The general rule is that you must prove the business purpose and payment, usually by an invoice and a check. You may be able to support the deduction by other means, such as a diary for small items where a receipt is difficult to get. If you don't have adequate documentation, the courts can use the Cohan Rule to estimate expenses for most other types of expenditures, such as office supplies and utilities.
Lee Baker worked as a self-employed truck driver. He owned a 1995 Mack Truck tractor which he used to haul tank trailers. He did not own the trailers. The taxpayer claimed approximately $63,638 of expenses related to his truck business for the year at issue.
Of the total, he claimed $38,516 for fuel, $12,200 for truck maintenance, and the remainder for other expenses. But he provided no documentation to support any of the expenses claimed.
Because the property use didn't have to meet the strict substantiation requirements, the court could estimate the taxpayer's expenses under the "Cohan Rule." Under the Cohan Rule, when taxpayers are unable to produce records of actual expenditures, they may rely on reasonable estimates, provided there is some factual basis for it. The rule is based on a tax case involving entertainer, composer and playwright George M. Cohan, who claimed a deduction for entertainment expenses but had no documentation. The court estimated his deduction on the rationale he must have incurred some expenses. Ironically, the rule can no longer be used for travel and entertainment or expenses related to listed property such as cars and trucks.
Five Key Things to Document for Car and Truck Expenses
For meals, entertainment and listed property usage (cars, trucks, etc.), the requirements are more specific and the Cohan Rule isn't available. For vehicles, you must document the:
- Cost and date of each expense;
- Mileage for each business use;
- Date of vehicle use;
- Business destination, and
- Business purpose of the trip.
Each of these applies to each trip. In addition, you'll need the date you started using the vehicle for business and the total miles during the year.
The best approach is a diary (or app for your smartphone, tablet or other device) with the date, destination, business purpose, start and stop odometer readings, and expenses. The recording should be made as close as possible to the time of the trip. That could be the same day, or within the week. The longer you delay, the less credible the record.
Employee Seeking Vehicle-Expense Reimbursement
Whether you reimburse using the actual or standard mileage method, the same recordkeeping rules apply. When employees use a company car, the same recordkeeping rules apply. Undocumented mileage must be included as income on the employee's W-2.
While the requirements may sound draconian, once you're in the habit, it's not that bad. The rules are lengthy because they cover a broad spectrum of activities.
If you would like someone to suggest ways to reduce your paperwork, contact Tim Sturm at 615-309-2303 or by e-mail at firstname.lastname@example.org