Mileage Log Survive an IRS Audit?
Do you have a mileage log that will survive an IRS audit? If so, good for you! If not, get ready to give up all (not some, but all) of your vehicle tax deductions for not just one year but three years, as you will see in this true story.
The story is about Therone Johnson, president of Diversified Innovative Products Co, Inc. (Dip Co), a corporation in Colorado that manufactures and sells disposable ink pans for printing presses.
Mr. Johnson and the rest of Dip Co’s management work from home offices because the manufacturing facility does not have enough office space for all of them to work there regularly.
Need for the Mileage Log
Tax code Section 274 imposes strict substantiation requirements for business mileage.
As the court noted in this case, for expenses such as the pickup truck Mr. Johnson used for business purposes, he had to substantiate the following with adequate records or with sufficient evidence corroborating his own statement:
- The amount of the expense
- Mileage for each business use of the pickup, as well as the total mileage for all purposes during the taxable period
- The time and place Mr. Johnson used the pickup
- The business purpose of the use
Planning note. Don’t latch on to the “with sufficient evidence corroborating his own statement” thinking that you have a real alternative to keeping a good mileage log. From the myriad court cases we have read regarding the mileage log, this is an impossible task.
The Outlook Calendar
The primary evidence Mr. Johnson submitted to the court (and previously to the IRS) in support of his claimed travel-related and 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 work at the ranch, his work for Dip Co, and his personal activities.
But many of the entries in his calendar noted only that he traveled to and/or from a ranch; they did not note the purpose for his visit (hay farming business, Dip Co work, property maintenance, or personal).
The Court’s Take on the Calendar
The court noted that without the business purpose information, it could not determine which of Mr. Johnson’s trips were for business purposes as required by tax code Section 162. It then cited various cases that disallowed the expenses because the taxpayer
- could not establish the business purpose for each expense,
- did not differentiate between business travel purposes and personal travel purposes, or
- gave broad testimony and receipts that were insufficient to establish the business purpose of travel.
Because the court could not determine that Mr. Johnson’s business use of the truck for Dip Co and the ranch exceeded 50 percent of Mr. Johnson’s total use as required by Section 179, it simply denied the entire Section 179 deduction and the other car and truck expenses for the three years before the court.
The failed mileage log cost Mr. Johnson all of his car and truck deductions, not just in Year Three when he purchased and expensed the pickup truck. Also gone were all his deductions for depreciation of his prior vehicle—and all gas, insurance, and repair deductions for a combined three years.
So the vehicle deduction equation for you is clear: if you want to keep your vehicle deductions, you need a good mileage log.
If you would like my help with your mileage log, please call me on my direct line at (541) 690-8711 or schedule an appointment below.
There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following:
- Pension or IRA distributions
- Significant change in income or deductions.
- Notice from IRS or other revenue department.
- Job change.
- Divorce or separation.
- Attainment of age 59½ or 72.
- Charitable contributions of property in excess of $5,000
- Sale or purchase of a business.
- Sale or purchase of a residence or other real estate.
This blog post contains general information for taxpayers and should not be relied upon as the only source of authority.
Please seek professional tax advice (like reaching out to us) for more information concerning your specific scenario.
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