Historically, one of the largest deductions on my clients’ returns has been the deduction for standard mileage. Many clients accrue yearly deductions of $10,000.00 or more. But, they can only take the deduction if, and only if, they follow through with certain requirements of the Internal Revenue Code.
The tax law requires taxpayers to maintain books and records sufficient to substantiate the deductions claimed. If a taxpayer is unable to fully substantiate the expenses incurred, but there is at least evidence that deductible expenses were incurred, the Court may under certain circumstances allow a deduction based upon an approximation of expenses. However, in the case of expenses related to the use of “listed” property, specifically including any passenger automobile, Section 274(d) imposes heightened substantiation requirements to document the nature and amount of such expenses, thereby superseding the court case which allowed for approximation of other business expenses. Thus, as to automobile expenses, the taxpayer must maintain adequate records or other corroborating evidence to establish each of an expenditure. Specifically, elements of an expenditure include (1) the amount, (2) the time and place of the expense, and (3) the business purpose of the expense. The best way to take care of this is by keeping a contemporaneous mileage log.
In one case, when presented with a taxpayers who obviously used their vehicle for business purposes, but did not properly document the business usage, a judge announced:
“Undoubtedly, petitioners used their vehicles for business purposes during the year in issue. However, we are unable to find that petitioners’ mileage logs are sufficiently credible to accept them at face value, as we are convinced that petitioners both overstated deductible business miles and understated nondeductible commuting and personal miles.6 Thus, we conclude that petitioners’ mileage logs are not adequate records, within the meaning of section 274(d) and the regulations thereunder, of mileage expenses and that petitioners have failed to provide other corroborative evidence sufficient to establish that they have met the requirements of that section. See also Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).”
Don’t get caught in this predicament! Believe it or not, even I, your humble tax preparer, maintain a mileage log – and I do it on a DAILY basis. I write down the odometer reading and the business purpose at the beginning and end of each business trip. I do NOT do this for personal trips (like a visit to the grocery store) – even though at least one court has approved this method, it was a lower court and not an appeals court and therefore could be deemed at least a little aggressive. I also do this on a DAILY basis – there are court cases which disallow automobile expenses when the taxpayer goes back a year later and “reconstructs” his mileage log. So folks, the following is the very least of what I would advise for a mileage log:
- For each business trip, record the odometer readings at the beginning and end of the trip.
- Write down the name of the destination and the names of any people you visited or escorted to the destination.
- Write down the purpose of the visit, if not already obvious.
Yeah, I know this can be disruptive, for example, if you are a real estate agent showing a client 20 different houses in a day. In that case, there is no problem taking care of this at the END of the day. In fact, some agents simply do a “Mapquest” to get the appropriate mileage and record the odometer readings accordingly. Also, there is an I-Phone App out there.
No matter how you do it, just make sure you get it done – the deduction is definitely worth it!