Many of my clients drive for work purposes; therefore, we often decide to take the mileage allowance in lieu of actual expenses (subject to business %). The mileage allowance is designed to be a materially equivalent deduction to the actual expenses, but offers taxpayers an "easier" way of tracking.
In the real world, tracking business mileage is NOT easier (personal experience here) and I've seen a variety of "logs" amongst myself and clients... Some fancy paper logs, mileage app logs, scrap paper, to NO log. Varying completeness exists as well. With all of this, reporting the business mileage for clients is an art: marrying the intent of the deduction and the reasonableness of the IRS upon audit, with the technical rules surrounding the support required to deduct.
In the following IRS opinion, one can see how the art comes into play. Some notable takeaways:
-without a log, the IRS CAN disallow the deduction
-if the deduction is abnormally large with respect to net income, the risk of scrutiny dramatically increases
-if the deduction is abnormally large, combined with no log, combined with an excuse for no log equivalent to "the dog ate my homework", disallowance upon audit is almost a certainty
Review the actual Opinion summary here:
Summary Cross References
- Maki, T.C. Summary Opinion 2019-34
In general, travel expenses have strict substantiation requirements. A taxpayer must maintain records that include:
- The amount of the expense,
- The time and place of travel,
- The business purpose of the expense, and
- The business relationship between the taxpayer and persons provided meals.
Courts generally require that the taxpayer produce a contemporaneous log book documenting the above information for each business trip taken.
The taxpayer in this case regularly traveled to take care of and monitor timber on his land. The round trip from his residence to and from the land is about 300 miles for each visit. During the trips, the taxpayer would plant new trees and care for them so that they could be harvested for future timber sales. Two of his properties had trees with a harvest value of over $1 million.
The taxpayer testified that in a previous year while he was very sick and not able to check on his land, the fir trees were illegally harvested. Commercial timber companies hire people to regularly check and patrol their timberland to curb or thwart illegal harvesting. The taxpayer was not able to afford the cost of hiring people to check and patrol his land. That is one of the reasons why he regularly visits his timber properties.
The taxpayer maintained a log listing the days that he visited and stayed on the land. The log, along with other records, was maintained in the building he uses when visiting the land. During an IRS audit, the taxpayer used the log to make a summary of his visits during the tax year that was under audit. After he prepared the summary, the original contemporaneous logs and other records were stolen when the building in which they were maintained was vandalized. The summary reflected that the taxpayer was present at the properties a total of 161 days during the year at issue. The summary also reflects that the taxpayer made 47 round trips from his residence to the timber properties. Some visits were as short as one day, but most were three-day visits.
For the year at issue, the taxpayer reported zero income on Schedule C for his timber activity. Expenses included $7,011 for travel, and $55,925 for away from home per diem.
The IRS disallowed these two deductions because the taxpayer did not adequately substantiate the expenses with a contemporaneous log book.
Be sure to engage a CPA skilled in these matters to protect you as best as possible and avoid these pitfalls when filing your income tax. Please feel free to reach out :)