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Lessons from the Tax Court: Tax rules of the road

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in Small Business Tax

The rules for substantiating business car deductions are hard to navigate. What’s more, it’s a hassle to comply with all the requirements.

Strategy: Follow the IRS-approved route. If you veer off course, deductions may be disallowed.

The IRS tends to take an extra-long look at deductions for business vehicles.   

New case: An affluent couple owned three vehicles: a Mercedes-Benz, a Cadillac and a Suburban. They claimed that the husband used the Mercedes exclusively for business, the wife used the Cadillac exclusively for business and both of them used the Suburban for personal driving. They had three businesses and filed a Schedule C for each one.

The husband deducted $19,126 for 51,100 business miles and the wife deducted $16,177 for driving 43,140 business miles. They maintained mileage logs on Excel spreadsheets and listed daily dates and odometer readings.

However, the Tax Court rejected the logs as being unreliable. The logs included entries for numerous holidays and regularly showed daily business travel of several hundred miles. Furthermore, the logs were vague and failed to list specific addresses for business visits.

Result: The Tax Court ruled that the business mileage was overstated and the personal mileage was understated. The couple claimed that almost every trip was a business trip—even an outing to the supermarket. The husband, who owned a real estate business, said he would converse with people in the meat department and hand out business cards. (Moore, TC Summary Opinion 2010-102)

Tip: Under the “Cohan rule”—named after a case involving legendary entertainer George M. Cohan—you may be able to estimate expenses without adequate documentation if the court is otherwise convinced that some expenses were incurred. But this should be viewed as a last resort.

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