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Denied Deductions for Inadequate Business Records

On October 10, 2019, the Tax Court decided a case against a business owner who lost business records during a fire. IRS denied deductions for travel and meals because the rules require that you substantiate those deductions, and, in this case, the business owner couldn’t do it. Let’s take a quick look, so you understand how you can do it better.

  • You may deduct ordinary and necessary expenses paid in connection with operating your business.
  • You must show that deducted expenses were paid primarily for business rather than personal reasons, and
  • You are required to maintain records sufficient to substantiate all deducted expenses.

You can substantiate each expenditure in two ways: by adequate records or by your own statements. You must be able to show:

  1. The amount of the expense,
  2. The time and place the expense was incurred, and
  3. The business purpose of the expense.

Adequate Records: To substantiate an expense by adequate records, you must maintain something like Receipt Bank (which we can provide you at a discounted price, which does the log and maintains the receipt), or an account book, diary, log, expense statement, trip sheets, or similar record prepared at the same time as the expense, and you must have the documentary evidence (e.g., receipts or paid bills). So Receipt Bank, or two things, a log and the receipt.

Your own statements: You have the right to substantiate a deduction by a reasonable reconstruction of your expenditures. In order go down this road, you must establish that the failure to produce adequate records is due to the loss of such records through circumstances beyond your control, such as destruction by fire, flood, earthquake, or other casualty. But you also have the burden of providing secondary evidence, i.e., evidence from third-party sources or testimony from individuals he or she paid. We have found this method more difficult than adequate records.

Keep your business-related expenses organized, efficient, and IRS compliant. Contact us today to learn more about Receipt Bank and get started.