Taxpayer Hits Recordkeeping Roadblock to Travel Deductions

The IRS is notoriously picky when it comes to substantiating business travel expenses. As a result, disputes often end up in the Tax Court, even when taxpayers use digital methods for tracking expenditures.

Jul 9th 2020
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The IRS is notoriously picky when it comes to substantiating business travel expenses. As a result, disputes often end up in the Tax Court, even when taxpayers use digital methods for tracking expenditures. In a new case, Johnson, TC Memo 2020-79 , 6/8/20, some glaring omissions by the taxpayer proved to be the turning point.

First, here’s some background information. If you own a business, you can deduct the ordinary and necessary expenses relating to your business activities, including certain travel expenses. However, to qualify for any deduction, you must meet strict recordkeeping requirements spelled out in the tax regulations.

Notably, if a taxpayer uses a vehicle for business purpose, he or she must substantiate by adequate records, or by sufficient evidence corroborating their own statement, the following:

  • The amount of the expense;
  • The mileage for each business use of the vehicle as well as the total mileage for all purposes during the tax year in question
  • The time and place of the travel or use and
  • The business purpose of the expense

The regulations generally require taxpayers to keep an account book, log or similar record and documentary evidence to establish each element for each expenditure.

In the new case, the taxpayer, who operated a farm and lived on a ranch in Colorado, claimed business travel expenses for an automobile and pick-up truck, including a Section 179 deduction for the truck. He submitted as his main evidence a Microsoft Outlook calendar reflecting his travel during the periods in issue, supplemented by his testimony.

The taxpayer used the calendar for all appointments and events, including those relating to his work for the farm, another business he owned and his personal travel  activities. Many of the entries on his calendar noted only that he traveled to and/or from the ranch. Significantly, they did not list the purpose of the travel.

Accordingly, absent that vital information, the Tax Court said it could not determine which of the trips served a legitimate business purpose, if any. Furthermore, it could not determine if the taxpayer’s business use of the truck exceeded  50% of its total use, as required by Section 179. Bottom line: The deductions relating to the taxpayer’s travel expenses were denied.

Moral of the story: It’s easier to track travel expenses these days than in the not-so-distant past due to technological advances. But you still must ensure that all the i’s are dotted and the t’s are crossed the old-fashioned way. Make sure that your clients are complying with the rules for substantiating expenses.

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