Proper Documentation of Business Expenses

file9411346624378Keep your receipts.

When I talk to business owners or anyone who needs to document expenses or deductions, that’s the number-one piece of advice I give. So I’ll repeat it in bolder type:

Keep your receipts.

The IRS doesn’t really say what a business should keep in order to prove expenses. See, for example, IRS Publication 583, starting on page 11 (“Recordkeeping”).

Basically, you can use a variety of methods in order to prove your income and expenses.

But my professional opinion is that receipts in conjunction with bank statements, canceled checks, etc. are the ideal way to go.

Receipts will show the date of the purchase, the amount of the purchase, and what was purchased. This, combined with proof of payment (bank statements, canceled checks, credit card statement, etc.) provides the ideal documentation. Not just for the IRS but also for basic recordkeeping and business management purposes.

Sometimes you need to keep receipts for certain expenses, such as for meals and entertainment expenses.

It’s sometimes necessary to keep receipts in non-business settings too. One example is the the tax credit for daycare expenses. Keep the receipt from the daycare.

One time Iowa audited a client’s daycare credit that was claimed on the Iowa return. The client handed the auditor a stack of carbon-copies of checks written to the daycare, but the client couldn’t find the receipts. For whatever reason, the daycare couldn’t or wouldn’t provide receipts.

The state rejected the daycare credits for several years worth of tax returns because there were no receipts.

In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.

PS: If you don’t like the idea of massive stacks of paper, you can scan your receipts, so long as the scanned copy contains a complete copy of the receipt, is legible and is easily accessible.

Rare Home Office Deduction Win in Tax Court

A taxpayer recently won a Tax Court case involving the home office deduction. workstation-405768

The taxpayer worked for a PR firm based out of Los Angeles, but the taxpayer lived in New York City and was expected to grow and develop the firm’s New York business.

The firm maintained no formal offices in New York. The taxpayer worked out of her 700-square-foot studio apartment.

On her 2009 tax return, she took a sizeable deduction for home office expenses. The IRS audited her, and the case ended up in Tax Court.

Review of Home Office Rules

The rules for taking the home office deduction are generally that you must have an area of your home used regularly and exclusively for business purposes. Exclusively generally means 100%, though as we’ll see in this case, the courts have made exceptions to this rule.

If you’re an employee working from home, there’s an extra hurdle to clear before you can take the deduction: you must be working from home for the convenience of your employer.

In other words, flexible work arrangements where you can choose to work from home don’t qualify because you could also choose to work in your employer’s office.

The Case

In the taxpayer’s case, she had no other location to work from in New York, so the “convenience of the employer” part was met. But she lived in a small studio apartment, and had to pass through the office area to get to her bedroom. Does this blow the “exclusive use” part?

Not according to the Tax Court:

Although petitioner admitted that she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions.

The Court cited a 1981 ruling of theirs in which the Court ruled that de minimis personal usage of office space is impossible to avoid in a studio apartment.

Here’s a link to the full ruling: Lauren E. Miller , TC Summary Opinion 2014-74

Taxpayer Advocate Says IRS Issues Too Many FAQs

ID-10094159This was recently in my e-mail inbox from PPC:

National Taxpayer Advocate, Nina Olson, spoke at a recent accounting conference, addressing the IRS’s practice of increasingly providing significant guidance in the form of Frequently Asked Questions (FAQs) and other formats that aren’t published guidance. There are a number of ways that this can be problematic, including the fact that such guidance can be changed without notice. It is also unclear who writes FAQs (i.e., no contact name is listed, which is typically provided in published guidance), what type of vetting process they are subject to prior to online publication, and the extent (if any) to which taxpayers can rely on them, which is especially problematic when the FAQs are the primary guidance available on a topic.

From PPC’s “Five-Minute Tax Update” on 7/30/14

I agree. Too many FAQs and not enough facts.

Take the example of something I wrote about a few weeks ago regarding same-gender marriages and the impact of last year’s DOMA ruling where DOMA got struck down.

My take on the official IRS response to the DOMA ruling (Notice 2013-17) is that any tax return filed with the IRS after September 16, 2013, by a person in a same-gender must use a filing status of “married.”

But then the IRS — in a news release (!) — later said that using a status of “married” was optional on prior-year amended tax returns. This was in a paragraph tacked onto the end of a news release about something completely unrelated to same-gender marriage.

I won’t belabor the point here because I already wrote about it in this blog post from June.

But the overall point is, things like FAQs and news releases are  no substitute for coherent, authoritative guidance.

Can one cite a FAQ or news release as defense in an audit? Doubtful.

I’ll be interested in seeing if the IRS responds to Ms. Olson’s statements. That seems doubtful too.

Image courtesy of Stuart Miles /

Baseball: Revisiting Games Behind in the Loss Column

Last year I wrote a post about the concept of “games behind in the loss column” in baseball standings. This is a term that gets used a ID-100271413lot as we head into the final stretch of the baseball season.

I wanted to revisit this topic with a real example from the current season.

Let’s go back to the the American League Central Division standings on the morning of June 11th:

Detroit 33 28 0
Kansas City 33 32 2
Chicago 33 33 2.5
Cleveland 33 33 2.5


Here we see the classic example of where games behind in the loss column is relevant. You have a jumble of teams that have played an unequal number of games. KC has played 65 games, Chicago and Cleveland have played 66 games, but Detroit has only played 61 games.

But this race is not really as close as it seems. Detroit is only 2 games up on KC, but they are 4 games up in the loss column.

Let’s pretend the season is only 70 games long. So Detroit has 9 games left, KC 5 and Chicago and Cleveland 4.

KC, Chicago and Cleveland are basically helpless in this scenario. Even if they win all of their remaining games, they have to rely on Detroit losing.

So let’s say KC wins their last 5 games to finish 38-32. They are still in a bad situation because they must rely on Detroit losing at least 4 of its last 9 games. That’s possible, of course, but the point is: in our hypothetical scenario, KC doesn’t “control its own destiny.” It has to rely on Detroit losing.

Winning, in and of itself, doesn’t close that 2-game gap in the standings because the gap is in the loss column.

Now let’s say the gap was in the win column:

Detroit 33 28 0
Kansas City 29 28 2


If the season ends at 70 games and KC wins all of its remaining games, they are guaranteed to at least finish in a tie with Detroit. Obviously winning 11 straight is a tall task, but this illustrates that KC can close the gap with Detroit just by winning. Something that doesn’t happen when the deficit is in the loss column.

Image courtesy of Stuart Miles /

Find All of My Identity Theft Blog Posts in One Location

One year ago Saturday, Wendy Boka’s identity theft saga with the IRS finally ended when she received her long-awaited refund check from the IRS, took it to the bank and it went through without issue.

My ongoing blog posts (19 parts) about Wendy’s story, and the IRS’s ham-fisted way of handing her case, has been the most-talked-about thing on my blog for nearly 2 years (Part 1 debuted on August 6, 2012).

Now, I have brought together all 19 parts in one convenient location on this blog — click here! — so that any reader can quickly and conveniently access any piece of Wendy’s story at any time.