Reminder: support your auto expense.

• Author: Allison, Ali

Auto expenses are a very common deduction for business owners and employees who must travel. Often the taxpayer does not know the exact amounts necessary to calculate the proper deduction and the tax preparer must estimate the mileage, business percentage, and ultimate auto deduction with the client's help. Tax preparers should remind their clients to have proper substantiation or, if the IRS examines the return, the deduction will more than likely be denied.

If the substantiation is lost or stolen, the IRS will generally deny the deduction because the Cohan rule (which allows a court to estimate deductible amounts of unsubstantiated expenses) cannot be applied for certain expenses, including automobile expenses (Sec. 274(d)(4)). In the case of a lost or stolen substantiation, combined with the nonavailability of contemporaneous records, substitute records may be provided, but they must include sufficient information to support the deduction (Temp. Regs. Sec. 1.274-5T(c)).

On September 24, 2008, the Tax Court, in a summary decision, upheld the Service's disallowance of an auto expense deduction of a traveling salesperson due to lack of substantiation (Niyitegyeka, T.C. Summ. 2008-129). It was obvious that the taxpayer traveled for business and would ordinarily be entitled to a deduction, but the submitted evidence was too weak to allow it.

Background

Sec. 6001 requires taxpayers to keep records to substantiate their tax liability. In the absence of such evidence, expenses can be estimated using circumstantial evidence per Cohan, 39 F.2d 540 (2d Cir. 1930). However, Sec. 274(d) overrides the Cohan rule and requires a taxpayer to substantiate auto expenses (along with a few others).

Temp. Regs. Sec. 1.274-5T(c)(2) expands upon the substantiation rule. The regulation states, "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." This means the record does not have to be documented at the exact same time as the expense, but it must be done within a reasonable time so that the time, place, amount, and business purpose can be recorded. The regulation gives the example that maintaining a log on a weekly basis is near enough to the expenditure to count as proper substantiation. The evidence may be written or recorded on an accessible computer memory device. The...