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That mileage log isn't worth much if you don't fill it out right

April 26, 2011

Life can be hard for a commission seller. Jessica tried it in 2006 for a St. Louis office supply business, working her territory in her 2001 Chevy Cavalier. Six months work earned her $3,307.

Tax time came around. The Tax Court takes up the story:

Petitioner brought her Forms W-2, Wage and Tax Statement, for all of the companies she worked for in 2006,4 as well as a shoebox full of receipts, to H&R Block, and a return preparer at H&R Block completed her return.

At least it was a shoebox. It's the grocery bags that scare me. The preparer deducted employee business expenses in a big way. The IRS ended up challenging over $17,000 of them -- not bad for $3,307 of income.

The Tax Court seems to question whether she got much value from her preparer:

It is not clear whether the return preparer made any attempt to distinguish deductible from nondeductible expenses or whether the return preparer simply added up the receipts and deducted the sum as unreimbursed employee business expenses.

The biggest expense was her Chevy. That deduction went awry:

Petitioner kept track of her automobile mileage using a daily mileage log. However, there are several problems with the mileage log. First, the mileage log simply notes the odometer reading on petitioner's car at the beginning and end of each day and includes no information regarding where petitioner drove, the purpose of the trip, or petitioner's business relationship to the persons she visited. Second, petitioner included in the mileage log the roughly 27 miles she drove each workday commuting to and from MV Marketing's office. Finally, petitioner conceded that she may have included some personal trips in the mileage log. Petitioner did not present any evidence at trial, such as appointment books, calendars, or maps of her sales territories, to corroborate the bare information contained in the mileage log, nor did she testify with any specificity regarding her vehicle expenses in 2006.

Well, the Court made an estimate and gave her some of her expenses, right? Wrong:

Although we do not doubt that petitioner used her Chevrolet Cavalier for business between June and December 2006, we have no choice but to deny in full petitioner's deduction for mileage expenses. For the reasons discussed in the preceding paragraph, petitioner's mileage log does not satisfy the adequate records requirement of section 274(d), petitioner did not present any documentary evidence to corroborate the mileage log, and petitioner's testimony was not detailed or specific enough to satisfy the requirements of section 274(d) and section 1.274-5T(c)(3), Temporary Income Tax Regs., supra. Moreover, we are not permitted to estimate petitioner's mileage because section 274(d) supersedes the Cohan rule. Consequently, petitioner's deduction for mileage expenses is denied in full.

The moral? The tax law has very specific substantiation requirements for deducting travel and entertainment expenses, including vehicle expenses. You must substantiate:

(1) the amount of the expense or item;
(2) the time and place of the travel, entertainment, or expense;
(3) the business purpose of the entertainment or expense; and
(4) the taxpayer's relationship to the person or persons entertained.

The mileage log needs to include this information, or you need to be able to be able to support it with other items, like a travel calendar. The tax law doesn't allow you to make a good guess. No substantiation, no deduction.

Cite: Solomon, T.C. Memo 2011-91

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How did that end up in tax court? Makes no sense to take such an obviously losing case.

Also, what the heck is the tax court talking about by suggesting that her 2006 tax prep fees should be on her 2006 tax return. Does the cash basis not apply to tax prep fees?

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