How To Document Vehicle Expenses for the IRS

HOW TO DOCUMENT VEHICLE EXPENSES FOR YOUR TAX RETURN

You may not have kept perfect records in the past, but you can begin now to document your business vehicle use. If the IRS should audit tax return for prior years, when you were not keeping good records, you can sometimes use current records as supplemental documentation for the prior years. The ideal documentation for your business automobile mileage would be the following:

• Mileage log clearly showing the date, address you drove to, and business purpose. Examples: (1) 2/21/2011, 548 North Main, purchase office supplies, odometer out: 24937, odomenter in: 24945; (2) 2/21/2011, 23 NE Loop 410, call on prospective client Smith Construction, odometer out: 24945, odomenter in: 24960
• Oil change or repair receipts toward the beginning and end of the year, providing 3rd party substantiation of your total mileage for the year;
• Calendar showing appointments that match your mileage log. Example: 2:00 Monday Feb 21, 2011 – John Smith, Smith Construction 23 NE Loop 410
• Some (most) people are in a hurry when they get into the car to go to a business appointment. If they keep a mileage log at all, it will often be on a sporadic basis. It’s best to have a log, but if you do not have a complete log, you can still substantiate your mileage using a calendar and third party documentation of your total mileage. In addition to repair or oil change receipts, you can use receipts for gasoline purchased and calculate your total mileage using this formula: miles driven = gasoline purchases/average price per gallon x miles per gallon. For example, if you spent $2000 for gasoline for 2010 and the average price of gasoline during 2010 was $2.75, you purchased about 727 gallons of gasoline in 2010. If you car travels an average of 20 miles per gallon of gasoline, your approximate mileage for 2010 would be 727 x 20 = 14,540 miles.
• Once you have proved your total mileage for the year, you will need to show how much of that mileage was for business purposes. The following documents are useful for this: (1) a calendar that shows your business appointments; (2) invoices sent to clients or customers for work performed at the client’s or customer’s location; (3) print-out of Mapquest or Google Maps route between your office and the location.
• A narrative description of your driving habits can also be helpful. Example: My base of operations is my office, located in my home. Each morning, I answer my email and return phone calls. Then I drive to my first appointment. I usually call on 4 or 5 prospective new customers each day, Monday through Friday. I also call on 1 or 2 existing customers each day, to make sure they are happy with the services they are receiving. My sales territory covers all of San Antonio and the surrounding small cities. I drive an average of 55 miles each day calling on prospective and existing customers. I also drive to the bank to make deposits once a week, and drive to purchase office supplies once every 2 or 3 weeks.