Almost every new client that comes to me has one thing in common – A nonexistent or crappy mileage log.
However, what one record receives special attention during an IRS audit? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records? And for those of you that need an overhead audit, what one record can cause your rate to plummet?
Let me address a big myth - There's a common misconception that if you keep track of actual expenses, you don't have to track mileage. But you can only deduct business expenses, so you still have to track mileage to separate the business miles from the personal miles. How do you accomplish that task?
Yep, that pesky and annoying mileage log.
Here is why it’s such a big deal:
The Problem:
Taxpayers That Fail to Keep an Adequate Mileage Log are Getting Crushed by the Courts
The IRS imposes strict substantiation requirements for business mileage.
As a business owner, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:
1. Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
2. List your total business/investment miles on each vehicle.
3. List your total commuting miles on each vehicle.
4. List your total personal miles on each vehicle.
The mileage log is the record of proof that you need to use for your answers to the tax form questions.
When it comes to logging business mileage the IRS defines adequate records must include:
Mileage for each business use
Total mileage for all purposes during the taxable period
The time (date will do) and place (your destination)
The business purpose of the use
Right now, you are probably asking yourself “How bad can it be?” The answer – BAD, REALLY BAD.
Let’s take the court case of Paul Martin v. Commissioner, the IRS disallowed Mr. and Mrs. Martin’s auto and travel expense deductions of $9,185; $30,807; and $40,627 (for 2012, 2013, and 2014, respectively). The IRS noted that the Martins failed the mileage log and travel substantiation requirements of tax code Section 274(d).
Under this tax code section, the IRS says in its regulations that substantiation of vehicle use and travel expenditures by adequate records requires the taxpayer to maintain an account book, diary, a log, a statement of expense, trip sheets, or a similar record prepared contemporaneously with the use or expenditure and documentary evidence (e.g. receipts or bills) of certain expenditures.
The IRS considers a mileage log that is kept weekly as contemporaneous for this purpose.
To substantiate their auto expenses, the Martins submitted mileage logs to the court that appeared to show how many miles they traveled each week but not the individual dates of travel or the places to which they traveled. Because of the failed mileage log and no proof of travel, the court agreed with the IRS and denied the Martins their $81,619 of claimed auto and travel expense deductions.
The Solution:
Hopefully, this cautionary tale has convinced you that it is time to implement a new strategy. If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day, and there are some great options.
Good mileage logs range from paper logs, online and phone apps, and even GPS models you install in your vehicle.
This is the cheapest option, but requires the most effort. You can download a free mileage log template from Microsoft. Whether you use a log book, tax diary, or a daily appointment planner, you’ll need to record the information about the trip at the time it happens. Include the name of the person and why you are traveling to this location. Write down the point at which you began driving there. Include the address or some information about your destination. I also recommend you record your odometer reading at least at the beginning of each month.
You can record the actual mileage - where you started and ended - if you want, or you can add this in later from a map app on the Internet.If you are permanently connected to your smartphone, numerous apps are available that will record your mileage for you. They'll even separate your business miles from your personal miles. If you use the same vehicle for both business and personal use, you must also record your overall mileage at the beginning and end of the year.
Be sure to record information about business purpose on the app as soon as possible after the trip.
App fees range from free to $60 annually. My favorite app is MileIQIf you are like me and only drive one car but you want something super easy and accurate, then The Mileage Ace is the option for you. It lives in your car using rapid capture GPS tracking to log every mile you drive with extreme accuracy. You can completely forget it’s even there, but it will always be tracking your miles.
The real beauty is GPS is everywhere. It doesn’t matter if you are in the city, the country, or in the middle of nowhere. Don’t worry about leaving cell coverage or exceeding your data limits, it won’t affect your car mileage tracker.
All your trip details are uploaded to your online account, which allows you to create your mileage log in minutes.
I am sure you have guessed; this is the most expensive option. There is a one-time purchase price of $30 and then $15.49 per month for tracking. If you drive a lot for your business, consider this option.The Conclusion:
If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day. We have noticed an increase in IRS correspondence audits. The IRS sends you a computer-generated letter asking for your supporting documentation to substantiate your auto expense. No matter what you send the IRS, if it does not include an adequate mileage log, your auto deduction will be denied.
The mileage log is often one of the first records that an IRS examiner will look at. A good mileage log shows that you know the rules and you respect them. We have seen dozens and dozens of IRS audits end favorably and quickly upon presentation of a good mileage log.
On the other hand, a bad mileage log can turn your IRS examiner into an 800-pound gorilla.
Think of it this way: your mileage log gives you the choice to get in and out of the IRS audit quickly and with your wallet or to spend time with an 800-pound gorilla.
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 have received a correspondence audit request or need help with IRS issues including audit examinations, give us a call (770) 213-5777.