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The Tax Rules of the Road Shouldn’t be Ignored

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According to Parker, TC Memo 2021-111, 9/23/21, your client's business travel expense deductions may be substantially reduced if they don’t keep credible records to present before the IRS, and the Tax Court if need be.

Feb 23rd 2022
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The IRS often challenges deductions claimed for business use of a vehicle. And as shown in a new Tax Court case, it pays for your clients to document this activity well.

For starters, taxpayers may deduct their actual business-related vehicle expenses or use the standard mileage rate. For 2022, the standard mileage rate is a flat 58.5 cents per business mile, plus any business tolls and parking fees.

Next, they must establish the percentage of business use of the car and substantiate business expenses. Taxpayers are advised to keep records of the time, place and business purpose of each business trip. These requirements must be met whether they’re deducting actual expenses or using the standard mileage rate.

In addition, your client must record the total mileage for the year for actual expense deductions. This is needed to establish the percentage that the car is used for business purposes.

Furthermore, if clients are deducting actual expenses, they should keep detailed records and receipts for out-of-pocket expenses such as gas, oil and repairs. The total expenses are pro-rated based on the percentage of business use for the year. If they’re using the standard mileage rate, they’re off the hook for this accounting.

The IRS has established that the best method for establishing proof of business use is a contemporaneous diary, log or other ledger. Certainly, reports made at or near the time of the events are more credible than those prepared at a later date. If taxpayers typically compile records at the end of the year, they should keep the original logs or electronic entries should the IRS ever come calling.

Facts of the new case: The taxpayers, a married couple, had one car, a Camaro. The wife worked as a personal trainer and the husband was in IT. The car broke down frequently and the parts required to repair it were difficult to obtain.

The couple deducted almost $26,000 in business car expenses in 2015, but did not keep a contemporaneous of travel. They claimed they used the Camaro about 80 percent for business purposes. However, the IRS challenged this deduction.

During the IRS examination, the couple estimated the wife’s business mileage based on her calendar, her driving habits and distances drawn from Google Maps. They eliminated commuting miles and assumed no personal miles other than weekly trips to buy groceries, bi-weekly trips to buy household items and monthly trips to Costco.  Accordingly, they arrived at a business use percentage of 97 percent, claiming a deduction of around $28,500.

Not surprisingly, the Tax Court wasn’t convinced. It found that the couple didn’t adequately account for their personal use of the car.

First, the Court did not find it plausible that their personal use was limited to weekly, bi-weekly and monthly trips to buy groceries and household supplies. Second, the Court determined that the business use was often inconsistent with other evidence in the record and therefore not credible.

Result: The deduction was limited to $4,800. Don’t cut corners when it comes to business vehicle records. Ensure that your clients keep a contemporaneous log reflecting the requirements.

Replies (2)

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By [email protected]
Mar 18th 2022 16:41 EDT

Would entries in the memo area for Quickbooks transactions be adequate if they were descriptive?

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Replying to [email protected]:
Seth F
By Seth Fineberg
Mar 21st 2022 17:09 EDT

Response from the Author: I don't think that would suffice. Section 274(d)(4) and regulations impose stringent substantiation requirements with certain specific elements.

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