Expenditures – Part 3 – Local Travel
Expenditures – Part 3 – Local Travel
In a recent newsletter (Expenditures – Part 2) we discussed some basic principles regarding expenditures including “travel expenses related to the property or management thereof.” In this newsletter we will discuss further a few aspects of this particular expenditure.
As stated in Expenditures – Part 1, to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
As also stated in Part 1, you can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip was to collect rental income or to manage, conserve, or maintain your rental property. This will usually include educational costs related to managing your income properties. You must properly allocate your expenses between rental and non-rental activities. You cannot deduct the cost of traveling away from home if the primary purpose of the trip was related to the acquisition of a new property or the improvement of your existing property. These costs would be recovered by taking depreciation.
In this article, we will discuss only local transportation expenses in the normal course of managing rental property, leaving the significantly more complex issues related to other categories of travel (e.g., cruise ship seminars) for future discussions. Very few landlords utilize public transportation for travel related to management of properties reasonably close to their place of residence, so local transportation almost always means use of a private motor vehicle of some kind. This usually means a car, SUV, van, pickup truck, or panel truck. In most cases this vehicle is owned rather than being leased.
All landlords utilize one or more motor vehicles in managing their income properties. However, few landlords fully comply with the IRS requirements regarding the deductibility of vehicle use and many do not even come close.
You can deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Generally, if you use your personal vehicle for rental management activities, you can deduct the expenses using one of two methods: (1) actual expenses allocated to business use according to the percentage of miles driven for business compared to total miles driven for the year or (2) the standard mileage rate for the business miles.
Actual expenses can include essentially everything related to operation of the vehicle, including repairs and maintenance, insurance, and fuel. Depreciation or, with certain restrictions, Section 179 are also applicable to the business share of usage. For 2011, the standard mileage rate for a car, SUV, van, pickup, or panel truck is 51 cents a mile for all business miles. Changing from one method to the other is restricted by the IRS.
The IRS says that to take a business deduction for the use of your vehicle, you must determine whether the use was business or personal. If the answer is personal, no deduction is allowed.
Travel between home and an office where business is conducted is considered commuting and commuting miles are not deductible. However, for any business, travel is not considered commuting when your home is your principal place of business and the travel is to another work location in the same trade or business, regardless of whether that location is regular or temporary and regardless of distance. However, if you have an office where you perform a substantial part of the work related to the business, with this office being located other than at home, travel between home and that office will usually be considered non-deductible commuting even though you also maintain a home office.
To deduct vehicle expenses under either method, you must keep records that follow the rules in chapter 5 of IRS Publication 463. In order to determine the percentage of vehicle expenses or mileage that are business related and support the percentage in an audit, it is important that a log be kept. The log should include beginning and ending odometer mileage for each business related trip.
The IRS expects all business use of vehicles to be documented and your documentation may be required in an audit. Most tax experts interpret IRS requirements to be a written detailed log showing dates, times, purpose, and beginning and ending odometer readings for each trip driven. Whether or not such detail is really necessary, we mention the fact that one IRS publication states:
“….. to claim the deduction, keep adequate records, such as a written travel log with complete and accurate mileage records for each business use of your car. If you are unable to produce a clear and accurate business mileage record, the IRS may disallow the deduction.”
Does the language “such as” mean that there are other options? Whether a log is the only option or not, in order to be certain of the mileage deduction surviving an IRS audit, one who takes a deduction for business use of vehicles will be on firmer ground if able to produce a mileage log. While some may be able to reconstruct a log if needed from receipts and day-planner records, a contemporaneous log is best and is what the IRS means by a log. That is, writing down each trip including the date, time, destination, and the starting and ending mileage.
Although simply the miles for each leg or a round trip may be adequate in some cases, it is best to log starting and ending mileage. Although the trip meters available in most modern vehicles may seem a simpler way to keep track of a trip distance, recording only the trip meter results will not be nearly as convincing to an auditor as recording starting and ending mileages.
Logging in the day’s travels in the evening is doable if odometer mileage notes are kept throughout the day, but trying to recreate your travels at the end of each week (or longer) is next to impossible to do while remaining consistent with personal trips and fuel fill-up mileages so as to avoid discrepancies that might be discovered in an audit.
It is almost certain that the majority of self-employed individuals fail to keep a contemporaneous log with odometer readings for each stop, as the IRS would like to see, and it is likely that the percentage keeping any type of log at all is relatively low. Many simply roughly estimate their business mileage each year when doing their returns, some simply using a number that significantly reduces their taxable income.
Most know that only 1 to 2 percent of small business owners are audited and, even then, certain types of businesses are targeted whereas others are essentially ignored. For example, cash businesses are more likely to be audited than businesses where there is a bank record for most items of revenue. Furthermore, all audits won’t touch on the auto mileage issue anyway.
Therefore, in practice, the chance of being caught without a needed log is extremely low. For various reasons, all of the deduction taken is unlikely to be disallowed to begin with because there are ways to prove certain usage. For example, the mileage for driving to a landlord seminar in a distant city can be proven and various receipts would show that one made the trip, including those for buying gas along the way.
Most understand these facts and also know that the worst that will happen is that they will have to pay the taxes (plus some penalties) on a non-allowed portion of the deduction for one year in question. Many probably figure that they earned many, many times that amount for the hours that would have been spent on maintaining proper mileage logs during the 20 years that they were never audited.
However, considering the relatively little time and energy required for maintaining an adequate log, there is really no excuse for not doing so. As with other items related to a possible audit, having detailed records regarding a particular item being looked at by the audit can reduce the chance that the auditor will look at other items. Having inadequate records regarding your business auto deduction may encourage the auditor to look more closely at your records for other items, both income and expenses.
This article summarizes certain issues related to business use of a motor vehicle. For more detailed information regarding significantly more issues, see the appropriate IRS publications. For tax advice consult a competent tax advisor.