Court Sides with IRS: Businesses Must Document Expense Deductions
Tax Court Sides with IRS: Why Businesses Must Document Expense Deductions
A recent ruling from the Tax Court highlights the critical need for businesses to maintain proper documentation when claiming expense deductions. The case involved a self-employed individual who failed to substantiate her business expenses, leading the court to side with the IRS. The taxpayer did not provide sufficient records, such as receipts or invoices, to verify the deductions for expenses like vehicle use, office supplies, and meals. As a result, the court disallowed the claims.
This ruling serves as an important reminder for business owners: simply claiming a deduction is not enough. The IRS requires taxpayers to prove that expenses were both ordinary and necessary for their business operations, as outlined under Section 162 of the tax code. Without adequate proof, businesses risk losing valuable deductions.
An essential point emphasized by the court is that bank and credit card statements are not sufficient by themselves to verify a business expense. While these statements show that a payment was made, they do not provide the necessary details about what the payment was for. For instance, if a check for $500 clears your account, the statement confirms that a payment took place, but it does not specify the purpose of the payment. Similarly, a credit card statement may show a payee but not clarify the nature of the expense.
To meet IRS requirements, businesses need supporting documentation such as receipts, invoices, contracts, or bills that explain the purpose of the expenditure. Even digital copies of these records are acceptable, but they must be retained for at least four years after filing tax returns. In certain cases, the retention period may be even longer, especially for specific types of deductions.
If you have questions about documenting tax expenses and deductions for your business, your ShindelRock team is here to help you.