What's the Burden of Proof for Business Tax Deductions?

Burden of proof is a legal concept that describes the standard someone trying to prove a fact must satisfy to get the fact legally established. The burden of proof concept also applies to proving your business transactions, to get them established as deductible expenses for your business tax return.

This article looks at the burden of proof you need various types of business records in case your business is audited by the IRS.

What Can You Deduct on Your Business Taxes?

You can deduct most business expenses on your business's tax return, but you have a responsibility to prove that they are ordinary and necessary to your business. An ordinary expense is common and accepted in your type of business (retail, financial services, etc.). A necessary expense is helpful and appropriate.

Most general expenses and costs, like advertising, legal fees, utilities, and employee costs, are those listed on the business tax forms. Costs for buying long-term assets, like vehicles, furniture, and equipment, are deductible, but they are spread out over a number of years, using a process called depreciation.

The burden of proof differs depending on the type of business expense. In general, that means documents like receipts, canceled checks, or bills.

Burden of Proof for Business Assets

Assets are property you own and use in your business, like vehicles, equipment, and furniture. You'll need to keep records to establish the basis (initial cost) and the cost of improvements for each asset, in order to be able to depreciate these assets over their tax life. You will also need this information to get information for capital gains or losses when you sell the asset.

In addition to the purchase price, you'll need to have proof of costs for:

• Acquiring the asset
• Making improvements
• Any deductions for depreciation, including section 179 deductions
• Deductions for casualty losses
• How you use the asset

For the sale of an asset, you'll need to be able to prove when and how you disposed of the asset, the selling price, and expenses of the sale.

Listed Property: A Special Type of Asset

Some types of business property, called listed property, can also be used for personal purposes. The IRS requires a higher degree of proof of business use. Listed property includes passenger autos weighing 6,000 pounds or less, other property used for transportation, and property used for entertainment, recreation, and amusement.

If you want to write off listed property, it must be used more than 50% for business purposes. To prove business use, you'll need to keep excellent records. The best way to do this is to keep timely records showing how much time the property is used for each purpose. You'll need these records when you report depreciation and other expenses for use of the property.

If you have the property at your business location (not your home office), like digital recording equipment, you don't have to keep a log. All use at a business location is assumed to be for business purposes. 

Using Expense Logs 

Some expenses are more difficult to prove than others. The IRS requires additional evidence for travel, entertainment, gifts, and auto expenses to make sure they are only being used for business purposes.

For example, the IRS prefers "at the time" proof for driving expenses. That is, a note you make on an expense slip or receipt or mileage log at the time of the trip is better than a list you write up at the end of the year.  Keeping a mileage log means that every time you get into your car, whether it's for business or personal driving, you must record: 

• The date
• Mileage
• Where you went
• The purpose (business or personal) as specifically as possible

Commuting (driving back and forth to work) is not deductible as a business expense; record commuting as personal driving.

Using Business Travel Receipts

You will need to keep track of receipts for business travel expenses. The best way to prove business travel expenses (including hotels, flights, rental cars, meals, and entertainment) is to use a credit card slip (using your business card, of course) with additional notes on the business purpose. Make the note at the time you incur the expense. You could also use a day planner, appointment book, or calendar to note business travel events, which you can then tie in with your receipts. 

Proving Business Income

You may need to prove your business income by showing your gross receipts from these sources:

• Cash register tapes
• Information on deposits from both cash and credit sales
• Receipt books
• Invoices
• Annual tax reports from 1099 forms (1099-MISC, 1099-MISC, 1099-K, and others)

If you have a cash business, your burden of proof increases because the IRS wants to make sure you aren't hiding cash income. Consider incorporating some paper or electronic records into your business, like receipt books and sales sheets. Include detail on bank deposits and use an online accounting system to help with the burden of proof.

Electronic vs. Paper Records

The IRS can accept electronic information from accounting software programs, and they may ask for electronic records to review in an audit. An auditor may use standard reports to get data and documents for investigation, but they may also request paper documents.

Frequently Asked Questions (FAQs)

How do I maximize my tax deductions for a small business?

The best way to maximize your tax deductions is to keep excellent records so you don't miss anything. For example, some businesses don't keep good records on amounts they spend in cash, for small costs like parking, tolls, and snacks for employee meetings. Keeping a record of these petty cash expenses can give you additional write-offs at tax time.

When you buy business assets, like equipment or computer systems, you can maximize your depreciation deduction by including all expenses for the item in its cost basis. This includes delivery charges, sales taxes, setup fees, and training for employees.

If you or your employees drive for business, using a mileage tracker app can show you how your driving miles add up during the year, adding another deduction to your list. Look for an app that allows you to separate personal and business driving.

What are the best tax deductions for self-employed business owners?

In general, the best tax deductions are those that bring you the most benefit with the least outlay of money.

One commonly overlooked tax deduction is depreciation, deductions for the purchase of "big-ticket" items, like computers, furniture, vehicles, or equipment. These deductions spread out the cost of the asset over several years, giving you a "non-cash" write-off during this time. You can even accelerate depreciation deductions, taking most of them during the first year you own and use the asset.

Another great tax deduction for self-employed businesses is the Qualified Business Income deduction that allows you to take a 20% deduction on your business net income, in addition to regular allowable deductions. This deduction is in effect through the 2025 tax year.