Don’t let the IRS reject your business deductions: DOs and DON’Ts from Padgett

At Padgett, we’ve seen too many small business owners lose valuable deductions simply because they didn’t document their expenses properly. The IRS loves to take a close look at certain business deductions—especially meals, vehicle expenses, and home office costs. Why? Because these are the areas where business owners most often make mistakes or don’t keep proper records.

A recent court case shows exactly what can go wrong when you don’t document your expenses properly. A software consultant lost thousands of dollars in deductions because she couldn’t prove her expenses were actually for business. Here’s what happened and how your Padgett advisor can help you avoid the same fate.

What went wrong: Real examples from court

Business meals ($9,000 Rejected)

What she claimed: “Working lunches” with colleagues and developers What she provided: Just bank statements Why it failed: Bank statements don’t show who you ate with, why it was business-related, or what you discussed. The court said eating lunch during work hours isn’t automatically a business expense.

Office supplies ($17,000 Rejected)

What she claimed: Desks, monitors, printers, and other business equipment What she provided: Receipts from office supply stores Why it failed: The receipts were dated after the tax years she claimed, included personal items like soda dispensers and gift cards, and were purchased after she closed her business.

Home office ($21,393 Rejected)

What she claimed: Using part of her home exclusively for business Why it failed: She admitted spending most of her time at client offices and couldn’t prove which part of her home was used only for business or how much time she actually worked there.

How to protect your deductions: Simple rules to follow

DO these things

Keep detailed records immediately

• For business meals: Write down the amount, date, restaurant, who you ate with, their role/company, and what business you discussed
• For all expenses: Record the business purpose right when it happens, not months later
• Use a simple notebook, phone app, or receipt envelope system

Separate business and personal expenses

• Use business credit cards and checking accounts only for business
• If you accidentally use a business card for something personal, note it and reimburse the business

Be ready to prove your deductions

• The IRS often questions vehicle, travel, meal, and home office expenses
• Keep receipts, logs, and any supporting documents organized

DON’T do these things

Don’t wait to document expenses

• Creating expense logs at tax time or after an IRS notice is too late
• Don’t try to recreate records from memory months later

Don’t mix business and personal

• Avoid using business accounts for personal purchases
• Be careful about expenses that could be seen as personal enjoyment

Don’t assume the IRS will take your word

• Bank statements alone aren’t enough proof
• You need to show the business purpose and relationship

The bottom line

The IRS requires you to prove three things for any business deduction:

1. You actually spent the money (receipts, bank statements)
2. It was for your business (business purpose documented)
3. The amount is reasonable (not excessive for the business benefit)

If you can’t prove all three, you’ll lose the deduction—and possibly face penalties.

What if your records are lost?

If your records are destroyed by fire, flood, theft, or other disasters, there may be ways to estimate certain deductions using what’s called “the Cohan rule.” However, this is complex and requires professional help—your Padgett advisor can walk you through your options if this happens.

Your next steps

1. Start now: Begin tracking expenses properly today, even if it’s mid-year
2. Get organized: Set up a simple system for recording business expenses immediately when they happen (your Padgett advisor can recommend tools that work best for your business)
3. Get help: Work with your Padgett advisor who can guide you on proper documentation and represent you if you face an audit

Remember: Good record-keeping isn’t just about avoiding problems with the IRS—it also helps you understand your business expenses and make better financial decisions. A few minutes of documentation today can save you thousands in rejected deductions later. Your Padgett advisor is here to help you set up systems that work for your specific business and ensure you’re maximizing every legitimate deduction available to you.