The tax law can be cruel, but it is harshest on taxpayers who don’t keep good records. The Tax Court gave an attorney a tough lesson on this last week.
The attorney ran his practice the old-fashioned way: as a Schedule C sole proprietorship on his individual return. He had an out of town case, so it’s unsurprising that there were travel expenses.
The tax law has special recordkeeping requirements for deducting travel costs. Tax Court Judge Kerrigan explains these “strict substantion rules”:
To meet these strict substantiation rules, a taxpayer must substantiate by adequate records or by sufficient evidence corroborating the taxpayer's own statement (1) the amount, (2) the time and place of the travel or use, and (3) the business purpose. To substantiate by adequate records, the taxpayer must provide (1) an account book, a log, or a similar record and (2) documentary evidence, which together are sufficient to establish each element of an expenditure.
What sort of “documentary evidence” was the judge looking for?
Documentary evidence includes receipts, paid bills, or similar evidence.To substantiate by sufficient evidence corroborating the taxpayer's own statement, the taxpayer must establish each element by his or her own statement and by documentary evidence or other direct evidence.
The judge found the documentation wanting (emphasis added):
Although the documents petitioner husband produced do provide information regarding the amount, time, and place of incurred expenses, none of the documents provide enough information for us to determine to what extent, if any, these expenses had a business purpose. Petitioner husband produced no contracts with clients to substantiate travel expenses incurred for client engagements. Furthermore, some of the travel expenses were for trips that included petitioners' family members, and petitioner husband did not provide any evidence distinguishing which travel expenses were incurred for business and not personal purposes, if any.
The sad thing is that the attorney likely incurred perfectly deductible expenses -- if only he had kept better track of them.
The moral: Travel expenses can be a big deal. You need to keep track of them like they are if you want to deduct them. Keep a mileage log that includes dates and business reasons for your trips. Keep an appointment calendar that backs up your log. Keep your travel receipts for your hotel and meal expenses on the road.
And if family comes along for the ride, be sure you keep any of their expenses out of it.
Cite: Near, T.C. Memo. 2020-10