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Substantiation of Schedule C Deductions
Under section 162(a), a taxpayer may deduct ordinary and
necessary business expenses incurred or paid during the taxable
year. However, deductions are a matter of legislative grace, and
the taxpayer must clearly demonstrate entitlement to the claimed
deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992). A taxpayer must keep records sufficient to establish the
amount of his deductions. Sec. 6001; sec. 1.6001-1(a), Income
Tax Regs.
If the taxpayer claims a business expense deduction but
cannot fully substantiate it, we may estimate the allowable
amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). However, there must be sufficient evidence in the record
to provide a basis for the estimate. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985).
For certain types of expenses, such as those for cellular
telephones, automobiles, and trucks, section 274(d) overrides the
rule of Cohan. See Sanford v. Commissioner, 50 T.C. 823, 827
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969). Under
section 274(d), a taxpayer must meet strict substantiation
requirements before any of the listed expenses will be allowable.
See also sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. We
may not apply the Cohan rule to those expenses covered by section
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Last modified: May 25, 2011