Certified Public Accountants

Vehicle Tax Deductions and Records

TAXING TIMES, MARCH 2015 EDITION

By Rick Torkelson, CPA and principal of Torkelson & Associates, LLP in Petaluma, CA

As I plow through another income tax season the vehicle tax deduction is the category I most often have to question or request more information. As I go through lists of business expenses and Quickbooks printouts, it seems the vehicle expense account always stops the progress and demands a conversation.

Automobile Deduction

Everyone wants to deduct their car. In Heaven where they know all the tax laws, all the facts and have perfect bookkeeping, every vehicle used more than never for business purposes would have the following records: Total miles for the year. Total miles used for business (or as an employee required for their job). This information is necessary to derive the percentage of business use. You also need a record of all your business trips – The date, where you went, how many miles, who you saw and what the business purpose was. While this contemporaneous record would be perfect, the IRS would accept any “corroborative evidence sufficient to establish use”. You could stop here if you wanted and just use the standard mileage rate – 56¢ per mile in 2014 – for the business miles.

If you wanted to test the standard mileage rate against actual expenses, you have more bookkeeping. You would need a good breakdown of 100% of your vehicle expenses for each vehicle for which you intended any deduction – Gas, maintenance, parking, tolls, insurance, DMV (both the personal property portion and the license expense). Most important, you need the total cost of the vehicle and date you bought it for depreciation purposes. Now that you now know 100% of the vehicle cost, take the percentage of business use (determined above) and apply it to the total expense for the year.

Remember – this is in Heaven. I’m not going to pretend that all my clients, or even most of my clients are prepared with this kind of information. Generally what I do is determine a reasonable amount of miles for each vehicle for the year and then estimate a reasonable amount of business mileage considering how the client makes a living – Real estate agents and contractors generally have lots of business miles while physicians and dentists generally do not. Remember that getting from home to work and back is a commute and not deductible so those miles are non-business for sure.

Believe it or not, during a rare audit, the IRS is pretty reasonable. If a restaurant owner deducts 100% of every vehicle they own, forget it – the IRS will ask for records and you’d be lucky to deduct half of one vehicle. But if your total mileage is reasonable and your business mileage is reasonable for your occupation, under audit, the IRS will touch the subject and generally move on. Now-a-days, the IRS gets their gold stars by closing cases. Keeping a case open by arguing over a few miles doesn’t get the job done.

Reminders

Calendar year corporations are due March 15 – but since that’s a Sunday, you have until Monday March 16 to file your tax return or extension. The extension is good for 6 months. Your minimum $800 to the Franchise Tax Board for 2015 is due April 15.

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