Be Sure Business Expenses are Ordinary and Necessary!

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 Schedule. 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 paid to vendors, 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]

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