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Tax Court Puts Up Roadblock to Travel Deduction

If you incur unreimbursed expenses while traveling away from home on business, you are generally entitled to deduct the cost of your travel expenses, within certain limits. But the tax law imposes strict substantiation requirements.

Feb 3rd 2020
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If you incur unreimbursed expenses while traveling away from home on business, you are generally entitled to deduct the cost of your travel expenses, within certain limits. But the tax law imposes strict substantiation requirements. In a new case, Near, TC Memo 2020-10, 1/14/20, the Tax Court denied a deduction because the taxpayer didn’t establish the requisite relationship between his business and the travel expenses.

Background: Generally, if you’re self-employed, you can deduct ordinary and necessary expenses incurred when traveling on business. This includes transportation costs back and forth from your business destination, as well as any business-related expenses at your business destination, such as lodging. The full amount is deductible if the trip is completely business-related.

However, the IRS often challenges deductions for travel expenses that are not properly substantiated. Therefore, it’s important to maintain records that show

  • The amount of the expense;
  • The time and place of the business activity; and
  • The business purpose and relationship.

Note that the records must be “adequate.” According to IRS Publication 463 (Travel, Entertainment, Gift and Car Expenses), evidence is adequate if it shows the amount, date, place and main character of the expense. For example, keep receipts from hotels when you stay overnight on business. Also, credit card statements can corroborate the receipts. As a last resort, the IRS says you may offer a written or oral statement containing specific information to help prove an element of the expense with other supporting evidence.

Furthermore, a slew of special rules apply to substantiating business use of a vehicle.

Facts: In the new case, the taxpayer, a resident of California, operated a private law practice as a self-employed individual. He was also employed by e State of California Department of Transportation (Caltrans).

Because the taxpayer had a monthly transit pass, he did not drive to work regularly. Sometimes he would carpool with his spouse, but their work schedules were not the same.

As an employee of Caltrans, the taxpayer served as counsel for a major trial in 2015. During the trial, which lasted about two month, the taxpayer rented a room near the courthouse. His agreement with Caltrans provides reimbursement for travel expenses, including lodging and excess car mileage above usual commuting costs.

The taxpayer deducted almost $17,000 in travel expenses on his Schedule C for 2015. To substantiate the travel expenses, he provided a list, receipts, and bank statements identifying the amounts, dates, and locations of his reported travel expenses. Although the documents included information regarding the amount, time, and place of the expenses, none of them enabled the court to determine to what extent, if any, these expenses had a business purpose.

The taxpayer did not produce any contracts with clients to substantiate travel expenses incurred for client engagements. Furthermore, some of the travel expenses were for trips that included family members and he didn’t provide any evidence distinguishing which travel expenses were incurred for business and not personal purposes, if any. Accordingly, the deductions for lodging and automobile expenses were denied.

Moral of the story: Make sure travel deductions can withstand IRS scrutiny. Be proactive about having clients maintain contemporaneous records.

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