If you plan on claiming tax deductions for auto expenses or business meals, you should expect them to be closely reviewed by the IRS.
In some situations, taxpayers may have incomplete documentation or try to create records months or years after the fact. In doing so, they fail to meet the strict substantiation requirements that exist under federal tax laws.
Tax auditors are trained to root out inconsistencies, omissions, and errors in taxpayer records as is evidenced by a recent U.S Tax Court case involving a couple of unscrupulous taxpayers whose poor documentation of expenses came back to haunt them.
Details of the case
In this case, a married couple claimed over $13,000 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were created using estimates instead of odometer readings.
The court disallowed the entire reduction, stating that “subsequently prepared mileage records do not have the same amount of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”
The court observed that the taxpayers appeared to have tried to deduct their commuting costs. However, it stated that the “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which… are nondeductible.”
Taxpayers aren’t relieved of their obligation to substantiate business mileage, even if they opt to use the standard mileage rate of 65.4 cents per business mile instead of keeping track of actual expenses.
The court also ruled that the couple was not entitled to deduct over $5,000 of meal, travel, and entertainment expenses due to the fact that they didn’t meet the strict substantiation requirements of the tax code. (See TC Memo 2022-113).
Stay on the right track
The case mentioned above is an example of why it’s essential to maintain precise records to support business expenses for vehicle and meal deductions. Here’s a list of “DOs and DON’Ts'' to assist you in meeting the strict IRS and tax law substantiation requirements for these write offs.
DO maintain meticulous and accurate records. For every expense, you need to document the amount, date, location, business purpose, and the business relationship with any individual for whom you provided a meal. If you have employees whom you reimburse for meals and auto expenses, ensure they’re in compliance with all the rules.
DON’T reconstruct your expense logs at the end of the year or wait to do so until you get a notice from the IRS. Take the time to record the details in a log or diary or on a receipt at the time of the event or soon thereafter. Require your employees to submit monthly expense reports.
DO recognize the clear distinction between personal and business expenses. Be careful about trying to combine business and pleasure. Your business checking account shouldn’t be used for any of your personal expenses.
DON’T be surprised if the IRS requires you to prove your deductions. Vehicle and meal expenses attract a great deal of attention. Be prepared to substantiate your claims in the event of a challenge.
Have questions? Smolin can help
With help from the professionals at Smolin, your tax records will stand up to scrutiny by the IRS. There may even be opportunities to substantiate deductions that you haven’t thought of, as well as a way to estimate certain deductions (under the Cohan rule) if your records are lost to theft, flood, fire, or other disaster.
Contact us today to make sure you keep your business in the clear when writing off expenses.