Car & Truck Expense Deductions
What is expected to substantiate the deduction for using a vehicle for work? Whether it is a claim for actual expense incurred or the standard mileage rate, the IRS requires substantiation of the use. This is a good time to review
How to substantiate business/investment use of a vehicle --
Deductions for the business/investment use of vehicles (including both cars and trucks) are not allowed unless the usage is substantiated with an adequate record of the following elements:
1) The date, mileage and business or investment purpose of each trip;
2) If the trip involves away-from-home travel (such as a business trip to another city), the record also should describe the destination and the business purpose of the travel or the nature of the business benefit to be derived from the trip; and
3) Total mileage for the taxable period (business/investment and personal).
Without a record of total mileage, a taxpayer deducting actual expenses related to business/investment use of a vehicle would not be able to compute the required annual ratio of business/investment use to total use. IRS tax forms require the taxpayer to enter total mileage driven on the vehicle during the year.
Aggregation allowed. Aggregation of business use is allowed if warranted by the facts and circumstances. For example:
• a round trip or period of uninterrupted business use may be substantiated with a single record; and
• an outside salesperson who makes a number of sales calls during an out-of-town trip may make one entry for the trip, if there is no intervening personal mileage (other than incidental use).
Form of the record. To meet the adequate records requirement the taxpayer must maintain:
(1) an account book, diary, log, statement of expenses, trip sheet or similar record, which records the required elements of expenses or uses at or near the time they occur, and
(2) documentary evidence which together are sufficient to establish each element of each expense or use which must be substantiated. This is a corroboration of some detail from a third party by way of a receipt or other written document.
Information reflected on a receipt need not be duplicated in an account book or other record so long as the account book or other record and receipt complement each other in an orderly manner.
Generally, a record must be written. However, a record of the business use (but not out-of-pocket expenses) of a vehicle kept by way of a computer logging program is an adequate record.
When adequate records must be made. To be considered adequate records, the elements of the expenditure or use must be recorded in an account book, diary, log, statement of expenses, trip sheet or other similar record at a time when the taxpayer has full present knowledge of each element of the expenditure or use.
Recording information in an automobile log maintained on a weekly basis and accounts for each business use of the automobile during the week would be a record made at or near the time of use.
Lost records. A taxpayer who establishes that he is unable to produce his records through circumstances beyond his control, such as fire, flood, earthquake or other casualty, may substantiate a deduction by means of a reasonable reconstruction of the expenses or uses.
Next, how to distinguish between business and personal mileage --
The most commonly encountered driving situations for employees and self-employed taxpayers, and how the mileage should be treated are addressed.
Overnight trips. A taxpayer who drives away from his tax home on an overnight trip that is undertaken primarily for business is engaged in business driving, even if there is some personal element to his trip. Remember that trip to visit with relatives? It may not be much for pleasure, but it may not qualify for a business deduction, either. By contrast, if the trip is undertaken primarily for personal reasons, the mileage between tax home and destination is not business related even if the taxpayer engages in some business activity at the destination.
Travel between two local business locations. This is treated as business travel whether the locations are related to one business or several.
An accountant (who, us?) has an office in town, but regularly travels to clients during the day by auto. The mileage between his office and the clients' offices, and then back to his office, is business mileage.
Commuting. The trip from the taxpayer's home to his regular place of business or employment, and back, is personal travel. Where the taxpayer works outside of the home and has several regular places of business, the trip from home to the first business stop, and the trip back home from the last business stop, is nondeductible commuting. A regular place of business is any location at which the taxpayer works or performs services on a regular basis.
A doctor performs services on a regular basis at his office in a medical-arts building, and at a hospital clinic. The trip from home to either practice location is commuting. However, if the doctor drives from his office to the clinic during the day, and then back to the office, that mileage is business-related.
Travel between a home that's the principal place of business and another place of work. If a taxpayer's residence is his principal place of business, he can deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance. Whether the taxpayer's residence is his principal place of business is determined under the home office expense deduction rules.
Travel between home and a temporary business location. Under the “temporary” work location rules:
(1) Transportation between the taxpayer's residence that is not his principal place of business and a temporary business location outside the metropolitan area where the taxpayer lives and normally works is business transportation.
Here is an example. An employee normally drives or takes the train to the company offices in the city. Every two or three months, he spends a couple of days at a supplier's factory 30 miles away. If he drives each day from his home to the factory and back, the trip is treated as business transportation.
(2) Transportation between the taxpayer's residence that's not his principal place of business and a temporary work location in the same trade or business within the metropolitan area where the taxpayer lives and normally works is business transportation only if the taxpayer has one or more regular work locations away from his residence.
When is a taxpayer's residence his principal place of business? There are two ways that a taxpayer's residence qualifies as his principal place of business: the statutory administrative/management activities test and the comparative analysis test.
Under the statutory administrative/management activities test, the principal place of business test is met if a portion of the home is used for the administrative or management activities of any trade or business of the taxpayer, but only if there is no other fixed location where the taxpayer conducts substantial administrative or management activities of that trade or business. Examples of administrative or management activities are: billing customers, clients or patients; keeping books and records; ordering supplies; setting up appointments; and forwarding orders or writing reports.
Under the comparative analysis test, set forth under the United States Supreme Court decision, the determination of a taxpayer's principal place of business requires a comparative analysis of: (1) the relative importance of the activities performed at each business location, and (2) the time spent at each place, i.e., the amount of time spent at the home compared with the amount of time spent in each of the other places where business activities occur. If the nature of the trade or profession requires the taxpayer to meet or confer with clients or patients or to deliver goods or services to a customer, the place where that contact occurs, particularly where that place is a facility with unique or special characteristics, is often important.
When is a work location “temporary”? A work location is “temporary” for purposes of deducting daily transportation costs if employment at the location is realistically expected to last (and in fact does last) for one year or less. If employment at a work location initially is realistically expected to last for one year or less, but at some later date it is realistically expected to exceed one year, that employment is temporary (absent facts and circumstances indicating otherwise) until the date that the taxpayer's realistic expectation changes, and is treated as not temporary after that date.
Where an assignment at a work location is expected to last for more than one year, but the taxpayer is realistically expected to be present at that location for no more than 35 workdays (partial or complete) during each of the calendar years in that period, the location is temporary for a calendar year in which he actually works there for no more than 35 partial or complete workdays.
Here is an example. A taxpayer who normally works in an office building works at an offsite location on an assignment lasting 36 months, but he is at the offsite location for only 30 days each year. The offsite location is “temporary,” and his round-trip transportation costs between home and that location are deductible.
Now that you are brought up to speed on general rules (with the help of RIA Research Group), do you really believe that we have covered everything that applies? The general rules are the easy part. The exceptions to the rules make up the fun part. The details of your specific situation might be one or many of those exceptions. We suggest that you call with questions.