Introduction

Most taxpayers assume that if an expense is “ordinary and necessary,” it is deductible. While that is generally true under IRC § 162, there is a much harsher rule lurking beneath the surface—one that overrides common sense and even credible testimony.

That rule is IRC § 274(d), commonly referred to as the strict substantiation rule, and it applies to some of the most commonly audited deductions: travel, meals, entertainment (to the extent still relevant), and listed property such as vehicles.

Unlike most tax rules, this one is unforgiving: if you do not have the right records, you lose the deduction—period.

The Statutory Rule: No Records, No Deduction

The Internal Revenue Code states:

“No deduction or credit shall be allowed… unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement…”
— IRC § 274(d)

This applies specifically to:

• Travel expenses (including meals and lodging)
• Meals (subject to current limitations under § 274(n))
• Listed property (e.g., vehicles, computers historically, etc.)

The key phrase here is “adequate records”—and courts interpret this strictly.

Treasury Regulations: What Counts as “Adequate Records”?

The IRS expands on this in the regulations:

“The taxpayer shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record… and documentary evidence… which… establish each element of an expenditure.”
— Treas. Reg. § 1.274-5T(c)(2)

To properly substantiate, you must document:

1. Amount of the expense
2. Time and place
3. Business purpose
4. Business relationship (for meals/entertainment)

This is not optional. Missing even one element can be fatal.

Why This Rule Is So Dangerous: No “Cohan Rule” Rescue

In most tax situations, courts may estimate expenses under the famous Cohan v. Commissioner rule if records are incomplete.

Not here.

The regulations explicitly reject estimation:

“Section 274(d) supersedes the Cohan rule.”
— Treas. Reg. § 1.274-5T(a)

That means:

• No estimates
• No approximations
• No “reasonable guesses”

If your client says, “I drove about 10,000 miles for business,” but has no mileage log—that deduction is gone.

Real-World Applications (Where Clients Get Burned)

1. Vehicle Deductions

Clients love to claim:

• Mileage
• Gas
• Repairs

But without:

• A contemporaneous mileage log
• Dates, locations, and purposes

→ The IRS disallows everything.

2. Business Meals

Even after TCJA changes, meals are still partially deductible.

But you must show:

• Who attended
• What business was discussed
• Date and location

A credit card statement alone is not enough.

3. Travel Expenses

Airfare + hotel may be easy to prove, but:

• Why were you there?
• What business activity occurred?

Without that narrative connection, deductions can fail.

What “Contemporaneous” Really Means

The regulations emphasize that records should be made:

“At or near the time of the expenditure or use.”
— Treas. Reg. § 1.274-5T(c)(2)(ii)

Translation:

• Reconstructing logs at year-end = weak evidence
• Real-time tracking = strong evidence

This is why apps, calendars, and mileage trackers are so valuable.

Practical Advice for Taxpayers and Advisors

Minimum Best Practices:

• Use a mileage tracking app (automatic GPS logs)
• Keep digital receipts (organized by date)
• Add calendar entries describing business purpose
• Maintain a simple expense log (even Excel works)

For Higher-Risk Clients:

• Real estate agents
• Contractors
• Consultants
• Anyone with heavy vehicle use

→ You should proactively enforce documentation habits early in the year.

Strategic Insight: This Is an Audit Lever

From a practitioner standpoint, § 274(d) is one of the IRS’s most powerful audit tools because:

• It bypasses credibility arguments
• It eliminates judicial discretion
• It creates a binary outcome: substantiated or not

In other words, it turns gray areas into black-and-white disallowances.

Conclusion

IRC § 274(d) is one of the most underestimated dangers in tax compliance. It does not matter how legitimate the expense is—without proper documentation, the deduction fails.

For taxpayers, this means discipline.

For advisors, this means education and systems.

Because when it comes to § 274(d), the rule is simple:

If you didn’t document it, it didn’t happen.

At Dino Tax Co, we help clients navigate tax matters ranging from unfiled returns to IRS letters and levies and everything in between with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call or text (713) 397-4678 or email davie@dinotaxco.com. We’re here to help you take the next step.