Taxpayer’s right to deduct travel expenses for a side gig upheld by Tax Court
The U.S. Tax Court has issued a decision upholding a taxpayer’s right to claim vehicle and travel expenses related to a side gig that produced little income relative to the claimed business deductions. The taxpayer brought the court challenge after the IRS disallowed $14,056 in vehicle and travel expenses for a side business that only generated $1,200 in income during the year at issue.
Key to the Tax Court’s reasoning for siding with the taxpayer in its July ruling in Gonzalez vs. Commissioner, T.C. Summary Opinion 2022-13 (2022), was the fact the IRS allowed the taxpayer to deduct other expenses related to her business and her substantiation of the claimed expenses. It noted that the IRS allowed the taxpayer to claim $15,800 in expenses for other business property, $4,000 for utilities, and $140 for advertising during the same year it disallowed the vehicle and travel expenses.
Taxpayer made weekend trips for business
The taxpayer, Maribel Gonzalez, moved from Los Angeles to Palo Alto, Calif., in 2014 and was employed full time by Stanford University. That year she also took an interest in starting a Los Angeles business as a wholesaler designing children’s clothing. In 2014 Gonzalez began working with a Los Angeles patternmaker to make patterns and samples. In 2015 she participated in a sample sale and had $1,200 in gross receipts.
In 2015 Gonzalez made the 400-mile trip to the patternmaker’s workshops in the Los Angeles area about every other weekend. During these trips, she would review the patternmakers’ progress, provide supplies, and give additional instructions. During at least one of these trips, Gonzalez offered her samples in a Los Angeles wholesale market. While Gonzalez stayed with family and friends in the Los Angeles area while on her trips, her primary purpose was to engage in wholesale clothing design.
IRS disallowed expenses for travel
Gonzalez included a Schedule C (Form 1040),Profit or Loss from Business (Sole Proprietorship), with her 2015 federal return where she reported gross receipts of $1,200 and $40,496 in expenses. Those expenses included $12,256 in car and truck expenses; $1,800 in travel expenses; and $6,500 in other expenses that the IRS disallowed. However, the IRS allowed the other $19,940 in claimed expenses.
In October 2018, the IRS issued Gonzalez a notice of deficiency in which it determined that she owed $5,499 in federal income tax for 2015 and imposed a §6662(a) accuracy-related penalty of $1,100.
Taxpayer was engaged in a trade or business
The Tax Court found that Gonzalez’s tax home was in Palo Alto and that she was engaged in a trade or business relating to the production of children’s clothing in Los Angeles during 2015. It noted that she produced a mileage log that documented each trip along with vehicle service receipts to corroborate the miles driven. The court added that Gonzalez testified credibly as to the business nature of her trips.
The Tax Court observed that the IRS allowed Gonzalez to claim business deductions for other items on her Schedule C such as the rental or leasing of business property, advertising and utilities. Since the IRS allowed these business expenses claimed for the business to be deducted, the Tax Court said the substantiated vehicle expenses were deductible as ordinary and necessary business expenses.
Gonzalez was also entitled to deduct $1,800 in travel expenses for 2015, the Tax Court said. It explained that she submitted a log estimating her claimed meals and incidental expenses using the federal standard per diem rate for Los Angeles. The court said Gonzalez was not required to strictly substantiate her expenses under §274(d) when they were computed using the federal per diem rate.
Finally, the Tax Court upheld the IRS’s disallowance of Gonzalez’s claimed $6,500 deduction for other business expenses. While she stated the claimed expenses were for payments to the patternmaker, the court said it was unable to determine the time or purpose of the payments.