Although this case involved a self-employed, it applies equally to any small business—especially with the imminent IRS crackdown on small businesses not paying the proper federal taxes owed.
The case: B, a self-employed, serviced the entertainment business. He reported income and expenses on one Sched. C. The IRS denied many of his deductions for lack of proof.
Held: For the IRS. The taxpayer admitted his recordkeeping was scanty. He produced PayPal receipts to support deductions for advertising, depreciation, legal and professional expenses, and many “other expenses”—no supportive invoices, receipts or similar records.
The PayPal receipts substantiated only the amounts, vendors paid and dates of payment—not that the expenses were ordinary and necessary for operating the business.
Crucial missing details: exactly what was purchased and how it was used in one of the businesses. The court found the records insufficient, even for estimating the amount of allowable expenses. The deductions were denied and accuracy-related penalties were imposed. [Bridges v. Commissioner, T.C. Summ. Op. 2021-16]
Why risk falling behind?
Try a no-risk membership and see what it can do for you. If not completely satisfied, cancel for a refund. Join now and get:
- The General Ledger digital newsletter every month—free.
- Free use of our telephone Member AnswerLine, where experienced accountants answer your everyday bookkeeping and payroll questions.
- Free answers to your QuickBooks questions from experts on our Member AnswerLine.
- Discounts on self-study courses in payroll, adjusting entries, depreciation and other skills . . . plus: you get other professional discounts.
- 21 Key Bookkeeping Changes in Current Tax Laws—free!
- Better Bookkeeping in 15 Minutes—the best bookkeeping tips of 2019—free!
- The Bookkeeper’s Guide to Internal Controls–free!
- Free telephone Member AnswerLine, where experienced accountants answer your everyday bookkeeping and payroll questions
- Discounts of up to 34% on UPS shipping services.
- Discounts on continuing professional education.
- Discounts on professional liability insurance.
Get the recognition you deserve, and stay up to date. Join bookkeepers nationwide as a member of The American Institute of Professional Bookkeepers. Join now.