Tracking your business mileage can be a simple way to get a tax deduction. The caveat is that
vehicle deductions are frequently challenged by the IRS in an audit. This means that taxpayers
need to be sure that they have clear documentation to support their claims.
If you are planning to deduct your business mileage, review the best practices below before tax
season comes around. For additional assistance understanding the requirements for business
deductions, you can also connect to a Certified Tax Planner.
KEEPING ADEQUATE RECORDS
As long as the miles driven were for an “ordinary and necessary” business purpose, you are
allowed to deduct your mileage. Taxpayers may have heard that even if their records are
incomplete they can still deduct their miles under the “Cohan Rule.” This rule says that when
taxpayers are unable to produce records of actual expenditures they can use reasonable
estimates.
However, the tax code also says that travel-related deductions cannot be claimed unless the
taxpayer “substantiates by adequate records or by sufficient evidence” the amount they are
claiming. This is more leeway than the IRS is given for other types of deductions. Taxpayers
should note that the courts have often denied mileage logs created after the fact—records need
to be kept up-to-date throughout the year.
What type of information do you need to collect to have “adequate records”? First, the mileage
log should be updated at or near the time that each expense was incurred. The log should
contain these elements:
● the amount of business mileage for each business use of the automobile
● the total mileage (business and nonbusiness) of the automobile during the taxable year
● the date of each business use of the automobile
● the business purpose of each business use of the automobile
Be wary of inconsistencies as you log your miles. Your records should not indicate that you are
simultaneously driving in two different states or deducting fuel in one state while allegedly
driving in a different state. A log can be kept via pen and paper or a smartphone-based app that
tracks the user’s GPS location and provides date and time stamps. One benefit of using an app
is that the taxpayer can easily go in at a later time and differentiate between personal and
business usage trip by trip. They can also add notes to substantiate the business reason for
each trip and export those records to a single document.
In addition to a log, secondary documentation is needed to validate the mileage on the vehicle.
If you have maintenance or inspection work done near the beginning or end of the calendar
year, those receipts will typically contain the mileage of the vehicle. You can also take a picture
of the vehicle’s mileage on the first and last day of the year and rely on the digital timestamp of
the photo, but that may not be as credible as a third-party validation.
PROVIDING SUFFICIENT EVIDENCE
What if your mileage records are woefully lacking by the time tax season comes around? The
closer you can get to complete records, the better position you are in if the IRS does challenge
your deduction. In the absence of intentionally-kept records, taxpayers should collect any
evidence available to create the most complete picture of their vehicle expenses.
Where else might you find evidence to back up your claims? Look for receipts, credit card
statements, or other third-party documents that show where you were on a certain date and
time. Even social media posts or selfies could help document your location and validate a
mileage expense. If you can couple that with a justification for the business purpose, you might
be able to substantiate the deduction even without complete records.
Past legal cases show that the IRS will test a taxpayer’s credibility when a deduction comes
under questioning. Take the Kilpatrick case as an example: Kilpatrick was required to establish
each element of the business use of his vehicle (mileage, date, business purpose, etc.) by his
own statement and by direct evidence (such as receipts or bills). Unfortunately, he only provided
Mapquest print-outs created two years after his trips allegedly took place. He also could not
pinpoint the exact towns he traveled to and had only generally estimated the length of each trip.
A slightly different example can be found in the Craddock case. Mr. Craddock presented the tax
court with a comprehensive mileage log that accounted for every mile driven. However, the
court determined the log was lacking credibility because Craddock made purchases with his
credit card in a different state than he was allegedly in according to the mileage log. As a result,
the court denied his mileage deduction.
SUMMARY
The IRS and the tax court realize that a perfectly meticulous mileage log is often not realistic.
However, since unlawfully claiming business mileage has the potential to be so easy, the court
is more likely to be strict when it comes to documenting these deductions. Taxpayers need to
develop the habit of maintaining a comprehensive mileage log that is updated in real-time. The
more information a taxpayer can gather, the higher their chance of sustaining their business
deductions.
Maximize your business deductions and learn best practices for substantiating your claims by
working with a Certified Tax Planner.