Vehicle expenses are one of the least understood and poorly documented deductions on most tax returns. Yet it is commonly the biggest deductions for small business owners. It is also the one that can get you in the most trouble during an audit.
Tax court trash cans are lined with failed attempts to deduct vehicle expenses. So, how do you avoid becoming another statistic?
Understand IRS Requirements
First, know the rules of the game. The tax code allows businesses to deduct actual vehicle expenses or a standard mileage deduction. While you are allowed to choose the method that produces the greatest tax benefit, switching methods is difficult or impossible so make a thoughtful decision from the beginning.
Keep Immaculate Records
The catch – The thing that most business owners find tedious and neglect to do – The thing that will cause you to fail an audit – YOU MUST HAVE A MILEAGE LOG. If your vehicle is not used exclusively for business you must track business, personal, and total miles for the year regardless of which method you choose. Going into an audit without a mileage log is a sin that IRS auditors and tax courts do not forgive. It is a simple concept: no log means no deduction. So, what must be in this log?
- Starting place
- Business purpose
All five items must be in the log. Having two or three of the five does no good. Courts have been consistent – You must prove your expense, or you get NOTHING.
Learn from other’s mistakes.
You don’t have to take it from us, learn from those that have pled their case in tax court.
- Mr. Johnson deducted $23,000 (100% of the cost) for his pickup truck. When audited, he showed up with an Outlook calendar detailing his travel. His truck was used for all company business as well as his personal activities. His ultimate sin was not listing the business purpose of each trip. Since the court could not separate business it cost him ALL his deductions.
- Mr. Gist had no log whatsoever and attempted to use verbal testimony support his deduction for a new $53,625 F-250. He even was able to get a customer to testify as a witness. In the end, the court ruled that his testimony fell short by not conveying each expense, use, and mileage.
- Mr. and Mrs. Moore maintained logs containing odometer readings, mileage, destinations, and purpose of trips. Well done! Based on these logs they claimed over $31,000 in vehicle deductions. The court ended up removing 100% of their deductions because they found the logs contained far too many errors, irregularities, and questionable entries.
This generic information is not intended to be taken as tax, legal, benefits, financial, or HR advice.
Since rules and regulations change over time and can vary (by industry, entity type, and locale), consult
your accountant, lawyer, and/or HR expert for specific guidance.