MLR

Auto expenses: No substantiation, no deduction

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If you use your vehicle for business, be sure to keep detailed records of each trip if you want to get a tax deduction.

Estimates aren’t enough. Keep a log that includes:

  • Business purpose
  • Date
  • Miles driven
  • Location

If you don’t have strong enough substantiation and are audited, the IRS will in all likelihood deny your entire deduction – even if it is obvious that you used your vehicle for business purposes. And to make matters worse, you’ll probably also be charged penalties and interest for overdue taxes.

The Tax Court made that clear this summer when it clamped down on a Time Warner employee who used his pick-up truck on the job. The court disallowed his entire deduction because he didn’t keep good enough records.

It was not disputed that David Garza was required to drive his own vehicle in his job as an outside direct sales representative for Time Warner, or that he was not reimbursed by his employer for his vehicle expenses.

But he did not document each business trip, other than writing down the odometer reading at the beginning and end of each month. And he did not separate business travel from personal travel and commuting costs – which are not deductible.

Garza had reported unreimbursed employee expenses of over $24,000, about $20,000 of which were vehicle expenses. Before the trial, Garza conceded that he was not entitled to meal and entertainment expenses and that 4,608 of the reported 40,171 business miles were actually commuting expenses (David H. Garza v. Commissioner, T.C. Memo 2014-121, 107 TCM 1586, June 17, 2014).

The court ruled that the taxpayer bears the burden of proof for any deduction claimed and must keep sufficient records to establish the amounts reported on the tax return.

Estimates were not acceptable because estimates of certain expenses – including automobile expenses, travel, entertainment and other listed property – are not allowed based on the Cohan rule, the court said.

The Cohan rule is based on a 1930 decision that found in favor of allowing entertainer and composer George M. Cohan to estimate travel and entertainment expenses because he had poor bookkeeping habits and couldn’t provide adequate records.

Tax laws have changed since then, and listed property – property used by employees in a business that can also be used for personal reasons – may no longer be estimated. For non-listed property, whether reasonable estimates are accepted is typically at the court’s discretion.

If substantiation of auto expense records is lost or stolen, the IRS will generally also deny the deduction.