Will Your Mileage Log Withstand IRS Scrutiny?
Business mileage is a tax deduction available to most real estate investors.
As you wear your car down traveling between rentals, builds, flips, and client sites you can and should keep detailed records of the trips because the deduction can really add up.
In 2021, every business mile you travel qualifies for a 56 cent deduction.
If you log 10,000 business miles in one year, you’re looking at reducing your taxable income by $5,600!
But the real question is: are you doing a good job substantiating your trips?
We’re going to explore a 2020 Tax Court case where the taxpayer’s mileage log didn’t hold up in court.
You Must Have a Mileage Log
A business mileage log is required by IRC Sec. 274 in order to take a deduction for miles traveled.
And Treas. Reg. Sec. 1.274-5T(b)(6) provides that a taxpayer must substantiate the log with “adequate records” or “sufficient evidence” corroborating the taxpayer’s statements.
The log must provide for the following:
- The amount of the expense
- The distances, in miles, for each trip
- The time and place of the trip
- The business purpose of each trip
Though easy in theory, it’s difficult in practice to meet all four of these requirements. We recommend a mile tracking app, like MileIQ to track trips on the fly.
Johnson v. Commissioner T.C. Memo 2020-79
The taxpayer worked for a company, Dip Co, out of his home office in Colorado. As Dip Co’s president, he was required to travel for at least one week per month to attend industry events and conferences located outside of Colorado. The taxpayer lived 4 miles from the closest airport and 120 miles from a ranch he owned that he farmed at.
The taxpayer would drive from his home to the farm to handle irrigation issues and drag the fields as the hay grew. He drove a truck he purchased in 2014 for $23,000 to and from the farm.
The taxpayer had a couple of issues with his documentation substantiating his trips to and from the farm.
First, he did not keep a mileage log. Instead, he recorded appointments and events in his calendar to show that he was at the farm working. Many of the entries on his calendar only note that he traveled to and from the ranch and did not note the purpose of each visit.
The taxpayer submitted his calendar and “corroborating statements” as evidence for his deductions.
Additionally, the taxpayer’s calendar did not clearly differentiate between business and personal trips nor did it differentiate between the various activities he was involved in (personal, farming, Dip Co, etc).
Lastly, receipts provided by the taxpayer were not clear enough to establish that the trips were business trips.
The Tax Court determined that they could not allow a mileage deduction without proper evidence, and the taxpayer lost out on the deduction.
How Could Mr. Johnson Beef Up His Log?
The taxpayer in the above case simply didn’t do a good job documenting the purpose of each trip. It was easy for the Court to side with the IRS as a result.
To substantiate by adequate records, a taxpayer must provide an account book, a log, or similar record and documentary evidence which together are sufficient to establish each element with respect to an expenditure (Sec. 1.274-5T(c)(2)(i)).
Without adequate records, a taxpayer may still substantiate expenses with sufficiently detailed written or oral statements and other corroborative evidence showing that he incurred the expense (Freeman v. Commissioner, T.C. Memo. 2009-213).
Although a contemporaneous log is not required, corroborative evidence to support a taxpayer’s reconstruction “must have a high degree of probative value to elevate such statement” to the level of credibility of a contemporaneous record (Sec. 1.274-5T(c)(1)).
It seems in this case that Mr. Johnson was relying on the fact that his Outlook calendar gave a general idea of where he was traveling too and he felt that his verbal statements would be enough support for the travel deductions.
But again we warn you that the evidence he submitted was clearly not enough. Though the Regs clearly say you don’t need a log, the Tax Court seems to place little emphasis on statements made by taxpayers.
Takeaways
Moral of the store: use a mileage tracker to log trips and business purpose in real-time. Don’t use a calendar and don’t try to reconstruct this later.
Tax Court places little weight on your corroborating statements, even though the Regs allow for them.
For real estate investors, the mileage deduction is often large. Don’t mess it up by keeping lousy records.
