Audit Proofing Your Car Deduction

Audit proofing your car deduction is important. Without evidence to support your deduction, the IRS may disallow it.

There are two methods for claiming a deduction for the business use of your vehicle:

  1. Actual expense method
  2. Mileage allowance method.

Using the mileage allowance method saves you the trouble of having to save receipts and keep depreciation records, which is required for the actual expense method.

Actual Expense Method

If. you use the actual expense method you'll have to save receipts for repairs, maintenance, tolls, and any other documentation that supports your deduction.

You must maintain a depreciation schedule to support your depreciation deduction. The depreciation schedule should inlcude:

  • The date the vehicle was placed in service
  • Its depreciable basis
  • A description of the vehicle
  • The depreciation method
  • The convention used
  • The recovery period

Estimates are not acceptable to the IRS, unless your records were lost in some type of disaster or for some other reason acceptable to the IRS.

Note: Keep in mind, if you start out using the actual expense method for a specific vehicle, you may not switch to the mileage allowance method for that same vehicle in any later year. On the other hand, if you start out using the mileage allowance method for a vehicle, you may switch to the actual expense method for that same vehicle in a later year.

Mileage Allowance Method

If you use the IRS mileage allowance method you need to maintain a mileage log. Break it down into weekly and monthly business miles traveled.

At year-end, just add up each month's business miles traveled to find total business miles traveled for the year.

Your mileage log should include:

  • Beginning odometer and ending readings for each trip
  • Dates traveled
  • Names of clients/customers visited
  • Business purpose of trips
  • Miles traveled on each trip

Schedule C

Schedule C, Part IV, is where you provide information about your vehicle.

For example:

  • The date you placed the vehicle in service for business purposes
  • Your business mileage, commuting mileage, and other mileage
  • Do you have evidence to support your deduction?

Estimates of Car and Truck Expenses

Estimates of vehicle expenses are not acceptable to the IRS unless your information was lost or destroyed due to a natural disaster, fire or some other valid reason. In such a situation you may be allowed to reconstruct your records.

Mileage Sampling

If you have a pattern of business use, the IRS may allow you to record your mileage for a representative part of the year instead of the whole year (e.g., four months). For example, you visit the same clients routinely and do little driving soliciting new clients.

QuickBooks Self-Employed
For Freelancers and independent Contractors

- Organize your financial data into one central accounting system on the cloud
- Software kept up to date.
- Your data kept secure
- Anytime, anywhere data access.
- Pay your quarterly estimated taxes online.
- Export Schedule C to TurboTax at year-end for faster filing.
- Save up to 50% off QuickBooks Self-Employed. Track every deduction! Start your free trial now!

Have an accounting or bookkeeping question? Email it to me.