Authored by: Rod Washausen, CPA.  Rod is an accountant in the Logan office of Cook Martin Poulson, PC.  He specializes in the taxation of small businesses and individuals as well as QuickBooks setup and training.  Rod is a CPA in Utah, Missouri and Illinois and a Certified QuickBooks ProAdvisor.

Vehicle expenses that are deducted as business expenses will be disallowed in full unless you satisfy strict substantiation requirements.  The IRS has found that they are an easy target for adjustments (and related penalties and interest) because many people abuse these deductions.

As with travel, meals and entertainment expenses, you can protect your deduction by keeping timely and adequate records.  Remember that absent proper documentation, the IRS can disallow even legitimate business expenses.  Therefore, it’s up to you to maintain timely and accurate records.

In regards to vehicle expenses, your records should show:

1. The amount of each use (i.e., the mileage),
2. The time and place of the use, and
3. The business purpose of the use

In addition, you should also document the cost of the each vehicle you use for business, any improvements, the date you started using the vehicle for business and the total mileage for the year.  You should record your total mileage each year by taking odometer readings each January 1.  However, it is not necessary to otherwise document the personal usage of your automobile. 

You should update your mileage and expense log each time you begin and end a business trip.  The IRS does not consider statements prepared after the fact to be as accurate or reliable as timely-kept records.  Poor or inaccurate record keeping will lead to your expenses being disallowed in full.

Remember that commuting mileage is not deductible.  If you regularly drive to the same office location to discuss sales territories or other business issues (even as an independent contractor) it is considered commuting. 

In regards to proving business purpose, the circumstances of each case determine the degree of proof needed.  For example, if you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route.  You can meet the requirements by recording the length of the route once, the date of each trip at or near the time of the trips and the total miles you drove the car during the tax year.   You can also document the date of each trip with a receipt or record of delivery.

Setting up a system to maintain timely and accurate records can be confusing when you’re first getting started.  If you need help, please feel free to give us a call!