Why Canceled Checks Aren't Enough

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It would be difficult to find a taxpayer who doesn't seek to deduct business-related entertainment expenses. But a recent Tax Court decision serves as a stark reminder that even legitimate entertainment expenses might not be deductible if you can't provide proper substantiation.

Donald Sap deducted lunches, dinners, and other entertainment expenses on his tax return. He only offered canceled checks as evidence of these expenses. The court said that wasn't enough. To substantiate an entertainment deduction properly, you must have a record of the amount, the date, the place, the business purpose, and whom you entertained. By themselves, the court held, checks do not indicate who was entertained.

But the rules on checks aren't all black and white. Sap also deducted travel expenses to attend trade shows in California and Florida. Only canceled checks payable to the travel agency and the hotel were used to support these deductions. For travel expenses, the court said, canceled checks are sufficient: The checks "are direct evidence of the amount, time, place, and date of the expenditure."