As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists taxpayers with representation in tax examinations, tax audits, appeals, and civil litigation with the Internal Revenue Service and the Ohio Department of Taxation. As part of that representation, our tax attorneys routinely advise sole proprietors regarding when a taxpayer may deduct certain transportation expenses relating to business travel on Schedule C of their Form 1040 U.S. Individual Income Tax Return. This article is the last in a series that addresses deductible travel expenses for sole proprietors. See our prior articles in this series: Deductible Business Travel Expenses for Sole Proprietors, Deductible Transportation, Lodging, and Meal Expenses for Sole Proprietors, and Deductible Business Travel Expenses for Spouses & Family Members. Specifically, this article addresses recordkeeping relating to business travel. It is important for a taxpayer to maintain the proper records to avoid further scrutiny by a Revenue Agent during an IRS examination.

Recordkeeping

    To deduct travel expenses, including business mileage and expenses, taxpayers are required to keep adequate records to substantiate the expenses. Generally, a taxpayer must prepare a written record for the documentation to be considered adequate. When deducting mileage relating to travel to and from meetings or events for business purposes, the taxpayer should prepare a diary or log supporting the mileage deductions. Please click here for an example of the daily business mileage and expense log that a taxpayer should keep.

    The taxpayer should keep a record of the mileage and expense log simultaneously with the business trip. A taxpayer may not, however, deduct the mileage to and from his home and his normal place of work. That is, a taxpayer may not deduct commuting expenses. But, if a taxpayer is traveling from his regular place of work to another business meeting, even if the business meeting is at a local place, the taxpayer may deduct the mileage relating to that travel. Again, it is important that the taxpayer maintains the proper documentation relating to the business travel and keep a mileage log, to avoid further scrutiny by a Revenue Agent during an IRS examination.

Standard Mileage Rate

    One option a taxpayer has when it comes to deducting mileage expenses is to use the standard mileage rate. The taxpayer may use the standard mileage rate to figure the deductible costs of operating a car for business purposes. For 2017, the standard mileage rate for the costs of operating a car for business use is 53.5 cents per mile. Generally, a taxpayer may use the standard mileage rate whether or not the taxpayer is reimbursed, and whether or not any reimbursement is less or more than the amount figured using the standard mileage rate. But, if a taxpayer chooses to use the standard mileage rate for a year, the taxpayer may not deduct his actual car expenses for that year. Specifically, when using the standard mileage rate, a taxpayer may not deduct depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, or vehicle registration fees, as examples. If a taxpayer decides not to use the standard mileage rate, then the taxpayer may deduct the actual car expenses.

Deduction of Actual Car Expenses

    If a taxpayer does not use the standard mileage rate, the taxpayer may be able to deduct actual car expenses. Actual car expenses include: (i) depreciation; (ii) licenses; (iii) gas; (iv) oil; (v) tolls; (vi) lease payments; (vii) insurance; (viii) garage rent; (ix) parking fees; (x) registration fees; (xi) repairs; and (xii) tires, as examples. Ultimately, if a taxpayer uses his car for both business and personal purposes, the taxpayer must divide the expenses between business and personal use. The taxpayer may divide his expenses based upon the mileage driven for each purpose. If the taxpayer deducts actual car expenses, then the taxpayer is required to maintain documentation, including receipts and proof of payment relating to the actual car expenses incurred. Maintaining the proper documentation will avoid further scrutiny by a Revenue Agent during an IRS examination.

Conclusion

    In sum, it is important for a taxpayer to maintain proper documentation when deducting business travel expenses, including mileage expenses. A taxpayer must generally keep these records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means that you must keep the records to support your deductions three years from the date when you filed the related income tax return on which you claimed the deduction. Ultimately, it is important for sole proprietors to understand what business travel expenses are deductible and to maintain proper documentation regarding the expenses to avoid further scrutiny by Revenue Agents during an IRS examination. If you have been contacted by the IRS or the Ohio Department of Taxation, contact the Nardone Limited tax attorneys at 614-223-0123.