How To Maximize Your Business Car Deductions And Protect Them From IRS Attack
May 2018Tax Practice/Corporation
While the new tax law increases business car deductions, you must have the records to back up your business use to qualify. Otherwise, you could find yourself facing steep taxes, interest, and penalties from an audit. Here’s how to maximize your deductions while protecting them from IRS attack.
The new tax law accelerates depreciation deductions for business cars, providing faster tax savings. However, deductions for depreciation, as well as for operating expenses (gas, oil, insurance, repairs, maintenance, etc.) are limited to your business use. For example, if you incur $30,000 in business car expenses (including depreciation) and can justify 60% business usage for the year, your tax deduction will be $18,000.
A recent Tax Court case underscores the importance of maintaining adequate records to support the business use claimed. In Velez v. Commissioner, TC Memo 2018–46, a tax attorney claimed $18,946 in business car deductions for 2012, based upon travel between his five law offices in Ohio. Unfortunately, Section 274(d) requires that a taxpayer maintain an account book, diary, or log to evidence the time, place and amount of all business car expenses and their related business purpose. While a contemporaneous log is not required, the court places a higher value on records prepared close to the time of the actual expense. In this case, the tax attorney produced reconstructed mileage logs just shortly before trial, and years after the fact. As a result, the court wiped out his deduction, and slapped him with additional taxes, interest, and penalties!
Documenting Business Car Usage
Are you tracking your business mileage in order to justify your deduction? If not, we can help. We have a limited supply of mileage logs available, so contact us* and we’ll be happy to share one with you. If you’re more tech savvy, there are a number of free apps that can do the job. MileIQ and Hurdlr are the top-rated mileage tracking apps that are easy-to-use, automatically detect drives, and provide detailed tracking and reporting.
Maximizing the Business Deduction
While trips between offices and for other business purposes are deductible, commuting to and from your office is not. In order to limit non-deductible commuting trips, aggressive doctors may schedule business trips, such as meetings with referring doctors, picking up supplies or lab cases, making bank deposits, etc. on the way to and from the office in order to increase their tax-deductible travel.
Some super aggressive doctors have even taken the position that they are operating a valid home office, thereby eliminating any non-deductible commuting trips. The Tax Court has upheld this strategy in cases where doctors were actually seeing patients in their home.
Otherwise, justifying a home office deduction under Section 280A is extremely difficult. In order to qualify, you must use a portion of your home regularly and exclusively for business purposes, and your home office must be where you perform substantially all of your administrative and management work. So if you’re performing any management or administrative duties in your private office at the practice, you'll likely lose an IRS challenge to your home office deduction, and some of your business car deductions as well.
A Better Approach
At one of our Park City ski seminars, a doctor boasted that he was deducting 100% business use of his auto. I asked if he had ever been audited, and he replied that he had. He was extremely proud that he had received a “no change” letter from the IRS as a result of his recently completed audit. He explained that his mileage logs documented 80% business use for one month of the year, which the IRS agent accepted as a proxy for the entire year.
Furthermore, he related that his practice was in a deteriorating neighborhood, so he agreed to garage the business car in a safe location (his home) at no charge to his corporation! He convinced the IRS agent that the trips to and from the garage (home) benefited the corporation, and offset the value of any personal use of the car. As result, the corporation ended up with 100% deduction for his business car, and he reported no income from the personal use of the vehicle.
* To request your complimentary mileage log for documenting business car usage, email us or call 888.249.7537.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
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