Now’s the time to shore up your business driving recordkeeping

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in Small Business Tax

As the cost of gas continues to soar, more people are rethinking the way they write off their business driving expenses.

Specifically, you may try to increase your deduction by switching from the standard per-mile method (37.5 cents
per mile this year) to the "actual costs" method, which allows you to deduct all out-of-pocket costs. (See 4/19/04 issue.)

While reviewing your vehicle write-off options, make sure you're doing it right. As a recent court case illustrates, the IRS will swat down any halfhearted attempt at recreating your driving costs after the fact.

Track time, place and purpose of all business trips

To deduct driving costs, you must establish your vehicle's percentage of business use and prove your business-related expenses. Three "musts": Track the time, place and business purpose of each business-related driving trip. You must meet these rules if you're deducting your actual expenses or using the standard 37.5 cents per-mile rate.

If you're deducting your "actual" driving expenses, keep detailed records and receipts for out-of-pocket expenses such as gas, oil, repairs, insurance, etc. Your total expenses are prorated based on the percentage of business use for the year.

(To find the percentage, divide your car's business miles by its total miles for the year.)

If you're using the standard mileage rate, you're off the hook for tracking every fill-up and oil change. But you must closely track the time, distance and purpose of any business-related trip.

Best tool: an ongoing driving log

The IRS has long said the best method for establishing proof of business use is a contemporaneous diary, log or other ledger. Notes you make at or near the time of the trip are much more credible than those prepared at a later date. Tip: Keep those original logbooks and other notes, no matter how messy, should the IRS ever come calling.

Caution: Some taxpayers think they can rely on the so-called "Cohan rule" if they don't have adequate business-driving documentation. Don't be so sure.

This rule, named after a historic case, allows taxpayers to estimate expenses without adequate records if they can convince the court that the expense was actually incurred. But you can't use the Cohan rule to bail you out on business travel or entertainment expenses. It's put up the records or shut up.

Case in point: A doctor who used his car on the job failed to properly substantiate his business driving deductions, even though the IRS asked several times. Then the doctor relied on the Cohan rule and several other legal technicalities in court—throwing in everything but the kitchen sink—to salvage the deductions. "No dice," said the Tax Court.

End result: Not only did the court deny the doctor's deductions, it tacked on an accuracy-related penalty for failing to maintain adequate records. (Megibow, TC Memo 2004-41)

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