When claiming deductions for business meals or auto expenses, the IRS may closely review them. It is important to have clear accurate records when claiming these deductions. In some cases, taxpayers have incomplete documentation and try to recreate these records months (or years) later. This can create problems with meeting the strict substantiation requirements set forth under tax law. As shown in the following case, tax auditors are skilled professionals in finding inconsistencies, omissions, and errors in these records.
The Case
A married couple claimed $13,596 in car and truck expenses on their tax return, they supported this deduction with mileage logs that were not updated regularly and only used estimates rather than actual odometer readings. The court did not allow any of these expenses to be deducted with the explanation of, “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 found that it appeared the taxpayers attempted to deduct their commuting costs. The court noted that “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which… are nondeductible.”
Taxpayers choosing to use the standard mileage rate (65.5 cents per business mile in 2023) rather than keeping track of actual expenses are not relieved of the obligation to provide proof of mileage.
The court also ruled that the couple was not entitled to deduct $5,233 of travel, meals, and entertainment expenses because they didn’t meet the strict substantiation requirements of the tax code. (TC Memo 2022-113)
Best Practices to Stay on Track
The above case is an excellent example of why it is important to keep clear and precise records to support vehicle and meal deductions taken by a business. Ensure you’re meeting the strict requirements set forth by the IRS and tax law by following these rules:
- DO keep detailed and accurate records. For each expense, you should keep track of the amount, time and place, the business purpose, and the business relationship of any person you provided a meal for. If you are reimbursing employees for meals and auto expenses, make sure they comply with all the required rules.
- DON’T wait until the end of the year or until you receive a notice to reconstruct expense logs. Take the time to track the details of a transaction in a log or on a receipt at the time the event occurred or shortly after. Request all employees submit monthly expense reports.
- DO understand the fine line between personal and business expenses and ensure you follow it. Be careful about combining business and personal, your business checking account should not be used for personal expenses.
- DON’T be surprised if the IRS asks you for proof to support your deductions. Vehicle and meal expenses draw attention, and you should be prepared to provide proof when requested. Have your records organized and ready to provide upon request.
Keep organized and carefully prepare your tax records for inspection from the IRS. There may be ways to substantiate your deductions that you haven’t considered, and ways to estimate certain deductions (called “the Cohan rule”), if your records are lost due to various circumstances such as fire, theft, or natural disaster.
