Poor Organization Leads to Inability to Claim Business ExpensesFebruary 8, 2023
written on behalf of Feigenbaum Law
While business owners generally have the ability to take advantage of various business write offs and tax deductions, many employees do not have the same benefits. However, there are some instances where a business expense can be claimed on an income tax return. It is important to speak with a tax professional when filing your personal taxes to make sure that your claims are allowable and to prepare yourself to defund such claims if they are challenged.
This blog will review a recent decision from the United States Tax Court in which the manager of a car dealership was denied significant tax claims due to his inability to provide sufficient evidence to back up each claim.
Car dealership manager claims a wide range of expenses
In the case of Kambiz Ayria v. Commissioner, the taxpayer and petitioner, had been working in the automobile industry since 1982, primarily as a car salesperson. In 2017, he became a Manager at a Honda dealership in Santa Monica, California, where he earned a salary of $295,693 in 2017. The taxpayer told the Court that his job often required him to work 60-hour weeks.
When filing his 2017 taxes, he included business-related deductions totalling $86,925. He stated that his claimed expenses helped enhance his productivity and earned him a higher commission. Several of these expenses were related to the petitioner’s “consulting” job in relation to his work at the dealership.
Tax claims included hotel stays and personal vehicle expenses
Many of the petitioner’s expenses were related to his frequent stays at a hotel during the week. He told the Court that staying at a hotel allowed him to avoid the 60-mile commute from his home to the dealership. He also claimed that the hotel allowed him to facilitate community contacts and entertain clients.
The petitioner also claimed expenses related to the use of his personal vehicle for work totalling approximately $16,000. He told the Court he used his vehicle to transport employees and clients to meetings, auctions, and other dealerships. Further, his personal tax return included dining, gifts, and dry cleaning deductions.
The Internal Revenue Service (“IRS”) disallowed all of the deductions submitted by the petitioner. It indicated that the petitioner would be required to provide the IRS with documentation which could support such claims.
Supporting documentation required to support “ordinary and necessary” expense claims
The Court affirmed that the taxpayer bears the burden of proof in proving that the position taken by the IRS is erroneous. While taxpayers are able to file deductions for “ordinary and necessary expenses paid or incurred… in carrying on any trade or business,” the wording must be considered.
The Court explained that to be “ordinary”, an expense must be a common or frequent expense for the taxpayer’s sort of business. To help establish this, a Court can ask a taxpayer to provide evidence to support such claims. In this instance, this requirement was difficult for the petitioner to prove.
Lodging and vehicle expenses not approved by Court
The Court reviewed the claims amounting to over $40,000 in lodging expenses. The Court acknowledged that commuting expenses are not deductible business expenses because individuals can generally choose where they live, as opposed to being required to live in a specific location because of their job. In denying these expenses, the Court determined that the hotel expenses were likely higher than the cost the petitioner would have accumulated had he commuted daily from his home.
The petitioner’s vehicle expenses were primarily related to his failure to adequately record his mileage or details concerning the use of his personal vehicle for business purposes. He told the Court he “didn’t do a good job of logging” his vehicle travel and instead chose to claim his average costs. TThe Court concluded that the petitioner had not substantiated, by records or sufficient evidence, any work-related use of his car. As a result, the $15,896 in vehicle-related claims were disallowed.
Petitioner unable to differentiate between personal and work-related entertainment expenses
The petitioner claimed over $22,000 related to food and entertainment expenses. While the petitioner provided the Court with statements from his bank account and credit card, he failed to highlight which expenses were related to work and which were personal. Further, the petitioner claimed a deduction of $4,010 in relation to client gifts.
Due to the petitioner’s inability to provide sufficient evidence, or differentiate between personal and work-related expenses, the Court declined all of his deductions.
The Tax Team at Feigenbaum Consulting will create tax solutions tailored to your unique needs
If you have complicated or business-related tax files in Canada or the United States of America, contact the experienced lawyers at Feigenbaum Law. We help clients develop customized solutions to achieve their personal tax planning or corporate tax compliance needs. Our professional tax law team ensures that clients are prepared for legislative changes and that they remain compliant with applicable tax laws. To learn more about how we can help you, contact us online or call us at (905) 695-1269 (toll-free (877) 275-4792).