That’s not an unusual question. The exchange continues often like this.
Vance: Do you have contemporaneous records that document (1) the amount of the expense; (2) the time and place of the travel or use; and (3) the business purpose of the expense?
Client: Well . . .
Vance: How about an after-the-fact reconstruction of such information to a high degree of probative value that rises to the level of credibility of a contemporaneous record?
Bottom line, you have to keep good records to deduct auto expenses.
In a recent Tax Court Memorandum decision, the result of failure to keep good auto expense records is well illustrated. Mr. Powell owned an S corporation that was involved in several aspects of the petroleum marketing business. He had several problems with his personal tax return, some of which he blamed on his tax preparation software. (By the way, blaming TurboTax did not get him out of his understatement penalties.)
One of the issues before the court was his business auto expenses. The need for the regular use of an auto in the business is pretty convincing. No problem there. But, it seems that Mr. Powell was a sporadic auto record-keeper. Sometimes, he kept detailed contemporaneous records. Sometimes, he was able to assemble after-the-fact convincing records. Sometimes, he seems at some late date to have thrown together some pretty questionable information to document the auto use he had claimed on his tax return. For example, the Tax Court noted that one particular destination seemed to have varied in round-trip distance from 325 miles to 600 miles (with no further explanation by Mr. Powell for the difference).
So, the Tax Court let him deduct the auto expenses (based on the per-mile allowance method) for which he had good records and denied the auto expense deductions for which he did not have good records.
If the IRS audits your auto expenses and you don’t keep good records – preferably contemporaneous – you’ll lose every time. If you want to increase your chances of debating the issue with the IRS, deduct 100% of the costs of an automobile. Except for a vehicle that wouldn’t be used for personal transportation of any kind – maybe a front end loader, for example, deducting 100% of an automobile’s expenses as business seems to be an IRS audit red flag.