Car - law requirements for record keeping - Do Not Become Complacent!
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Internal Revenue Code Requirements - Essential Elements - Character of Record in General - Character of Records for Each Element - Summary
Description/Scope: Documentation of car and truck expenses for business use.
Purpose: Assist with compliance and making it more simple to comply with the tax rules for substantiation.
Who This Applies to: Any business use of any vehicle which must have the business use documented.
When to Perform: Monthly
Special Circumstances:
Why This Is Important: Loss of deductions costs you money and can subject you to double taxation in many circumstances.
General Benefits & Objectives:
The business use of any vehicle is deductible from your income. However, the IRS personnel are instructed to inquire about proof the transportation or travel was in fact a business purpose. This instruction has been mandated because not all taxpayers conduct themselves in a business like and honest manner. Therefore, the honest business person is paying for the dishonesty of those desiring to find methods to break the law and cover the misdeeds. In order to protect the honest business person this letter has been drafted to teach you not just what the IRS expects, but to teach both the actual requirements of the law and the real world activities of attempting to operate your business profitably and maintaining the essential elements as required by the Law. Herein are discussed the essential elements and how you can use your ordinary business records to prove those essential elements - hopefully in a fairly painless and labor-free manner.
This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. .......
Thursday, February 22, 2007 11:45 AM
Law (commentary and citation)
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Internal Revenue Code Requirements Essential Elements Character of Record in General Character of Records for Each Element SummaryCar - law requirements for record keeping
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The taxpayers maintain there was business use of personal automobiles. There are methods of reliable reconstruction of business mileage at this date.
Percentage of business use is necessary only in the instance that actual costs are being claimed. Therefore, Percentage of business use is not relevant in this claim. You were presented the interest on the automobile loan. The taxpayer and the representative presented this in the context of being expedient and hoping to settle this claim quickly, and effortlessly. It would seem reasonable to allow the deduction of the loan – and realizing there is business use, and the business can be proven and substantiated.
If the policies of the Service prevent you or do not allow you to use judgment in the process then the taxpayer will claim the deduction in the character of the number of miles and use the allowable rate for each of the years in this claim. This method, in my judgment will provide a much larger deduction for the taxpayer than you are allowing.
If you need documentation, then the taxpayers and the representative of the taxpayers will weigh the cost of the additional assessment against the cost of producing those records for you.
It is the intention of the representative to expend the time and effort necessary to protect the taxpayer’s deductions and claims.
Internal Revenue Code Requirements
The internal revenue code does mention what information is to be recorded and proven. The internal revenue code and related regulations mention that more reliability should be placed upon documents prepared at a time that is near the occurrence of the business use. Furthermore, the internal revenue code provides other methods the taxpayer may use in determining and proving the business use of personal automobiles. The internal revenue code makes no definition for the methods of recording the necessary and essential items of information. In addition, the code includes a provision that provides the taxpayer permission to use documents in the client’s records (or other party’s records) which establish the essential elements proving the business use. In all probability, I believe that any oversight party would agree that the code was written to allow taxpayers some latitude in each person’s own record keeping. Additionally, the code was written with the intention of encouraging a taxpayer to keep the records of the essential elements in order to foster compliance with these code sections and related regulations. To focus on only a portion of the written code would be tantamount to mitigating or at the least diminishing the intent of code itself. In addition to written records, you are permitted to permit oral representations of the taxpayer.
The following is an excerpt from the tax regulations (not tax law) which states some of the specific requirements of "Adequate Records". Please know and understand this is not the specific requirements of "Essential Elements" that the records must contain. It is important to distinguish "Adequate Records" from "Essential Elements".
Furthermore the box immediately following this is the section most often cited but FAILS TO DISCLOSE THE SECTION ON "OTHER RECORDS PERMITTED". I emphasize to you - "Other Sufficient Evidence". It is "OTHER Sufficient Evidence" the §1.274-5T(c)(3) addresses and provides for the replacement of the "Adequate Records" rule. Please notice these two sections are neither mutually required nor are they mutually exclusive. Both sections work in unison to allow the taxpayer to use the records in his or her own business. Furthermore - the entire area of §1.274-5T(c)(2) and §1.274-5T(c)(3) are in an "or" relationship. It other words, the "Adequate Records" or the "Other Sufficient" evidence rules can be used together or separately. If you do not have the "Adequate Records" then you may use the "Other Sufficient Evidence".
1.274-5T(c)(2)
(2) SUBSTANTIATION BY ADEQUATE RECORDS-- (i) IN GENERAL. To meet the "adequate records" requirements of section 274(d), a taxpayer shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record (as provided in paragraph (c)(2)(ii) of this section), and documentary evidence (as provided in paragraph (c)(2)(iii) of this section) which, in combination, are sufficient to establish each element of an expenditure or use specified in paragraph (b) of this section. It is not necessary to record information in an account book, diary, log, statement of expense, trip sheet, or similar record which duplicates information reflected on a receipt so long as the account book, etc. and receipt complement each other in an orderly manner.
(ii) ACCOUNT BOOK, DIARY, ETC. An account book, diary, log, statement of expense, trip sheet, or similar record must be prepared or maintained in such manner that each recording of an element of an expenditure or use is made at or near the time of the expenditure or use.
(A) MADE AT OR NEAR THE TIME OF THE EXPENDITURE OR USE. For purposes of this section, the phrase "made at or near the time of the expenditure or use" means the element of an expenditure or use are recorded at a time when, in relation to the use or making of an expenditure, the taxpayer has full present knowledge of each element of the expenditure or use, such as the amount, time, place, and business purpose of the expenditure and business relationship. An expense account statement which is a transcription of an account book, diary, log, or similar record prepared or maintained in accordance with the provisions of this paragraph (c)(2)(ii) shall be considered a record prepared or maintained in the manner prescribed in the preceding sentence if such expense account statement is submitted by an employee to his employer or by an independent contractor to his client or customer in the regular course of good business practice. For example, a log maintained on a weekly basis, which accounts for use during the week, shall be considered a record made at or near the time of such use.
(B) SUBSTANTIATION OF BUSINESS PURPOSE. In order to constitute an adequate record of business purpose within the meaning of section 274(d) and this paragraph (c)(2), a written statement of business purpose generally is required. However, the degree of substantiation necessary to establish business purpose will vary depending upon the facts and circumstances of each case. Where the business purpose is evident from the surrounding facts and circumstances, a written explanation of such business purpose will not be required. For example, in the case of a salesman calling on customers on an established sales route, a written explanation of the business purpose of such travel ordinarily will not be required. Similarly, in the case of a business meal described in section 274(e)(1), if the business purpose of such meal is evident from the business relationship to the taxpayer of the persons entertained and other surrounding circumstances, a written explanation of such business purpose will not be required.
(C) SUBSTANTIATION OF BUSINESS USE OF LISTED PROPERTY--
(1) DEGREE OF SUBSTANTIATION. In order to constitute an adequate record (within the meaning of section 274(d) and this paragraph (c)(2)(ii)), which substantiates business/investment use of listed property (as defined in Section 1.280F-6T(d)(3)), the record must contain sufficient information as to each element of every business/investment use. However, the level of detail required in an adequate record to substantiate business/investment use may vary depending upon the facts and circumstances. For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of a truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number miles driven during the taxable year, the length of the delivery route once, and the date of each trip at or near the time of the trips. Alternatively, the taxpayer may establish the date of each trip with a receipt, record of delivery, or other documentary evidence.
(2) WRITTEN RECORD. Generally, an adequate record must be written. However, a record of the business use of listed property, such as a computer or automobile, prepared in a computer memory device with the aid of a logging program will constitute an adequate record.
(D) CONFIDENTIAL INFORMATION. If any information relating to the elements of an expenditure or use, such as place, business purpose, or business relationship, is of a confidential nature, such information need not be set forth in the account book, diary, log, statement of expense, trip sheet, or similar record, provided such information is recorded at or near the time of the expenditure or use and is elsewhere available to the district director to substantiate such element of the expenditure or use.
(iii) [RESERVED]. For further guidance, see Sec. 1.274-
5(c)(2)(iii).
(iv) RETENTION OF WRITTEN EVIDENCE. The Commissioner may, in his discretion, prescribe rules under which an employer may dispose of the adequate records and documentary evidence submitted to him by employees who are required to, and do, make an adequate accounting to the employer (within the meaning of paragraph
(f)(4) of this section) if the employer maintains adequate accounting procedures with respect to such employees (within the meaning of paragraph (f)(5) of this section.
(v) SUBSTANTIAL COMPLIANCE. If a taxpayer has not fully substantiated a particular element of an expenditure or use, but the taxpayer establishes to the satisfaction of the district director that he has substantially complied with the "adequate records" requirements of this paragraph (c)(2) with respect to the expenditure or use, the taxpayer may be permitted to establish such element by evidence which the district director shall deem adequate.
I believe that any oversight party would agree that the
code was written to allow taxpayers some latitude in each person’s own record keeping.
Each industry and each business is slightly different and Congress has written the Code to
allow the Administration of the Tax Code to recognize those subtle variations.
Additionally, the code was written with the intention of encouraging a taxpayer to keep
the records of the essential elements in order to foster compliance with these code
sections and related regulations. To focus on only a portion of the written code would be
tantamount to mitigating or at the least diminishing the intent of code itself. In
addition to written records, the Internal Revenue Service is permitted to permit oral
representations of the taxpayer.
OTHER SUFFICIENT EVIDENCE §1.2745T(c)(3) |
| (3)
SUBSTANTIATION BY OTHER SUFFICIENT EVIDENCE-- (i) IN GENERAL. If a taxpayer fails to establish to the satisfaction of the district director that he has substantially complied with the "adequate records" requirements of paragraph (c)(2) of this section with respect to an element of an expenditure or use, then, except as otherwise provided in this paragraph, the taxpayer must establish such element-- (A) By his own statement, whether written or oral, containing specific information in detail as to such element; and (B) By other corrobative evidence sufficient to establish such element. If such element is the description of a gift, or the cost or amount, time, place, or date of an expenditure or use, the corrobative evidence shall be direct evidence, such as a statement in writing or the oral testimony of persons entertained or other witnesses setting forth detailed information about such element, or the documentary evidence described in paragraph (c)(2) of this section. If such element is either the business relationship to the taxpayer of persons entertained, or the business purpose of an expenditure, the corrobative evidence may be circumstantial evidence. (ii) SAMPLING-- (A) IN GENERAL. Except as provided in paragraph (c)(3)(ii)(B) of this section, a taxpayer may maintain an adequate record for portions of a taxable year and use that record to substantiate the business/investment use of listed property for all or a portion of the taxable year if the taxpayer can demonstrate by other evidence that the periods for which an adequate record is maintained are representative of the use for the taxable year or a portion thereof. (B) EXCEPTION FOR POOLED VEHICLES. The sampling method of paragraph (c)(3)(ii)(A) of this section may not be used to substantiate the business/investment use of an automobile or other vehicle of an employer that is made available for use by more than one employee for all or a portion of a taxable year. (C) EXAMPLES. The following examples illustrate this paragraph (c)(3)(ii). EXAMPLE 1. A, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. A uses an automobile for local business travel to visit the homes or offices of clients, to meet with suppliers and other subcontractors, and to pick up and deliver certain items to clients when feasible. There is no other business use of the automobile but A and other members of her family also use the automobile for personal purposes. A maintains adequate records for the first three months of 1986 that indicate that 75 percent of the use of the automobile was in A's business. Invoices from subcontractors and paid bills indicate that A's business continued at approximately the same rate for the remainder of 1986. If other circumstances do not change (e.g., A does not obtain a second car for exclusive use in her business), the determination that the business/investment use of the automobile for the taxable year is 75 percent is based on sufficient corroborative evidence. EXAMPLE 2. The facts are the same as in example (1), except that A maintains adequate records during the first week of every month, which indicate that 75 percent of the use of the automobile is in A's business. The invoices from A's business indicate that A's business continued at the same rate during the subsequent weeks of each month so that A's weekly records are representative of each month's business use of the automobile. Thus, the determination that the business/investment use of the automobile for the taxable year is 75 percent is based on sufficient corroborative evidence. EXAMPLE 3. B, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. For the first three weeks of each month, B uses his own automobile occasionally to travel within the metropolitan area on business. During these three weeks, B's use of the automobile for business purposes does not follow a consistent pattern from day to day or week to week. During the fourth week of each month, B delivers to his customers all the orders taken during the previous month. B's use of his automobile for business purposes, as substantiated by adequate records, is 70 percent of the total use during that fourth week. In this example, a determination based on the records maintained during that fourth week that the business/investment use of the automobile for the taxable year is 70 percent is not based on sufficient corroborative evidence because use during this week is not representative of use during other periods. (iii) SPECIAL RULES. See Section 1.274-6T for special rules for substantiation by sufficient corroborating evidence with respect to certain listed property. |
ALERT: One is urged to notice and fully understand some of the essential
elements can be supported by indirect while some MUST be proven by direct
evidence. For some of the elements, or for additional support circumstantial
evidence may be used successfully.
Video - Business Use Proven by "Other Evidence" (2.6 MB)
TOPReg 1.2745T(b) (6) Listed Property. |
| The elements to be
proved with respect to any listed property are-- (Amount, time,
business purpose)
1.274-5T(b)(6)(i) Amount
1.274-5T(b)(6)(ii) Time.
1.274-5T(b)(6)(iii) Business Or Investment Purpose.
|
[Reg 1.2745T(b)(6)]
See also § 1.274-5T(e) relating to the substantiation of business use of employer-provided listed property and § 1.274-6T for special rules for substantiating the business/investment use of certain types of listed property.
Character of Records in General
The taxpayer has the flexibility to keep records in his own format and to offer records that substantiate the above elements in the format of his choice. First we shall address the issue of whether the taxpayer has alternatives and taxpayer rights to maintain records for his business in a manner which is convenient for him, still maintain the proof of the essential elements and concurrently furnish records which are not defined in the Code but establish all the facts and circumstances of the essential elements.
Incomplete records. If the taxpayer does not have adequate records to prove an element of an expense, then s/he may prove the element by: [Reg 1.274A5T(c)(3)]
Substantiation By Other Sufficient Evidence
Reg 1.274A5T(c)(3)
1) His or her 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.
1.274-5T(c)(3)(i) In General.
1.274-5T(c)(3)(i) In General.: If a taxpayer fails to establish to the satisfaction of the district director that he has substantially complied with the "adequate records" requirements of paragraph (c)(2) of this section with respect to an element of an expenditure or use, then, except as otherwise provided in this paragraph, the taxpayer must establish such element-- 1.274-5T(c)(3)(i)(A) By his own statement, whether written or oral, containing specific information in detail as to such element; and
1.274-5T(c)(3)(i)(B) By other corroborative evidence sufficient to establish such element.
If such element is the description of a gift, or the cost or amount, time, place, or date of an expenditure or use, the corroborative evidence shall be direct evidence, such as a statement in writing or the oral testimony of persons entertained or other witnesses setting forth detailed information about such element, or the documentary evidence described in paragraph (c)(2) (bpcpa comment: c2 is the paragraph requiring "Adequate Records") of this section. If such element is either the business relationship to the taxpayer of persons entertained, or the business purpose of an expenditure, the corroborative evidence may be circumstantial evidence.
In some cases, circumstantial evidence may support the amount of business and investment use. For example, the nature of the work, such as deliveries, provides circumstantial evidence of the fact that the taxpayer may use to prove the car for business purposes. Invoices of deliveries, court dates for an attorney, depositions for an attorney, etc. establish when the taxpayer used the car for business. [Reg 1.274A5T(c)(3)(i); Reg 1.274-5T(c)(2)(B)]
| (B) Substantiation Of Business Purpose. |
| In order to constitute an adequate record of business purpose within the meaning of section 274(d) and this paragraph (c)(2), a written statement of business purpose generally is required. However, the degree of substantiation necessary to establish business purpose will vary depending upon the facts and circumstances of each case. Where the business purpose is evident from the surrounding facts and circumstances, a written explanation of such business purpose will not be required. For example, in the case of a salesman calling on customers on an established sales route, a written explanation of the business purpose of such travel ordinarily will not be required. Similarly, in the case of a business meal described in section 274(e)(1), if the business purpose of such meal is evident from the business relationship to the taxpayer of the persons entertained and other surrounding circumstances, a written explanation of such business purpose will not be required. |
Sampling. The taxpayer 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 the taxpayer 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)]
Destroyed records. The taxpayer can prove a deduction by reconstructing the records or expenses if the taxpayer cannot produce a receipt for reasons beyond his or her control, such as fire, flood, or other casualty. [Reg 1.274A5T(c)(5)]
Character of Records For Each element
Second, we shall discuss the character of substantiation that the Code of Federal Regulations requires for each of the elements.
Mileage Amount
As stated in the Code, the detail, time of recording, method of recording, frequency of recording and items shown are not defined in the Code and the taxpayer is provided some (within reason) freedom in each of the aforementioned items. The level of detail required in an adequate record to substantiate business/investment use might vary depending upon the facts and circumstances.
§1.274-5T(c)(2)(C) Substantiation Of Business Use Of Listed PropertyThe taxpayer is not required to maintain a detailed individual logbook entry for each trip when there are routine trips of a set number of miles.
The taxpayer is required only to show the number of miles of the trip one time. In this instance, the trips to the ___________, the _____________, the ________ companies and other required trips are always the same number of miles.
1.274-5T(c)(2)(ii)(C)(1) Degree Of Substantiation.
In order to constitute an adequate record (within the meaning of section 274(d) and this paragraph (c)(2)(ii)), which substantiates business/investment use of listed property (as defined in § 1.280F-6T(d)(3)), the record must contain sufficient information as to each element of every business/investment use. However, the level of detail required in an adequate record to substantiate business/investment use may vary depending upon the facts and circumstances. For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of a truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number miles driven during the taxable year, the length of the delivery route once, and the date of each trip at or near the time of the trips. Alternatively, the taxpayer may establish the date of each trip with a receipt, record of delivery, or other documentary evidence.
1.274-5T(c)(2)(ii)(C)(2) Written Record.
Generally, an adequate record must be written. However, a record of the business use of listed property, such as a computer or automobile, prepared in a computer memory device with the aid of a logging program will constitute an adequate record.
Date
§1.274-5T(c)(2)(ii)(B) Substantiation Of Business Purpose.The date of the business use can be established by methods other than a logbook or daily diary. The corroborative/circumstantial documentation is not defined in the code, but is written into the CFR as a reliable method of substantiation. The Code provides for the use of other and related documents to establish the date element. [please read and understand §1.274-5T(c)(2)(C) and the following:
In order to constitute an adequate record of business purpose within the meaning of section 274(d) and this paragraph (c)(2), a written statement of business purpose generally is required. However, the degree of substantiation necessary to establish business purpose will vary depending upon the facts and circumstances of each case. Where the business purpose is evident from the surrounding facts and circumstances, a written explanation of such business purpose will not be required. For example, in the case of a salesman calling on customers on an established sales route, a written explanation of the business purpose of such travel ordinarily will not be required. Similarly, in the case of a business meal described in section 274(e)(1), if the business purpose of such meal is evident from the business relationship to the taxpayer of the persons entertained and other surrounding circumstances, a written explanation of such business purpose will not be required.
Business Purpose
The taxpayer is provided a means of substantiating the business purpose that is flexible. In fact, the substantiation is not a narrowly defined requirement, but a flexible definition of substantiation written in the Code of Federal Regulations. Please read and understand §1.274-5T(e)(2)(ii)(B)
The taxpayer’s statements that the use was business purpose, and related documentation is all that is required. No other documentation, written or otherwise, is necessary.
Before I summarize/close I shall state that the employer has additional remedy in §1.274-6T. The §1.274-6T pertains to employer provided vehicles, policy statements, prohibition of personal use by employees and the work around to include the value of the vehicle in the W2 wages of the employee.
It is likely that the taxpayer cannot support 100% business use. On the other side, it is unreasonable that there was no business use. If the Service is to eliminate the amount of interest on the vehicle and any other mileage claimed, the taxpayer or his representative will locate the paperwork necessary and will be able to find more deductions than claimed at this date in the case.
§§§ Law §§§
§274(d)
§§§ Regs §§§
§§§ Cases §§§
This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.
Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.
This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.
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