COMMENTARY
Cars in your Business: How to Deal with the IRS
09/18/96
Autos in your Business? - Make 1996 a Record Year for your Car Expenses or How to Deal with the IRS
Part two of two
By Gerald Levinson, CMA
Dealing with the IRS is fraught with peril!
There are certain rules that must be followed in order to reduce your exposure to possible penalties and interest. Some loopholes exist but do not depend on them.
These basic rules will help you avoid tax overpayment and traps. They also make good sense in running your business or keeping personal records.
1. Keep good records. A must.
2. File tax returns on time. Including extensions.
3. Do not ignore IRS letters or communications. Reply
immediately. This is the most common pitfall of all.
4. If audited, send your tax consultant ALONE to meet with
the IRS representative at the first session. Do not go
yourself. This will give you a chance to see the IRS's
strategy before replying with well planned counter-
strategy.
KEEP METICULOUS RECORDS!!!
CAR DEDUCTIONS CAN BE DEDUCTED IF YOU HAVE BACKUP EVIDENCE INCLUDING MEDICAL, INVESTMENT AND CHARITABLE ITEMS.
Your car can generate large deductions such as the lease payment or depreciation scenarios we talked about in the first part of this series. However in order to claim these deductions the following practices must be observed:
Keep an automobile expense book in your car or office to record all cash, check and credit transactions daily.
Overall the best way to pay for expenses is thru a credit card, because you get formal statements from the credit card company. This is acceptable by the IRS as payment for gas, repairs, insurance, parts, tools and so on.
Keep all cash receipts in an envelope or file for recapping at the end of the year. For purchases by check notate the invoices with the check number and date paid. Keep your bank statements and canceled checks for 3 years after you have filed your return including the extension time if applicable.
If you are recording mileage (31 cents a mile deduction) keep a daily trip log showing each business trip along with mileage attributable to medical purposes, investment use and charitable causes.
Mileage to and from work is not allowed. If you have two jobs the mileage of going from the first to the second is OK.
LOOPHOLES - DO NOT DEPEND ON THEM
The following cases illustrate those situations where the TAX COURT modified the existing code in favor of the tax payer. However in these instances the deductions ultimately allowed, were far below the potential total had good records been kept.
NO LOG OR ANY DOCUMENTATION
Take this case decided in TAX COURT. Mr. B had several jobs which he regularly drove to and from each day. He kept absolutely no business records. So after filing his return a subsequent audit by the IRS disallowed his deduction.
HOWEVER upon appeal the TAX COURT held that Mr. B had to drive between jobs and that he was entitled to expenses based on measurements of his daily trips.
Mr. B did get a deduction, but it was minimized. Had he kept good records he would have been allowed much more.
SOURCE: BARNES TC MEMO 1986-585
AUTO DEDUCTIONS WITH NO RECORDS
Ms. F had a van she used for business. She had no records at all, but filed a return claiming business deductions.
Again an appeal to tax Court resulted in a minimal result of an allowance of $250 per year plus a negligence penalty for claiming a deduction without records.
SOURCE: ROSE C FABBO TC MEMO 1987-402
CAR EXPENSES NOT PAID BY EMPLOYER
Most employers will reimburse the employee for car expenses either in full or in part. If no reimbursement is forthcoming for whatever reason the expenses can be deducted in full as long as they are reasonable and good records are kept.
SOURCE: GEORGE KESSLER, TC MEMO 1985-254
CONCLUSION: In working with the IRS good records are mandatory to provide irrefutable evidence of all your costs. This is also a good business practice to use in establishing a case history on your car relative to gas mileage, maintenance and other high cost factors
Gerald Levinson -- The Auto Channel
