P&L Statement Doesn’t Substantiate Business Expenses

A person who owned a welding company that grossed over $7.5 million didn’t file a tax return, so the IRS prepared one for him based upon information from third parties. He wanted to take deductions in 29 categories of expenses, but the Tax Court wouldn’t allow it. He didn’t have evidence. He wanted to rely on a profit and loss statement prepared once litigation began, but this reconstruction is not proper substantiation. At the very least, a taxpayer must show that expenses were actually incurred and that there was a business purpose for them. #IdeaoftheDay