The IRS pays close attention to your deductions for business meals and auto expenses. Senior manager at 415 Group, Brian Raber, CPA, MT, explains why it’s imperative to keep accurate records throughout the year—no matter how many aspects of your business you find yourself juggling.
If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law.
Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.
Facts of the case
In the case, a married couple claimed $13,596 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were made using estimates rather than odometer readings. The court disallowed the entire deduction, stating that “subsequently prepared mileage records do not have the same high degree of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”
The court noted that it appeared the taxpayers attempted to deduct their commuting costs. However, it stated that “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which … are nondeductible.”
A taxpayer isn’t relieved of the obligation to substantiate business mileage, even if he or she opts to use the standard mileage rate (65.5 cents per business mile in 2023), rather than keep track of actual expenses.
The court also ruled the couple wasn’t entitled to deduct $5,233 of travel, meal and entertainment expenses because they didn’t meet the strict substantiation requirements of the tax code. (TC Memo 2022-113)
Stay on the right track
This case is an example of why it’s critical to maintain meticulous records to support business expenses for vehicle and meal deductions.
Here’s a list of “DOs and DON’Ts” to help meet the strict IRS and tax law substantiation requirements for these items:
- DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.
- DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.
- DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.
- DON’T be surprised if the IRS asks you to prove your deductions. Vehicle and meal expenses are a magnet for attention. Be prepared for a challenge.
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.
Reach out to the trusted advisors at 415 Group today.
© 2023
Vehicle and meal expenses are quite often challenged by the IRS. Unfortunately, they're aware of how easy it is to forget to log it in real time and/or lose track of documentation.
For business owners focused on starting and or growing their business, these details often get lost or forgotten. But it’s important to keep detailed records using methods that work best for you. You can document them electronically or on paper—either way, keep them safe and available to access at the end of the tax year.
If you’re fearful of forgetting to log your expenses, set up a weekly reminder so you’re sure to document what you spent that week.
What happens if you didn’t track expenses very well throughout the year?
If you need to backtrack, start by analyzing the previous four weeks of activity. If it is consistent year-round, you and your tax advisor can make calculations. These estimates will come with some risks, but it’s the best you can do having not contemporaneously documented them.
But, what happens if you did keep detailed records and they get destroyed by a fire, flood, or other disaster?
Sometimes an oral or written statement—along with other supporting evidence if you don’t have complete records—could suffice. Sampling could also help support similar situations. For example, if you take a client to lunch each month, you might not need to show receipts for the entire year.
If all else fails, you might be able to reconstruct some records if the originals were lost or damaged. For example, you may have business meeting details saved in your electronic calendar.
One more point to note: There is a fine line between business and personal expenses. Do not try to deduct personal expenses on your business’s tax return.
At 415 Group, we’d love to discuss your business with you and help you figure out the best path forward, whether that’s organizing the previous year’s expenses or devising a better plan for documenting future expenses.
Contact us today to get started.