What is Internal Revenue Code (IRC) 274?

March 2nd, 2014 at 2:39 PM

If you are a business owner, you need to be familiar with IRC 274. This very important code section is the “substantiation requirement,” meaning certain deductions that you claim on your business tax returns MUST be supported with appropriate documentation.

For example, if you claimed a tax deduction for auto expenses last year, you would need to have a supporting mileage log that “substantiates” your claim. If you deducted travel expenses, you need to have kept receipts of your stay, and a tax diary noting the business purpose. Without this documentation, these deductions will be disallowed in case of an IRS audit.

If you operate as a Corporation, or as a Limited Liability Company, IRC 274 is of extreme importance. Substantiation includes resolutions and annual minutes. If you claimed a dividend or distribution from your business, you need a resolution. Or, if you loaned money to your company, you need a resolution as well. Why?

If you do not maintain this type of record keeping for the above referenced items,  you will not be able to “substantiate” the deduction or loan requirements as specifically stated by the Internal Revenue Service. This can result in deductions being disallowed and loans being reclassified by the IRS as wages. Either, will cost you.

I have written White Paper on the very important topic that I share with my clients.