A couple who used their vehicles in their sole proprietorships found this out the hard way. Their logbooks were riddled with mistakes, questionable entries and other irregularities—so much so that the Tax Court was unable to rely on them. As a result, the Court upheld IRS’ disallowance of all mileage expenses for the vehicles, even though they were partially for business (Moore, TC Summ. Op. 2012-16).
Taxpayers must be prepared to substantiate auto deductions with adequate records. Failure to do so will cost you thousands of dollars in increased taxes and/or fees to accountants or tax lawyers if you are audited.
Taxpayers should be able to substantiate:
- The amount of each expenditure for the vehicle, including purchase price, vehicle improvements, lease payments, repair and maintenance, gas, and other expenses.
- The total mileage on each business vehicle and a breakdown of the business, personal and commuting miles.
- The date of the business use and a brief description of the business purpose for each use and expense.
Records should be maintained in an account book, diary, log, trip sheet, or similar record near the time of usage [Brown, TC Summary Opinion 2005-155(2005)]. Without a written record of business or investment mileage, a tax auditor will not allow the deduction.
Without a mileage log, the taxpayer will have to convince an appeals officer or the tax court (at considerably increased legal and accounting costs) through oral testimony and other circumstantial evidence. This can include statements from employers and customers, invoices that required the use of the taxpayer’s car for ordering and delivering, and entries in calendar programs.
I prepare hundreds of business returns every year and have spoken to each owner about these requirements. Still, I can count on one hand the number of business owners who actually keep a log.
Technology today can be very helpful. Both the iPhone and the Android offer applications (“apps”) that assist in tracking business mileage. Be sure to look for one that exports to a computer file format such as Excel in order to keep a hard copy. I personally use “MileIQ” and have found it to be very easy to use.
Don’t say I didn’t warn you!