If your business claims deductions for expenses like meals, vehicle use, or a home office, be prepared for close scrutiny from the IRS. These types of deductions are among the most commonly audited, and even honest taxpayers can find themselves in hot water if documentation is lacking.
A recent U.S. Tax Court case (T.C. Memo. 2024-82) serves as a cautionary tale for business owners. The ruling disallowed multiple deductions due to inadequate records—highlighting the importance of keeping detailed and accurate tax documentation.
Real Case: Why the IRS Rejected These Deductions
In the case, a taxpayer operating a software training and consulting business claimed significant business expense deductions across several tax years. Unfortunately, many were denied due to poor substantiation.
Here’s what went wrong:
🚫 Meals and Entertainment
The taxpayer claimed nearly $9,000 in meal deductions, describing them as “working lunches.” But she provided only bank statements—without detailing the business purpose or relationship of the guests. The court emphasized that meal expenses must meet strict substantiation rules: date, place, purpose, and attendees must all be documented.
IRS Insight: A receipt alone isn’t enough—you must demonstrate a clear business connection.
🚫 Office Supplies
She deducted over $17,000 for business supplies but submitted receipts dated after the business had closed. Some expenses included items like soda dispensers and gift cards, which were deemed personal.
IRS Insight: Expenses must occur during the tax year in question and directly support your business.
🚫 Home Office Deduction
The taxpayer deducted over $21,000 for a home office but couldn’t show that it was the principal place of business. She worked primarily on-site at client locations and failed to document exclusive business use of her home.
IRS Insight: A home office must be used regularly and exclusively for business—not just occasionally.
🚫 Other Denied Deductions
Additional disallowed expenses included legal fees, hotel stays, utilities, and vehicle costs. In every case, the taxpayer failed to provide sufficient records to tie the expense to legitimate business activity.
DOs and DON’Ts: Protecting Your Tax Deductions
To ensure your business deductions can withstand an IRS audit, follow these best practices:
✅ DO: Keep Thorough and Timely Records
Record essential details at the time of the expense—not months later. For meals, track:
- Date and location
- Amount spent
- Business purpose
- Attendees and their relationship to your business
For vehicle expenses, maintain a mileage log showing business vs. personal use.
❌ DON’T: Wait to Reconstruct Your Records
Creating logs after the fact—especially in response to an IRS notice—raises red flags. Encourage employees to submit expense reports weekly or monthly to avoid this.
✅ DO: Separate Business and Personal Finances
Use dedicated business credit cards and bank accounts. Mixing personal purchases with business expenses can weaken your case if audited.
❌ DON’T: Assume You’re in the Clear
Vehicle, home office, and meal deductions are IRS hot spots. Expect them to be questioned and prepare accordingly.
What If Your Records Are Lost?
In certain situations—such as fire, theft, or natural disasters—you may still be able to claim deductions under the Cohan rule, which allows reasonable estimates. However, this exception is limited and shouldn’t replace good recordkeeping.
Final Thoughts: Stay Prepared, Stay Compliant
Proper documentation isn’t just about staying organized—it’s your best defense during an IRS audit. If you’re unsure whether your business expense deductions are properly substantiated, it’s time to consult with a tax professional.
At THF, we help business owners understand IRS substantiation requirements and ensure that deductions are supported with the right records. Whether you need help organizing receipts or navigating a tax audit, our CPAs are here to guide you.
👉 Need help with IRS compliance or defending your deductions? Contact us today.
