Mileage Substantiation

How do you keep track of your business mileage and could you lose that deduction in an audit?

If you are a business owner, keeping track of your business travel and mileage can provide a great benefit on your tax return, but properly recording your mileage is vital. Mileage expenses for taxpayers are vulnerable to Internal Revenue Service (IRS) examinations and audits due to the higher substantiation requirements that are needed to prove mileage expenses. The substantiation requirement applies to all business, whether they are operated as sole proprietors, partnerships, or corporations.

Adequate records need to be kept to prove any business expenses that you are claiming. According to the IRS, a written record or log is considered an adequate record. Documentation or a log kept on a computer is also considered an adequate record. For business mileage, an owner needs to record four details for each trip that is taken, amount of mileage, the date of your trip, the location you drove to and the business purpose of your trip. These items should be recorded in your written register at least weekly, if not daily, in order to be considered a timely-kept record of expenses. Recording your expenses regularly is a best practice, as the IRS will not allow any deduction that is estimated or approximated. If you are using a personal vehicle for business, you should also document what percentage of time you are using the vehicle for business use versus personal use. You can achieve this by making entries in your mileage log for commuting and personal mileage. Also, the IRS allows for sampling techniques to be utilized under certain limited circumstances. Generally, you will need to keep your records that support your deduction for three years from the due date of the income tax return.

Business owners also have the option to record actual vehicle expenses instead of mileage. However, recording actual expenses requires much more substation and receipts will need to be kept for all fuel purchases and repairs and maintenance expenses. Using the standard mileage option is recommended for most business owners because it is much simpler. The standard mileage rate is also high enough to cover fuel and repairs and maintenance expenses for most business vehicles. For 2016, the standard rate for business mileage is 54 cents per mile, which is down from the 2015 rate of 57.5 cents per mile.

Businesses have a greater audit risk because they are responsible for self-reporting their income and expenses to the IRS. Usually, the IRS knows exactly how much a wage earner is receiving for income through W-2 and 1099 filings and thus knows what to expect on their tax return. Since income reporting for businesses is not as structured, the IRS tends to audit business tax returns at a higher rate.

Keeping adequate records of mileage may seem like a very time consuming task, but thanks to technology, there are multiple apps for your phone or software that easily allows you to track your mileage. One of the more user friendly and accurate apps is MileIQ. This app automatically detects when you are driving and begins to record your trip. Each trip can then be classified as business, personal, charitable or any custom category you choose with the simple swipe of your finger. It also allows you to add additional details, such as parking and tolls fees and your business purpose. Reports can then be created that include all of the details needed for the IRS substantiation requirements. Another mileage tracker is TripLog, which has very similar features as MileIQ and can also be integrated with your QuickBooks software. Of course for those not-so-tech-savvy people, simple paper and pencil still suffices.

Properly keeping track of business mileage is crucial when you are taking a deduction on your business income tax return and can prevent you from losing your deduction. With a little time and effort or assistance from technology, you can rest assured that you should not lose your deduction if under an IRS audit as long as you follow the simple rules that are identified above.

If you have any questions regarding these requirements, it is recommended you contact your financial and tax advisers about your specific situation.

Amanda Dubs is practicing as a Certified Public Accountant at Gamwell, Caputo, Kelsch and Co., PLLC in Conway. She can be reached at (603) 447-3356.