Bob Parrish CPA BMOdessa@Home.net BMSarasota@Home.net
Protecting Vehicle Deductions
Small Business and Home Office
Yes -- the write off period of expensive vehicles is quite lengthy. Please note that if you are contemplating the disposal of a vehicle being depreciated you have alternatives in the selection of disposition methods. One is to trade the vehicle in on another vehicle the second is to sell the vehicle and use the proceeds to purchase the new vehicle. You will find the taxes on the transaction to be lower in the following circumstances.
IF: The remaining depreciable basis is "more" than the sales price
It will behoove you to sell the vehicle. Why? The 'cost' for tax purposes is more than you will receive from the sale. Therefore, you will be able to show a loss on the disposition of the vehicle. Therefore, sell.
It will behoove you to trade the vehicle. Why? The 'cost' for tax purposes is less that you will receive from the sale. Therefore, you will be required to show income {taxable} from a sale. Therefore trade.
The following is an excerpt from IRS publications and will inform you how IRS looks upon substantiation of the business use of vehicles. IRS like to make it so difficult to prove to them the business use portion, it becomes a true burden to all taxpayers. You can use methods such as a small hand held tape recorder to record the information or use a sampling technique that covers at least 25% of the year on a 'representative basis'. Click here to go to TOP
This chapter discusses the rules you should follow to keep records of the business use of your car and cars provided by your employer.
To claim a credit or deduction for your car that you use in your business or work, you must be able to prove (substantiate )certain elements of the expense. You must be able to prove these elements by adequate records or sufficient evidence, either written or oral, that will support your own statement. Estimates or approximations do not qualify as proof of an expense. [IRC 274(d); Reg 1.274A5T(c)(1)]
Note. These rules do not apply to qualified non personal use vehicles as discussed in Chapter 4. [IRC 274(d); Reg 1.274A5T(k)]
1) The amount of each separate expense for a car, such as the cost of buying a car, the cost of capital improvements, lease payments, the cost of maintenance and repairs, or other expenses.
2) The mileage for each business or investment use of the car, and the total miles for the tax year.
3) The date of the expense or use.
4) The business or investment reason for the expense or use of the car.
[Reg 1.274A5T(b)(6)]
Adequate records. You should keep the proof you need for these items in an account book, diary, log, statement of expense, trip sheet, or similar record supported by adequate documentary evidence. Written evidence has considerably more value than oral evidence alone. [Reg 1.274Ä5T(c)]
Timely recordkeeping. You do not have to write down the elements of every expense at the time of the expense. However, a record of the elements of an expense or of a business use made at or near the time of the expense or use, supported by sufficient documentary evidence, has more value than a statement prepared later when generally there is a lack of accurate recall. A log maintained on a weekly basis, which accounts for use during the week, is considered a record made at or near the time of the expense or use. You do not have to record information that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. [Reg 1.274A5T(c)(2); Reg 1.274Ä5T(c)(1)]
An adequate record contains sufficient information for each element of every business or investment use. The level of detail required to prove the use may vary depending on the facts and circumstances. For example, if your only business use of a car is to make deliveries to customers of your employer on an established route, you can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. [Reg 1.274A5T(c)(2)(ii)(B); Reg 1.274A5T(c)(2)(ii)(C)]
Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. For example, deliveries at several different locations on a route that begins and ends at your employer's business premises and that may include a stop at the business premises between two deliveries can be accounted for by a single record of miles driven. Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. [Reg 1.274A5T(c)(6)(i)(C)]
Generally, an adequate record must be written. However, a record prepared in a computer memory device with the aid of a logging program is considered an adequate record. [Reg 1.274A5T(c)(2)(ii)(C)(2)]
A receipt is ordinarily the best evidence to prove the amount of an expense. [Reg 1.274A5T(c)(2)(iii)]
Canceled check. A canceled check, together with a bill from the payee, ordinarily establishes the cost. However, a canceled check does not prove a business expense without other evidence to show that it was for a business purpose. [Reg 1.274A5T(c)(2)(iii)]
Business purpose. A written statement of the business purpose of an expense is generally required. However, the degree of proof varies according to the circumstances in each case. If the business purpose of an expense is clear from the surrounding circumstances, a written explanation is not required. [Reg 1.274Ä5T(c)(2)(ii)(B)]
Example. A sales representative who calls on customers on an established sales route does not have to submit a written explanation of the business purpose for traveling that route. [Reg 1.274Ä5T(c)(2)(ii)(B)]
Confidential information. Any confidential information relating to an element of a deductible expense, such as the place or business purpose, need not be put in your account book, diary, or other record. However, the information has to be recorded elsewhere at or near the time of the expense and be available to fully prove that element of the expense. [Reg 1.274A5T(c)(2)(ii)(D)]
Incomplete records. If you do not have adequate records to prove an element of an expense, then you must prove the element by: [Reg 1.274A5T(c)(3)]
1) Your own statement, whether written or oral, containing specific information in detail as to the element, and
2) Other supporting evidence sufficient to establish the element.
In some cases, circumstantial evidence may support the amount of business and investment use. For example, the nature of your work, such as deliveries, provides circumstantial evidence of the fact that you use your car for business purposes. Invoices of deliveries establish when you used the car for business. [Reg 1.274A5T(c)(3)(i); Reg 1.274A5T(c)(2)(B)]
Sampling. You can maintain an adequate record for parts of a tax year and use that record to substantiate the amount of business or investment use for the entire year if you can demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. [Reg 1.274Ä5T(c)(3)(ii)]
Example. You use your car for local business transportation to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. There is no other business use of the car, but you and other members of your family use the car for personal purposes. You maintain adequate records during the first week of each month that show that 75% of the use of the car is for business. Invoices and bills show that your business use continued at the same rate during the later weeks of each month. Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. [Reg 1.274A5T(c)(3)(ii)(C) Ex 2]
Destroyed records. You can prove a deduction by reconstructing your records or expenses if you cannot produce a receipt for reasons beyond your control, such as fire, flood, or other casualty. [Reg 1.274A5T(c)(5)]
Additional information required. The IRS may require additional information to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. [Reg 1.274A5T(c)(6)(iv)]
Keeping records and receipts. You must keep proof to support your claim to a deduction as long as your income tax return can be examined. Generally, it will be necessary for you to keep your records for 3 years from the date you file the income tax return on which the deduction is claimed. A return filed early is considered as filed on the due date. [RP 63A4, Q 30]
You must keep records of business use for each year of the recovery period for your car. See More-than-50%-use test, in Chapter 2 under Partial Business Use.
Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep duplicate copies of this information. However, you may be required to prove your expenses if: [RP 63Ä4, Q 32]
1) You claim deductions for expenses that are more than reimbursements,
2) Your expenses are reimbursed under a nonaccountable plan,
3) Your employer does not use adequate accounting procedures to verify expense accounts, or
4) You are related to your employer as discussed in Chapter 6 under Adequate Accounting.
Records for Vehicles Provided by Your Employer
If your employer provides you with a vehicle, you have received a fringe benefit that may be included in your income unless it qualifies as a working condition fringe. See Chapter 4. [IRC 61(a)(1); IRC 132(a)]
Written policy statement. Generally, you must keep records, as previously discussed, to substantiate the business use of the vehicle. However, if your employer implements a written policy statement of no personal use (or no personal use except for commuting) of employer-provided vehicles, that policy statement will qualify as sufficient supporting evidence and satisfy the substantiation requirements. [IRC 274(d); Reg 1.274A6T(a)(1)]
No personal use. Instead of having to prove the business use of an employer-provided vehicle, you can treat all use of the vehicle as business use if all of the following conditions are met: [Reg 1.274A6T(a)(2)(ii)]
1) The vehicle is owned or leased by your employer and is provided to one or more employees for use in connection with your employer's trade or business,
2) When not being used in your employer's trade or business, the vehicle is kept on your employer's business premises, unless it is temporarily located elsewhere (for example, in a garage for maintenance or repairs),
3) No employee using the vehicle lives at your employer's business premises,
4) Under your employer's written policy statement, you, or any individual whose use would be taxable to you (such as a family member), cannot use the vehicle for personal purposes, except for minimal personal use (such as a stop for lunch between deliveries), and
5) Except for minimal personal use, neither you, nor any individual whose use would be taxable to you, uses the vehicle for any personal purpose.
There must be evidence that would enable the IRS to determine whether the use of the vehicle meets these conditions.
No personal use except for commuting. Instead of having to prove the business use of an employer-provided vehicle, you can prove any exclusion allowed for a working condition fringe by meeting all the following conditions: [Reg 1.274Ä6T(a)(3)(ii)]
1) The vehicle is owned or leased by your employer and is provided to one or more employees for use in connection with your employer's trade or business and is used in that business,
2) Your employer, for bona fide noncompensatory business reasons, requires you to commute to or from work in the vehicle,
3) Under your employer's written policy statement, you, or any individual whose use would be taxable to you, cannot use the vehicle for personal purposes, other than for commuting or minimal personal use (such as a stop for a personal errand on the way between a business delivery and your home),
4) Except for minimal personal use, you (or any individual whose use would be taxable to you) do not use the vehicle for any personal purpose other than commuting,
5) You are not a control employee (defined later under in this section), and
6) You include in gross income the commuting value determined by your employer to the extent that you do not reimburse your employer for the commuting use.
There must be evidence that would enable the IRS to determine whether the use of the vehicle meets these conditions.
A control employee is an officer appointed, confirmed, or elected by the employer's board members or shareholders and whose compensation is at least $50,000, a director, any employee whose compensation is at least $100,000, or a 1% or more equity, capital, or profits interest owner. A control employee of a government employer is any elected official or employee whose compensation is at least as much as that paid to a federal government employee at Executive Level V (for 1991 this was $101,300). Government means any federal, state, or local governmental unit, and their agencies or instrumentalities. [Reg 1.61A21(f)(5); Reg 1.61A21(f)(6)]
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Your support of the firm is greatly appreciated. If you feel you would like support from us in matters not addressed herein, please communicate your needs to us.
Thank you,
Bob Parrish
941/387-0926 {Last date letter read} 03/18/93