Substantiation for vehicle Expenses

Without proper vehicle substantiation, your vehicle expenses may be treated as a taxable income and you will be forced to pay tax.

It is quite important you get it right and that is why this article will explain substantiation of vehicle expenses.

In the previous article, substantiation of business expenses was explained, and a brief highlight was given on what is needed for a business expense.

The Internal Revenue Service tax guide states that it is a must for employee to substantiate their business expenses (vehicle falls under this) by providing the employer with evidence of the amount, place, business purpose and time of the expense after the cost has been incurred.

Many tax payers have vehicles that are being used for business purpose and it is important they claim the related expense in tax deduction.

It is important that tax payers know that the internal revenue service gives a close look at the expense incurred and the documents tendered for substantiation.

This means if by any means you own a vehicle that is being used by an employee, you would want the employee to provide you with adequate substantiation for the Internal Revenue Service purpose and for your peace of mind.

Before going into details, kindly read through the following highlight;
Except with the following evidence, taxpayer cannot substantiate for vehicle expense as stated in the tax law;

  • Time and place of use
  • Mileage for vehicles
  • Business relationship
  • Purpose of business

Any taxpayer that can’t provide the documents listed above is not entitles to tax deduction. Also, having simple ads signs on the vehicle does not change the vehicle from being a personal vehicle to a business vehicle; adequate record must be provided.

There major way to substantiate vehicle expense is by keeping both;

  • Documents like paid bills, receipts, and other related information
  • A trip sheet, diary, account book, expense report similar records and other evidence.

Another important point is that keeping of records should be done from time to time and verification of expense should not take long (it is advisable to verify near the actual time of expense of occurrence).

If they are actual expense paid by credit cards or expense where you get cash receipt, it is quite easy to keep records.

If they are other expense situations like mileage verification, it is recommended you make use of business log or diary to keep track of expense and miles covered.

This may not be always required to survive the Internal Revenue Service audit, but it is practically the best way.

For mileage verification, a travel log is the best option to handle the documentation as you can record periodically the total miles covered within this framework, the business miles are identified.

You may think the ideal way is using the exact odometer reading, but it is not done that way. Recording and listing the total miles covered with the vehicle can suffice for one part and a notation of the total miles driven for business purpose that day can suffice. Depending on the specific part and circumstance, the details that will be needed to document business varies.

A very good example is if you or your employee have an established business routine that is being followed, all you need to do is to keep record of the length if delivery trip once, document the day you go on each trip (if similar records and receipts substantiate the date).

Most times, creating and maintaining a routine log for a specific period of the year can be used to establish the taxpayer’s business pattern.

The bottom line is that taxpayers can create a log maintained for a period of the year (that is if that period is proven to be recorded can represent the vehicle business use for the whole tax year).

Additionally, if there the taxpayer cannot provide records and sufficient evidence due to reasons beyond taxpayer control, the vehicle expense can be substantiated if the taxpayer can provide credible, and real evidence that can support the deduction for vehicle expense.

Let’s look into some exemptions; come certain types of vehicle are exempted from all or some of the record keeping rules for substantiation and the notable vehicles are;

  • Cranes
  • Heavy specialty trucks
  • Forklifts
  • Buses
  • Moving vans
  • Ambulances
  • Cranes
  • Forklifts
  • Bucket trucks
  • Dump trucks,
  • Certain delivery vehicles
  • Hearses
  • Garbage trucks
  • Farm vehicles
  • Certain vehicles that is strictly for hire and not for personal use etc.

The basic criteria for major substantiation record if the nature or type of vehicle and whether or not the vehicle is used or likely to be uses for personal use.

The answer is not farfetched, if the records are to be kept for Internal Revenue Service purpose, three years from the date you files the tax return in question is enough to keep substantiation record.

However, contemporary documentation and keeping of record is ideal and the best, it is not an absolute requirement for the Internal Revenue Service.

This means there is no need for you do document your vehicle immediate you turn off the engine. However, what is required of you is the proof of actual expense.

Paid invoice and Cancelled checks will be sufficient. Well there may be other expense where the type of substantiation is almost impossible at time. In such cases, expense log or other consistent record keeping can be used as an adequate proof.

Employees and business owners most time fail to follow the strict tax rule for substantiation their vehicle expense when filing for tax return. Auditing your business means the Internal Revenue Service will demand for mileage logs if vehicle expense was deducted. If you are employed or self-employed, this tends to be critical to the amount deducted.

The basics and summary of substantiating vehicle expense may seem simple; there are numerous exceptions that will be explained.

Taxpayers are actually allowed to deduct actual vehicle expense like maintenance, insurance, gas, depreciation and other cost of operating the vehicle. Another method that can be adopted or used is the standard mileage method which allows deduction based on the standard mileage rate for each mile the vehicle covers when used for business purpose.

Let’s make use of a practical example; if the standard mileage rate of a vehicle is 54.5 cents a mile for the year 2018 purpose (increase from 43.5 cents per mile for 2017), if you cover 1000 miles with the vehicle for business, under the standard mileage method, 545 could be deducted.

One unique feature of the mileage is that record keeping requirements are the same regardless of the method used. The requirements are also the same whether the vehicle owned privately and used for the company work and the company reimburses you, you employ people to use the company vehicle, and you are the employee making use of the vehicle.

For each business trips, vehicle logs must provide the following information;

  • Business purpose,
  • Date,
  • Destination,
  • Mileage.
  • Start odometer reading,
  • Stop odometer reading

As an employee, these details must be provided to the employer. If the employer then reimburses you without the required documentation, the reimbursement received is a taxable income. Use of vehicle by an employee for other use aside the business is accounted for as personal use and the value of the personal/ unaccounted usage should be part of the employer’s income to make deductions easy.

Contemporaneous (recording time near the time of the trip) record keeping is required for mileage because waiting much longer makes the vehicle log suspicious and may affect the entire vehicle deduction.

Depending on the circumstance, varying level of details is also required by the tax agency. A good example is being able to list the customer’s name if you visit the customer regularly to show them new products, take order or provide service. But a single entry may be enough for different customers visited the same day.

If your company maintains a policy that forbids the use of company vehicles for personal use, there is no need for record keeping. However, the exception has some restrictions, rules and regulations.

An instance is that the policy must be documented and must meet six conditions. Before going into the exemption, let it be noted that only “non-control” employees fall under the exception. They include;

  • Directors,
  • Employees with an annual income of at least $205,000
  • Employees who own at least 1% of equity, capital or profits in the business.
  • Elected officer earning $100,000 or employer appointed by the board or shareholders

Just the same way it was listed above, Internal Revenue Service permits specific exceptions for the following vehicles;

The reason why these vehicles are given specific exceptions is because they have minimum probability for personal use.

  • Cargo vehicles that can carry gross vehicle weight of over 14,000 pounds
  • Buses with a minimum sitting capacity of 20 passengers
  • Special purpose farm vehicles
  • Delivery trucks with a driver seat only
  • Other exceptions have been listed earlier.

​It can be a tedious task to comply with the Internal Revenue Service mileage record keeping rules, but here are ways to help you simplify the process;

1. The first is to makes use of technology;
This is simple and you don’t need to write daily or keep the mileage logs in your day planner or diary- download apps that will help you track mileage on your cell phone or tablet. These apps are built to help you take a picture of the odometer at the beginning mileage and ending mileage on the odometer.

Using this method means you need to back up the mileage logs from time to time to prevent loss of records.
GPS tracking of company vehicle can also be used for mileage documentation.

2. Sampling method;
IRS allows that mileage can be used for regular routes but must be updated if there is change in route.

3. Use standard mileage rate
This is the easiest way to simplify record keeping for vehicle expenses because it relieves you the stress of maintaining records and saving gas receipts. But the cons of using the standard mileage rate is that it understate expense most especially if you pay above-average insurance premiums of if you drive an expensive gas guzzler.

The same way vehicle expenses can quickly add up for businesses, it can also add up for individuals who track vehicles for charitable deductions, itemized medicals, supplemental business activities like rentals properties, local businesses or managing investment. Just the way they add up, the vehicle deductions can also disappear from the IRS inquiry.

Keeping up to date mileage record is key to preserving your deductions. Another mistake tax payers make is that they wait until a night before the IRS visit to put their mileage log together.

This barely works because the Internal Revenue Service might question the use of a pen for documenting over a period of two years.

Another case is when the Internal Revenue Service notices that the taxpayer claimed to be at the mall and in few minutes was at a client 95 miles away.

Cases where the discrepancies cannot be neglected, the vehicle expense deduction is denied with a claim that the mileage log is not credible.

If the expense deduction is denied, you won’t only lose the deduction; you might be penalized for underpaying your tax liability.

On a final note, the Internal Revenue Service hardly exceptions for its strict rules when it comes to record-keeping requirement for vehicle. Also, check with your tax advisor for complicated vehicle record keeping rules before assuming yourself qualified for an exception.

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