Tax law requires that taxpayers be able to provide adequate records or sufficient evidence to prove certain business expenses or otherwise they cannot be taken as deductions.

What Are the Types of Business Expenses Covered under This Substantiation Rule?

The types of expenses that are covered under the substantiation rule include:

  • Traveling and lodging expenses;
  • Entertainment expenses;
  • Business gifts; and
  • Expenses related to the use of automobiles, computers, and cellular phones.

Substantiation is required for these types of expenses because they are often the more common expenses susceptible to abuse.

What Do I Need to Substantiate?

There are four things that the taxpayer needs to substantiate:

1. The amount of the expense;
2. The time and place of the expense;
3. The business purpose of the expense; and
4. The business relationship between you and the person entertained/received your gift.

What Types of Records or Evidence Do I Need?

Generally, expense diaries and account books would be the appropriate types of records. Receipts and paid bills are usually required as supporting evidence for expenses over $75. Obviously, written documentation is preferred over oral confirmations, and more contemporaneous records are better than records not prepared at or near the time of expense.

Are There Any Exceptions to This Substantiation Rule?

Yes. If the taxpayer can show that he/she lost his/her records due to some circumstances that are beyond his/her control (e.g. a fire, earthquake, or flood), then the taxpayer may use other reasonable means to substantiate the expenses. Otherwise, this substantiation rule is generally strictly applied.

What Happens When Not All of My Expenses Are Business Expenses?

When expenses (e.g. entertainment expenses) are incurred for both business partners and personal friends at the same time, then the taxpayer must make a reasonable allocation to only deduct the amount associated with business and not with personal purposes.

Do I Need an Attorney to Help Me with My Tax Problems?

Tax laws are complex and ever-changing. Although there are various tax preparation softwares on the market that help you file your returns, they cannot provide the same level of service that an experienced and knowledgeable tax attorney provides. If you are unsure about the characterization of your expenses or you need someone to represent you before the IRS, a business attorney can help.