Substantiation of Business Expenses
For certain business expenses, taxpayers are required to provide specific information substantiating the expense in order to deduct. These four common expenses require specific detail:
- Travel expenses, including meals and lodging.
- Entertainment expenses.
- Business gifts (limited to $25)
- Property that lends itself to personal use such as automobiles and property used for entertainment or recreation.
The taxpayer is required to substantiate by "adequate records or by sufficient evidence corroborating the taxpayer's own statement". Adequate records must include:
- The amount of the expense.
- The time and place of the travel, entertainment, recreation, use of facility or property and the date and description of the gift.
- The business purpose of the expense and
- The business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.
Recent Tax Court cases have shown that although the court may believe the expenses are legitimate, without the proper substantiation, no deduction is allowed. Tax Court is bound to deny the expenses if the requirements of Code Sec 274(d) and the regulations are not followed. These rulings demonstrate the importance of keeping the detailed contemporaneous records for these types of expenses.
You should keep the proof you need in written form such as account books, mileage logs, expense apps, etc. along with documentary evidence such as receipts, bills, etc. Please see the attached mileage log for an example of automobile use documentation. For additional information regarding substantiation records and examples, see IRS Publication 453 at www.irs.gov.
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