Vehicle mileage expenses comprise one of the major expense deductions on many businesses’ tax returns. The US Tax Code and regulations require the expenses claimed be reasonable and necessary for the production of income. In addition, the Code and regulations require the taxpayer substantiate the expenditures by adequate records. The taxpayer can meet the “adequate records” requirement by maintaining an account book, a diary, a log, a statement of expenses, trip sheets, or a similar record prepared contemporaneously with the use or expenditure, plus documentary evidence (e.g., receipts or bills). The IRS considers a mileage log that is kept weekly as contemporaneous for this purpose. But, keeping the log daily is better and quicker overall.
Mr. Johnson was the president of a manufacturing company who worked primarily from home due to limited office space in the manufacturing facility. He also operated a hay farming business. He used a vehicle in both operations and claimed a deduction for the expenses involved. Mr. Johnson lost his expense deduction because he failed the substantiation test. Are you in danger of failing the substantiation test, too?
The taxpayer submitted to the IRS and the Tax Court mileage logs that appeared to show how many miles he traveled each week but not the individual dates of travel or the places to which he traveled. The primary evidence the taxpayer submitted to the Tax Court and the IRS in support of the claimed travel-related car and truck expense deductions was a Microsoft Outlook® calendar reflecting his travel during the periods at issue, supplemented by his testimony. He used the calendar for all appointments and events, including those related to his two different business ventures and his personal activities.
But many of the entries in the calendar noted only that he traveled to and/or from the ranch; they did not note the purpose for his visit (hay farming business, company work, property maintenance, or personal).
The court noted that without the business purpose information, it could not determine which of the trips were for business purposes as required by the US tax code.
Would your vehicle mileage records stand up under this test? If no, continue reading.
A mileage log that should get you through an IRS audit tracks all the required bits of information: date, time and place, business purpose, mileage, the fact that you make a personal stop at the grocery store, even if it happens to be on the route between two business locations. It also has the beginning and ending odometer readings. When this is supported by various repair and inspection records with mileage recorded, you should be able to quickly satisfy even the pickiest IRS auditor.
If you have questions about your mileage log or would like a sample of this log, send an email to email@example.com with the subject line “Mileage Log Sample.” May your audit end better than Mr. Johnson’s did.