- November 28, 2016
- Posted by: admin
- Category: Taxes
For business owners and self-employed individuals, the deduction for automobile expenses can be worth thousands of dollars per year in income tax savings. For some, automobile expenses are among their largest business expense deductions. Unfortunately, many business owners are at risk of being denied the automobile expense deduction altogether in the event of an audit because they do not keep a mileage log.
For automobiles used partially for business and partially for personal use, taxpayers may deduct only the portion of expenses attributable to business use1. A mileage log is required to substantiate business use. A mileage log is required whether the vehicle is owned or leased, and whether you deduct actual expenses or the standard mileage rate.
Automobiles are considered “listed property” by the Internal Revenue Code. Tax deductions for listed property are held to a higher standard of required substantiation. Failure of a taxpayer to properly substantiate the business use of an automobile may result in denial of the entire deduction2. Proper substantiation for the business use of an automobile is provided by maintaining a mileage log.
The elements of a mileage log include:
- Odometer reading beginning of the year
- Date of business trip
- Destination of business trip
- Business purpose of the trip
- Miles driven (round trip)
- Odometer reading end of year
Your mileage log should contain sufficient detail about destinations and business purpose of trips. The U.S. Tax Court has upheld the IRS’ denial of automobile expense deductions even where a mileage log existed because the mileage log lacked credibility for different reasons3. If the mileage log contains insufficient detail or appears to have been created after-the-fact just for the audit, the taxpayer may be called upon to further substantiate the information in the mileage log by providing supporting documentation such as a calendar of appointments.
Keeping a mileage log all year may seem like an onerous task for a busy business owner. Fortunately, the regulations provide for “Sampling”2. Under the Sampling rule, a taxpayer may keep a log for any three months of the year, assuming that the mix of personal and business use remains fairly constant throughout the entire year. The percentage of business use for the three month period will then be applied to the full year to calculate the full year deduction. In this case, the same mileage log elements are required as above, but you should additionally capture the odometer reading at the beginning and end of the three month period.
There are several free or inexpensive apps for your mobile phone that can greatly simplify tracking your mileage using GPS technology. One free app that we recommend checking out is Mile IQ.
As we start the 2016 tax year, this is a good time to begin your mileage logs for vehicles used in your business. Do not risk losing this valuable tax deduction!
By David Bentz, CPA
- IRC Sec. 162 and 26 CFR 1.162-1
- 26 CFR 1.274-5T
- Rasmussen v. Comm’r, T.C. Memo 2012-353 (T.C. 2012)