A taxpayer who deducted expenses related to use of his business vehicles recently took a wrong turn in Tax Court. Ultimately, his deductions were denied because he couldn’t provide the documentation need to support his deductions.
In general, you can deduct costs relating to the business use of your vehicle. However, you must meet strict substantiation requirements. Specifically, you must keep a contemporaneous diary or other log of your business driving activities, including the amount of business mileage for each business use; the total mileage for the tax year; the date of each business use; and the business purpose of each business trip.
In Eze, TC Memo 2022-83, 8/4/22, the taxpayer reported income and expenses from two business activities for 2015 and 2016. The first involved healthcare consulting while the second involved residential construction.
In his consulting business, the taxpayer visited clients and potential clients. For his residential construction business, he allegedly performed handyman, construction and residential rehabilitation projects for individuals. None alleged customers reported payments to him on Forms 1099. His reported expenses vastly exceeded his reported income.
The taxpayer owned three vehicles: a Mercedes, Ford SUV and a Chrysler. He testified that he used the Mercedes exclusively for his EHC business; that he used the Ford exclusively in connection with his construction business; and that he used the Chrysler exclusively for personal purposes.
To support deductions for vehicle expenses, the taxpayer submitted calendars with annotations. The calendars showed the date and locations he visited in connection with either business. For several reasons, the Tax Court didn’t find this written records to be credible.
Here are the issues they had with his recordkeeping.
• None of the calendar entries were made at the same time the travel occurred. These were not all-purpose calendars recording various appointments in the taxpayer’s daily life. Rather, he created them solely for use in the IRS examination.
• The taxpayer supplied no evidence linking the locations on the calendars to the clients. He did not identify the clients who resided or worked at the locations. The court determined that these calendar entries were not evidence that, he actually made business trips to this location.
• The calendar entries in general felt a little fishy to the court. For example he showed identical entries for January 2015 and January 2016. The taxpayer asserted he visited the same address, on the same dates each year.
• The court also took issue with his odometer readings, he claimed to have jotted down the beginning and ending odometer readings on scraps of paper, since discarded. It appeared to the court that he created this records only in response to the IRS audit. Simply said, the Tax Court didn’t find this testimony to be credible.
• Finally, the descriptions of the business purpose were all the same, a vague reference to “business meetings.” No details of what business was discussed or what project he was working on were provided.
The Tax Court denied the vehicle deductions.
Let this tax case serve as a reminder of what records you must keep in order to deduct vehicle related business expenses – your evidence must include:
1. Written documentation: Using a mileage app is OK, but you will need to be able to print the reports and provide to an auditor if requested.
2. Odometer reading: You must take a beginning and ending odometer readings to establish total and business miles.
3. Distance: You must show where you went from and to for each trip.
4. Business Purpose: You must include what the business purpose was for each trip. As this case proves just saying “business meeting” is not enough.