in-20251126-IR-045250649NRA: DEPARTMENT OF STATE REVENUE
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Business Owner provided some verifiable documents to substantiate the ordinary and necessary expenses paid or incurred during the taxable year in carrying on her business. As such, Business Owner was permitted to deduct the qualified expenditure.
The agency’s own summary, as published.
The rule, in full
1,911 words as published, November 26, 2025. View the original →
DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241168 Individual Income Tax For The Tax Year 2022 HOLDING Business Owner provided some verifiable documents to substantiate the ordinary and necessary expenses paid or incurred during the taxable year in carrying on her business. As such, Business Owner was permitted to deduct the qualified expenditure. ISSUE
I. Individual Income Tax — Burden of Proof.
Authority: I.R.C. § 61; I.R.C. § 62; I.R.C. § 162; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-8.1-5-1; IC 6-8.1-5-4; Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64 (Ind. 2009); Stinson Est. v. United States, 214 F.3d 846 (7th Cir. 2000); Express Scripts Inc. v. Indiana Dep’t of State Revenue, 170 N.E.3d 273 (Ind. Tax Ct. 2021); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Treas. Reg. § 1.162-1; Treas. Reg. § 1.162-17; Internal Revenue Service, Publication 535: Business Expenses (2022), https://www.irs.gov/pub/irs-prior/p535--2022.pdf. Taxpayer protests the proposed assessment of individual income tax for the tax year 2022. STATEMENT OF FACTS Taxpayer, an Indiana resident, works for a company located in a different state. In 2023, together with her spouse, Taxpayer filed Indiana resident income tax return (Form IT-40) to claim a refund for the tax year 2022. The Indiana Department of Revenue (“Department”) reviewed Taxpayer’s filings and requested that she provide additional documents to substantiate approximately $83,000 deductions claimed under her Schedule C, Profit or Loss From Business. Subsequently, the Department reviewed the documents submitted and disallowed the deductions claimed. That disallowance resulted in a proposed assessment. Taxpayer timely protested the assessment and requested that the Department make the final determination without an administrative hearing. This Letter of Findings ensues based on the documentation submitted and information available to the Department within the file.
I. Individual Income Tax — Burden of Proof.
DISCUSSION Taxpayer protested the assessment which was attributable to the Department’s disallowance of her business deduction under Schedule C to their federal return (1040). Taxpayer contended that “[my] business had [an approximately $76,000] loss and is based in Indiana.” The issue thus is whether Taxpayer demonstrated that the proposed assessment was incorrect.
A. The Law
IC 6-8.1-5-4 requires that “[e]very person subject to a listed tax must keep books and records so that the [D]epartment can determine the amount, if any, of the person’s liability for that tax by reviewing those books and records. The records [] include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks.” IC 6-8.1-5-4(a). The person also “must allow inspection of the books and records and returns by the [D]epartment or its authorized agents at all reasonable times.” IC 6-8.1-5-4(c). The Department “shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment” if it “reasonably believes that a person has not reported the proper amount of tax due[.]” IC 6-8.1-5-1(b). Crucially, “each tax year stands alone.” Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). Notices of proposed assessment issued by the Department are prima facie evidence that the Department’s assessments are correct; the burden of proving the assessment is incorrect rests with the taxpayer. IC 6-8.1-5-1(c). Poorly developed or non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep’t of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). When submitting evidence as part of his or her protest, the taxpayer needs to specify and explain the portions of the evidence that he or she believes to be relevant. As the Indiana Tax Court has previously noted (in the context of a summary judgment motion): “the Court will not consider” exhibits “on the off chance that it might find, on its own and undirected, some fact that supports” a claim, and “the Court is not required to search for specific facts on which” a party relies. Express Scripts Inc. v. Indiana Dep’t of State Revenue, 170 N.E.3d 273, 279 (Ind. Tax Ct. 2021). When an agency is charged with enforcing a statute, courts defer to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dep’t of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). In addition, Indiana imposes an adjusted gross income tax on all residents. IC 6-3-2-1. An Indiana resident taxpayer’s income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. The Indiana statute refers to the Internal Revenue Code to compute what is considered the taxpayer’s Indiana income tax. I.R.C. § 61(a) provides that gross income includes “all income from whatever source derived[.]” Thus, for both federal and Indiana income tax purposes, profits attributable to the taxpayer’s trade or business reported on Schedule C are income subject to income tax pursuant to I.R.C. § 61. The taxpayer may be able to claim certain deductions, such as deductions under I.R.C. § 62, to reduce his or her income from the income-producing activities attributable to his or her Schedule C. “Internal Revenue Code provisions dealing with deductions, exemptions, and exclusions are matters of legislative grace.” Stinson Est. v. United States, 214 F.3d 846, 848 (7th Cir. 2000). As such, the taxpayer bears the burden of proof to substantiate his or her claim for such deductions. To that end, the taxpayer is required to provide documentation to explain and support his or her claim. Where such a deduction is claimed, “the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law.” See Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 100 (Ind. Ct. App. 1974). I.R.C. § 62(a)(1), in part, provides that a taxpayer who is in a trade or business – with certain statutory and regulatory restrictions – may be able to claim deductions “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.” To qualify for such deduction, the taxpayer is required to substantiate the ordinary and necessary expenses paid or incurred during the taxable year in carrying on his or her trade or business. I.R.C. § 162(a). Treas. Reg. § 1.162-1(a) explains, in part: Treas. Reg. § 1.162-17(a) explains further, in part: Therefore, to properly claim the business expense deduction, a taxpayer is required to provide verifiable supporting documentation to demonstrate: (1) the activities of the taxpayer constitute a trade or business; (2) the expense to be deducted are paid or incurred during the taxable year in carrying on the trade or business; and (3) the expense itself is an ordinary and necessary expense in the context of the taxpayer’s trade or business. See Internal Revenue Service, Publication 535: Business Expenses (2022), available https://www.irs.gov/pub/irs-prior/p535--2022.pdf
B. The Department’s Initial Review and Proposed Assessment
The Department reviewed Taxpayer’s filings for the tax year 2022, including her Schedule C. The Department found that Taxpayer reported an approximately $7,000 income and deducted expenses under (i) Advertising, (ii) Car and truck expenses, (iii) Contract labor, (iv) Legal and professional services, (v) Office expense, (vi) Supplies, (vii) Taxes and licenses, and (viii) Other expenses. In a letter, the Department requested that Taxpayer provide verifiable records to substantiate the deductions, in part: After a review of the additional documents submitted by Taxpayer, the Department disallowed all of the Schedule C deduction because Taxpayer’s documents failed to support the deductions she claimed. The disallowance resulted in an assessment.
C. Taxpayer’s Protest
Taxpayer protested the assessment and stated the following: To support her protest, Taxpayer provided copies of the 2022 tax filings, PayPal Transaction History, some invoices, and some receipts. Taxpayer elected to use cash accounting method for tax reporting purposes.
D. Analysis and Conclusion
In this case, Taxpayer’s Schedule C claimed approximately $83,000 deduction, which consisted of: (i) Advertising, (ii) Car and truck expenses, (iii) Contract labor, (iv) Legal and professional services, (v) Office expense, (vi) Supplies, (vii) Taxes and licenses, and (viii) Other expenses. Based on her Schedule C, Taxpayer used the cash method accounting for tax reporting purposes. Under the cash accounting method, income is generally reported in the year that it is received; deductions are generally taken for the same year in which the related expenditures are actually paid. As such, for the purposes of tax year 2022 deduction, Taxpayer was not permitted to deduct expenses paid in years other than 2022. Thus, Taxpayer was not entitled to deduct expenses with respect to Invoice Numbers 971852297 and 969598593. Also as mentioned, Taxpayer was required to keep books and records, which included all source documents necessary to determine the amount of tax and also required to substantiate: (1) her activities constitute a trade or business, (2) the expenses she deducted were paid or incurred in carrying on her trade or business, and (3) the expense itself is an ordinary and necessary expense in the context of her trade or business. If the expenditure provides a substantial personal benefit to the business owner (or his or her family members) with only a limited or incidental connection to the business, the deduction could not be allowed. Taxpayer deducted approximately $5,500 under the advertising category. A further review of the supporting documents, the Department is prepared to agree that the following should be allowed: Date Reference Amount ($) 03/23/2022 559724481073 214.74 04/25/2022 559724545078 64.18 05/27/2022 578754021330 291.92 08/04/2022 31204 195.00 12/04/2022 I-971 133.00 01/25/2022 #977585815 5.99 01/21/2022 #976921675 79.00 01/19/2022 #976606249 30.91 12/01/2022 XXXXX91371 14.99 09/08/2022 #8185 4,042.46 Taxpayer deduced approximately $3,500 under the office expense category. Based on the verifiable documents, the Department is prepared to agree that Taxpayer provided sufficient documents to substantiate the following expense deduction and should be allowed: Date Reference Amount ($) 05/10/2022 VP_HXWCJDZQ 546.22 11/21/2022 279976269-001 244.32 12/21//2022 100001198689104 30.00 3. Other Expenses Taxpayer deducted approximately $57,000 under other expenses category. Upon review, the Department is prepared to agree that the following expense deduction should be allowed: Date Reference Amount ($) 01/08/2022 1318434845 97.14 03/15/2022 61054643 2,500.00 06/15/2022 66128808 1,250.00 07/15/2022 67674571 1,250.00 As to the remaining expenses, the Department was not able to verify or the documents provided failed to substantiate such expense as ordinary and necessary expense in the context of her trade or business. As mentioned, expenses must be reasonable and primarily associated with profit-motivated or business purposes and cannot be incidental or for personal benefits. Payments to attend a retreat or obtain personal career coaching were for personal benefits. To conclude, given the totality of the circumstances and based on verifiable documents provided, the Department is prepared to agree that Taxpayer met her burden of proof under IC 6-8.1-5-1, demonstrating that the assessment was incorrect. The above-mentioned expenses qualified as an ordinary and necessary expense for Taxpayer’s business and were deductible. But, Taxpayer was not permitted to deduct the remainder because she failed to provide verifiable documentation to substantiate that these payments were ordinary and necessary expenditures directly connected with or pertaining to her business. FINDING Taxpayer’s protest is partially sustained. August 1, 2025 Replaces Finding Document: New
Documents
- Full text (state register) · November 26, 2025
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