Richard A. Lindsey, CPA Lindsey & Waldo, LLC – Certified Public Accountants
  • How to Audit Proof Your Auto Expenses

    Filed under Informational, Taxes
    Dec 22

    Auto expenses are an important deduction for business owners and employees who must travel. If you use your personal vehicle for travel, in-town or out-of-town, it is very important that you audit proof your auto deduction or risk losing the deduction in its entirety. The last thing you want to do is sit across the table from some burly, growling IRS auditor, with all the sympathy of a moon rock and the understanding of a doorstop, without any records to back up your deduction.

    Can you say bye-bye deduction and hello penalties?

    Auto expenses may be deducted using either the actual cost method or the mileage method. Documentation is the key and the required documentation is different with each method.

    Under the actual cost method, all expenses for purchasing, owning, and operating the vehicle must be documented. Receipts for fuel, oil, repairs, maintenance, insurance, etc. must be kept. In addition, if the business use of the vehicle isn’t 100% then you may also need to keep the mileage log information discussed next.

    You can audit proof your mileage method deduction by keeping a few simple records. A mileage log, diary, expense reports, trip sheets, cancelled checks, receipts, repair bills, and any other relevant information and documents are all that you need.

    What exactly does the IRS want to see?

    • How many total miles did you put on your automobile last year?
    • How many of the total miles on your automobile were for business and how many were personal? (This will show the business percentage.)
    • How many miles were driven for each trip, from business destination to destination? (IRS wants real numbers, not just a guess.)
    • What was the business reason for going to this destination? (Examples: Business meeting with Tom Smith of ABC Corp. or XYZ Store for office supplies.)
    • What other business expenses were involved in this travel? (Examples: Tolls, parking…etc.)

    Caution: There is a general rule which enables taxpayers to estimate business expenses when evidence indicates such expenses were incurred but an exact amount cannot be determined. However, such estimates cannot be used when claiming deductions related to automobiles. You must meet the substantiation requirements, or the deduction will be disallowed.

    If you use a day planner for your appointments, just write the mileage down on it. Or, if you use a wall calendar for your appointments, use that. Or, if you prefer spreadsheets, use that. Or use an app for that. The best method to use is the one that you will use. The IRS requires that you keep these records “contemporaneously”- meaning shortly after the event occurred. It is easier to keep up with it daily and is more acceptable in an audit.  Once you get in the habit it won’t seem so onerous.

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