Many clients use their cars for both business and personal use. The IRS code allows taxpayers to take a tax deduction in one of two ways.
1. Cent-Per-Mile Method
In 2010, taxpayers can deduct 50¢ per mile for all business miles driven in a year.
2. Depreciate the Car
Taxpayers can take a depreciation deduction for the business percentage use of their car plus all other expenses incurred, such as gas, oil, repairs, tolls, etc.
Caution: You were probably aware of the above rules, but what you might not be aware of is how strict the IRS can be in allowing these deductions. In a recent tax court case, a professor who used his car for legitimate business use was not allowed any tax deduction because he failed the IRS’s strict substantiation requirements. The key is that you must be able to document the following through log books, trip sheets, a diary, and/or other documentary evidence:
a. the mileage for each business use of the car
b. total mileage for all use of the car during the year
c. the date of each business use
d. the business purpose for the use.
The professor in the recent case submitted to the tax court a travel log consisting of a collection of preprinted forms which he had filled in; however, he had completed them after he was already being audited by the IRS, and he had no other support.
Conclusion: It is fair to state that many taxpayers are not recording and keeping the documentation they need and run a significant risk of no deduction being allowed for legitimate business use of their car. Remember that the key to most tax planning opportunities is having good records to prove your case. IF you are not certain that you are meeting the guidelines required by the IRS please give us a call.