I began the week with a “winter rerun” from my former THE FLACH REPORT blog. It seems only fitting that I end the week the same way.
If you use your car for business you must keep “contemporaneous” records of your business mileage. This means that you should record the information on the day the trip occurs, and not wait until February of the year after, when you are getting your tax “stuff” together to hand to your preparer, to “estimate” your miles for the year.
Record each individual business trip separately and not as a weekly or monthly cumulative amount. Do not enter “Week of January 5-11 - 127 miles visiting clients”. Enter the date, location, business purpose and miles driven for each trip in some kind of diary, account book, or expense log.
I have found that, for me, the best way to keep a mileage log is in my daily appointment book. What I do is make notes on the mileage and other expenses in a pocket notebook and when back in the office transfer the information to my larger bound appointment book. For example I would enter “Barroso (West Windsor) 1040 103 miles” on the page for the date and time that I drove to the Barroso home in West Windsor NJ to pick up and review their tax “stuff”. If you do not have EZ Pass you should also note any toll expenses. In this case I took the NJ Turnpike and, as I no longer have EZ Pass, I would enter the amount of the tolls paid for the round-trip along with the other information. If you do have EZ Pass, identify the trip on the monthly statement.
You would also enter the likes of “Office Depot (Union City) to purchase office supplies 4 miles” or “Wachovia (Union City) to make deposit for client 3 miles”.
I also enter in my appointment book the quarter I put in the parking meter while visiting a client or the cost of using a pay phone to call the client when I am running late (hey – I don’t have a cell phone!) – any expense for which I do not receive an actual paper receipt.
You should start off the year by entering the total miles on your car on the morning of January 1st in your log – and end the year by entering the speedometer reading after your last trip on December 31st. If you sell the car during the year, enter the total miles on the date of sale and enter the beginning mileage on your new car on the day you drive it off the lot. In addition to the business miles driven for the year you will also need to know the total miles driven for the year.
The simplest way to deduct business use of your automobile is by using the “standard mileage rate”. This will also usually provide the biggest tax deduction. For 2007 the standard mileage rate for business travel was 48.5 cents per mile. For 2008 it is 50.5 cents per mile from Jan. 1 - June 30 and 58.5 cents per mile from July 1 - Dec. 31. However you can also elect to claim the business use percentage of the total cost of maintaining your car, including depreciation. You want to use the method that gives you the biggest tax deduction. Be advised that there are special rules for determining what method you can use.
It is a good idea to keep a car maintenance log to record all related expenses for the year – gas, oil changes, tune-ups, repairs, car washes, etc – so you will have the information available to make an informed decision on what method to use. This is especially important for a new car, or for the first year you are deducting business use of a car. Special recordkeeping is also required for business overnight travel and business meals and entertainment. For travel you will need to record:
* The dates you left and returned for each trip and number of days spent on business.
* The destination or area of your travel (name of city, town, or other designation).
* The business purpose of the travel (NATP Annual Conference).
* The cost of each separate expense for travel (airfare, train), lodging, meals, taxis, laundry, tips, etc.
You must have documentary evidence such as receipts, credit card statements, etc. for any expense for lodging and meals while traveling away from home and for any other expense that is $75 or more. For meals and “incidental” expenses (tips given to porters, baggage carriers, bellhops, hotel maids) you can deduct either the actual expenses or elect to use a “per diem” allowance that is determined by the location of the trip. If you're combining business and personal activities on the trip, you must be particularly careful in documenting the business portion.
For business meals and entertaining you must record the time and place, the name(s) and “relationship” (business owner or CFO of “XYZ”) of the person(s) you are entertaining or with whom you are dining, and the business purpose (“discussed my business proposal”, “tax planning”, “audit preparation”). The back of your credit card receipt for the meal or drinks is a good place to record this information.
IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses) says, “You cannot deduct amounts that you approximate or estimate” (although under the Cohan rule I would think you would be able to). Plus Pub 463 later states “If you do not have complete records to prove an element of an expense, then you must prove the element with:
* Your own written or oral statement containing specific information about the element, and
* Other supporting evidence that is sufficient to establish the element.”
However, I would rather go into an audit armed with detailed documentation than have to negotiate with the IRS to accept your “oral statement”.
IRS Pub 463 also includes an excellent table on “How To Prove Certain Business Expenses”.
Any questions?
TTFN
If you use your car for business you must keep “contemporaneous” records of your business mileage. This means that you should record the information on the day the trip occurs, and not wait until February of the year after, when you are getting your tax “stuff” together to hand to your preparer, to “estimate” your miles for the year.
Record each individual business trip separately and not as a weekly or monthly cumulative amount. Do not enter “Week of January 5-11 - 127 miles visiting clients”. Enter the date, location, business purpose and miles driven for each trip in some kind of diary, account book, or expense log.
I have found that, for me, the best way to keep a mileage log is in my daily appointment book. What I do is make notes on the mileage and other expenses in a pocket notebook and when back in the office transfer the information to my larger bound appointment book. For example I would enter “Barroso (West Windsor) 1040 103 miles” on the page for the date and time that I drove to the Barroso home in West Windsor NJ to pick up and review their tax “stuff”. If you do not have EZ Pass you should also note any toll expenses. In this case I took the NJ Turnpike and, as I no longer have EZ Pass, I would enter the amount of the tolls paid for the round-trip along with the other information. If you do have EZ Pass, identify the trip on the monthly statement.
You would also enter the likes of “Office Depot (Union City) to purchase office supplies 4 miles” or “Wachovia (Union City) to make deposit for client 3 miles”.
I also enter in my appointment book the quarter I put in the parking meter while visiting a client or the cost of using a pay phone to call the client when I am running late (hey – I don’t have a cell phone!) – any expense for which I do not receive an actual paper receipt.
You should start off the year by entering the total miles on your car on the morning of January 1st in your log – and end the year by entering the speedometer reading after your last trip on December 31st. If you sell the car during the year, enter the total miles on the date of sale and enter the beginning mileage on your new car on the day you drive it off the lot. In addition to the business miles driven for the year you will also need to know the total miles driven for the year.
The simplest way to deduct business use of your automobile is by using the “standard mileage rate”. This will also usually provide the biggest tax deduction. For 2007 the standard mileage rate for business travel was 48.5 cents per mile. For 2008 it is 50.5 cents per mile from Jan. 1 - June 30 and 58.5 cents per mile from July 1 - Dec. 31. However you can also elect to claim the business use percentage of the total cost of maintaining your car, including depreciation. You want to use the method that gives you the biggest tax deduction. Be advised that there are special rules for determining what method you can use.
It is a good idea to keep a car maintenance log to record all related expenses for the year – gas, oil changes, tune-ups, repairs, car washes, etc – so you will have the information available to make an informed decision on what method to use. This is especially important for a new car, or for the first year you are deducting business use of a car. Special recordkeeping is also required for business overnight travel and business meals and entertainment. For travel you will need to record:
* The dates you left and returned for each trip and number of days spent on business.
* The destination or area of your travel (name of city, town, or other designation).
* The business purpose of the travel (NATP Annual Conference).
* The cost of each separate expense for travel (airfare, train), lodging, meals, taxis, laundry, tips, etc.
You must have documentary evidence such as receipts, credit card statements, etc. for any expense for lodging and meals while traveling away from home and for any other expense that is $75 or more. For meals and “incidental” expenses (tips given to porters, baggage carriers, bellhops, hotel maids) you can deduct either the actual expenses or elect to use a “per diem” allowance that is determined by the location of the trip. If you're combining business and personal activities on the trip, you must be particularly careful in documenting the business portion.
For business meals and entertaining you must record the time and place, the name(s) and “relationship” (business owner or CFO of “XYZ”) of the person(s) you are entertaining or with whom you are dining, and the business purpose (“discussed my business proposal”, “tax planning”, “audit preparation”). The back of your credit card receipt for the meal or drinks is a good place to record this information.
IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses) says, “You cannot deduct amounts that you approximate or estimate” (although under the Cohan rule I would think you would be able to). Plus Pub 463 later states “If you do not have complete records to prove an element of an expense, then you must prove the element with:
* Your own written or oral statement containing specific information about the element, and
* Other supporting evidence that is sufficient to establish the element.”
However, I would rather go into an audit armed with detailed documentation than have to negotiate with the IRS to accept your “oral statement”.
IRS Pub 463 also includes an excellent table on “How To Prove Certain Business Expenses”.
Any questions?
TTFN
2 comments:
It's my understanding that the "contemporaneous" requirement went away in 1985.
The Deficit Reduction Act of 1984 first subjected local travel expenses to the substantiation requirements of §274(d) by applying these requirements to all deductions or credits claimed for the use of listed property.
Controversially, the 1984 Act eliminated a person's ability to substantiate any expense, whether for travel or for transportation costs, by any method other than by contemporaneous logs or receipts.
The resulting outcry led Congress in Section 5 of Public Law 99-44 (the 1985 Act) to retroactively revoke the contemporaneous aspect of the recordkeeping requirements and restore to the law the ability to substantiate expenses by sufficient evidence corroborating a person's own statement.
By the way, you’ll find no mention of contemporaneous in IRS Pub 463.
Tim Koupal
TK-
Regardless of whether “contemporaneous records” are strictly required in the wording of the Code or IRS publications and instructions, it would seem to me that such records are the best way of providing “sufficient evidence corroborating a person's own statement”.
My post was to tell readers, based on my 37 years experience, of the best way to keep track of business expenses.
TWTP
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