Maintain Meticulous Records to Protect Your Deductions

139467695_8A lack of substantiation caused one taxpayer (and his wife's estate) to have deductions denied by the IRS — and the U.S. Tax Court agreed with the denials. Here are two issues in the case:

1. Deductions for hiring children. Taxpayers can hire their children to work in their businesses but the children must hold legitimate jobs. In the case, a consultant and his wife's estate weren't entitled to business deductions for payments to "assistants," who were the couple's children and a grandchild. The payments were for alleged reimbursement or compensation for services provided in connection with consulting activities. Notably, there was no documentary evidence substantiating certain payments. Copies of negotiated checks to the "assistants" from an account used for personal purposes had no notation as to the purpose of payment and there was no evidence to show one child did any work for her father.

2. Business mileage deductions. Taxpayers who use their vehicles for business can deduct some of the costs. But you could lose that tax benefit if you neglect to keep good records as you go. In this case, the consultant and his wife's estate were denied a business mileage deduction for his consulting activities. He provided mileage logs and calendars showing purported dates of business use of a vehicle. But the records weren't kept contemporaneously and lacked sufficient detail. Records need to include trip dates and destination, the number of days spent on business and the business purpose of each trip. (TC Memo 2022-70)

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