What documentation do I need to support charitable contribution and Schedule C business expense deductions if the Virginia Department of Taxation asks for it in an audit?

Plain-English summary

A married couple claimed itemized charitable contribution deductions, reported on federal Schedule A, and business expense deductions, reported on federal Schedule C, on their 2018 Virginia return. During an audit, the Department asked them to document those deductions. When they didn't respond, the Department disallowed both and assessed additional tax. On appeal, the couple argued they'd provided enough support, submitting copies of their federal Schedules A and C -- including Forms 8283 for their noncash donations -- but nothing more.

Virginia's income tax generally "conforms" to federal law, starting with federal adjusted gross income, and the Department normally relies on the accuracy of a taxpayer's federal return. But that reliance isn't automatic once there's a real dispute -- the Department can and will look behind the numbers, and under Virginia law an assessment is presumed correct, so the burden falls on the taxpayer to prove it wrong.

For the charitable contributions, federal rules require different levels of proof depending on the value of noncash property donated: under $500 needs at least a donee receipt describing the property and the date and place of the gift; between $500 and $5,000 additionally needs a written record of how and when the property was acquired and its cost basis; over $5,000 generally requires a qualified written appraisal. The couple's forms showed values suggesting some of their donated categories (clothing, lawn furniture, equipment, office equipment) likely crossed the $5,000 threshold once similar items are aggregated together, and the clothing donation alone clearly exceeded it. But they submitted no receipts at all -- not even the baseline requirement for the smallest category -- and no appraisals for the larger ones.

For the Schedule C business expenses, the Department focused on car and truck expenses, which require a mileage log or similar record showing the dates, times, locations, business purpose, and mileage of each trip, in order to separate business use from personal use. The couple submitted no mileage log whatsoever -- only their federal Schedule C and a bare statement that business use was under 40%, which the Department found doesn't substitute for actual records.

Because the couple didn't provide anything beyond the schedules already reflected in the numbers under dispute -- and had ignored two additional Department information requests sent during the appeal, one by email and one by letter -- the Department upheld the assessment. It noted that Virginia law bars courts from granting relief where an erroneous assessment traces to the taxpayer's own willful failure to provide required information. Still, the Department gave the couple one final chance: 30 days from the determination letter to submit adequate documentation, after which the assessment would be adjusted if warranted, or stand as correct if nothing more came in.

What this means for you

Anyone claiming noncash charitable contribution deductions

Keep the underlying paperwork, not just your federal forms. At minimum, get a receipt from the charity describing what you gave and when; for gifts over $500, also document how and when you acquired the property and its cost basis; for gifts over $5,000, including aggregated similar items given to one or more charities, get a qualified written appraisal. A completed Form 8283 alone, without the receipts and records behind it, is not enough if the Department asks.

Self-employed taxpayers deducting vehicle expenses on Schedule C

Keep a contemporaneous mileage log recording the date, time, location, business purpose, and mileage of each trip. A general estimate of your business-use percentage, without records to back it up, will not survive a documentation request.

Anyone under Virginia income tax audit

Respond to every Department documentation request, including follow-up requests made while an appeal is pending -- ignoring them can itself become part of the reason relief is denied, separate from the underlying substantiation question.

Common questions

Q: Does submitting my federal tax return schedules count as proof for a deduction the Department is questioning?
A: Not by itself -- the Department generally accepts a federal return's figures on their face, but once an item is actually being audited or appealed, the taxpayer must produce the underlying substantiation the IRS itself would require, such as receipts, records, or appraisals.

Q: How much documentation do I need for a noncash charitable donation?
A: It depends on value: under $500 needs a donee receipt; $500 to $5,000 needs that receipt plus a record of acquisition date and cost basis; over $5,000 generally needs a qualified appraisal, with similar items donated together aggregated for this purpose.

Q: What do I need to substantiate vehicle expenses claimed on Schedule C?
A: A mileage log or similar contemporaneous record showing the date, time, location, business purpose, and mileage of each trip -- a general percentage estimate of business use is not sufficient on its own.

Q: What happens if I don't respond to the Department's documentation requests during an audit or appeal?
A: The assessment is presumed correct and the burden is on you to disprove it; Virginia law also bars a court from granting relief where the erroneous assessment results from your own willful failure to provide required information.

Citations and references

• Va. Code § 58.1-301 (Virginia income tax terminology conforms to the Internal Revenue Code)
• Va. Code § 58.1-322.03(1) (itemized deductions, including charitable contributions)
• Va. Code § 58.1-219 (Department's authority to adjust FAGI and itemized deductions)
• Va. Code § 58.1-205 (assessment presumed correct; burden of proof)
• Va. Code § 58.1-310 (Department may require a taxpayer to produce federal returns and supporting schedules)
• Va. Code § 58.1-1826 (no judicial relief where an erroneous assessment traces to the taxpayer's willful failure to provide information)
• Treas. Reg. § 1.170A-13 (substantiation tiers for noncash charitable contributions)
• Treas. Reg. § 1.6001-1(a) (recordkeeping requirement)
• IRC § 274(d) (substantiation requirement for vehicle and travel expenses)
• P.D. 14-155 (8/28/2014) and P.D. 19-78 (7/29/2019) (charitable deductions require receipts or cancelled checks)

Subject

Deduction: Business Expense - Schedule C Documentation Requirements Deduction: Itemized - Inadequate Documentation

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-24

Original ruling text

March 1, 2023

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2018.

FACTS

The Taxpayers filed a Virginia resident income tax return for the 2018 taxable year, claiming charitable contributions as itemized deductions reportable on federal Schedule A and business expense deductions on federal Schedule C. Under audit, the Department requested documentation to support the deductions. When no response was received, the Department disallowed the deductions and issued assessments.

The Taxpayers appeal the assessment, contending they provided sufficient documentation. With their appeal, the Taxpayers submitted copies of their 2018 federal Schedules A and C, including federal Forms 8283 used to report noncash charitable contributions.

DETERMINATION

Conformity

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia .

As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. The Department, however, retains the authority to adjust the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219.

Itemized Deductions

Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. These deductions include those for real estate taxes, home mortgage interest, personal property taxes, medical expenses, and charitable contributions, provided they are claimed in accordance with the IRC and its related regulations.

The auditor requested that the Taxpayers provide documentation supporting the charitable contribution deduction claimed on their 2018 Schedule A. The request clearly indicated the documentation required to substantiate the deduction. Deductions for charitable contributions are allowable only when they can be substantiated through items such as receipts or cancelled checks. See Public Document (P.D.) 14-155 (8/28/2014) and P.D. 19-78 (7/29/2019).

Under IRS regulations, substantiation requirements for gifts of property other than money vary depending on the amount of the deduction claimed. The regulations set up three tiers of deductions, for amounts up to and including $500, greater than $500 but less than $5,000, and greater than $5,000, and require greater substantiation for each tier. See Treas. Reg. § 1.170A-13. For purposes of determining the applicable threshold values, property and all similar items of property donated to one or more donees are treated as one property. See IRC § 170(f)(11)(F).

Under Treas. Reg. § 1.170A-13(b)(1), for items valued below $500, a taxpayer need only have a receipt from the donee containing the name and address of the donee, the date and place of the contribution, and a reasonably detailed description of the property donated.

Treas. Reg. § 1.170A-13(b)(3) provides that in addition to the receipt required by Treas. Reg. § 1.170A-13(b)(1), the donation of non-cash property with a value between $500 and $5,000 necessitates a written record of the manner and approximate date of acquisition and the cost basis.

Under Treas. Reg. § 1.170A-13(c)(2), if a taxpayer claims a deduction for a property valued in excess of $5,000, the taxpayer generally must obtain a qualified appraisal and attach an appraisal summary to their return.

The Taxpayers claimed deductions for donations of clothing, lawn furniture, equipment, and office equipment. With the exception of the clothing, it is unclear which thresholds applied, although it is possible based on how the property categories were reported on the Forms 8283 that the other categories also exceeded the $5,000 threshold after applying the aggregation rule of IRC § 170(f)(4)(5). In any event, the Taxpayers provided no additional information regarding their charitable contribution deductions with their appeal other than copies of their federal schedules. While the date of acquisition and cost basis for the donations were listed on the federal Forms 8283, no receipts were provided, which is the minimum requirement for any noncash charitable contribution. Further, no appraisals were submitted, and at a minimum, the deduction for clothing claimed by the Taxpayers far exceeded $5,000.

Schedule C Expenses

Under IRC § 162, taxpayers are permitted to deduct all of the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Such expenses must be directly connected with or pertaining to the taxpayer’s trade or business. See Treas. Reg. § 1.162-1.

Schedule C is used to report income or loss from a business, including a sole proprietorship. Income from the business is offset by expenses. This income or loss is reported on a taxpayer’s federal income tax return and thus is reflected in FAGI reported on the Virginia return.

The auditor requested that the Taxpayers provide documentation supporting the expenses claimed on Schedule C for the 2018 taxable year. The request clearly indicated the documentation required to substantiate each type of expense.

To substantiate car and truck expenses, the auditor requested, among other things, a mileage log. A mileage log show the dates, times and locations of travel as well as the business purpose and mileage. A mileage log or similar documentation is required to properly allocate miles driven between personal and business use. See IRC § 274(d) and IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. The Taxpayers, however, did not submit any mileage logs. The Taxpayers did not submit any documentation other than their federal Schedule C and a statement that business use was less than 40%.

CONCLUSION

Taxpayers must maintain records sufficient to allow the IRS to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Virginia Code § 58.1-310 provides:

Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof of any individual, estate, trust, partnership or corporation in order properly to audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof.

Under the provisions of Virginia Code § 58.1-205, in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayers to show that the assessment was erroneous. In this case, the Taxpayer did not provide any substantiation for the deductions other than the federal schedules on which the deductions were reported.

In addition to the request for information made by the auditor, two additional requests for information were made while the appeal was under review, one by email on September 29, 2022, and then by letter dated November 1, 2022. To date, the Department has not received the information requested. Further, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

Sufficient documentation has not been provided by the Taxpayers to support the deductions claimed for charitable contributions and business expenses. Accordingly, there is no basis to abate the Department’s assessment for the 2018 taxable year. I will, however, give the Taxpayers one last opportunity to provide adequate documentation. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *. Upon receipt, the documentation will be reviewed and the assessments may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessments will be considered correct.

The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4328.X

Related Documents

14-155

19-78