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he Court must have some basis upon which to make its estimate * * *. If a taxpayer's records are lost or destroyed because of circumstances beyond his control, the taxpayer may instead substantiate the expenses with other credible evidence.į a taxpayer claims a deduction but cannot fully substantiate the expense underlying the deduction, the Court may generally approximate the allowable amount, bearing heavily against the taxpayer whose inexactitude is of his own making. A taxpayer must identify each deduction available, show that he or she has met all requirements therefor, and keep books or records that substantiate the expenses underlying the deduction. * * *ĭeductions are a matter of legislative grace, and taxpayers bear the burden of proving their entitlement to any claimed deduction. * * *ĬHMD relied on a payroll processing company, Automatic Data Processing (ADP), to prepare its payroll checks. Garcia's duties consisted of paying bills, managing the two offices and their staffs, and maintaining CHMD's books using Quickbooks software.
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* * * Jane Garcia provided management services to CHMD as an independent contractor * * *. * * * At the beginning of 2007 CHMD employed about 25 people, some of whom were independent contractors. Holden operated his medical practice entirely through his wholly owned S corporation, CHMD. Jane Garcia was the bookkeeper for the S corporation, and she testified at the trial.ĭuring 2007 Dr. The IRS argued that the deductions were not adequately substantiated, the IRS lost. This case dealt with a situation where the IRS was attempting to disallow certain deductions claimed by an S corporation. The following is an excerpt from Holden v. There are many ways to substantiate deductions, depending on the circumstances surrounding the payment. This is merely an example of one way to substantiate a deduction. Copies of the monthly invoices along with copies of monthly credit card or bank records showing payments in the corresponding amounts to the foreign contractor would likely be sufficient to substantiate the deduction (unless there is some other evidence suggesting that the payments were not for the services described on the invoices). One way to substantiate deductions to a foreign contractor might be to produce the monthly invoices sent from the foreign contractor to the U.S.
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Pursuant to this regulation, taxpayers must keep books or records that substantiate expenses they deduct on their tax return.
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§1.6001-1(a) provides generally that taxpayers must keep:īooks of account or records * * * as are sufficient to establish the amount of * * * deductions * * * shown by such person in any return * * *. Filing a Form 1099 is not required to substantiate a deduction. The simple answer is that you substantiate the deduction the same way you substantiate all other deductions - by maintaining books and records evidencing how much was paid, why it was paid, and to whom it was paid.
Where to put contractor expenses on 1120s how to#
Sometimes taxpayers get concerned about how to substantiate the deduction if no Form 1099 needs to be issued to the foreign contractor. In general, no Form 1099 is required for payments to foreign contractors for services performed outside the U.S.