A recent court case - Lewis, TC Memo 2017-117 – brings attention to the importance of keeping good records of your tax deductions.
Willie Lewis was a minister and an author who occasionally performed weddings, attended meetings, and conducted seminars. He timely filed a federal return that claimed a deduction for unreimbursed employee business expenses. The IRS audited the return and disallowed the deductions for the business expenses.
The Tax Court found that Lewis was not engaged in a trade or business for profit under Internal Revenue Code Sec. 162. So the deductions related to his ministry and book writing activities were limited to the gross income he derived from these activities. However, because Mr. Lewis derived no gross income from the activities, he wasn't entitled to any deductions.
But the more important take away from this decision is the fact that the Court concluded that even if Mr. Lewis were found to have engaged in a trade or business for profit, the claimed deductions, which consisted mostly of automobile and travel-related expenses, would not be allowed because the taxpayer failed to properly substantiate them. Lewis produced no accounting records, bank statements, invoices, or any other records traditionally associated with a business operating for a profit. He only submitted credit card statements and a summary showing certain expenses.
As per IRC Sec. 6001 taxpayers are required to substantiate their claimed deductions. In addition, per IRC Sec. 274, additional substantiation is required for -
1. Any traveling expense, including meals and lodging away from home.
2. Any item with respect to an activity in the nature of entertainment, amusement, or recreation.
3. Any expense for gifts.
4. The use of "listed property", such as a passenger automobiles.
The taxpayer must substantiate expenses by adequate records or by sufficient evidence corroborating -
1. the amount of the expense,
2. the time and place of the travel, use of the property, etc.,
3. the business purpose of the expense, and
4. the business relationship to the taxpayer.
The bottom line – it is vitally important to keep proper contemporaneous documentation of all business-related expenses, whether claimed as employee business expenses on Schedule A or trade or business expenses on Schedule C.
Actually it is vitally important to keep proper contemporaneous documentation for ALLitems deducted on your tax return.