Many clients use their cars for both business and personal use. The IRS code allows taxpayers to take a tax deduction in one of two ways.
1. Cent-Per-Mile Method
In 2008, taxpayers can deduct 50.5¢ per mile for all business miles driven in a year, provided that the car is used at least 50% of the time for business use.
2. Depreciate the Car
Taxpayers can take a depreciation deduction for the business percentage use of their car plus all other expenses incurred, such as gas, oil, repairs, tolls, etc. In 2008, there is a new tax law change allowing up to an extra $8,000 deduction if you purchase and use the car for business. For new cars acquired in 2008, the depreciation deduction plus expenses will generally be greater than the cents-per-mile deduction.
Caution: You were probably aware of the above rules, but what you might not be aware of is how strict the IRS can be in allowing these deductions. In a recent tax court case, a professor who used his car for legitimate business use was not allowed any tax deduction because he failed the IRS's strict substantiation requirements. The key is that you must be able to document the following through log books, trip sheets, a diary, and/or other documentary evidence:
a. the mileage for each business use of the car
b. total mileage for all use of the car during the year
c. the date of each business use
d. the business purpose for the use.
The professor in the recent case submitted to the tax court a travel log consisting of a collection of preprinted forms which he had filled in; however, he had completed them after he was already being audited by the IRS, and he had no other support.
Please keep in mind that if you business has a home office then the mileage to and from the client will be business with no deduction for commuting.
Conclusion: It is fair to state that many taxpayers are not recording and keeping the documentation they need and run a significant risk of no deduction being allowed for legitimate business use of their car. Remember that the key to most tax planning opportunities is having good records to prove your case.
Please contact us for further information:
Wendy Ezell, CPA
dawezell@verizon.net
(817) 481-3784
Please feel free to forward this email to business associates who might benefit from this information.
