Documenting Business Deductions During COVID-19 Can Avoid Future IRS Disputes

March 25, 2020 by

…if new expenses are being implemented because of COVID-19, special care may be required to show that the expense is a valid deduction.
Business owners are having to adapt to increasing restrictions as the COVID-19 crisis spreads throughout the country and the world. As businesses change the way they normally do business, they may be faced with new expenses required to keep their businesses operating. Although the current focus is likely on doing what needs to be done to keep the business running, documenting those expenses should not be ignored. The IRS usually has three years from the filing of the tax return to make additional assessments, sometimes longer depending on the facts. As such, questions about business expenses associated with COVID-19 may not occur until long after the health crisis is over.

Many IRS audits are resolved via correspondence. Having detailed documentation ready and available in response to an IRS inquiry may resolve a dispute immediately and avoid a long audit process.

Ordinary and Necessary Business Expenses

A business expense is deductible if it is ordinary, necessary and reasonable. This is viewed in relation to what is commonly accepted in the specific trade or business. Necessary doesn’t mean that the expense is indispensable, just that it is helpful and appropriate. However, the specific reason why an expense is helpful and appropriate to your industry is not always obvious. To justify the expense, a business owner must show how the expense is directly attributable to the business and the ordinary and necessary needs of the business. Taxpayers bear the burden of proving that they are entitled to the deduction and substantiating business expenses remains one of the most litigated tax issues.

Obviously, it is important to save the invoices and receipts indicating when and how much was spent on the business expense. However, if new expenses are being implemented because of COVID-19, special care may be required to show that the expense is a valid deduction. Additional expenses related to remote work, communication with customers, and sheltering in place may be new expenses but still ordinary and necessary. As such, including corporate minutes or corporate resolutions outlining the business needs, approvals, and reasons the additional expenses serve the needs of the business will help justify the expenses if questioned later.

Home Office Deduction

The home office deduction is a potentially complex deduction. However, if you use a portion of your home regularly and exclusively for business, that portion can provide a useful deduction for a small business or the self-employed. Some business owners or self-employed individuals may be, for the first time, setting up specific home office spaces.

The home office space must, first and foremost, be used regularly and exclusively for business. If the home office space has both business and personal uses then it will not qualify. To show regular and exclusive use a log of business meetings, visits by clients, and other business activity taking place in the home office can be helpful. Also, creating a diagram with exact measurements of the home office will also help demarcate the exact portion of the home used exclusively for business and the square footage used for calculating the deduction. This can be useful in showing that the portion claimed is separately identifiable from other portions of the home that are not exclusively used for business activity.

 

Joshua D. Smeltzer
joshua@brownfoxlaw.com

Joshua D. Smeltzer is a tax attorney with over fifteen years of experience representing individuals, corporations, and formerly the U.S. Government in a variety of tax matters. Mr. Smeltzer uses the knowledge gained inside the government to represent and advise clients on potential tax risks, navigating the IRS labyrinth during audit examinations, arguing at the IRS Office of Appeals, and litigation in the federal courts. He also advises individual and corporate clients on a variety of tax compliance issues in an effort to avoid tax disputes from occurring.

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