentation
- Expenses are found to be not related to business
Business expenses can be challenging to substantiate when they are comingled with personal expenses. There are some apps that have received decent reviews that can track business expenses (disclaimer: MCCPA is not endorsing the use of any app).
Here are a few to research:
- Quickbooks Accounting
- SimpyWise receipt scanner
There are also options for small businesses to integrate the app with their current accounting system. This integration can allow continuous and automatic synchronization of expense reports and invoices.
With organization and guidance from us, your tax records can stand up to inspection from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.