An agent's Schedule C tells a story: big mileage, closing gifts, lunches with clients, a home office, marketing. The IRS reads that story too. And for several of those categories, the Code says the deduction does not exist unless you can prove specific facts with records. Not estimates. Not a reconstruction built the week before the audit.
Here is how each common agent expense is tested.
The special proof rule: IRC 274(d)
Most business expenses need ordinary records. A few need more. IRC 274(d) says no deduction is allowed for traveling expenses (including meals and lodging while away from home), for gifts, or for listed property as defined in IRC 280F(d)(4), unless the taxpayer substantiates by adequate records, or by sufficient evidence corroborating the taxpayer's own statement:
- the amount of the expense,
- the time and place of the travel or the date and description of the gift,
- the business purpose, and
- the business relationship to the taxpayer of the person receiving the benefit.
That list is the checklist the examiner will use. For agents, it hits three categories hard: vehicles, closing gifts and travel.
Vehicles
Agents drive. A lot. The car is the biggest deduction on many agents' returns, and passenger vehicles fall within listed property under section 280F(d)(4), which brings them under section 274(d).
The auditor will ask for a mileage log showing, for each business trip, the date, the destination, the business purpose (showing for the Smiths at 123 Main, listing appointment, inspection, closing) and the miles. The log also has to show total miles for the year so business use can be compared to personal use.
A log built from memory at year-end is the weakest form of proof. Agents have something better: their own business records. Showing confirmations, MLS showing logs, calendar entries, CRM notes and closing statements are time-stamped records of where you were and why. A mileage app synced to your calendar, reviewed weekly, is the strongest version of this.
If you claim a large SUV under IRC 179, know the limit. For tax years beginning in 2026, Rev. Proc. 2025-32 caps the section 179 deduction for a sport utility vehicle at $32,000.
Business use below 50 percent
Mixed-use cars carry one more rule. Under IRC 280F(b), if listed property is not used more than 50 percent in a qualified business use for the year, depreciation must be computed under the alternative depreciation system, and if business use drops to 50 percent or less after a year in which it was higher, the excess depreciation previously claimed is recaptured into income. A mileage log is what proves which side of 50 percent you are on.
Closing gifts
This is the expense agents most often get wrong. IRC 274(b)(1) says no deduction is allowed for gifts made directly or indirectly to any individual to the extent the total of those gifts to that individual during the year exceeds $25. That limit is written into the statute with no inflation adjustment.
So the $400 bottle of wine and the $300 restaurant gift card you gave your buyers at closing are deductible, if at all, at $25 per individual recipient for the year. Gifts are also on the section 274(d) list, so you need the date, a description, the cost, the business purpose and the recipient's business relationship to you.
Agents sometimes ask whether a closing gift is really a gift or a marketing expense. That is a facts question, and the records matter. A personalized gift to a specific client after closing looks like a gift. Promotional items with your name on them distributed widely look different. Document what the item was and why you gave it.
Meals and entertainment
Business meals are generally limited to 50 percent under IRC 274(n)(1). Entertainment is generally nondeductible: section 274(a)(1) denies a deduction for an activity generally considered entertainment, amusement or recreation, and section 274(a)(3) denies a deduction for membership dues in any club organized for business, pleasure, recreation or other social purpose. Tickets to the game with a client, the golf outing and the country club dues are not deductible because a client was there.
For meals you do deduct, keep the receipt and write on it who you were with and the business discussed. A credit card statement alone shows an amount and a place. It does not show a business purpose or a business relationship.
Travel
A trip to a national real estate conference is business travel. The flight, the hotel and the conference fee are deductible if substantiated under section 274(d). Extra days of vacation, a spouse's costs and side trips are not. Keep the conference agenda, registration and receipts, and a simple record of which days were business days.
The home office
IRC 280A(a) generally disallows deductions for the use of a dwelling unit used as a residence. Section 280A(c)(1) creates an exception for a portion of the home used exclusively and on a regular basis as the principal place of business for your trade or business, or as a place where clients meet with you in the normal course of business.
Two parts of that test trip up agents:
- Exclusive use. The guest room that is also the home office does not qualify. Neither does the dining table.
- Principal place of business. The statute says this includes a place used for administrative or management activities if there is no other fixed location where you conduct substantial administrative or management activities of the business. If your brokerage gives you a desk and you do your paperwork there, the home office claim is weaker. If the brokerage has no space for you and you do all your administrative work at home, it is stronger.
Section 280A(c)(5) also limits the home office deduction to the gross income from the business use after other deductions, with any disallowed amount carried forward.
Marketing, fees and dues
Listing photography, signs, online advertising, MLS dues, license renewals, errors and omissions insurance and brokerage desk fees are ordinary business expenses that need ordinary proof: an invoice and proof of payment. These rarely cause trouble if you keep them. They cause plenty of trouble if all you have is a bank statement and a memory.
Brokerage splits and fees deserve one extra step. If your brokerage reports gross commissions on its information return and pays you net of fees, your return should report the gross and deduct the fees. Otherwise the income will not tie to the form.
A useful habit: once a month, spend fifteen minutes matching your card statement to receipts and your calendar to your mileage log, and note the client and purpose on anything that lacks them. Records created monthly are believable. Records created the week before an audit are not.
What the audit actually looks like
Expect the examiner to request your general ledger or bank statements, your mileage log, your receipts for meals and gifts, and documentation for the home office. Expect questions about personal use of the car and who you were with at each meal. For agents who also claim rental losses, expect the same examiner to ask about your hours; see our guide to real estate professional audits. For the self-employment tax and estimated tax side of the same return, see our guide to IRC 3508 and agent taxes.
The firm's article on Schedule C audit triggers covers the self-employed audit picture more broadly.
The car, the gifts and the travel are the deductions you are most likely to lose. They are also the ones your calendar can prove. Use it.