Update: After the date of publication of this post, technology and tools evolved for tracking auto data and creating the documentation required by IRS. We suggest having a discussion on the most current tools.
Deductions for business automobile and truck expenses have become so problematic for some taxpayers lately that I added this page of position statement that the IRS will take in an audit. Taxpayers mistakenly presume that their “pretty good” records will meet the strict IRS standards established to allow business automobile and truck expenses. Instead, IRS may disallow the taxpayer’s entire deduction and add penalties and interest to the amount of tax due. The statement below is taken word-for-word from an actual IRS audit response letter except that I added the bold font to certain sections.
- Car & Truck Expenses
Section 274(d) prescribes more stringent substantiation requirements before a taxpayer may deduct certain categories of expenses, including expenses related to the use of listed property as defined in section 280F(d)( 4). See- Sanford v. Commissioner, 50 TC. 823. 827 (1968), affd. 412 F.2d 201 (2d Cir.1969).As relevant here, the term “listed property” includes passenger automobiles. Sec. 280F (c0 (4)(A)(i). To satisfy the requirements of section 274(d), a taxpayer generally must maintain records and documentary evidence which, in combination, are sufficient to establish the amount, the date, and the business purpose for an expenditure or business use of listed property. Sec. 1.274-5T (b)(6) Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,1985).
A taxpayer is entitled to deduct transportation expenses incurred in carrying on a trade or business. Commuting expenses, however, incurred in going from a taxpayer’s residence to his or her place of business and returning are nondeductible personal expenses. See – Commissioner v. Flowers, 326 US. 465 (I 946).
When a taxpayer uses a vehicle for personal as well as for business purposes, he or she must allocate expenses between personal and business use in accordance with the strict substantiation requirements of section 274(d). Sec. 280F(d)(4)(,4)(i): sec. l .274-5T(c0(2)(i), Temporary Income Tax Regs.. 50 Fed. Reg. 46025 (Nov. 6, 1985).
In light of the foregoing, it is not enough to provide a date and the number of miles travelled to adequately support a business mileage deduction. Proper mileage verification should be maintained for each vehicle used for business travel and should enable a review to accurately determine what position of the mileage claimed might possibly be personal mileage or commuting mileage which is not deductible. The same information would be needed even if you were to deduct actual expenses such as gas because the deduction would have to be limited by the business use percentage of each vehicle which is determined by dividing total business miles driven in each vehicle each year by total miles driven in each vehicle for each year.