Automobile Expenses

 

 


You can deduct auto expenses for business purposes using either the Standard Mileage method or the Actual Expenses method. You may choose the method you want to use.  However; once you select the method, you may be stuck with using that method for the entire time you own or lease the vehicle.

IMPORTANT:  To be able to deduct auto (as well as meal/entertainment and travel) expenses, precise record keeping is required.  Here is an excerpt from a 2012 Tax Court case where substantiation was a key issue:

Pro se taxpayer who “moonlighted” as building inspector but who lost his inspector's license during year at issue was denied business loss incurred in his building inspection business: taxpayer failed to substantiate vehicle and meals expenses as to time, place and business purpose as required by Code Sec. 274(d) . Also, he didn't show that he paid or incurred license fees, tuition and tools and supplies expenses in year at issue; and fees repaid due to loss of license and bad check from customer didn't qualify as bad debt within meaning of Code Sec. 166 where neither amount was reported as income. (Girish C. Patel v. Commissioner, (2012) TC Memo 2012-9)

Here is a 2013 Tax Court decision where the taxpayer lost ALL of his auto mileage deduction because of his failure to maintain a log:

Engineering field technician/independent contractor was denied deduction for gas and mileage expenses of vehicle used in part for work site visits: taxpayer didn't meet Code Sec. 274(d) 's strict substantiation requirements where, although he claimed that he kept driving log, he had destroyed same, after being diagnosed with fatal illness. Further, although he submitted bank statements listing dates and amounts of, and names and location of vendors from whom he made, gas and other vehicle-related purchases, those statements didn't specify what was purchased or show their business purpose. Similarly, although it was clear taxpayer incurred mileage for work-related site visits, he tried to substantiate same only with his own testimony and engineering corp.'s project calendar or other documents that just listed general information. And odometer readings just showed total miles driven, but didn't distinguish between business and personal purpose. (Jeffrey S. Striefel v. Commissioner, (2013) TC Memo 2013-102 )

Bottom line - get a log book and keep it in your car - and record daily your business trips (date, destination (from where to where), purpose and actual miles driven.  If you have not done so already, then while you have other records available to establish your business driving trips made during the year, create a log NOW (Excel spreadsheet should suffice) while you still have records of where you went during the year (using your appointment book, invoices, other records).  While not technically a contemporaneously kept log, it may save some of your deduction if you have a reasonable auditor.  Be sure in your log to record your beginning (January 1st) and ending (December 31st) odometer readings.  Keep copies of repair receipts, new tire receipts, etc that show a date and odometer reading on that date that were dated close to the beginning and end of the year to validate the beginning and ending odometer readings you wrote down.

As a side note, remember for meal/entertainment expenses, besides the date, place and amount, you MUST record who you entertained and their business relationship (client, potential client, vendor, supplier, etc).  You can record this information on the back of the receipt.  For lodging expenses (travel out of town for business), be sure to keep the lodging receipt.  No lodging receipt means NO DEDUCTION.

While this section is primarily devoted to vehicles used by self-employed taxpayers, the general rules apply to employees who use their personal vehicle for business.  However, employees need to address how their employer  reimburses them for their car expenses.

This is an excerpt from a 2013 case involving a taxpayer who commuted to work daily that was located a significant distance from his home.  Because the workplace was a PERMANENT and not a TEMPORARY location, no deduction for the travel was allowed:

 

Taxpayer was employed by National Security Tech at a remote test site in the Nevada desert. Direct public transportation to the site was unavailable, so taxpayer commuted by car. Taxpayer figured that the commute from his home in North Las Vegas to work and back was 160 miles per day, four days a week. He argued that his commute was exceptional compared to "ordinary commuting" and, accordingly, he should not be held to the general rule that commuting expenses are nondeductible. The Tax Court held, as it has before, that "travel expenses which arise from going to and from work on a daily basis are not ordinary business expenses deductible under [IRC Sec.] 162(a)(2) regardless of the distance traveled or the availability of housing at or near the work site." While there are exceptions to the general rule, such as commuting to a distant worksite for a temporary assignment, taxpayer did not argue that this or any other recognized exception applies. William Cor , TC Memo 2013-240 (Tax Ct.).

The IRS lowered its mileage rates for 2014. Here is a recap of the standard mileage rates by year:

Tax Year:

Business Moving or Medical Volunteer/ Charitable

2002 IRS Mileage Rate

36.5 Cents/Mile 13 Cents/Mile 14 Cents/Mile

2003 IRS Mileage Rate

36 Cents/Mile

12 Cents/Mile

14 Cents/Mile

2004 IRS Mileage Rate

37.5 Cents/Mile

14 Cents/Mile

14 Cents/Mile

2005 IRS Mileage Rate

Jan 1 - Aug.31

40.5 Cents/Mile

15 Cents/Mile

14 Cents/Mile

2005 IRS Mileage Rate

Sep. 1 - Dec. 31

48.5 Cents/Mile

22 Cents/Mile

14 Cents/Mile

2006 IRS Mileage Rate

44.5 Cents/Mile

18 Cents/Mile

14 Cents/Mile

2007 IRS Mileage Rate

48.5 Cents/Mile

20 Cents/Mile

14 Cents/Mile

2008 IRS Mileage Rate

Jan 1 - Jun.30

50.5 Cents/Mile

19 Cents/Mile

14 Cents/Mile

2008 IRS Mileage Rate

Jul. 1 - Dec. 31

58.5 Cents/Mile

27 Cents/Mile

14 Cents/Mile

2009 IRS Mileage Rate

55 Cents/Mile

24 Cents/Mile

14 Cents/Mile

2010
IRS Mileage Rate

50 Cents/Mile

16.5 Cents/Mile

14 Cents/Mile

2011
IRS Mileage Rate

Jan 1 - Jun.30

51 Cents/Mile

19 Cents/Mile

14 Cents/Mile

2011
IRS Mileage Rate

Jul 1 - Dec 31

55.5 Cents/Mile

23.5 Cents/Mile

14 Cents/Mile

2012
IRS Mileage Rate

 

55.5 Cents/Mile

23 Cents/Mile

14 Cents/Mile

 2013   IRS Mileage Rate

 

56.5 Cents/Mile

 

24 Cents/Mile

 

14 Cents/Mile
 2014   IRS Mileage Rate

 

56 Cents/Mile

 

23.5 Cents/Mile

 

14 Cents/Mile

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below is a graphical image (from the IRS) that may help explain the situations where an EMPLOYEE can deduct mileage (either standard rate or actual expenses).  If a company has an employee attend training ON THE SAME DAY as they also perform work (e.g., you go to work from 8-12, then to a class at another location from 1-5), then the training can be treated as a "second job" in the example below.   If you simply spend time (say, a week) traveling to the home office of the company (in the general area where normal work is performed) instead of commuting to a typical work site, then the travel is considered commuting and NOT deductible.  However, if the company send you far away to a training location, then you are no longer within the area of your "tax home" - and that travel can be deductible.

 

The Standard Mileage Method

Using this method, you compute how many miles you drove for business, then multiply that number by the standard mileage rate that the IRS allows for the tax year (40.5 cents per mile for 2005 through 8/31/2005, then 48.5cents for the rest of 2005).  That decreased to 44.5 cents in 2006.  For 2007, it will go back up to 48.5 cents per business mile. For 2008, it increased to 50.5 cents per mile.

You can also deduct parking fees and tolls in addition to the standard business mileage rate.  HOWEVER - any parking fees to park at your normal work are considered part of your commuting expense (as is the mileage to and from your normal work place) and are not deductible.

Example:

Tom is a real estate broker who used his personal car in his business. He used his car for a total of 20,000 miles in 2004. His business usage amounted to 12,000 miles (8,000 between 1/1 and 8/31, and 4,000 from 9/1 through 12/31/2005), and his personal use totaled 4,000 miles. In addition, he paid parking fees and tolls of $500 while visiting clients and escrow companies. Tom's deduction for 2005 is $5,680 computed as follows:

8,000 x 40.5 cents = $3,240

4,000 x 48.5 cents = $1,940

$3,240 + $1,940 + $500 = $5,680 **

Using the standard mileage rate means easier record keeping and reporting.

Qualifying for the Standard Mileage Deduction

Here are several important aspects to using the standard mileage deduction:

1.  You must actually OWN or LEASE the car.  If you use someone else's vehicle for business travel, you can ONLY deduct your out-of-pocket expenses for the business miles traveled.  You are NOT entitled to depreciation since you do not own the asset (vehicle).

2 You must use the standard mileage method in the first year you place your car in service in your business if you want to use that method at any other time during the life of the vehicle.

3.  If you want to use the standard mileage method for a leased vehicle, you must use that method during the entire lease period.  You cannot switch and use actual expenses in lieu of the standard mileage rate partway through the lease.

Starting in 2004, the standard mileage rate rules changed to allow use of the standard mileage rate if you used no more than four vehicles at the same time for business.  Previously,  you couldn't use the standard mileage method with respect to ANY car if you owned two or more vehicles that were used at the same time in the same business.

If you own more than one car that you use for business, but alternate use of vehicles, (for example, you normally use your sedan, but occasionally use a pick-up truck if you need to do some hauling), you can use the standard mileage method for both cars.

You cannot use the standard mileage method if you:

  • Use the car for hire (such as a taxi)

  • Operate more than four cars at the same time

  • Claimed a depreciation deduction for the vehicle using MACRS in an earlier year

  • Claimed a Section 179 deduction on the car

  • Claimed actual expenses after 1997 on a leased vehicle

  • Are a rural mail carrier who received a qualified reimbursement of expenses

IF YOU SELL A VEHICLE FOR WHICH YOU CLAIMED THE STANDARD MILEAGE RATE, YOU MAY HAVE A TAXABLE GAIN, OR A REDUCED LOSS BECAUSE YOU NEED TO TAKE INTO CONSIDERATION THE IMPUTED DEPRECIATION CLAIMED BY WAY OF THE MILEAGE DEDUCTION.

You multiply the BUSINESS MILES claimed over the life of the vehicle by the rates below for the specific year.

 
Year Method Used Amount of Adjustment
(Cents per Mile)
1988 10.5
1989-91 11
1992-93 11.5
1994-99 12
2000 14
2001-2002 15
2003-2004 16
2005-2006 17
2007 19
2008-2009 21
2010 23
2011 (1/1-6/30) 22

For example, if a car was purchased for $10,000 on 1/1/2005 and used for 7,000 business miles in 2005, and the car was sold on 1/1/2006, the basis would be reduced by $1,190 (7,000 x $0.17).  If the car sold for $9,000, there would be a gain of $190 ($9,000 less [$10,000-$1,190 = $8,810])

Deducting Actual Expenses

You may be able to deduct your actual car expense, such as:

  • Cleaning

  • Depreciation

  • Garage rent

  • Gas

  • Insurance

  • Interest (as a business owner, but not as an employee)

  • Lease payments

  • License

  • Maintenance

  • Oil

  • Parking fees

  • Registration fees

  • Repairs

  • Tires

  • Tolls

If you use your car for personal and business use, you must divide your expenses between the business and personal usage periods. You can divide your expenses based on the miles driven for each purpose.  Basically, this means that you must keep track of your mileage! You must also keep complete and precise records of your expenses.

Tracking Depreciation of the Vehicle

The most complicated deduction you can take using the Actual Expenses method is for depreciation. In general, you are allowed to depreciate your vehicle using the MACRS depreciation method. But if you used the standard mileage rate method at any time during the life of the auto, you must use the straight-line method to calculate depreciation.

If the vehicle is used less than 50% of the time for business, you must use the straight-line method. In addition, you may take a Section 179 deduction in the year that the vehicle is placed into service in your business. as long as your business use exceeds 50%. Like other expenses, your depreciation is only allowed to the extent of your business use of the vehicle.

Depreciation for vehicles is limited to a maximum amount per vehicle. The following chart summarizes the maximum depreciation and Section 179 expense allowed for each vehicle through 2006.  I will update the chart when I have time.  The information is available on the web:

For Cars Placed in Service Passenger Car Depreciation Allowable in-
After Before Year 1 Year 2 Year 3 Year 4
etc.
12/31/92 1/1/94 2,860 4,600 2,750 1,675
12/31/93 1/1/95 2,960 4,700 2,850 1,675
12/31/94 1/1/97 3,060 4,900 2,950 1,775
12/31/96 1/1/98 3,160 5,000 3,050 1,775
12/31/97 1/1/99 3,160 5,000 2,950 1,775
12/31/98 1/1/00 3,060 5,000 2,950 1,775
12/31/99 1/1/04 3,060 4,900 2,950 1,775
12/31/03 1/1/05 2,960 4,800 2,850 1,675
12/31/04 1/1/06 2,960 4,700 2,850 1,675
12/31/05 1/1/07 2,960 4,800 2,850 1,775
12/31/06 1/1/08 3,060 4,900 2,850 1,775

Note that the maximum annual amounts shown in the chart assume that the vehicle was used 100 percent for business. The amounts must be proportionately reduced if your business use of the vehicle was less than 100 percent.

 

Example In 2007, you purchased a new car. Sixty percent of the mileage you drove during the year was for business purposes. So, your maximum depreciation deduction for the first year would be $3,060 x .60 = $1,836.
 

This table represents the maximum depreciation you can claim. For the first year, if you used the car more than 50 percent for business, you may claim a proportionate part of the full amount, regardless of the actual cost of the car.

Beginning in 2003, separate maximum depreciation caps apply to trucks and vans. The following amounts are for trucks and vans placed in service in 2007: $3,260 in year one; $5,200 in year two; $3,050 in year three; and $1,875 for each year thereafter.

For later years, you must compute your depreciation on the car using the usual methods, but can't deduct more than the amount shown in the chart. As long as you continue to use the car more than 50 percent for business, you would multiply the business percentage of the car's cost by the percentage shown in the normal MACRS table for five-year property. The dollar amounts in the chart above, reduced proportionately for any non-business use of the car, acts as a ceiling on the amount of depreciation you can actually claim.

If you use the car 50 percent or less for business, you must use the straight-line ADS method for five-year property for that year, and for every subsequent year.

If you started out depreciating the car under MACRS, but then your business use dropped to 50 percent or less which required you to switch to the straight-line ADS method, you will have to "give back" some of the depreciation you claimed. Specifically, you'll have to report as income the amount (if any) by which the total MACRS depreciation you claimed is greater than the total straight-line depreciation you would have been entitled to claim.

Save Money Save Money

If you use a van, truck, or sport-utility vehicle that weighs over 6,000 pounds in your business, it is not subject to the annual depreciation dollar caps or the annual lease income inclusion rules.

Vehicle eligibility is based on a gross vehicle weight rating (GVWR), which is the maximum allowable weight of a fully loaded vehicle (i.e., weight of vehicle, including vehicle options, passengers, cargo, gas, oil, coolant, etc.). Generally, the GVWR is equal to the sum of the vehicle's curb weight and payload capacity. The GVWR of a particular vehicle is usually located on the vehicle's Safety Compliance Certification Label, usually attached to the left front door lock facing or the door latch post pillar.

The American Jobs Creation Act of 2004, however, limits the cost of an SUV that may be expensed in the first year under the expensing election from $125,000 to $25,000, even if the SUV is exempt from the depreciation limitations. The reduced election amount applies to SUVs placed in service after October 22, 2004. The rules, otherwise, remain the same.

 

If you own a relatively lower-priced car, you can expect to recover the entire basis of the business portion of the car over the six tax years for which the MACRS depreciation deductions are generally claimed.

However, when part of the normal MACRS deduction is disallowed because of the luxury car limitations, you'll recover only a portion of the car's basis during the normal recovery period. In that case, you may continue to depreciate the car for as long as it takes to recover the remaining basis of the business portion of the car.

* - Only if the 50% bonus depreciation is elected, if not the first year cap of 7,660 must be used.

If you lease your vehicle, you must reduce the deduction for your lease payment by an inclusion amount, which is similar to limiting the depreciation on the vehicle in order to place leased cars and purchased cars on equal footing as far as deductions. The inclusion amount is based on the fair market value of the vehicle at the time of purchase. The IRS publishes tables that are used to calculate the amount of the inclusion (reduction in lease expense). For more information on depreciation and leased vehicles, see IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.

Record Keeping Requirements

If you deduct automobile expenses, you must be able to prove your expenses. Keep adequate records with sufficient evidence to support your own statements about your business usage.

Write it Down.

The IRS prefers written evidence to oral evidence. Electronic evidence is basically the same as written evidence – you may keep your mileage on your personal digital assistant.

Keep a Log.

For either method, you should keep a mileage log showing business and personal miles driven for the year.

Keep Receipts.

If you are using the actual expenses method, you must keep the mileage log plus your receipts, cancelled checks, or other evidence to support your particular vehicle expenses.

You should keep your records for at least three years after filing your tax return. Caution: states have different statutes of limitation, meaning that you may have to keep the records longer for state purposes than you otherwise would for federal purposes. Find out your state requirements before you toss those records.

For more information on deductions for the business use of your auto, see IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.

 

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Additional Comments

You can deduct any additional costs you had for hauling tools or instruments (such as the rental of a trailer you tow with your car). You cannot deduct fines you paid for traffic violations, sales taxes paid when purchasing a car (these are part of the car's basis when calculating depreciation), or, if you are an employee, interest paid on a car loan, as this interest is treated as personal interest. However, if you used a home equity loan to purchase your car, you may be able to deduct this personal interest on Schedule A.

If the car was used only partly for business, expenses must be allocated between personal and business use. You will usually use a percentage based on miles driven for business purposes during the year over total number of miles driven during the year.

Distinguishing between business and personal mileage.

Following are the most commonly encountered driving situations for employees and self-employed taxpayers, and how the mileage should be treated:

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 (e.g., a visit with relatives). 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. ( Reg. § 1.162-2(b)(1) )

Travel between two local business locations. This is treated as business travel whether the locations are related to one business or several. ( Rev Rul 95-109, 1995-1 CB 261 ).  For example, An accountant 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. ( Reg. § 1.162-2(e) , Reg. § 1.262-1(b)(5) ) 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. ( Rev Rul 99-7, 1999-1 CB 361 ).  For example, 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 of Code Sec. 280A(c)(1)(A) , as explained below. ( Rev Rul 99-7, 1999-1 CB 361 )

Travel between home and a temporary business location. Under the “temporary” work location rules:

(1) Transportation between the taxpayer's residence that's 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.  For 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. ( Rev Rul 99-7, 1999-1 CB 361 )

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. ( Code Sec. 280A(c)(1) ) 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 Supreme Court's Soliman 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. ( Rev Rul 99-7, 1999-1 CB 361 )

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.  For 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.

* * * * * * * * * *

Not all commuting miles are treated the same for tax purposes and they may not be considered to be for business purposes. Your costs of driving a car between your home and your main or regular place of work are personal commuting expenses and are not deductible, no matter how far your home is from your regular place of work and regardless whether you worked during the commuting trip. For example, if you make business calls on your cell phone while driving or you have a business associate riding with you and you discuss business on the way to work, this does not change the regular commute from a personal expense to a business expense. Additionally, if you have a business advertisement on your car or if you haul tools or instruments in your car while commuting to and from work, the regular commute is still considered a personal expense.

Although regular commuting to and from work is not deductible, commuting miles may count as business use if your home is your office, if you are working out of a temporary location, or if you work in two or more different places during the day. For example:

Your principal place of business is in your home. You can deduct the cost of round-trip transportation between your qualifying home office and your client or customer's place of business.

You have no regular office and you do not have an office in your home. In this case, the location of your first business contact is considered your office. Transportation expenses between your home and this first contact are nondeductible commuting expenses. Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Although you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another.

You regularly work in an office in the city where you live. Your employer sends you to a one-week training session at a different office in the same city. You travel directly from your home to the training location and return each day. You can deduct the cost of your daily round-trip transportation between your home and the training location.

You do not have a regular place of work but you ordinarily work in the metropolitan area where you live. You can deduct your daily transportation costs between your home and a temporary work site if it is outside that metropolitan area.

You work at two places in one day. Whether or not you work for the same employer, you can deduct your expense of getting from one workplace to the other. However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost to go directly from the first location to the second.

Fees you pay to park a car at work or tolls paid to get to work are nondeductible commuting expenses. However, business-related parking fees and tolls are deductible (for example, when visiting a customer, traveling to a temporary work location, attending a seminar, or when looking for a job in a related field) whether you take the standard mileage method or actual expenses method.

 

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Car and Truck Expense Deduction Reminders

 
FS-2006-26, October 2006

The Internal Revenue Service reminds taxpayers to become familiar with the tax law before deducting car- and truck-related business expenses.

Overstated adjustments, deductions, exemptions and credits of all types account for more than $30 billion in unpaid taxes annually, according to the IRS. In an effort to educate taxpayers regarding their obligation to file accurate tax returns, this fact sheet, the fifth in a series, explains the rules for deducting car and truck expenses.

Deductible Car and Truck Expenses

Ordinarily, expenses related to use of a car, van, pickup or panel truck for business can be deducted as transportation expenses. Use of larger vehicles, such as tractor-trailers, is treated differently and is not part of this discussion. In order to claim a deduction for business use of a car or truck, a taxpayer must have ordinary and necessary costs related to one or more of the following:

  • Traveling from one work location to another within the taxpayer’s tax home area. (Generally, the tax home is the entire city or general area where the taxpayer’s main place of business is located, regardless of where he or she resides.)
  • Visiting customers.
  • Attending a business meeting away from the regular workplace.
  • Getting from home to a temporary workplace when the taxpayer has one or more regular places of work. (These temporary workplaces can be either within or outside taxpayer’s tax home area.)

Expenses related to travel away from home overnight are travel expenses. These expenses are discussed in Chapter One of Publication 463, “Travel, Entertainment, Gift, and Car Expenses.” However, if a taxpayer uses a car while traveling away from home overnight on business, the rules for claiming car or truck expenses are the same as stated above.

It is important to note that costs related to travel between a taxpayer’s home and regular place of work are commuting expenses and are not deductible.

Taxpayers can choose to use either the standard mileage rate or actual expenses to compute their allowable business deduction. They may want to figure the deduction using both methods to see which provides a larger deduction.

Standard Mileage Rate Method

The standard mileage rate may be used to figure the deductible costs of a vehicle that is owned or leased. If a taxpayer wishes to use the standard mileage rate for a leased vehicle, it must be used for the entire lease period. In other words, a taxpayer must use the standard mileage rate for the first year a vehicle is available for business use in order to use the standard mileage rate in subsequent years.

The standard mileage rate is adjusted annually by the IRS to reflect changes in the cost of operating a vehicle. In some situations it is adjusted during the year.

The standard mileage rate is used in place of actual expenses. Taxpayers who choose the standard mileage rate may not deduct actual expenses, such as depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance or vehicle registration fees. Business-related parking fees and tolls may be deducted in addition to the standard mileage rate. Fees for parking at a taxpayer’s main place of business or tolls related to commuting to and from that main place of business are personal expenses which are not deductible.

The standard mileage rate cannot be used if the taxpayer:

  • Uses the car for hire (such as a taxi).
  • Uses five or more cars at the same time (as in fleet operations).
  • Claims depreciation or a section 179 deduction (Publication 463, Chapter 4).
  • Is a rural mail carrier who receives a qualified reimbursement (Publication 463, Chapter 4).

Actual Expenses Method

Actual car or truck expenses include:

  • Depreciation
  • Lease payments
  • Registration fees
  • Licenses
  • Gas
  • Insurance
  • Repairs
  • Oil
  • Garage rent
  • Tires
  • Tolls
  • Parking fees

These and other expenses are discussed in detail beginning on page 16 of Publication 463. If business use of the vehicle is less than 100 percent, expenses must be allocated between business and personal use. Only the business use percentage of each expense is deductible.

For example, if, based on records maintained by a taxpayer, total actual vehicle expenses for a given year are $2,500 and the vehicle is used 75 percent for business, the allowable deduction using the actual expense method is $1,875 ($2,500 x 75 percent).

Recordkeeping

It is important to keep complete records to substantiate items reported on a tax return. In the case of car and truck expenses, the types of records required depend on whether the taxpayer claims the standard mileage rate or actual expenses.

To claim the standard mileage rate, appropriate records would include documentation identifying the vehicle and proving ownership or a lease and a daily log showing miles traveled, destination and business purpose.

For actual expenses, a mileage log helps establish business use percentage. Taxpayers should also retain receipts, invoices and other documentation to show cost and establish the identity of the vehicle for which the expense was incurred. For depreciation purposes they need to show the original cost of the vehicle and any improvements as well as the date it was placed in service.

Another 2013 Tax Court Decision relating to contemporaneous record keeping requirements:

UNITED STATES OF AMERICA, Plaintiff, v. PHILIP L. HART, et al Defendant.

Case No. 2:11-CV-00513-EJL

Travel and Mileage Expense Deductions

The United States argues Mr. Hart cannot deduct travel or mileage expenses because he failed to keep contemporaneous records of the business purpose of the trips. (Dkt. 72 at 7.) In particular, the United States points to the “Car and Truck Expenses” including mileage that are claimed on his tax returns.

Section 162(a)(2) allows a taxpayer to deduct travel expenses, including mileage, “in the pursuit of a trade or business.”Tilman v. United States, 644 F.Supp.2d 391, 407 [104 AFTR 2d 2009-5773] (S.D.N.Y. Aug. 3, 2009). Travel expenses are subject to the heightened substantiation requirement of § 274(d).Id. (citing § 274(d); 26 C.F.R. § 1.274-5T(b)(2)). “The tax code precludes a deduction for ... auto and travel expenses, unless a taxpayer substantiates by [1] adequate records or [2] by sufficient evidence corroborating the taxpayer's own statement the following five elements: the amount, date, time, place and business purpose of the expense.” Id. (citing Reynolds v. Commissioner, 296 F.3d 607, 615 [90 AFTR 2d 2002-5294] (7th Cir. 2002); 26 C.F.R. § 1.274-5T(b)(2)). As stated above in the previous section of this Order, “[t]axpayers are required to keep sufficient records to substantiate deductions.”Sparkman, 509 F.3d at 1159 (citing I.R.C. § 6001; Treas. Reg. § 1.6001–1(a)).Section 274(d) requires that the taxpayer substantiate business expenses “by adequate records or by sufficient evidence corroborating his own statement.” 26 U.S.C. § 274(d). Section 274(d) sets forth substantiation requirements for claimed deductions for travel expense stating no deduction shall be allowed:

((1)) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),

((2)) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity, or

((3)) for any expense for gifts,

...

unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation or use of the facility, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility, or receiving the gift.

See 26 U.S.C. § 274(d). “Absent substantiation of an element of [§] 274(d) (date, place, amount, business purpose, and business relationship), the deduction for [such] expenses is to be disallowed.”Meridian Wood, 725 F.2d at 1188 (citations omitted); see also Sparkman, 509 F.3d at 1159.

To deduct items in these categories, a taxpayer must show that the item claimed is directly related to or associated with the active conduct of their trade or business. Heinbockel v. Commissioner, Nos. 12139-09, 9311-10, 2013 WL 1953732 [TC Memo 2013-125], at 18 (U.S. Tax Ct. May 13, 2013). To do so, the taxpayer must provide“adequate records” showing the amount of the expense, the time and place of the expense, the business purpose of the expense, and the business relationship to the expense claimed.Id. (citing § 274(d); § 1.274-5T(c)(2)(I)). “A contemporaneous log is not required,” but a statement not made at or near the time of the expenditure has the same degree of credibility only if the corroborative evidence has “a high degree of probative value.” Id. (citing § 1.274-5T(c)(1) andReynolds v. Commissioner, 296 F.3d 607, 615 [90 AFTR 2d 2002-5294]–16 (7th Cir. 2002) (noting that keeping written records is not the only method to prove § 274 expenses but “alternative methods are disfavored”)). These substantiation requirements do not allow estimations of expenses. Id.

Mr. Hart's claimed travel expenses are not supported with contemporaneous logs or similar statements that detailed the time or place of the expense or its business purpose as § 274 generally requires. His proof, instead, consists of his own deposition testimony that in compiling his tax returns, he went through his checkbook and credit card statements one by one and assigned each expense to one of the businesses or as a personal expense. Mr. Hart's own deposition testimony however reveals that he did not distinguish between his business and personal activities during and throughout the year. Instead, he separated the two only later for purposes of filing his tax returns. Such record keeping is not sufficient to satisfy § 274. Further, Mr. Hart has not provided any contemporaneous logs, records, or receipts indicating the time or number of miles driven, much less bring forth any records detailing the business purpose of each trip he made or state for which of his alleged businesses a particular trip was made. Although there were a few receipts in the records he used to refresh his memory, his deposition testimony shows that most of Mr. Hart's claimed deductions were derived from his own recollections made some time after the expense was incurred.

This “kind of memory jogging” is not enough to meet the strict substantiation requirement to provide “adequate records.” Heinbockel, supra at 20 (citing§ 274(d) and § 1.274-5T(c)(1), Temporary Income Tax Regs.). “[S]uch testimony is not an “account book, diary, log, statement of expense, trip sheet, or similar record made at or near the time of the expenditure or use,”much less a record that explained the business purpose.”Id. (citing § 1.274-5T(c)(2)(ii), Temporary Income Tax Regs.). However, where a taxpayer is unable to substantially comply with the requirements ofsection 1.274-5T(c)(2), an exception exists allowing the taxpayer to satisfy the showing requirement by producing: (1) a statement-whether written or oral-“containing specific information in detail as to such element”; and (2) “other corroborative evidence sufficient to establish such element.”Heinbockel, supra at 20 (citing § 1.274-5T(c)(3)(I)).

The regulation continues, in greater detail, if that element is the cost or amount, time, place, or date of an expenditure or use, the corroborative evidence shall be direct evidence, such as a statement in writing setting forth detailed information about such element, or documentary evidence such as a receipt. If that element is either the business relationship to the taxpayer of persons entertained, or the business purpose of an expenditure, the corroborative evidence may be circumstantial. Id. The corroborative evidence supporting a noncontemporaneous statement must have a high degree of probative value to elevate such statement and evidence to the level of credibility reflected by a record made at or near the time of the expenditure or use supported by sufficient documentary evidence.

Id. (citing § 1.274-5T(c)(1)). “In sum, it is possible that documentary evidence such as receipts coupled with credible testimony can meet section 274's strict requirements.” Id. (citation omitted).

Here, Mr. Hart has failed to produce contemporaneous written records for his travel expenses or fuel costs to support his claimed travel and mileage business expense deductions. The records produced by Mr. Hart appear to include some receipts for travel expenses but no supporting documentation showing the business purpose for the claimed travel expenditure. Furthermore, the records do not substantiate the claimed deductions as there are no contemporaneous written records to support the business purpose for the claimed expenses as required by the Code and its governing Regulations. This finding is undisputed as Mr. Hart's own testimony at his deposition admitted to his poor record keeping during the time and that his travel expenses and mileage claims were estimates. (Dkt. 76-1 at 160–62.) For the 1998 return in particular, Mr. Hart testified that his record keeping for his business trips “was not very good” and that when he amended that return he used his calendars and different receipts he had in the office to account for his business travels. (Dkt. 76-1 at 160.) He was not, however, able to recall how he distinguished between his business trips for Alpine Northwest, his engineering business, and his book. (Dkt. 76-1 at 161–65.) Mr. Hart has not disputed these facts, pointed to specific facts showing that there is a genuine issue for trial, or come forward with any records and/or evidence to rebut the United States' showing in its Motion as to the “Car and Truck Expenses.” As such, the Court grants summary judgment as to the claimed business expense deductions for “Car and Truck Expenses” for the years 1998–2000 and 2002–2004 that Mr. Hart claimed on his tax returns.

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Updated: 12/6/2013