When Business Deductions Disappear: Lessons from a U.S. Tax Court Case for Global Entrepreneurs

Running a business across borders can be exciting and profitable — but when tax compliance is handled casually, it can also be very expensive. A recent decision of the United States Tax Court involving a married couple and their Malaysian engineering business is a powerful reminder of how quickly business expense deductions can be denied when ownership, entity classification, and documentation are not handled properly.

In Intan N. Ismail and Mohd Razi Abd Rahim v. Commissioner (decision issued November 29, 2022), the Court upheld the U.S. tax authority’s denial of several years of Schedule C loss deductions and later-year business expense deductions. The case illustrates what can go wrong when:

• You operate through a foreign company but claim individual business losses

• You do not properly elect entity classification for tax purposes

• You treat commuting and partially personal international travel as deductible business expenses

• You cannot substantiate your expenses with reliable, contemporaneous records

For globally active entrepreneurs — including those in the Caribbean and wider diaspora who own companies abroad or work between countries — this case is a cautionary roadmap. It shows exactly how tax authorities think, what they look for, and what you need to do differently if you want your deductions to stand up under scrutiny.

Dawgen Global shares this analysis to help business owners better understand the risks and to highlight why proactive, professional tax advisory support is essential, especially for cross-border structures.

1. The Story in Brief: Foreign Company, Local Deductions

The taxpayers in this case were a married couple. One spouse lived and worked in the United States; the other was connected to a Malaysian company, RNR Global Resources Sendirian Berhad (RNR), set up as a private limited liability company under Malaysian law.

On their joint U.S. federal returns for 2012–2014, they filed Schedule C (Profit or Loss From Business) reporting no gross receipts but large losses supposedly arising from RNR’s business activities. They treated RNR as if it were a sole proprietorship, allowing the losses to flow directly onto their personal tax return.

The tax authority disagreed and issued deficiency notices disallowing the Schedule C losses. It argued that:

1. Neither spouse actually owned RNR during the earlier years; and

2. RNR, under U.S. tax rules, was a foreign corporation, not a sole proprietorship or disregarded entity.

For 2015, the couple did report some gross receipts from RNR and a long list of business expenses (vehicle, travel, meals, and entertainment). The authority allowed some expenses but disallowed a significant portion of car, travel, and meals on the basis of poor substantiation and personal-use elements.

The Tax Court largely agreed with the tax authority.

2. Ownership Matters: You Cannot Deduct What You Do Not Own

A central question in the early years was whether the taxpayers actually owned RNR during 2012–2014.

Key points the Court focused on:

• Original incorporation documents: RNR was formed in 2008 by other individuals (including the husband’s father) as shareholders and directors.

• Contemporaneous directors’ report for 2013: This report listed the couple as directors, but clearly showed that the father owned all 500,000 shares. The husband even signed a statement attesting to the accuracy of this report.

• Later “revised” documents: Only after the tax authority challenged the ownership did the husband produce a “revised” directors’ report and a share-swap narrative indicating that he supposedly owned half the shares earlier.

The Court was not persuaded. It placed greater weight on:

• Contemporaneous records (created at the time events occurred)

• The lack of proof of any actual payment or consideration for the purported share transfer

• Contractual terms in the share-swap agreement indicating that shares would only be relinquished after certain business conditions were met — which had not happened in the years in question

Lesson for business owners:

If you claim business losses from a company, you must be able to prove that you actually owned the business during the relevant period — and your documentation must be credible, contemporaneous, and consistent.

Board minutes, share registers, shareholder agreements, and official filings need to tell the same story. “Back-dated” or revised documents produced only after a tax challenge are often viewed with suspicion.

3. Entity Classification: Foreign Company ≠ Personal Schedule C

Even if ownership had been clearly established, another major problem remained: how RNR should be treated for U.S. federal income tax purposes.

RNR was organized as a Sendirian Berhad, a private limited liability company under Malaysian law. Under U.S. “check-the-box” rules:

• Foreign entities with limited liability are generally treated as corporations by default, unless a special election is made to treat them differently.

• To change this default, the entity generally must file Form 8832 (Entity Classification Election).

• U.S. persons with certain interests in foreign disregarded entities or branches may also need to file Form 8858.

In this case:

• RNR did not file Form 8832.

• The couple did not file Form 8858.

• The entity’s own memorandum of association clearly confirmed that all members had limited liability.

Therefore, the court concluded that RNR was, by default, a foreign corporation. That means:

• Its profits and losses belong to the company, not directly to the individual shareholders.

• The individuals cannot simply place corporate losses on their Schedule C as if the business were a sole proprietorship.

Result: The Schedule C losses for 2012–2014 were denied in full.

Key takeaway:

The legal form of your entity abroad, combined with the classification rules of the tax authority in your country of residence, will determine whether you can personally deduct its profits or losses.

For Caribbean and international entrepreneurs, this is particularly important when:

• You own companies incorporated in other jurisdictions (e.g., Delaware, BVI, Dubai, the UK, Malaysia).

• You operate through local limited liability companies but treat them informally as “your personal business”.

Getting entity classification wrong can result in disallowed deductions, penalties, and increased scrutiny of your returns.

4. Substantiation: Records Are the Backbone of Deductions

For 2015, the issue was less about entity classification and more about substantiation — proving that claimed expenses were genuine business expenses and not personal in nature.

The law generally allows deductions for expenses that are:

• Ordinary and necessary in carrying on a trade or business, and

• Properly documented and substantiated.

Some categories, such as vehicles, travel, and meals, are subject to strict substantiation rules. It is not enough to say, “I know I spent it for business.” Authorities can demand:

• Dates and locations

• Amounts

• Business purpose

• Persons met or entertained

If you cannot provide this, they can deny the deduction.

Let’s see how this played out.

5. Vehicle Expenses: Commuting vs Business Use

The couple claimed substantial car and truck expenses based on mileage logs. But several problems emerged:

1. Mileage logs built from estimates, not contemporaneous records

   • Logs were reconstructed later instead of being kept in real time.

   • Authorities and the Court are naturally skeptical of “estimated” logs.

2. Patterns that look like commuting, not business travel

   • The husband’s log showed driving the same distance six days a week between home and another city.

   • The wife’s log similarly showed repeated daily travel between her home and her employer’s office.

Tax laws in many jurisdictions (including the U.S.) treat commuting — travel between home and your regular place of work — as personal, non-deductible expense, even if you are self-employed or a director.

3. Insufficient evidence of business purpose for longer trips

   • The husband’s mileage log also included long-distance drives (e.g., trips to Singapore).

   • While there may have been some business activity, there was inadequate, specific documentation of the business reasons for each trip.

Consequently, the Court found that:

• Much of the driving was commuting or partly personal.

• The taxpayers had not satisfied strict substantiation requirements.

All claimed vehicle expenses in dispute were disallowed.

Practical guidance:

If you claim vehicle expenses:

• Maintain a contemporaneous mileage log (digital apps make this easier).

• Record:

  • Date

  • Starting and ending odometer readings or distance

  • Destination

  • Business purpose

• Separate commuting from genuine business travel.

• Be prepared to show how you distinguished personal and business use.

6. Travel, Meals, and Lodging: When “Business Trips” Are Really Family Visits

The couple also claimed significant expenses for international travel, meals, and lodging — mainly related to trips the wife made between the United States, Singapore, and Malaysia.

They produced:

• Airfare receipts showing real travel costs

• General explanations of vendor meetings, demonstrations, and a pilot program with law enforcement in Malaysia

However, they did not produce:

• Detailed itineraries showing business meetings by date, time, and place

• Names and roles of people met

• Documentation linking specific trips to specific contracts or negotiations

• Evidence clearly separating business days from personal days

Moreover:

• Their children and parents were living in Malaysia.

• Visits to family were routinely built into the trips.

• Over roughly eight months, the wife spent close to 70 days abroad.

The Court concluded that:

• There may have been some business conducted, but

• The primary purpose of the trips appeared to be personal — visiting family.

Under such circumstances, the law can deny:

• Airfare and other travel costs, if the trip is primarily personal

• Meal and lodging deductions, especially where no receipts or detailed records exist

The couple’s claimed deductions for airfare, meals, and lodging were therefore disallowed.

Lessons for business owners and executives:

If you want to deduct international travel:

• Ensure the trip’s primary purpose is business, and you can prove it.

• Keep:

  • Conference registrations

  • Email invitations and meeting agendas

  • Contracts or proposals discussed on the trip

  • Notes or minutes from key meetings

• Clearly separate and document days that are purely personal.

• If family members travel with you:

  • Their costs are usually not deductible unless they are employees with bona fide business roles and you can prove it.

7. Common Pitfalls Highlighted by the Case

This case is a real-world checklist of what not to do. Key pitfalls include:

1. Treating a foreign limited company as a personal sole proprietorship

   • Ignoring default classification rules and failing to make proper elections.

2. Poor alignment between tax returns and accounting records

   • Reported expenses on Schedule C did not match the couple’s own books.

   • Inadequate internal consistency is a red flag for tax authorities.

3. After-the-fact documentation

   • Revised directors’ reports prepared only after the tax authority challenged ownership were discounted.

   • Reconstructed mileage logs and estimated figures lack credibility.

4. Blending personal and business life without clear boundaries

   • Using travel partly to see family and then claiming most or all of the cost as business.

   • Treating commuting as a deductible business cost.

5. Underestimating the strictness of substantiation rules

   • Especially for vehicles, travel, meals, and entertainment, the evidentiary bar is high.

   • Authorities can and do deny otherwise legitimate expenses if the documentation is weak.

8. How Dawgen Global’s Tax Advisory Team Can Help

For entrepreneurs, executives, and professionals operating across borders — particularly those in the Caribbean with links to the U.S., UK, Europe, Asia, or Latin America — these issues are not theoretical. They are everyday reality.

Dawgen Global’s Tax Advisory Services can help you:

1. Choose and Structure the Right Entity

• Advise on the tax implications of foreign corporations, partnerships, and disregarded entities.

• Guide you through classification elections and form requirements in the relevant jurisdiction(s).

• Align your legal structure with your commercial goals and tax efficiency objectives.

2. Clarify Ownership and Governance

• Ensure your share registers, directors’ reports, resolutions, and shareholder agreements are consistent and defensible.

• Help prevent the sort of conflicting documentation that undermined the taxpayers in this case.

3. Build Robust Documentation Systems

• Design practical processes for:

  • Mileage tracking

  • Travel approvals and trip documentation

  • Expense claims with supporting receipts and business purpose notes

• Implement digital tools to keep your records contemporaneous and audit-ready.

4. Separate Business and Personal Expenses

• Help you design policies that clearly separate commuting, private travel, family-related costs, and genuine business expenses.

• Develop travel and entertainment policies that comply with the requirements of your tax authority.

5. Prepare and Review Returns with a Cross-Border Lens

• Coordinate tax planning and compliance across multiple jurisdictions to reduce the risk of double taxation or disallowed deductions.

• Review existing practices to identify exposure and opportunities for improvement.

6. Support You in Audits and Tax Disputes

• Assist in preparing responses, organizing evidence, and engaging with tax authorities.

• Provide technical arguments grounded in statute, case law, and best practice.

9. Don’t Let Poor Records Erase Real Business Effort

The couple in this U.S. Tax Court case may well have been working hard on a genuine business. But:

• Unclear ownership,

• Misunderstood entity classification, and

• Weak documentation

meant that their claimed deductions didn’t survive scrutiny. The result: several years of denied losses and disallowed expenses — and a much higher tax bill than they expected.

In a world where tax authorities increasingly share information and apply sophisticated risk-based audit techniques, “casual” tax compliance is no longer an option, especially for global entrepreneurs.

Next Step: Protect Your Deductions, Protect Your Business

If you:

• Operate a business across borders

• Own or plan to form companies in multiple jurisdictions

• Are unsure whether your travel, vehicle, or overseas expenses are properly documented and deductible

then now is the time to act — before a tax audit forces the issue.

Partner with Dawgen Global’s Tax Advisory Services team to:

• Review your current structures and filings

• Implement practical record-keeping systems

• Optimise your tax position while staying compliant

👉 Let’s have a conversation about your tax strategy and documentation framework today.
Dawgen Global is ready to help you make Smarter and More Effective Decisions about your tax affairs — and to ensure that the deductions you earn through hard work are properly protected.

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