Internal Revenue Code Section 274- A Business Owner Must Read

June 27th, 2014 at 9:21 AM

If your a business owner, you need to be familiar with Internal Revenue Code Section 274 (IRC 274), IRC 274 is the substantiation regulation. All that means is that certain deductions that are claimed on a business tax return, must be supported by appropriate documentation. Not just any documentation, but precisely what the IRS states in this important section of the Internal Revenue Code.

For example, if a taxpayer claims a vehicle deduction last year, they would need a mileage log that substantiates the deduction; a travel deduction for their business needs to be documented in a diary, with receipts and business purpose. Without this documentation, taxpayers will lose these deductions in an audit.

If your a Corporation of LLC, IRC 274 is very important to be aware of. Substantiation includes resolutions and minutes. For example, if a taxpayer claimed a dividend or distribution last year from the business, this specific event should be included in the minutes with a proper resolution. Let’s say you loaned money to the business, you need a resolution. Why?

If one does not have this level of bookkeeping, the they will not be able to substantiate the deduction or transaction in an audit under IRC 274. Consequently, the income to a stockholder/officer receives from his Corporation may be reclassified by the IRS as wages, where the intention was a loan or dividend. A lesson one does not want to learn the hard way.

I have a white paper that I share with my clients on this very important area of the Tax Code.