Issues

How To Prove Your Business Expenses to the IRS

You really spent the money on your business—and for travel, meals, gifts, and your car, a missing record can still cost you the whole deduction.

You drove 18,000 miles for your business last year. You have the bank statements showing the gas, the insurance, the repairs. The IRS does not even dispute that you made the trips. And you can still lose the entire vehicle deduction—every dollar—because of a sloppy mileage log.

That is not a glitch. It is exactly how the law is built. For most business expenses, your documents are evidence: if a judge believes you really spent the money on the business, the court can estimate a reasonable amount even when your records are imperfect. But for four specific categories—travel, meals, gifts, and "listed property" like your car—Congress took that power away. For those, a missing contemporaneous record—one you created at the time of the expense, not reconstructed afterward—means zero, even when the IRS agrees the expense happened.

This is the substantive merits guide for the ordinary self-employed filer—the rideshare or delivery driver, the freelancer, the small contractor, the sole proprietor who files a Schedule C. It explains the burden you carry, the one rule that lets a court estimate, the four categories where that rule is forbidden, the cases that show how unforgiving the trap is, and how the path runs from a disallowance to a Notice of Deficiency to US Tax Court. It is a sister to How To Prove Your Charitable Deductions to the IRS and How To Prove Your EITC and Dependent Claims to the IRS.

It also happens to be the fight you are most likely to be in. Sole-proprietorship trade or business expenses were the #1 most-litigated issue for business taxpayers in the Tax Court in fiscal year 2024—1,625 petitions—according to the National Taxpayer Advocate's 2024 Annual Report to Congress. Schedule C deductions are perennially among the most contested issues in the court.

The Ground Rules: The Burden Is on You

Two settled principles drive everything below, and both cut against the filer with thin records.

Deductions are a matter of legislative grace. You do not get to deduct an expense because it feels fair—you get to deduct it only because a statute says you can, and only if you can show you fit within that statute's terms. As the Supreme Court put it in New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934), "Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed." The Court restated the "familiar rule" in INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992): "an income tax deduction is a matter of legislative grace and . . . the burden of clearly showing the right to the claimed deduction is on the taxpayer." The IRS's determination is presumed correct; you have to prove it wrong.

The deduction itself. IRC § 162(a) allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." "Ordinary and necessary" are terms of art—the canonical gloss comes from Welch v. Helvering, 290 U.S. 111 (1933). What is not deductible is just as important: personal, living, and family expenses (IRC § 262). The line between a deductible business trip and a nondeductible commute, or a client dinner and a meal with friends, lives right here.

You have a duty to keep records. IRC § 6001 requires every taxpayer to "keep such records . . . as the Secretary may from time to time prescribe," and the regulations require records sufficient to establish the amount of each deduction. This is not optional housekeeping—it is a legal obligation, and your failure to meet it is the single most common reason Schedule C deductions die.

Do not count on the burden shifting. Taxpayers sometimes hope IRC § 7491 will flip the burden of proof onto the IRS. It almost never rescues a poor-records filer, and the reason is circular: the burden shifts only if you first introduce credible evidence and have "complied with the requirements . . . to substantiate any item" and "maintained all records required." The very failure that gets your expense disallowed—no records, no substantiation—is exactly what forecloses the shift. The burden stays on you.

The Cohan Rule: Your Friend, With Limits

Here is the good news, and you need to understand it precisely because most of this article is about its limits.

Almost a century ago, the entertainer George M. Cohan deducted large sums for travel and entertaining without keeping receipts. The court was convinced he had genuinely spent something deductible but could not prove the exact amounts. In Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), Judge Learned Hand held that the court should not disallow the expense entirely but should make as close an approximation as it can. As the Tax Court restates the rule, that approximation must bear heavily upon the taxpayer whose inexactitude is of his own making—in other words, if your records are bad, the court will resolve doubts against you, but it can still allow something.

That is the Cohan rule, and it is a real lifeline. If you bought tools, supplies, postage, or materials for your business and lost some receipts, a court can estimate a reasonable amount.

But Cohan has two hard limits.

First, an estimate needs a reasonable basis. A court may estimate only when there is "some basis upon which an estimate may be made"; without one, any allowance would be "unguided largesse" (Vanicek v. Commissioner, 85 T.C. 731, 742–43 (1985)). Cohan is not a license to invent a number. You still have to give the judge a credible footing—a bank statement, a vendor invoice, a logically derived figure.

Second—and this is the centerpiece of this article—Cohan does not apply at all to four categories of expense. For those, Congress forbade estimation by statute. That is the trap.

The § 274(d) Strict-Substantiation Trap

This is the single organizing idea of this guide. For four kinds of expense, IRC § 274(d) says "no deduction or credit shall be allowed" unless you substantiate the expense with adequate records or sufficient corroborating evidence. There is no Cohan estimate. A missing contemporaneous record means total disallowance—even of an expense the IRS agrees you incurred.

The four categories are:

Travel (including meals and lodging away from home);
Meals (and, historically, entertainment—more on that below);
Gifts; and
Listed property—which, critically, includes your car. Under IRC § 280F(d)(4), "listed property" expressly covers any passenger automobile and other property used as a means of transportation. Your vehicle is listed property, so § 274(d) applies to it, so there is no Cohan rule for your mileage.

For each of these, the statute requires you to substantiate four elements:

(A) the amount of the expense;
(B) the time and place of the travel or use (or the date and description of a gift);
(C) the business purpose of the expense; and
(D) the business relationship of any person you entertained or gave a gift to.

The implementing regulation, Treas. Reg. § 1.274-5T, spells out what "adequate records" means: a contemporaneous account book, diary, log, or trip sheet, plus documentary evidence such as receipts or paid bills for each element. Bank statements alone do not cut it—they prove you paid money, not that the four elements are satisfied.

The Case That Proves It: Sanford

The rule that § 274(d) overrides Cohan was settled in Sanford v. Commissioner, 50 T.C. 823 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969). Sanford was a television-advertising salesman who deducted thousands of dollars of unreimbursed entertainment expenses. He kept a desk-calendar diary recording whom he entertained, the amounts, and the reasons—but he kept no receipts for the larger items. The IRS disallowed those items for lack of substantiation.

The Tax Court accepted that the expenses may well have been real. It said this might have been an appropriate case to apply the Cohan rule and approximate his allowable expenses—"were it not for section 274(d)." Because § 274(d) was enacted specifically to overrule the Cohan rule for these categories, the court held the unsubstantiated expenses had to be disallowed entirely. The deduction died purely on substantiation, not on whether the money was spent.

(Sanford is a 1968 entertainment case, and entertainment is no longer deductible at all today—see below. Cite it for the principle that § 274(d) defeats Cohan, not as live entertainment guidance. The modern application to vehicles comes from the next two cases.)

The Modern Vehicle Cases: Bass and Ayria

If Sanford is the rule, Bass is the cautionary tale every self-employed driver should read.

The pro se contractor who kept a log and still lost—Bass v. Commissioner, T.C. Memo. 2023-41. Duncan Bass was exactly the kind of person this guide is written for. He ran a genuine small business—landscaping and janitorial services plus a backyard used-clothing shop—alongside two regular jobs, and he represented himself in Tax Court. He claimed about $10,000 in car-and-truck expenses for driving roughly 18,940 business miles, and here is the important part: he actually kept a handwritten daily mileage log with destinations, business purposes, and miles. He did the thing everyone tells you to do.

He lost anyway. The court explained that the Cohan rule is superseded—estimates are not permitted—for expenses specified in § 274, including listed property such as a passenger automobile. Then it found "critical inaccuracies" in the log itself: the handwritten totals did not add up, and the miles he claimed on his return could not be reconciled with the miles his own log recorded. Because the log was internally inconsistent, it did not meet the strict substantiation requirements of § 274(d), and the vehicle deduction was denied.

The lesson is not "keep a log." Bass kept a log. The lesson is keep an accurate, internally consistent, receipt-backed log—one whose numbers actually add up and match what you put on your return.

The "didn't really keep records" companion—Ayria v. Commissioner, T.C. Memo. 2022-123. Ayria, a car-dealership manager, reported a Schedule C "consulting" business and claimed roughly $87,000 in deductions—vehicle, lodging, client entertainment, gifts, cellphone, and more. The court found the activity was really a repackaging of unreimbursed employee expenses, and that in any event the § 274(d) items failed because Ayria admitted he "didn't do a good job of logging" his travel and kept no trip sheets or odometer records. Cohan could not save the listed-property, travel, meal, and gift items, and for the other expenses he gave the court no basis to estimate either.

The takeaway from the pair: no real records means total loss on the § 274(d) categories, and you cannot relabel personal or employee costs as a Schedule C business to get around it.

Your Car, in Detail

For most pro se filers, the vehicle is the single biggest deduction and the single biggest exposure. Get this section right.

Two methods. You can deduct your car two ways:

Standard mileage rate—a fixed cents-per-mile figure that already bundles gas, depreciation, insurance, and maintenance. You multiply business miles by the rate.
Actual expenses—the business-use percentage of your real costs (gas, repairs, insurance, depreciation).

If you want the flexibility to switch methods later, you generally must use the standard mileage rate in the first year the car is available for business. Publication 463 (2025) explains both.

The mileage rate changes every year—do not memorize one number. For 2025, the standard mileage rate is 70 cents per mile (IRS Pub 463). But that figure moves annually—Bass shows the 2017 rate was 53.5 cents. Always look up the rate for the specific year in dispute; never assume a perennial figure.

Either way, your car is listed property, so § 274(d) applies. You must substantiate the business mileage, the time, and the business purpose of each use, along with your business-use percentage. What counts as "adequate records" for a car, per Pub 463:

A timely-kept record. Record the elements at or near the time of each trip. A usable entry is short and specific—for example: 3/14/2025 — home office to client site, 1200 Main St — deliver and review proposal, Acme job — 18 miles. A weekly log counts as timely—you do not have to write down every trip the same day—but a record made near the event "has more value than a statement prepared later when there is generally a lack of accurate recall."
Sampling is allowed, narrowly. You can keep an adequate record for part of the year and use it for the whole year only if you can show the sample period is representative.
Reconstruction is allowed only narrowly. Pub 463 lets you reconstruct lost records only when they were destroyed "because of reasons beyond your control," like fire or flood. A spreadsheet built from memory after you got the audit notice, because you never kept a log, is not this—it is exactly what Bass and Ayria rejected. If you are reading this mid-year with no log, the move is to start a clean contemporaneous log today: it will not retroactively rescue a past year you never recorded, but it protects the rest of this year, and a representative sample period can carry the remainder.
Use a mileage app. A GPS logger that records your business trips contemporaneously—the rideshare or delivery platform's own trip history, or a dedicated mileage app—is the modern version of the timely-kept record, and it is the easiest way to satisfy § 274(d).

Commuting is never deductible. The drive from home to your first work location is a personal commute under § 262, not a business trip. Logging it as "business" invites disallowance of the rest of your log along with it.

(The 2025 tax law changed depreciation rules that affect the actual-cost method; if you use actual expenses, see Pub 463 for the current depreciation treatment. Most drivers use the standard mileage rate, and depreciation mechanics are beyond this guide.)

Meals and Entertainment Today

The rules here changed significantly after 2017, and a lot of advice online is out of date. Here is the current state of play.

Entertainment is no longer deductible. The 2017 Tax Cuts and Jobs Act amended IRC § 274(a) to disallow entertainment, amusement, and recreation expenses paid or incurred after December 31, 2017. Pub 463 states it flatly: entertainment expenses are nondeductible. The client ballgame, the golf outing, the concert tickets—gone, no matter how good your records are.

Business meals are generally 50% deductible. IRC § 274(n) caps the meal deduction at 50%. The meal must be ordinary and necessary, not lavish, and you (or an employee) must be present. If you buy food and drinks at an entertainment event, they are deductible—at 50%—only if they are separately stated on the bill.

The 100% restaurant deduction has expired. A temporary rule allowed a 100% deduction for restaurant meals, but only for 2021 and 2022. It is gone. For 2023 and forward, business meals are back to 50%. Do not let anyone tell you 100% is still available.

Meals are a § 274(d) item too. Even a clearly business, 50%-deductible meal needs the full § 274(d) substantiation: the amount, the time and place, the business purpose, and the business relationship of the person you dined with. No receipt and no contemporaneous note of who and why means no deduction—and no Cohan estimate to fall back on.

Hobby or Business? The § 183 Recharacterization

If your Schedule C activity loses money year after year, the IRS may argue it is not really a business at all but a hobby—and recharacterize it to disallow the loss. This is a big topic that deserves its own article; here is the short version.

Under IRC § 183, if an activity is "not engaged in for profit," no deduction attributable to it is allowed except as the section narrowly permits. Whether you have the required profit motive turns on a nine-factor, all-facts-and-circumstances test in Treas. Reg. § 1.183-2(b): how businesslike you run the activity (including keeping complete records), your expertise, the time and effort you put in, the expectation that assets will appreciate, your success in similar activities, the history of income or losses, occasional profits, your financial status, and any personal pleasure or recreation involved. No single factor controls. There is a helpful presumption: under § 183(d), if you show a profit in 3 of 5 consecutive years, the activity is presumed to be for profit.

Here is the modern sting in the tail: even when an activity is a hobby, the hobby's deductions are miscellaneous itemized deductions—a category of write-offs you could once claim on Schedule A—and those are effectively unavailable today, because the Code suspends the entire category (IRC § 67(h)). That suspension was made permanent by 2025 legislation. So a hobby classification today does not just shrink your loss—it can wipe out your ability to deduct the activity's expenses against its income at all. Keeping businesslike records is your best defense against the recharacterization in the first place.

Recordkeeping That Survives an Audit

This is the practical payoff. The work that wins these cases happens before you file, not after the letter arrives. And there are really two distinct things you have to prove:

That the money was spent. Bank statements, credit-card statements, and canceled checks are strong corroboration of amount. But a bank statement alone proves only that you paid Vendor X $400—it does not prove the payment was an ordinary and necessary business expense. As Bass notes, a canceled check establishes cost but does not by itself support a business expenditure without other evidence of business purpose.
That it was for business. This is where most pro se filers lose: receipts and statements with no contemporaneous note of why the expense was incurred and for whom. For ordinary § 162 expenses outside the § 274(d) categories, a court can sometimes estimate (Cohan) if you give it a reasonable basis. For the § 274(d) categories—travel, meals, gifts, and your car—corroboration of amount is not enough; without the contemporaneous record of time, place, purpose, and relationship, the deduction dies entirely.

One number worth fixing in your memory: the documentary-evidence threshold under the current regulations is $75. Keep a receipt for anything that costs $75 or more, and for all lodging regardless of amount (do not use the lower figure you may see quoted from old cases). Expenses under $75 are not lost—a separate receipt simply is not required for them, so your contemporaneous log or diary entry still carries the amount and business purpose; lodging always needs a receipt. The concrete pre-file steps that follow from all of this are collected in What To Do Now below.

Use the Right IRS Sources

A lot of online advice still tells you to "see Publication 535." Don't—it is gone. The IRS discontinued Publication 535 (Business Expenses); its last revision was for tax year 2022. Its content now lives in these current publications instead:

Publication 334, Tax Guide for Small Business (2025)—the general Schedule C deduction guide and the main replacement for Pub 535's content.
Publication 463, Travel, Gift, and Car Expenses (2025)—the § 274(d) recordkeeping bible for travel, meals, gifts, and your car.
Instructions for Schedule C (Form 1040) (2025)—the line-by-line guide.

The Path: From Disallowance to Tax Court

A Schedule C expense dispute moves the same way most individual disputes do. Here is the route and where it usually ends.

Examination and the 30-day letter. These cases usually start as a correspondence or office examination—the IRS asks for your mileage logs, receipts, and records and, if it disagrees, issues an examination report (Form 4549) and a 30-day letter proposing disallowance. That report itemizes exactly which deductions it disallowed and recomputes your tax; to confirm what has actually been assessed against you, you can also pull your IRS account transcript. This is the stage where a clean substantiation package wins or loses the case—assemble your mileage log, receipts, and bank statements with a short cover summary tying each figure back to the matching line on your Schedule C (remember Bass: the numbers have to reconcile to your return). See How To Respond to an IRS Audit. Some Schedule C issues arrive instead through the automated underreporter program—see How To Respond to a CP2000 Notice.
Appeals (optional). A timely protest can route your case to IRS Appeals—an independent office inside the IRS that can settle the dispute—before any Notice of Deficiency issues. See How To Request an IRS Appeals Conference and What To Expect at Your IRS Appeals Conference.
Notice of Deficiency—the 90-day letter. If it is not resolved, the IRS issues a Statutory Notice of Deficiency—a deficiency is simply the additional tax the IRS says you owe. Under IRC § 6213(a), you have 90 days from the date on the notice (150 days if you are addressed outside the US) to petition the US Tax Court. This deadline cannot be extended. See You Just Got a 90-Day Letter From the IRS and How To File Your Tax Court Petition.
Tax Court—usually a small "S" case. Most ordinary Schedule C disputes are well under $50,000, so they qualify for the simplified small-case procedure—informal, plain-English, no rigid rules of evidence (the trade-off is that an S-case decision is final and sets no precedent). The filing fee is $60, with a waiver available. Most cases never reach trial: Most (76%) of Tax Court cases close by settlement, and more than 99% resolve without a trial on the merits. Cases typically take 6-18 months to resolve. See Small Case or Regular Case: Which Should You Choose.
Audit reconsideration—the fallback. If the 90 days lapse and the tax is assessed, audit reconsideration lets you ask Examination to reopen on the documents. It is discretionary, and by itself it does not stop the 10 years collection clock. For substantiation disputes it often works well—because the issue is purely documentary—but only if you can finally produce records that meet § 274(d). Reconstructing a mileage log after the fact will not save a vehicle deduction; the records have to be the genuine, contemporaneous kind you should have kept all along.

One paragraph on penalties—and interest. On top of the disallowance, the IRS often asserts a 20% accuracy-related penalty under IRC § 6662—both Bass and Ayria faced one. And on top of that, interest runs on both the additional tax and the penalty from the original due date of the return, so your real exposure is always larger than the disallowed deduction alone; Understanding Your IRS Balance shows how the pieces add up. The full penalty-defense toolkit, including reasonable cause and the supervisory-approval requirement of § 6751(b), is covered in depth in Unreported Income Disputes in Tax Court; for reasonable-cause arguments specifically, see How To Request IRS Penalty Abatement.

What To Do Now

Almost every § 274(d) failure is preventable, and the cure is boring: good records, kept on time. A pre-file checklist:

Open a separate business bank account and card so business spending is identifiable on its face.
Log your mileage contemporaneously—use a GPS mileage app, and make sure the total matches the figure you put on Schedule C.
Keep receipts for anything $75 or more, and all lodging.
Write down the business purpose and the people involved for every meal, trip, and gift, at the time.
Pick a vehicle method (standard mileage or actual) and substantiate the elements that method requires.
Do not deduct your commute, and do not relabel personal or W-2 job costs as a Schedule C business.
Build your evidence file before you file the return, not after a notice arrives. See How To Prepare Your Evidence for Tax Court.
If a Notice of Deficiency has issued, calendar the 90 days deadline and decide whether to petition. If you missed it, see You Missed the 90-Day Deadline: Now What.

Get Help

Around 89% of Tax Court petitioners represent themselves, and many Schedule C substantiation disputes are well suited to it because the case is documentary. But the represented win rate is higher (about 12% pro se versus about 23% represented in the most recent data), and some situations call for help—a hobby-loss recharacterization, a large penalty, or several years at once.

If your income is at or below 250% of the poverty line and your dispute is at or below $50,000, you may qualify for free representation through a Low-Income Taxpayer Clinic—they handle exactly these cases. For more complex situations, see When To Get Professional Help With Your Tax Dispute.

Resources

Statute and regulations:

IRS publications:

Cases cited:

New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934)
INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992)
Welch v. Helvering, 290 U.S. 111 (1933)
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)
Vanicek v. Commissioner, 85 T.C. 731 (1985)
Sanford v. Commissioner, 50 T.C. 823 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969)
Bass v. Commissioner, T.C. Memo. 2023-41 (U.S. Tax Court, DAWSON)
Ayria v. Commissioner, T.C. Memo. 2022-123 (U.S. Tax Court, DAWSON)

Companion articles on TaxCourtHelp:

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.