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Using Your Car for Business? Be Careful of Tax Deductions and Recordkeeping

Michael R. Viens, CPA
Michael R. Viens, CPA Retired, Former Director, Tax Strategies

A common issue in closely-held businesses involves the use of vehicles to carry out business-related functions, the limitations that can apply on the amount of related tax deductions, and the burden of maintaining the appropriate documentary records. A tax court decision issued last November (Gary F. Roy v. Commissioner, T.C. Summary Opinion 2016-77) highlights the potential trouble you can get into with the IRS on this point.

The taxpayer in this case operated a business as a sole proprietorship from his home and rendered consulting and technical writing services to clients in and around Los Angeles, California. Southern California is perhaps a bit unique in its residents’ propensity for driving higher-end exotic automobiles.  The taxpayer owned an Aston Martin Vantage, which in his tax filing for 2012 he claimed was used solely for business purposes.

It’s been my experience that most IRS examiners do not have an Aston Martin in their garages. So perhaps the examiner would have been somewhat inclined to be skeptical of the taxpayer’s assertion as to 100 percent business use and no personal use at the outset of the examination. However, the tax code is generally blind to such matters, with the exception of providing annual limits on the amount of depreciation deduction that may be taken on a tax return and requirements to support claimed deductions with appropriate documentation. In this case, unfortunately the court’s findings did not go particularly well for the taxpayer.

First, the court reminded the taxpayer that depreciation deductions start by referencing the cost basis in a vehicle. The taxpayer had based his depreciation deduction on an estimate that his Aston Martin had a fair market value of $121,700 rather than his actual cost of $75,045. Ouch!

Next, the court had difficulty with the taxpayer’s recordkeeping. Or, perhaps better said, the lack thereof. His “recordkeeping” consisted of illegible gas receipts and a vehicle log which was just a sheet of paper reflecting the mileage at the beginning and the end of the year, with a disclosure that all 8,900 miles logged were 100 percent for business use. The taxpayer told the court at trial that he believed the information provided constituted appropriate documentation. The court took exception, noting that the taxpayer must be able to show, through direct evidence or otherwise, that he used the vehicle for business purposes for the amount of time he claimed. It found that a one page summary was not adequate substantiation of the level of business use and purpose required. Things were not looking good for the taxpayer.

Further complicating matters, the taxpayer based his tax deduction on both the application of the IRS prescribed mileage rate to the claimed business mileage and his calculated depreciation amount. Use of the mileage rate is an acceptable alternative to keeping detailed records of actual operating costs; however, it may not be supplemented by depreciation cost. Rather, an allowance for depreciation cost is embedded in the IRS mileage rate. Although, maybe we could argue that the IRS should make an adjustment for an Aston Martin!

In the end, the court found the taxpayer liable for a substantial understatement of income tax along with assertion of penalties and interest. So what lessons can we learn from this case? While the majority of us aren’t driving an Aston Martin in the normal course of our business, the case does touch upon a subject many business owners should view with some level of concern. While the “stretch” in application of rules that this taxpayer may have taken may not apply to most of us, there may be opportunities to consider at least a modest enhancement to our respective recordkeeping habits, or in some cases, an absence thereof. In working with our clients, we welcome opportunities to discuss these types of subjects and review their practices and procedures, perhaps with a bit of levity over the misfortune of the taxpayer in this case, but with an eye toward the potential for an IRS examiner to someday come knocking on their door.

Michael Viens, Kreischer MillerMichael R. Viens is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.  

 

 

 

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Michael R. Viens, CPA

Michael R. Viens, CPA

Retired, Former Director, Tax Strategies

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