Statute’s Strict Requirements Doom Sales Representative’s Vehicle Expense Deduction

Many people maintain jobs that require them to travel for work, and many of those employers do not compensate their workers for those expenses. Taxpayers in this situation should take heed to a recent ruling by the US Tax Court, which sided with the Internal Revenue Service in disallowing a taxpayer’s $20,000 vehicle expense deduction. Even though the taxpayer used the standard mileage rate, and had records showing the miles he had driven, the Tax Code required more detailed information that the taxpayer did not keep.

Mr. Garza’s tax troubles related to certain expense deduction claims he made on his 2010 federal return. During that year, the taxpayer worked as outside sales representative for Time Warner Cable. Garza’s job required him to travel extensively, using his personal vehicle. The employer did not reimburse Garza for his travel.

To document his vehicle expenses, the taxpayer used a calendar book, in which he logged his truck’s odometer readings. When the taxpayer filed his 2010 return, he claimed more than $20,000 in vehicle expenses based upon his having driven 40,171 miles for work. The IRS rejected this deduction in its entirety. Garza took his case to the US Tax Court, but the court ruled that his documentation was inadequate. Section 274(d) of the tax code requires taxpayers to maintain extensive records before claiming certain expense deductions. These deductions include one for the use of certain types of property, including a taxpayer’s passenger vehicle. These records must record “the amount, date, and business purpose of each expenditure or business use” of the taxpayer’s property.

The tax regulations have created instructions for maintaining these types of records. A taxpayer may keep “an account book, a diary, a log, a statement of expense, trip sheets, or a similar record,” and the taxpayer must create the document at or around the time that he/she incurred the expense. Additionally, the taxpayer should also keep any additional documentation that supports the claimed expense. Even if you use the standard mileage rate for deducting personal vehicle expenses, you still follow all of the recording and documentation requirements of Section 274(d) if you want to claim a vehicle expense deduction.

The taxpayer recorded his mileage in his calendar, usually at the beginning and end of each month. This was a contemporaneous record, as required by the law, according to the court. The court also found that taxpayer’s witness testimony to be credible. But he still lost. Why? Because Garza’s recordkeeping fell short of the Tax Code’s requirements for detail. He did not record the amount, time or business purpose of each business use of his truck, as required by Section 274(d). The court explained that in spite of the taxpayer’s credible evidence, it could not overlook the strict obligations imposed by Section 274(d) and could not rule in his favor.

Garza testified that he did not log the necessary amount of details needed to satisfy Section 274(d) because “it was just too much to do.” Perhaps if he had understood the ramifications of this decision, and the financial consequences of failing to record those details, he might have arrived at a different conclusion. To avoid a similar pitfall, make sure you understand your recordkeeping obligations for your business expenses before it’s too late to correct. Reach out to the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They can provide you with the skilled advice needed to ensure your records pass muster with the IRS. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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Photo: Tessen-Gas at Wikimedia Commons.