Business Tax Preparation · Advising the business taxpayer

Record-keeping requirements (e.g., mileage log, accountable plans)

Two record-keeping regimes operate here and they do different jobs. The general one under IRC § 6001 asks for records sufficient to establish what is on the return. The special one under IRC § 274(d) makes records a condition of the deduction, so that an expense which certainly happened is disallowed if it was not recorded properly. Everything difficult in this topic comes from the second.

The rule

The general standard. permanent books of account or records, inventories included, sufficient to establish the amount of gross income, deductions, credits or other matters required to be shown on the return^TY2026 (Reg. § 1.6001-1(a)).

The special standard. no deduction or credit is allowed for any traveling expense, any gift expense, or any listed property unless the taxpayer substantiates by adequate records or sufficient corroborating evidence the amount, the time and place of the travel or date and description of the gift, the business purpose, and the business relationship of the person receiving the benefit^TY2026 (IRC § 274(d)) — and the elements are prescribed. For travel, for travel away from home the elements are the amount of each separate expenditure, the dates of departure and return with the number of days away on business, the destination by name, and the business reason or benefit expected^TY2026 (Reg. § 1.274-5T(b)(2)). A vehicle is listed property within IRC § 280F(d)(4), so the same regime applies to a mileage log.

What “adequate records” means. adequate records means an account book, diary, log, statement of expense, trip sheet or similar record together with documentary evidence which, in combination, establish every required element — the two complementing each other rather than duplicating^TY2026 (Reg. § 1.274-5T(c)(2)(i)), and the timing requirement that gives the mileage log its character: each element must be recorded at or near the time of the expenditure or use, meaning at a time when the taxpayer has full present knowledge of the amount, time, place, business purpose and business relationship^TY2026 (Reg. § 1.274-5T(c)(2)(ii)(A)).

And if the records fall short. a taxpayer who cannot show substantial compliance with the adequate records requirement must establish each element by their own written or oral statement containing specific detail *and* by other corroborative evidence — direct evidence where the element is a gift description, cost, amount, time, place or date^TY2026 (Reg. § 1.274-5T(c)(3)(i)). Note the conjunction: a statement and corroboration, not one or the other.

Accountable plans have three requirements. an arrangement is an accountable plan only if it meets all three requirements — business connection, substantiation to the payor, and the return of amounts in excess of substantiated expenses — and failing any one of them makes the whole arrangement a nonaccountable plan^TY2026 (Reg. § 1.62-2(c)(2)(i) and (c)(3)(i)). They are:

• Business connection. the arrangement must provide advances, allowances or reimbursements only for business expenses allowable as deductions and paid or incurred by the employee in performing services as an employee — payment may come from the employer, its agent, or a third party for whom the employee performs the services^TY2026 (Reg. § 1.62-2(d)(1)).
• Substantiation to the payor. each expense must be substantiated to the payor within a reasonable period; for travel, entertainment, a passenger automobile or other listed property, information sufficient to satisfy IRC § 274(d) itself must be submitted to the payor, not merely retained by the employee^TY2026 (Reg. § 1.62-2(e)).
• Return of excess, within a reasonable period, with two safe harbours — an advance made within 30 days of when an expense is paid or incurred, an expense substantiated within 60 days after it is paid or incurred, and an amount returned within 120 days after it is paid or incurred are each treated as occurring within a reasonable period of time^TY2026 (Reg. § 1.62-2(g)(2)(i)) and alternatively, where the payor gives employees a statement no less often than quarterly showing amounts paid in excess of substantiated expenses and asking for substantiation or return within 120 days of the statement, action within that period is timely^TY2026 (Reg. § 1.62-2(g)(2)(ii)).

Two rules about failure. where the arrangement itself qualifies but the employee fails to return an excess within a reasonable period, only the amounts not in excess of the substantiated expenses are treated as paid under an accountable plan — the rest becomes wages^TY2026 (Reg. § 1.62-2(c)(2)(ii)), and an employee paid under a nonaccountable plan cannot compel the payor to treat the payments as accountable by voluntarily substantiating the expenses — the arrangement’s character is fixed by the arrangement, not by the employee’s conduct^TY2026 (Reg. § 1.62-2(c)(3)(i)).

Current figures

How it works in practice

A mileage log is not evidence, it is the deduction. Because a vehicle is listed property, IRC § 274(d) applies and the absence of records is fatal rather than merely unhelpful. The log must show the elements — mileage, date, destination and business purpose — and must be written at or near the time of the use, meaning while the driver has full present knowledge of them. A log reconstructed in March from a diary and a calendar is not an adequate record, though it may serve as part of the alternative route.

That alternative route is much harder than it sounds. Reg. § 1.274-5T(c)(3)(i) requires the taxpayer’s own detailed statement and other corroborative evidence, and where the element is a cost, amount, time, place or date the corroboration must be direct evidence rather than circumstantial. A credit card statement establishes an amount and a date; it says nothing about business purpose, so it cannot corroborate the element most often in dispute.

Get the three accountable plan conditions in the right order and treat them as conjunctive. An arrangement failing any one of them is nonaccountable in its entirety, which means every payment under it is wages: reported on Form W-2, subject to withholding and to both halves of FICA, and — since the employee’s offsetting deduction is a suspended miscellaneous itemized deduction — with no deduction to offset it. The cost of a plan defect is therefore the full amount, not a timing difference.

Substantiation must go to the payor. This is where well-run businesses fail. An employee who keeps immaculate receipts in a drawer has not satisfied Reg. § 1.62-2(e); the information has to be submitted to the employer, and for expenses governed by IRC § 274(d) it must be information sufficient to satisfy § 274(d) itself.

Use a safe harbour rather than arguing about reasonableness. The fixed date method gives clean numbers — 30 days for an advance, 60 for substantiation, 120 for a return — and the periodic statement method substitutes a quarterly statement plus 120 days. Neither is compulsory, but a plan written to one of them is very hard to attack.

A partial failure does not destroy the plan. Where the arrangement itself qualifies and the employee simply fails to return an excess, only the excess becomes wages. That is a materially better outcome than a defective arrangement, and it is the reason to fix the plan document rather than police individual employees.

Scenarios

Traps

How this has changed

The substantiation regime has been stable since IRC § 274(d) was enacted in 1962 and the temporary regulations were issued in 1985 — they remain temporary forty years later, which is itself worth knowing, since a source describing them as proposed or as superseded is wrong.

What changed the economics was the suspension of miscellaneous itemized deductions. Before 2018 an employee reimbursed under a nonaccountable plan had wages and an offsetting deduction, subject to the two percent floor, so a plan defect was expensive but not catastrophic. Since the suspension there is no offsetting deduction at all, and Pub. L. 119-21 § 70110(a) made the suspension permanent while § 70110(b)(2) moved it from IRC § 67(g) to IRC § 67(h). A defective accountable plan is now a straightforward transfer of the whole reimbursement into taxable wages.

The record-keeping medium has moved without the standard moving. Electronic logs, mobile applications that capture location and time automatically, and expense platforms that collect receipts at the point of sale all satisfy the contemporaneous requirement better than a paper diary ever did — the regulation asks when the record was made, not what it was made on.

Nothing in the post-2024 legislation alters Reg. § 1.62-2 or the § 274(d) substantiation requirements.

Exam focus

Know the three accountable plan requirements by name, that they are conjunctive, and that failing one makes the entire arrangement nonaccountable. Then know the one softening rule: where the arrangement qualifies and only the employee fails to return an excess, only the excess is wages.

Memorise the fixed date safe harbour numbers — 30 days for an advance, 60 for substantiation, 120 for a return — and know that the periodic statement alternative is a quarterly statement plus 120 days.

For substantiation, know that IRC § 274(d) makes records a condition, know the four travel elements, and know that a vehicle is listed property so the same regime governs a mileage log.

The contemporaneous requirement is the highest-yield point on the record-keeping side. Records must be made at or near the time of the use, when the taxpayer has full present knowledge, so a reconstruction fails the adequate records test whatever its accuracy.

Finally, remember that the fallback requires both a detailed statement and corroborative evidence, with direct evidence needed for cost, amount, time, place and date.

Check yourself

1. An employer reimburses actual expenses on receipts, requires the receipts within 45 days, and requires unused advances back within 90 days. Is the plan accountable?

Answer: Yes, and comfortably. Business connection is met by reimbursing only deductible business expenses incurred in performing services; substantiation is required to the payor within 45 days, inside the 60-day fixed date safe harbour; and excess is returned within 90 days, inside the 120-day safe harbour. Note the safe harbours are not the standard — the standard is a reasonable period, and the safe harbours merely deem certain periods reasonable — so an arrangement outside them is not automatically bad, only harder to defend.

2. A sole proprietor claims 14,000 business miles supported by a spreadsheet showing total miles per month with no destinations or purposes. Is the deduction allowed?

Answer: No. A vehicle is listed property under IRC § 280F(d)(4), so IRC § 274(d) applies and no deduction is allowed without substantiation of each element. A monthly total records the amount and nothing else — no date, no destination, no business purpose. The taxpayer could try Reg. § 1.274-5T(c)(3)(i), but that requires a detailed statement plus corroborative evidence, and for the missing date and place elements the corroboration must be direct. A spreadsheet of totals supports neither route.

3. An employee under a nonaccountable plan produces perfect receipts at the year end and asks the employer to reclassify the payments. Can the employer agree?

Answer: No. Reg. § 1.62-2(c)(3)(i) provides that where an arrangement does not satisfy one or more of the requirements, all amounts paid under it are treated as paid under a nonaccountable plan, and that an employee cannot compel the payor to treat the payments as accountable by voluntarily substantiating the expenses. The character is fixed by the arrangement. The employer’s remedy is to amend the plan prospectively — receipts produced after the fact do not cure a plan that never required them.

4. Why does a defective accountable plan cost more now than it did before 2018?

Answer: Because the offsetting deduction has gone. Payments under a nonaccountable plan are wages, and an employee could formerly deduct the underlying business expenses as miscellaneous itemized deductions subject to the two percent floor, so the plan defect produced a partial mismatch. The suspension of those deductions — made permanent by Pub. L. 119-21 § 70110(a), which also moved it from IRC § 67(g) to § 67(h) — removes the deduction entirely, so the whole reimbursement is taxed with nothing against it, and both halves of FICA apply on top.

5. What does “at or near the time of the expenditure or use” actually require?

Answer: That the element be recorded when the taxpayer has full present knowledge of it — the amount, time, place, business purpose and business relationship — rather than within any fixed number of days. Reg. § 1.274-5T(c)(2)(ii)(A) defines it that way, and adds that an expense account statement transcribed from a contemporaneous log counts as contemporaneous if submitted to the employer or client in the regular course of good business practice. So a weekly write-up from daily notes is fine; an annual reconstruction from other sources is not.