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Importance of Documenting Unreimbursed Business Expenses

11/08/2016  |  By: Phyllis Hodge, Senior Manager, Tax

Many taxpayers incur business expenses for which they do not receive reimbursement. These unreimbursed business expenses are tax deductible, subject to certain limitations, but only if the taxpayer is willing to take the time to keep the proper records.  A recent tax court decision brings to light the importance of maintaining the proper records for deducting these types of expenses.

Why document unreimbursed expenses? 

At issue is the case of David Garza, an employ by Time Warner Cable.  In 2010 Mr. Garza was employed as an outside direct sales representative. His job required him to travel extensively to visit potential customers or dissatisfied customers and perform various tasks based on their particular needs. Mr. Garza used his personal vehicle and was not reimbursed for any vehicle expenses. Of course, Mr. Garza used his vehicle for personal travel as well as business travel.

Mr. Garza kept track of his vehicle mileage in a calendar planner book. He dutifully recorded the odometer reading at the beginning and end of each month; occasionally recorded an odometer reading at other times during the month. Besides the odometer readings, the calendar planner had some personal notes, but did not contain any other information related to his business travel or related expenses. There were also no notes related to the amount of personal travel for which the vehicle was used.

When he filed his 2010 Federal income tax return, Mr. Garza claimed a deduction in excess of $20,000 for vehicle expense based upon the standard mileage rate for 40,171 business miles driven. At trial Mr. Garza conceded that 4,608 of the reported business miles were actually attributable to commuting for which no deduction is allowed.

While the Tax Court agreed that Mr. Garza clearly incurred otherwise deductible unreimbursed travel expenses associated with his employment, the entire deduction was ultimately disallowed because Mr. Garza failed to properly substantiate any of the travel expenses.

What type of records should be kept?

What type of records should Mr. Garza have kept to properly substantiate his travel expenses? Generally, a taxpayer must keep records sufficient to establish the amounts of the items reported on his or her Federal income tax return as the taxpayer bears the burden of proving entitlement to any deduction claimed. A calendar planner book which contains only monthly or semi-monthly odometer readings does not substantiate the business purpose that gave rise to the mileage. The Internal Revenue Code requires that taxpayers comply with the onerous task of establishing the amount, date, and business purpose of each expenditure of business use of property. Had Mr. Garza recorded such entries on a daily basis, his calendar planner book arguably would have satisfied this test. It takes a not insubstantial amount of time to properly substantiate travel expenses, but failing to do so, as Mr. Garza learned, can be very expensive.

Expressing a sentiment undoubtedly shared by the vast majority of taxpayers, Mr. Garza informed the court that the amount of time and effort required to comply with the substantiation standard set forth in the regulations was “just too much to do."

For more information, contact Phyllis Hodge at phodge@lbmc.com