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Business-related deductions: what kind of records do you need?

Taking tax deductions for business-related activities has to be handled with care. You don't want the IRS to audit you, saying you should have provided a lot more documentation than you did for business expenses like mileage or the use of your home office.

In this post, we will discuss the documentation you need to be confident in taking business-related deductions.

On its website, the IRS gives several examples of the types of expenses that can be deducted. For example, suppose you use your personal car for both business and personal activities. As Publication 463 explains, in such cases you can take a deduction for the business expenses but must keep track of actual mileage.

Similarly, if you borrow money and use part of it for business purposes, the business part is deductible.

But what kind of records do you need to keep in order to deduct expenses like these as business expenses?

In a recent Tax Court decision, Garza v. Commissioner, the court clarified the requirements for record-keeping that must be met to deduct business expenses.

It isn't enough, the Tax Court said, to merely have estimates of mileage or the cost of meals. Instead, someone seeking a deduction for business-related expenses should have more detailed records, such as log that records miles driven, meals eaten on the road and so on.

Such a log would contain details about dates, times and actual amounts. It would also make the connection between the item to be deducted and the business purpose it served.

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