Business Deductions Not Allowed Due To Lack of Substantiation

In a recent tax court case, the taxpayer who is a self-employed nutritional supplement salesperson, deducted expenses for travel, vehicle, meals and entertainment allegedly related to his sales business.  Even though the taxpayer kept a mileage record on his calendar, the record lacked specific and necessary information on how and why the mileage was related to business.  The taxpayer supplied a spreadsheet to the court in support of his deducted meals.  However, he admitted that many of his meals were eaten alone.  The tax court concluded that the records and substantiation supplied were not reliable and could not be considered “adequate records” as required by the tax code.

The morale of the story…Document, document, document!  Each claimed meal and mile must be directly related to or associated with an active trade or business or for the production of income.  And specific documentation must be kept to substantiate the deduction.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Keeping a Mileage Log – Really?

For many business owners, the last thing they want to do is log each and every mile they drive for business. They believe logs are clumsy, time intensive, and easy to forget. The IRS, though, takes a very different stance.

In case after case fought in US Tax Court, the taxpayer has lost their mileage deductions because they can’t produce evidence of the business use of the vehicle. The IRS has also come out strong with this in audits as well, expecting to see a mileage log when examining a business.

There are several different ways to approach a mileage log, that will help if you’re ever asked the question.

  • Keep a log of all the business miles you drive, including the business purpose for the trip
  • Keep a log like the above, but just for 3-4 months out of the year, if your mileage tends to be pretty similar from month to month. Then, use these few months to determine the entire year.
  • Look into Apps for Blackberry, iPhone, and Android smartphones that use the phone’s internal GPS to track your mileage, and allow reports to be edited and printed online.

No matter what method you choose, always record the total mileage on the car at the beginning and end of the year.

Using Corporate Funds Correctly

Businesses that chose to organize as a corporation do so for many reasons. Chief among these is to protect the owners and their assets from liability arising from the actions of the business or its employees. This is accomplished because a corporation is an “artificial person” in the eyes of the law – a legally separate entity from its owners.


Some owners, however, have trouble keeping personal expenses out of the corporate checking account. These personal expenses are non-deductible, and in many cases are classified as loans from the corporation to the owners, or as repayments of prior loans made to the corporation by the owners. A recent court case highlights the danger of this practice.


A couple took nearly $740,000 out of corporations they owned, and classified them as discussed above. The IRS determined, and the US Tax Court agreed, that they were, in fact, dividends to the owners, and were fully taxable to the owners on their individual tax returns.


How do you help prevent this type of problem from occurring in your business? Below is a list of the factors the tax court considered in its decision – use these as a guide.


  • Document the intention to make a loan, and the intention to pay it back
  • Treat the loan like a loan- record the loan advances, calculate interest at a reasonable rate, have a repayment schedule.
  • Create a promissory note for all loans
  • Note that the loan advances and repayments are just that
  • Be sure the amount of money borrowed and loaned is not excessive given the financial position of the owners and the business.